Managing in an SBIR/STTR Phase II Environment

Perhaps the greatest factor that affects the SBIR/STTR Phase II regulatory environment is the particular agency you’re focused on. It can be hard enough if you are pursuing Research and Development (R&D) funding from just one agency. The administrative approach can be particularly challenging if you are seeking funding from both a contract agency (DoD, NASA) and a grant agency (DOE, NIH, NSF, and others). 

Phase II Proposals and Budgets

The process of developing an SBIR/STTR Phase II budget in general is common among all agencies. A variety of factors contribute to much confusion as every agency applies additional specific budget requirements. Some (but not all) examples are:

• Budget input platforms are notorious for being frustrating to sign up for and operate. This includes the DoD (DSIP) and Grants.gov for grant agencies.
• Budget limitations abound for direct costs, indirect costs, and indirect rates. There are too many permutations to list here. Some agencies (NSF/NIH/DOE) offer “Safe Rates”, a level under which you won’t need to provide details of how indirect rates are calculated.
• The type of contract or grant can be a factor to be aware of when pricing a large dollar proposal.
  
  

SBIR Rates and Budget Negotiations

Once selected for award, a negotiation period begins with your particular agency. Major focus may be on how you developed your indirect rates. Some comments may come back related to direct project costs.

In this pre-award phase the agency may either ask if your accounting system is adequate, or in the case of DoD, will send an auditor from the Defense Contract Audit Agency (DCAA) to inspect your accounting system. This can be a major hurdle to receiving the contract or grant. Designing a timekeeping and accounting system to meet these strict standards are discussed in additional articles linked below.

It should be noted that the NSF CAP (Cost Analysis and Pre-Award) review is as data-intense as a DCAA Pre-Award accounting system survey.

SBIR/STTR Award Financing

The process for getting paid varies depending on the agency and contract or grant type. For DoD contracts, you will be allowed to bill on a cost-plus-fee basis (for cost reimbursement contracts), or by accomplishing performance milestones (reports and product delivery for fixed price contracts). Requests for billings are generated electronically using the DoDs billing module (PIEE/WAWF).

Grants typically are financed through a “drawdown” method directly from the U.S Treasury, again based on costs incurred. The NSF is the exception, where the Phase II grant is considered a “fixed” grant. Grantees can draw down certain percentages of the total grant amount at certain times.

Indirect rates applied to project costs for billing purposes may have to be negotiated annually, depending on the agency and type of agreement.

Cost Reporting and Audits

Again, depending on the R&D agreement with the government, annual cost reporting may be required in the form of an Incurred Cost Proposal (ICP). In the case of DoD cost-plus type contracts, the DCAA may audit these annual ICPs. The DoD may also perform post-award audits on the accounting system, timekeeping systems, and billing processes.

In the grant world, an audit must be performed by a CPA firm if the R&D firm expenses more than $750,000 a year on a project or a number of projects under one agency.

Taxes

While ReliAscent is not a tax CPA firm, we are following the development of IRS Section 174. This tax law became active in 2022. It dictates that 80% of R&D expenses must be amortized each year as they occur. This levies a potential draconian tax bill on the business if all they do is R&D, even if contracted by the government. We strongly recommend you obtain the assistance of a tax CPA knowledgeable in this area. We also have partnering R&D Tax Credit Consulting Firms that can work with you to minimize your tax burden through the tax credit and determining which expenses and tasks performed under a Ph I or II contract or grant may not fall under the tax rules. See our Partners Page (CPA's and R&D Tax Credit Consultants section) for more information.

Closeout

The lifecycle of a grant or contract ends with an administrative closeout of the agreement. This can include a final settlement/accounting of costs and billings. Other closeout forms address any intellectual property discovered during the project, along with any government property remaining in the firm’s possession.

Other considerations

Many other activities are addressed in our DCAA Compliance Blog, to include payroll for corporate or LLC entities, timekeeping practices, and accounting system solutions. Be sure to subscribe to our blog and check it out!