SBIR & STTR· · 6 min read
Do SBIR Awardees Need a DCAA-Compliant Accounting System?
It depends on your agency and your award type. When an SBIR company needs an accounting system DCAA finds adequate, when it does not, and what still applies on grants and fixed-price awards.
Founders of Small Business Innovation Research (SBIR) companies usually ask this question right after a win, or while reading a solicitation that mentions the Defense Contract Audit Agency (DCAA) for the first time. The answer changes what you spend on accounting in your first year, so it helps to get it right early. It depends on two things: which agency funds you, and what type of award you hold.
The short answer
You need an accounting system DCAA finds adequate if you expect a cost-reimbursable SBIR or STTR (Small Business Technology Transfer) contract, which is the typical Phase II at the Department of Defense (DoD). You generally do not need one for a firm-fixed-price Phase I, and the National Institutes of Health (NIH) and the National Science Foundation (NSF) do not rely on DCAA to review their awardees.
Fewer awards require a DCAA review than founders expect, but almost every award requires timesheets and cost tracking by project.
A note on wording: "DCAA-compliant" is a shorthand. DCAA does not approve or certify software. It evaluates whether your accounting system as a whole is adequate for the award, as we explain in Is There Such a Thing as DCAA-Approved Software?
When you need it, by award
| Your award | Is a DCAA review likely? | What you still need |
|---|---|---|
| DoD Phase I, fixed price | Unlikely. The government usually expects a basic system at this stage | A basic system, with the award tracked on its own |
| DoD Phase II, cost plus fixed fee | Yes, it may be requested during negotiations | A system that meets the criteria of the SF-1408 (the form used to evaluate a contractor's accounting system), before the award |
| DoD Phase II, firm-fixed price | Less likely. DARPA, a Department of Defense research agency, notes this structure for companies without an adequate cost system | A basic system, and the full cost risk stays with you |
| NASA | Depends on the contract type in the current solicitation | Check the solicitation; Phase I is firm-fixed price |
| NIH grant | No, NIH does not rely on DCAA for this review | Timesheets, cost tracking by award, and FAR 31.2 (the Federal Acquisition Regulation cost rules) for for-profit grantees |
| NSF grant or cooperative agreement | No, NSF does not rely on DCAA for this review | Adequate timekeeping, and NSF reviews your accounting system by Phase II |
Each agency sets its own terms, so the current solicitation is what counts. The agency-by-agency detail is in SBIR Grants vs. SBIR Contracts.
Why the award type decides it
On a fixed-price award, the government pays the agreed price, and it does not need your internal costs to pay you. On a cost-reimbursable award, it pays your documented costs plus a fee, so your books become the proof behind every invoice. That is why the review is tied to the contract type more than to the size of the award.
DARPA's SBIR/STTR contracting guidance states it directly: eligibility for a cost plus fixed fee award depends on a cost accounting system DCAA has found adequate, and Phase II companies are asked to complete the SF-1408.
What "adequate" means in practice
The SF-1408 asks whether your system can do a set of specific things. For an SBIR company, these are the ones that matter first:
- Separate direct costs from indirect costs, so the project carries its own cost and shared costs go through an indirect rate.
- Track costs by project, so each award's total can be pulled on demand.
- Record time daily, for everyone, including founders. The SBA's SBIR accounting guidance calls timekeeping the requirement that causes the most difficulty.
- Exclude unallowable costs from what you bill. See Unallowable Costs for SBIR Companies.
- Post costs at least monthly, with a labor distribution that reconciles to payroll and the general ledger.
The full criteria are in The DCAA Pre-Award Accounting System Review. You do not need an ERP to meet them. Many small companies meet them on QuickBooks Online with the right setup and a tool for the labor side, as How to Make QuickBooks Online DCAA Compliant explains.
If your award is a grant
A grant takes DCAA out of the picture, and the core records stay the same. The SBA's guidance warns against assuming timesheets are only required by agencies like DoD. NSF states that time and effort records must be maintained for employees, and NIH points for-profit grantees to FAR 31.2, the cost rules used on contracts. So a grant company still tracks time daily, keeps costs by award and excludes costs the rules do not allow.
Building to the contract standard from the start also leaves more doors open. If a DoD topic or a cost-type Phase II comes later, the system is already running.
When to start
Start during Phase I, or as soon as you expect a cost-type award. Problems found in a pre-award survey can lengthen the gap between Phase I and Phase II, according to the SBA's guidance. And timesheets cannot be rebuilt after the fact, so a system that starts late has a gap in its records. For the steps, see SBIR Phase I to Phase II: How to Get Your Accounting Ready Before the Award.
FAQ
The Bottom Line
If you expect a cost-reimbursable contract, plan for an accounting system DCAA can find adequate. If you hold a fixed-price Phase I or a grant, DCAA may never review you, and you still need daily timesheets and costs tracked by award. Building the basics early costs little and keeps your options open for Phase II.
Not sure where your system stands? Take the free DCAA Readiness Self-Assessment, or start a 14-day free trial of WiseCost on your own QuickBooks Online.