Activity Based Costing for Biotech R&D: Practical roadmap to track program costs

Activity-Based Costing: A Practical Guide for Biotech R&D

Your cash runway is the ultimate measure of survival. Every month, you scrutinize the burn rate, looking at the big P&L categories like salaries, consumables, and lab rent. Yet, a critical question remains unanswered: which of your R&D programs is consuming the most cash? Is Program A twice as expensive as Program B, or is it the other way around? This lack of clarity makes every go/no-go decision a high-stakes gamble. Answering this requires a deeper look than standard accounting provides. It requires a practical framework for understanding the true cost of your science, which is essential for making strategic decisions, justifying budgets to your board, and preparing for due diligence. This is a core challenge in learning how to track R&D costs in biotech startups effectively.

Why Your QuickBooks P&L Isn't Enough for Strategic Decisions

Your Profit & Loss (P&L) statement, whether from QuickBooks or Xero, is essential for compliance and high-level financial reporting. It tells you what you spent money on by listing expenses like ‘Salaries’, ‘Lab Supplies’, and ‘Software’. For tax purposes and a general overview of spending, this is perfectly adequate. However, for strategic R&D management, it’s critically insufficient. The P&L provides almost no insight into why the money was spent, which is the question that drives your business forward.

Imagine your P&L is a grocery receipt. It shows you bought flour, eggs, and sugar for $20. It doesn't tell you if you used those ingredients to bake a $50 cake for a key project or a $5 batch of cookies for a side experiment. This is the gap Activity-Based Costing (ABC) fills. ABC is a methodology for assigning resource costs to the specific activities they support, and then assigning those activity costs to the final cost objects, such as your R&D programs.

This distinction is vital. The P&L is for looking backward at spending categories. ABC is for looking inward at program-level efficiency and forward to make informed decisions about resource allocation. It moves you from simple accounting to true biotech r&d budgeting and financial transparency. This process tells the story behind the numbers that investors and partners need to see.

The Building Blocks of Activity-Based Costing

To implement Activity-Based Costing, you do not need a massive new system from day one. Instead, you need to begin tracking four key components. The reality for most pre-seed to Series B startups is more pragmatic: start with a simple structure and build from there. Focus on gathering the right information first, and the tools can follow.

1. Resources: These are the costs already captured in your accounting software. Think salaries, benefits, reagent purchases, equipment depreciation, and lab space rent. This is your starting pool of costs, straight from the P&L.
2. Cost Objects: These are the final destinations for your costs. In biotech, your primary cost objects are your R&D programs (e.g., Program A: Small Molecule Inhibitor, Program B: Monoclonal Antibody). They could also include internal projects like platform development or specific grant-funded research. For guidance on managing grants, see our guide on grant-budget integration. The NIH also offers guidance on indirect cost rates, which you can view in the NIH notice.
3. Activities: This is the crucial link between resources and cost objects. These are the core processes your scientific team performs. A good starting point is to collaborate with your science lead to define 5 to 7 high-level lab activities. Do not try to capture everything; focus on the most time and resource-intensive work. Common biotech R&D activities include Cell Culture, Assay Development, Protein Purification, Sequencing, and In-Vivo Studies.
4. Cost Drivers: These are the metrics that link the cost of an activity to a cost object. A cost driver is a measure of how much of an activity a specific program consumes. For example, the cost driver for Assay Development might be the 'number of scientist hours' spent on that task for Program A. For In-Vivo Studies, it could be the 'number of animals' used for Program B. For protein purification, it might be the 'number of purification runs'. Choosing the right cost driver is key to accurate research cost tracking and meaningful insights.

A Practical Roadmap to Track R&D Costs in Biotech Startups

Implementing a new system can feel daunting, especially with a lean finance function and a science team focused on discovery. The key is a phased approach that aligns with your company’s stage and complexity. What founders find actually works is starting small and building value incrementally, rather than attempting a large, disruptive overhaul.

Stage 1: Manual ABC (The 80/20 Approach)

This initial stage is about gaining directional accuracy over perfect precision. For most early-stage startups, this manual approach can provide 80% of the value for 20% of the effort. The goal is to get a good-enough view of program costs to improve decision-making immediately.

