Accounting System Compliance for SBIR Awards Accounting System Compliance for SBIR Awards Accounting System Compliance for SBIR Awards Accounting System Compliance for SBIR Awards

Applying for DoD’s SBIR Program?
Don’t forget to prepare your accounting system.

By Robert C. Smith, ICAT Systems

The U.S. Department of Defense Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Program awards more than $1 billion annually to U.S. small businesses that demonstrate the ability to fulfill R&D needs in support of the warfighter. 

The first of three Broad Agency Announcements (BAA) for 2018 funding is currently in pre-release, and opening for proposal submission on January 8, 2018. You can view the full list of topics on the Defense SBIR/STTR Innovation Portal.

With hundreds of topics addressing a wide range of technology areas - from nuclear to information systems to bio medical, among others - small businesses have an excellent opportunity to deliver innovative solutions to the DoD, while strengthening your company’s position. This non-dilutive "seed funding" enables small businesses to expand their technical capacity, with the goal of commercializing the resulting technologies.

If you find a topic that fits your company’s expertise, now is the time to be asking questions and lining up your response to the upcoming solicitation. If you’re new to government contracts and/or SBIR, you’ll also be well served to understand the implications of winning an SBIR award on your accounting practices before we head into 2018. Preparing now to be in compliance with adequate accounting procedures can save you from stress and delayed funding in the new year. 

What do I need to know about Accounting System Compliance for SBIR awards?

Structurally, SBIR is a three-phase program. Phase I is awarded as a Firm Fixed Price (FFP) contract. Because the award amount is relatively small, a basic accounting system is sufficient at this stage.

For Phase II, however, the contract type often shifts to a Cost-Reimbursement Type contract. This requires you to demonstrate that your business has an adequate accounting system as a pre-condition to the contract award. The Defense Contract Audit Agency, or DCAA, conducts this Preaward Accounting System Survey for DoD SBIR/STTR contracts. DCAA details the audit process and expectations in a publication entitled Information for Contractors, available for download on their website. Enclosure 2 of that publication, Preaward Surveys, provides the specific guidance on the accounting system requirements. Contractors should become familiar with its contents.

DCAA will evaluate the prospective contractor based on their Preaward Accounting System Adequacy Checklist, also known as Standard Form 1408. This checklist outlines the requirements necessary to satisfy the FAR and DFARS requirements and pass the audit.

Why should I prepare now for an eventual audit?

The start of a new fiscal year is a great time to reassess you accounting policies and procedures. If there’s room for improvement in order to satisfy the requirements outlined on the Standard Form 1408, why not start the year out by addressing those deficiencies. This way, your new practices take effect with the new fiscal year and become standard procedure well ahead of any audit. This is particularly beneficial for certain requirements.

Proper Segregation of Direct Costs from Indirect Costs

For small businesses using QuickBooks as their accounting system, the proper segregation of direct costs from indirect costs can easily be achieved by organizing the chart of accounts into cost pools, with the direct costs contained in its own pool, separate from the various indirect cost pools.

Direct costs are costs incurred specifically for the contract. A top level account for direct costs, with sub-accounts for the various direct cost elements, serves to group these contract-specific costs while segregating them from indirect and unallowable costs. Likewise, indirect costs, which can support contract performance but can be assigned to more than one single contract (overhead costs) or are necessary for the overall business operation but do not have a direct relationship to a specific contract (G&A costs), should be accumulated in cost groupings, or cost pools, that reflect the reason behind incurring such a cost. Common top level indirect cost pools are Fringe, Overhead, and General & Administrative (G&A).

Consider whether your current groupings segregate the various costs and assign them into logical cost groupings now to prevent having to re-organize your chart of accounts partway through the year.

Compliant Timekeeping

For many contracts, labor is one of the most significant types of costs incurred. Labor also has a significant role in determining your indirect rates. Consequently, timekeeping is a critically important part of a compliant accounting system.

Why does timekeeping attract more scrutiny? For most transactions, you will have some form of outside documentation to substantiate the cost – a receipt, an invoice, a lease agreement. For labor, the documentation is internally generated, and that leads to increased oversight for compliance in this area. DCAA’s Information for Contractors, Chapter 2, discusses the Labor Charging System, including timekeeping procedures, timesheet preparation, timekeeping policy recommendations, and internal controls.

Whether you’re using a web-based timekeeping system with alerts and internal controls, or an old-fashioned pen and ink method, it’s vital that you and your employees adhere to adequate, accurate timekeeping procedures. A key element of an acceptable timekeeping system is the independent responsibility of the employee in maintaining his/her own timesheet. Realistically, this may take some getting used to. Time should be entered daily, for everyone in the company. All hours worked should be recorded, whether paid or not, even if more than 8 hours. Employees should be regularly reminded of the timekeeping policies and procedures. Getting your team into a new timekeeping routine early helps ensure you have the proper documentation to substantiate costs and your indirect rates.

Exclude Unallowable Costs

Unallowable costs must be segregated out in the chart of accounts to ensure they are not charged directly, or allocated through an indirect cost pool, to the contract. Contractors should familiarize themselves with FAR 31.205 and be prepared to demonstrate an understanding of which costs are unallowable. It’s worth noting that in addition to the FAR guidelines, some SBIR/STTR agencies have supplemental regulations for certain costs, which can mean either more limits or greater allowability. What internal controls do you have in place to ensure unallowable costs are not charged to the contract?

Just as starting the year out properly accounting for direct costs versus indirect costs, you will benefit from beginning 2018 with a strong understanding and a corresponding procedure for handling those costs which cannot be charged to a contract.


The consequence of not having your financial house in order can mean a significant gap between Phase I and Phase II. I recently spoke with a Phase II awardee who was shocked by how soon the auditors were calling. Now, following his successful DCAA preaward survey, he anticipates having his Phase II funding award in a matter of weeks. That quick turnaround sets his business up for success, and means we’re closer to meeting our military’s needs.

ICAT gives small business government contractors a quick, affordable and easy-to-use solution that enables growing companies to meet the requirements of an adequate accounting system. See how ICAT fills the gap for DCAA compliance using QuickBooks, or learn more about Federal Contract Cost Accounting with our online video training.