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). However, once an SBIR/STTR Phase II or other cost type contract is awarded, it now becomes necessary to hire an experienced SBIR accounting firm to ensure compliance,
Phase I SBIR/STTR Accounting - What is Required of Awardees?
SBIR/STTR Ph I contracts and grants are Firm Fixed Price awards (FFP) that do not require a government approved accounting system (very little is required in the way of accounting compliance, and the threat of audit of your Ph I is nearly non-existent). However, many agencies (like the National Science Foundation) may suggest Ph I winners set up a DCAA compliant timekeeping system (either manual or automated), and NIH Ph I grantees may also need guidance on how to track labor and costs, and properly invoice the government. (contact ReliAscent to learn more).
If your small business was just awarded your first Ph I contract or grant, or you only have Ph I awards at this time, ReliAscent® recommends the following steps to prepare your business for a smooth transition into the world of DCAA compliance that is required in most Ph II contracts, and to ensure you avoid potential issues with future audits or with an NSF CAP review (for NSF grantees):
- Implement a DCAA compliant timekeeping system - there are multiple automated systems that are affordable and easy to use (to see a list of our timekeeping partners, visit our DCAA Compliant Timekeeping page). ReliAscent® can also provide you with our DCAA Compliant Timekeeping Procedure and example Timecard at no charge. We highly recommend that all employees track their time regardless of whether or not they work on a particular SBIR/STTR or any other contract. This will help your business to establish and justify your indirect rates for the Ph II proposal or any other contracting opportunity you may have.
- Track ALL of your Direct Contract/Grant Costs
- Hire a Professional (Commercial) Bookkeeper or Accountant for Ph I - though many companies try to do the accounting on their own, we always recommend that Ph I winners have a professional bookkeeper or accountant handle their books. Most local firms or bookkeepers are more affordable than a Government Contract Accounting Firm, and having a professional can help businesses when it comes to preparing taxes or creating financial statements (it is critical that your business is able to create accurate financial statements, for example, for the NSF's CAP Review, or during a DCAA audit).
- Get Professional Help with your Ph II Pricing Proposal - the time to call ReliAscent® is when you are working on your Ph II proposal. ReliAscent's experts can review your indirect rates and the budget to ensure you are not leaving money on the table or making mistakes that could cost you (potentially) tens of thousands of dollars during Ph II. Once you win your Ph II, it's time to setup your compliant system, and this is where the real work begins. ReliAscent can provide contractors and grantees with a quote for setup on our DCAA compliant QuickBooks platform, and monthly outsourced accounting services, at this point.
**ReliAscent® will be reintroducing our Ph I SBIR/STTR Accounting Packages in 2023. As mentioned above, a traditional CPA or commercial accounting firm can meet your needs during Ph I, and it is always best to leave your accounting to professionals (this will help when it comes to taxes, migrating your accounting system to our platform, and may make the difference in passing an NSF CAP Review). However, if your business needs consulting support related to award compliance, grant drawdowns, invoicing, or other areas, we do offer SBIR/STTR consulting services on an as-needed basis (billed hourly, starting with a one-time $1,500 retainer), and will be bringing back our Ph I Accounting Packages for 2023.
Once the Phase II contract or grant is awarded (or in the case of an NSF award, the grantee must pass a CAP Review after being selected for Phase II), our experts begin working with your business to ensure compliance.
Phase II 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.