When a government contractor or grantee has an SBIR or STTR award, the accounting requirements they are going to face, and thus, how they structure and maintain their system, will be vastly different between the Phase I and Phase II. In a Phase I SBIR/STTR, the only real deliverable the government expects is research and a report; there are no prototypes, and the award amount is relatively small (i.e. not worth scrutinizing). As a result, a small business can make do with a very simple accounting system, and typically can use a local, commercial bookkeeper (with no government or SBIR accounting experience).
Many small businesses with a Phase I SBIR/STTR may even perform the accounting in-house, and this is perfectly reasonable, provided they track their project expenses meticulously (in a spreadsheet, for example) and track their time per DCAA guidelines. You can do the latter in an excel spreadsheet, or with a DCAA compliant automated system like Hour, SpringAhead, or TSheets (learn more about DCAA compliant timekeeping systems).
However, we recommend that, when possible, the SBIR/STTR award winner start developing the foundation for a compliant Federal Government/DCAA accounting system during Phase I of the program. This means using a DCAA compliant timekeeping system (as mentioned above), so the company can get used to tracking their time in a completely different manner than the commercial world or academia is used to (and that will be required during Phase II). It also means that while it is not required, it is generally a good idea to install an accounting system that will be capable in the future of doing all the things that are required by the government in a FAR part 31 compliant accounting system that will be required in Phase II.
For NSF, DoD, and DoE (Energy) contractors and grantees, ReliAscent® does offer optional Phase I QuickBooks Desktop and Online general ledger templates (along with timekeeping procedures, an example excel timecard, accounting manuals, and limited training), for this very reason, and we can even provide outsourced monthly accounting to SBIR Phase I awardees. However, given the costs involved (and relatively low risk of audit in a phase I), most awardees still opt to perform their own accounting until Phase II.
Phase II and SBIR Accounting Requirements
Things change dramatically once the business is awarded a Phase II contract or grant. The government has much higher expectations of the contractor/grantee, not only regarding the deliverables, but more importantly, how they track their costs, time, and how the accounting system is setup. Why do they do this? Simply put, there's a lot more money on the line. Additionally, most Phase II SBIR/STTR awards are cost type (CPFF), instead of a firm fixed price (FFP). Thus, a Phase II award presents a greater risk to the government.
An FFP contract or grant is simpler for the government, and pushes the awardee to control costs, as they are on a limited budget. On the other hand, in a cost type contract, the government will pay the small business for the work performed on the contract, in addition to a “fair share” of the overhead costs/operating expenses of running your business (based on your indirect rates). This makes cost type contracts very valuable and more appealing to a government contractor, but with that added benefit, comes the requirement that your accounting system is complex enough to prove you are billing the government their fair share of the overhead costs.
As a result, the government needs to be assured that a small business has a compliant accounting system that can calculate indirect rates, separate direct from indirect costs, and isolate unallowable costs from allowables, and one that allows the business to be able to report, at any given time, how much they have billed on a particular contract, and how much they have left to bill.
Phase II Award Selection and the SF1408 Preaward Survey
When your Phase II proposal is being considered for award, the awarding agency often will require that you self-certify the state of your accounting system and your financial viability with their Standard Form (SF) 1408. The SF1408 is a 2-page document, consisting of 3 portions and 15 questions regarding the abilities of your accounting and timekeeping systems. Most government agencies that issue SBIR/STTR awards, with the exception of the NSF and NIH, will ask companies to submit the SF1408, and may use the Defense Contract Auditing Agency (DCAA) to perform the audit (survey), rather than simply having the business complete SF1408 and waiting for an accounting systems audit several months, or even a year or more, into the period of performance during the phase II.
The preaward survey always includes at least two components, though there can be more. The purpose of the survey is to assess your business’ financial stability (i.e., is the business financially healthy enough that it will stay in business long enough to complete the phase II), and to evaluate your accounting system (as mentioned above). However, the government/DCAA may also want to dig deeper into your proposed indirect rates and evaluate your payroll taxes.
Because of this process, and the backlog of work at DCAA, there can be significant delays between the end of a company’s Phase I, and the actual start work date of the Phase II (which can be difficult for many smaller companies and startups). This is why it is important that you collect all the documentation they require, and either install a DCAA compliant accounting system during this time or have a plan to setup the system before work begins on the Phase II (learn more about DCAA compliant Accounting Systems offered by ReliAscent®, and our outsourced monthly SBIR accounting services).
ReliAscent® personnel have participated in the SBIR/STTR program for over 30 years and not only have the knowledge required to keep your business compliant with SBIR accounting requirements, but also have a vested interest in helping companies succeed in this program. ReliAscent's SBIR/STTR experience, from providing DCAA compliant accounting systems and services, to outsourced contract and grant management & administration services, and even financial and business management consulting services to awardees, makes our firm unique in the industry, and uniquely capable of positioning your business for success in this highly competitive industry.
Contact us today to learn how we can help you. Our experts can set you up on, or migrate your current accounting system to, our DCAA compliant QuickBooks Enterprise platform, hosted on the cloud, in as little as 1-2 weeks, and then provide the necessary outsourced SBIR accounting services you need to remain in compliance and grow your business.