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SBIR & STTR· · 8 min read

SBIR Grants vs. SBIR Contracts: How Your Agency Shapes Your Accounting

Will DCAA review your books before Phase II? It depends on which agency funds you and whether your award is a grant or a contract. A map of NIH, NSF, DOE, NASA, and DoD.

SBIR Grants vs. SBIR Contracts: How Your Agency Shapes Your Accounting

Eleven federal agencies run the Small Business Innovation Research (SBIR) program, and they do not all fund it the same way. Some award grants, some award contracts, and that single difference shapes who reviews your books, which rules apply, and what happens before a Phase II is signed.

The short answer

If your SBIR is a contract, especially a cost-reimbursable Phase II, expect a pre-award review of your accounting system, often performed by the Defense Contract Audit Agency (DCAA) using Standard Form 1408 (SF-1408). If your SBIR is a grant or cooperative agreement, as at NIH and NSF, DCAA is usually not involved, but you still need timesheets, cost tracking by award, and costs that follow federal cost rules. In both cases the accounting foundation is the same. What changes is who checks it, and when.

Grant or contract: what is the difference?

A contract is a purchase: the government is buying research it needs, under the terms of a specific contract type, such as firm-fixed price (FFP) or cost plus fixed fee (CPFF).

A grant or cooperative agreement is financial assistance: the government is supporting work in the public interest, through a budget you spend against and report on, rather than buying a defined deliverable at a set price.

For an SBIR company, this difference shows up in three places: who reviews your accounting system before award, how you get paid, and which rules decide whether a cost is allowable.

Agency by agency

The table below reflects how each agency describes its own program. Award types can change from one solicitation to the next, so always confirm in the current one.

AgencyHow it funds SBIR/STTRAccounting review before Phase IIWorth knowing
DoD (including DARPA)ContractsA DCAA review of your accounting system may be requested during Phase II negotiationsPhase II is typically cost-reimbursable, though it can be fixed-price for companies without an adequate cost system
NASAContractsDepends on the contract type in the current solicitationPhase I is a firm-fixed-price contract
NIHMostly grantsNot performed by DCAACost rules for for-profit grantees come from the Federal Acquisition Regulation (FAR 31.2); a fee of up to 7% is available
NSFGrants (Phase I) and fixed amount cooperative agreements (Phase II)Not performed by DCAANSF requires adequate timekeeping systems from its awardees
DOEGrantsSet by DOE's own grant termsOnly Phase I awardees may apply for Phase II on a given topic; a fee of up to 7% is available

Sources for each row are listed at the end of this article. To see the same rules for your own situation, pick your agency and phase:

Contracting agencies: DoD and NASA

At the Department of Defense, SBIR awards are contracts, and Phase II is where the accounting bar rises. DARPA's own SBIR/STTR contracting guidance describes Phase I as fixed-price purchase orders and Phase II as typically CPFF. Eligibility for a CPFF award depends on an adequate cost accounting system, Phase II companies are asked to complete the SF-1408, and the contracting agency will request a DCAA review during negotiations if one is required. A Phase II can also be structured as FFP for companies that do not yet have an adequate system, which keeps the project moving but shifts the cost risk to the company. For how each contract type uses your rate, see Cost-Reimbursable vs. T&M vs. Firm Fixed Price.

NASA is also a contracting agency, and its SBIR solicitation structure confirms that winning Phase I proposals receive a firm-fixed-price contract. Check NASA's current solicitation for the Phase II contract type on offer.

Granting agencies: NIH, NSF, and DOE

NIH, NSF, and DOE fund most SBIR work through grants or cooperative agreements, and neither NIH nor NSF relies on DCAA for a pre-award survey. That does not mean the accounting bar disappears. Three things still apply.

Federal cost rules still decide what you can charge. Grant rules written for universities and nonprofits do not automatically apply to for-profit companies. NIH's own Grants Policy Statement points to FAR 31.2, the same cost rules used on government contracts, as the general standard for determining allowable costs on NIH grants to for-profit organizations. Costs that are unallowable on a contract, such as entertainment and alcohol, are generally unallowable on an NIH grant too.