• Tools: Your existing accounting software (QuickBooks or Xero) and spreadsheets (Google Sheets or Excel). For time tracking, you can start with a simple shared spreadsheet or a free tool like Clockify.
• Process:
  1. Define Activities: Work with your head of science to identify 5 to 7 primary lab activities that consume the most resources.
  2. Track Time: Ask scientists to log their hours against these activities and the program (cost object) they were working on. Keep it simple: “4 hours, Assay Development, Program A.” The goal is not micromanagement but strategic allocation.
  3. Allocate Salaries: At the end of the month, export the time data. If 40% of scientist hours were spent on Program A, you allocate 40% of the total scientist salary and benefits cost to Program A in your ABC model spreadsheet.
  4. Allocate Major Consumables: You do not need to track every pipette tip. Work with the lab manager to estimate the consumption of major reagents or kits by program. If Program B is the only one using a specific expensive antibody kit, allocate 100% of that cost to it.
  5. Review and Analyze: Build a simple spreadsheet that pulls these allocated costs together to give you a total cost per program. This project-based financial planning provides immediate insight into your portfolio.

Stage 2: Semi-Automated (Scaling for Complexity)

The trigger for moving to Stage 2 is typically when you are managing three or more active programs. At this point, spreadsheets become cumbersome, prone to error, and time-consuming to maintain. The goal here is to introduce lightweight tools to streamline data collection and improve accuracy without adding significant overhead.

• Tools: Continue using your accounting software and spreadsheet model, but augment it with dedicated tools. A lab management tool like Quartzy or Scispot can help track consumable orders and assign them to projects at the point of purchase. More formal time-tracking tools like Harvest can offer better reporting and integration capabilities.
• Process:
  1. Direct Cost Assignment: Instead of estimating consumable costs, use your lab management tool to tag purchases directly to a program or project. This provides more accurate direct cost data with less manual effort.
  2. Refine Time Tracking: Use a dedicated tool to enforce more consistent time logging against predefined activities and projects. This improves data quality and reduces the administrative burden on scientists.
  3. Integrate Data: Your process is still largely managed by the finance function. You will export reports from your time tracking and lab management tools and import them into your central ABC model in Excel or Google Sheets. This improves the reliability of your program expense allocation.

Stage 3: Integrated (The Future State)

This stage is generally for Series B companies and beyond, especially those preparing for clinical trials or a significant operational scale-up. The goal is a single source of truth that connects operational activity with financial data in near real-time, providing auditable and highly accurate program costs.

• Tools: This involves implementing an Enterprise Resource Planning (ERP) system like NetSuite, often integrated with an Electronic Lab Notebook (ELN) or Laboratory Information Management System (LIMS).
• Process: An ERP implementation is a major project. The system is configured to track resource consumption (instrument time, consumable usage, scientist hours) automatically or with minimal manual input. It then allocates costs to the correct R&D program directly within the ERP. This level of biotech cost management provides highly accurate data but requires a significant investment in both time and capital.

Staying on Track: Common Missteps and How to Avoid Them

Embarking on an ABC implementation can be challenging, but avoiding a few common pitfalls can make the process significantly smoother and more valuable.

1. Starting with Too Much Complexity: The most frequent error is trying to build a perfect, granular system from day one. A common misstep is defining 30 different activities when 5 would provide most of the insight. This creates an unsustainable data collection burden on the science team, leading to poor quality data or outright abandonment of the initiative. Start with a minimal viable model, prove its value, and iterate. You can always add more detail later.
2. Poor Communication with the Science Team: If scientists perceive time or resource tracking as a micromanagement tool, they will resist it. It is crucial to frame ABC as a strategic tool for funding science, not a mechanism for policing work. Explain how this data helps you make a stronger case to the board for more funding, decide which promising programs to double down on, and ultimately protect their research. When the team understands the "why," they are far more likely to provide accurate data.
3. Letting the Model Go Stale: Biotech R&D is dynamic. Your research focus, lab processes, and team structure will change. An ABC model built today may not reflect reality in six months. Review your model quarterly to ensure it remains accurate. Check in with the science team: Have the core activities changed? Are the cost drivers still appropriate? A stale model produces misleading information, which is often worse than no information at all.

Practical Takeaways for Founders

For a founder focused on the science and extending the runway, implementing a new financial process can seem like a distraction. However, understanding how to track R&D costs in biotech startups is not just an accounting exercise; it is a core strategic capability.

• Start Simple, Start Now: You do not need a new software suite. This week, sit down with your lead scientist and define 5 to 7 core lab activities. Create a basic spreadsheet for your team to track their time against those activities and your main programs for just one month.
• Focus on a Single Question: Use that initial data to answer one critical question: “How much is Program X actually costing us?” The answer will likely be surprising and immediately useful for your next board conversation or budget review.
• Build the Habit for Future Wins: This process does more than provide insight. It builds financial discipline and transparency into your company's DNA. This becomes a significant asset during fundraising. Having even six months of ABC data during due diligence can dramatically increase credibility and shorten the process. Investors are not just backing your science; they are backing your ability to manage capital effectively to get that science to the next milestone. That is a story worth telling. Continue at the program-portfolio FP&A hub for templates and models.