Cost Sharing Agreement

A Cost Sharing Agreement is a formal arrangement between a government agency and a contractor in which both parties agree to contribute resources or absorb a defined portion of the total program costs, typically used in research and development programs where the government wishes to leverage private investment or share financial risk.

What is a Cost Sharing Agreement?

Cost sharing arrangements in federal contracting are governed by FAR 35.003 for R&D contracts and appear in various forms across agency programs. In a cost-sharing contract, the contractor agrees to absorb a specific percentage or dollar amount of allowable project costs without reimbursement from the government. This is distinct from a fully funded government contract where the government pays all allowable costs plus fee. Cost sharing is most common in basic and applied research programs (particularly DoE, NSF, NIH, and DoD science and technology programs) where the government wants to attract and incentivize private investment alongside government funding, share development risk, and increase the likelihood that the contractor will commercialize results. Some agency programs, particularly SBIR Phase II, require cost matching from the recipient or their investors. Cost sharing also appears in cooperative agreements and grants, where the recipient organization must contribute a specified percentage of the total project budget from non-federal sources. The cost-sharing portion must be from eligible, non-federal sources and must be verifiable.

Why Cost Sharing matters for government contractors

For research-intensive contractors, particularly those pursuing SBIR/STTR awards, DoE cooperative agreements, or NIH grants, understanding cost sharing requirements is critical to budgeting and proposal development. Underestimating cost sharing commitments, or failing to document cost sharing properly, can result in audit findings and repayment obligations.

Example

A defense technology firm wins a DoD Applied Research program where the government funds $3 million and requires the contractor to contribute $1 million in cost sharing (25% of the total $4 million budget). The contractor documents its cost sharing through a combination of non-federal labor hours, equipment depreciation from company-owned assets, and a state economic development grant, all eligible non-federal cost sharing sources.

Frequently Asked Questions

Can cost sharing be documented with in-kind contributions?

Yes. Cost sharing can include cash, in-kind contributions (equipment, facilities, labor time charged at actual cost), and third-party contributions, as long as the contributions are verifiable, necessary for the project, not provided as cost sharing on another federal award, and otherwise eligible under the agency's cost sharing rules.

What happens if a contractor fails to provide the required cost share?

Failure to provide the committed cost share is treated as a breach of the award terms. The government may require repayment of the federal share proportional to the shortfall, disallow costs, or take other corrective action. Recipients must track and report on cost share contributions throughout the project period.

Is cost sharing required in all government R&D contracts?

No. Cost sharing is required only when specified in the solicitation or award terms. Many R&D contracts are fully funded. Cost sharing requirements vary by program, agency, and competition, they are most common in applied research, technology development, and commercialization-focused programs.

Can other federal funds be used to satisfy a cost sharing requirement?

Generally, no. Federal regulations require that cost sharing contributions come from non-federal sources. Using another federal grant or contract to fund cost sharing for a separate federal award is typically prohibited and can result in audit findings.