Timesheets are still expected. NSF's own position, cited in the SBA's SBIR accounting guidance, is that organizations receiving NSF awards must have adequate timekeeping systems, with time and effort records maintained so that salary charges to a grant can be verified. The same guidance notes that NSF has stringent expectations of a company's accounting system by the time it reaches Phase II, covering both financial capability and timesheets. What a compliant timesheet looks like is covered in Timesheets for SBIR Companies.

The fee is real money, and it is different from cost. NIH and DOE allow SBIR and STTR recipients to request a fee of up to 7% of total costs (direct plus indirect) in each phase. NIH's own guidance describes the fee as not a cost, usable for any purpose. Every dollar that is a cost, however, still needs records behind it. How the fee sits on top of your indirect rate is shown in How to Build the Indirect Rate in Your SBIR Phase II Cost Proposal.

Why grant companies should still build a contract-ready system

There are three practical reasons to set up your accounting as if a contract were coming, even when your Phase I and Phase II are both grants.

  1. The rules overlap. FAR 31.2 cost principles, timesheets, and separate tracking by award apply to for-profit grantees at NIH too, so most of the underlying work is already shared.
  2. Phase III is often a contract. Agencies can award Phase III work, including sole-source contracts, to the company that performed the earlier phases, as covered in SBIR and STTR Explained. If that Phase III is cost-reimbursable, a pre-award survey can follow, in which case see SBIR Phase I to Phase II: How to Get Your Accounting Ready Before the Award.
  3. Companies cross agencies over time. A company with an NIH grant today may compete for a DoD topic next year. A system built to the SF-1408 standard works for both.

How WiseCost fits

WiseCost adds compliant timekeeping, labor distribution, and indirect rates on top of the QuickBooks Online account a company already uses, and it is built for both sides of this divide.

For contract work, it applies the controls a DCAA review expects: daily time entry, employee certification, approval by someone other than the person who logged the hours, and no retroactive edits that erase the original record. For grant work, it applies the same approval discipline in the form that time and effort reporting requires, with each award carrying its own budget and period of performance so spending can be tracked against what was awarded.

A company with both grants and contracts, or a grant today and a contract on the horizon, can run everything to the stricter standard and still report on each award separately. In either setup, approved hours become labor cost in QuickBooks Online, and fringe, overhead, and G&A are calculated from the company's actual books rather than estimated. Setting Up Your Accounting System for Your First Cost-Type Contract walks through what that structure looks like in practice.

Deciding what is allowable on a specific award, and writing the policies behind it, stays a conversation with a CPA or grants officer. WiseCost provides the records that support that conversation, not the answer to it.

FAQ

NIH does not use DCAA for SBIR pre-award surveys. But NIH applies FAR 31.2 cost rules to for-profit grantees, and charges still need records behind them.

Yes. Granting agencies like NIH and NSF also expect timesheets, and NSF requires adequate timekeeping systems from its awardees.

It avoids the pre-award accounting review, but the company carries all the cost risk. If the R&D takes longer than planned, the overrun is the company's to absorb. Many companies prefer to be ready for CPFF so the choice is theirs, not forced by an inadequate system.

In the current solicitation or notice of funding opportunity for your topic. Participating agencies are listed at sbir.gov/participating-agencies.

The Bottom Line

Grant or contract, an SBIR company needs the same foundation: costs tracked by award, direct separated from indirect, unallowable costs kept out, and timesheets from everyone. Contracting agencies check that foundation before a cost-reimbursable Phase II; granting agencies expect it to already be there. Build it once, to the stricter standard, and the award type will not decide whether you are ready.

You can run our free DCAA Readiness Self-Assessment to see how your current setup would hold up against the SF-1408, or book a demo to see award-by-award tracking on top of your own QuickBooks Online.

Official Sources