SBIR Accounting System Requirements Guide

Introduction

Winning an SBIR award is a major milestone, but it also comes with serious financial responsibilities. Unlike traditional venture capital or angel funding, SBIR money is federal money—meaning your accounting practices must meet specific standards. Whether your award is a grant or a contract, the right accounting system isn’t just a bureaucratic checkbox; it’s a safeguard that protects your funding, supports compliance, and positions your business for future phases. In this post, we’ll break down what systems you need in place to stay audit-ready and fully aligned with SBIR expectations.

Core SBIR Accounting Requirements

If your business is awarded SBIR funding, your accounting system must do more than track revenue and expenses—it must handle cost segregation, time tracking, and indirect cost allocation with precision. Here’s what that looks like in practice:

Track Costs by Project

Federal guidelines require you to isolate all SBIR-related expenses from your other business activities. This means your accounting system must track costs by individual project and funding source. You’ll need to distinguish between:

• Direct costs, such as salaries for employees working on the project, materials, and travel;
• Indirect costs, including shared expenses like office space, utilities, and administrative overhead.

This segregation allows agencies to verify that federal funds are being used appropriately and exclusively for the SBIR-supported work.

Use a Comprehensive Chart of Accounts

Your chart of accounts must categorize every transaction by both project and cost type. That means you’ll need to distinguish:

• Direct vs. indirect costs
• Allowable vs. unallowable costs
• Costs specific to each SBIR award

A robust chart of accounts ensures that your reports will hold up under audit and makes it easier to manage multiple concurrent awards.

Timekeeping: Daily and Project-Specific

Timekeeping is one of the most scrutinized elements in any SBIR audit—especially for contract awards. Every employee who charges time to an SBIR award must fill out daily timecards that clearly show the hours worked on each project. This helps validate labor costs as a direct expense and is a cornerstone of federal cost accountability.

Document Your Indirect Cost Rate

Indirect costs are shared expenses that can’t be assigned to a single project but are still necessary for operations. The federal government allows you to recover these costs—but only if you apply a documented, reasonable methodology. That includes:

• Defining your indirect cost pools (e.g., facilities, administration)
• Determining allocation bases (e.g., direct labor, total costs)
• Calculating your provisional rate and updating it periodically

Your accounting system must support these calculations and provide the documentation needed for audits and financial reporting.

Audit Readiness & Internal Controls

A compliant accounting system isn’t just about collecting the right data—it’s about proving it. Federal agencies expect a clear audit trail and internal checks that ensure data accuracy, cost allowability, and financial integrity. Here’s what that entails:

Maintain an Audit Trail

Every transaction tied to your SBIR award must be documented. That includes:

• Receipts for purchases and services
• Invoices and subcontractor agreements
• Employee timesheets with approvals
• Records of indirect cost calculations
• Internal communications about budget decisions

These documents must be easily traceable within your accounting system and retained for at least three years after the final payment on the award.

Build Internal Controls

Internal controls are procedures designed to catch errors, prevent fraud, and ensure that every dollar is spent appropriately. For SBIR awardees, key internal controls include:

• Formal approval workflows for expenses and timesheets
• Regular bank and ledger reconciliations
• Periodic internal audits of cost categories and allocations

The goal is not just to prevent problems, but to demonstrate to auditors that your company actively monitors how it handles federal funds.

Generate Compliant Financial Reports

Your system should produce financial statements that follow Generally Accepted Accounting Principles (GAAP) and align with any agency-specific reporting formats. These reports often support:

• Progress reports during the project period
• Invoicing for cost-reimbursement contracts
• Final closeout submissions

If your reports aren’t formatted to federal expectations, you may face funding delays—or worse, disallowed costs.

SBIR accounting requirements apply whether your award is a grant or a contract.
However, contract recipients—especially those working with DoD—may face additional scrutiny and audit triggers.

Additional Requirements for DoD or Contract Awards

If your SBIR award comes in the form of a contract—especially from the Department of Defense (DoD)—the bar for compliance is higher. You’ll need to meet specific standards enforced by the Defense Contract Audit Agency (DCAA).

DCAA Compliance Overview

DCAA is responsible for auditing contractors working with the DoD. If your accounting system doesn’t meet their standards, your contract award may be delayed, reduced, or even withdrawn. While grants focus on outcomes, contracts are performance-based and tightly regulated, with compliance tied directly to your ability to bill the government.

DCAA Preaward Survey (SF-1408)

Before awarding a contract, the DoD may require your accounting system to pass a Preaward Survey using Standard Form 1408. This assessment evaluates:

• Whether direct and indirect costs are clearly segregated
• If timekeeping procedures are compliant
• Whether labor costs are distributed accurately
• If job cost reporting is in place for each project
• The presence of internal controls and audit-ready documentation

Failure to meet these criteria can delay your ability to begin work or get reimbursed.

Key Differences Between Grants and Contracts

To help you visualize the differences, here’s a quick comparison:

Best Practices for Long-Term Compliance

Even if you meet baseline accounting requirements, a few proactive steps can make your system stronger and reduce your risk in future audits or follow-on funding phases.

Separate Federal Funds Completely

One of the simplest and most important actions you can take is to isolate SBIR funds. Use separate bank accounts or cost centers to track SBIR transactions independently. This not only simplifies your reporting but also demonstrates to auditors that federal money is being used solely for its intended purpose.

Retain Records for 3+ Years

Federal regulations typically require you to keep all financial records related to your SBIR award for at least three years after the final payment. Digital document management platforms can make this process easier—just ensure your system backs up data securely and organizes files in a way that matches your project’s chart of accounts.

Work with an Experienced CPA

Federal compliance isn’t something you want to navigate alone. A CPA with experience in SBIR or government contract accounting can:

• Help establish a compliant system from the outset
• Advise on indirect cost proposals and provisional rates
• Conduct internal reviews before an external audit occurs

A good CPA is an investment in audit readiness and funding continuity—not just a tax-season helper.

Set up your accounting system before you request your first SBIR drawdown.
Retroactive compliance fixes are costly and may not satisfy agency requirements.

Accounting Software Considerations

While your accounting system must meet federal standards, there’s no official software requirement. What matters is how well your system supports documentation, reporting, and compliance.

DCAA-Compliant Software Isn’t Mandatory—but It Helps

Contrary to popular belief, the government does not require a specific accounting platform. What it does require is that your system:

• Segregates direct and indirect costs
• Tracks time and labor distribution
• Maintains an audit trail
• Supports cost-based invoicing

However, certain tools are designed to make this easier. DCAA-compliant software comes preconfigured to align with federal requirements, reducing your risk and your administrative burden.

Common Tools Used by SBIR Awardees

Many small businesses use off-the-shelf solutions, sometimes with add-ons or integrations:

• QuickBooks + GovCon Add-ons: Affordable and familiar; can be customized for SBIR compliance with timekeeping and job-costing plugins.
• PROCAS: Built specifically for government contractors and DCAA compliance.
• Unanet: A more robust option for growing firms managing multiple contracts and indirect cost rates.

Choosing the right tool depends on your size, number of awards, and internal capacity for accounting oversight.

Manual Systems Can Work—with Discipline

If you’re in Phase I and operating lean, a manual or spreadsheet-based system may be feasible—if you have rigorous procedures in place. That means:

• Daily timekeeping by all staff
• Clearly labeled folders and cost tracking
• Documented indirect cost calculations

The trade-off is higher audit risk and more time spent preparing reports, so this approach is best for teams with financial experience or temporary solutions during setup.