SBIR Phase I to Phase II: Get Your Accounting Ready Before the Award

If your company holds a Small Business Innovation Research (SBIR) Phase I award, or expects one soon, Phase II brings a requirement that catches many teams off guard: your books have to be able to prove what the work cost. This guide covers what changes between phases, what a pre-award accounting review looks at, and how to prepare while Phase I is still running.

The short answer

In Phase I, the government usually expects only a basic accounting system. In Phase II, expectations rise, and the award is more likely to shift from fixed price to cost plus fixed fee. Before a cost-reimbursable award, the agency may request a pre-award survey of your accounting system, often performed by the Defense Contract Audit Agency (DCAA) and based on the criteria in Standard Form 1408 (SF-1408). This comes from the U.S. Small Business Administration's own SBIR accounting guidance.

The practical takeaway: build your Phase II accounting system during Phase I. Waiting until a contracting officer requests the review can delay your award or put it at risk.

What changes between Phase I and Phase II

	Phase I	Phase II
Purpose	Test whether the idea is feasible	Do the main R&D work
Award level that needs no SBA waiver (as of April 2026)	Up to $323,090	Up to $2,153,927
Common award type at contracting agencies	Firm-fixed price	Often cost-reimbursable; sometimes fixed price
What the government expects from your books	A basic system	A system that tracks every cost by project and separates direct from indirect costs
Review before award	Rare	A pre-award accounting system survey may be requested

Each agency sets its own amounts and award types within these rules, so the specific solicitation is what counts. For the program basics and the three phases, see SBIR and STTR Explained.

Why the contract type matters more than the money

The size of a Phase II award is not what drives the accounting requirements. The type of award is.

Firm-fixed-price (FFP)

You carry the cost risk

You deliver the work for an agreed price. If it costs more than planned, that is your risk to carry; if it costs less, you keep the difference. The government does not need to see your internal costs to pay you.

Cost plus fixed fee (CPFF)

Your books are the proof

The government reimburses your documented costs, plus a fee. Your accounting system then has to distinguish costs on one project from costs on another and track every dollar well enough to defend it. If a cost cannot be proven, it cannot be billed.

DARPA, the Defense Advanced Research Projects Agency within the U.S. Department of Defense and one of the larger SBIR funders, lays this out clearly in its own SBIR/STTR contracting guidance: Phase I is typically a fixed-price purchase order, and Phase II is typically CPFF, though it can also be FFP. Eligibility for a CPFF award depends on having a cost accounting system DCAA has found adequate, and Phase II companies are asked to complete the SF-1408. During negotiations, the contracting agency will request a DCAA review of that system if one is required.

A clarification on language: DCAA does not "approve" or certify software. It evaluates whether a company's accounting system, as a whole, is adequate for the award. We cover that distinction in Is There Such a Thing as DCAA-Approved Software?

A company without an adequate system is not automatically shut out of Phase II. DARPA's own guidance notes that a Phase II can be structured as firm-fixed price specifically for companies that do not yet have one. That keeps the work moving, but shifts the full cost risk onto the company.

Not every agency works this way. NIH and NSF fund most SBIR work as grants or cooperative agreements and do not rely on DCAA for this review, though they still expect real cost tracking and timesheets. For how the rules differ by agency, see SBIR Grants vs. SBIR Contracts: How Your Agency Shapes Your Accounting.

What a pre-award survey looks at

A DCAA pre-award survey for a Phase II covers two required areas, plus up to two optional ones.

1Financial stabilityIs the company financially stable enough to complete the project?
2The accounting systemIs the system itself suitable for cost-reimbursable work?

The optional pieces look at how the proposed indirect rates were calculated and whether payroll tax deposits are current.

The accounting system portion is evaluated against the SF-1408, and the most common gaps tend to cluster around four areas: separating direct costs from indirect costs, timekeeping, posting costs on a regular monthly basis, and excluding costs the government will not pay. For the full criteria and what to have ready for each, see The DCAA Pre-Award Accounting System Review: What the Auditor Actually Checks.

Open each part of the survey below to see what the auditor asks and, where it applies, what to have ready:

Direct costs, indirect costs, and your rate

A Phase II cost proposal separates direct costs, the labor, materials, and travel that belong to the project, from indirect costs, the shared cost of running the company, applied through an indirect rate. Contracting officers need confidence that this rate is accurate, which depends on a system that keeps direct and indirect costs apart and isolates unallowable costs from the start.

A rate without records behind it is a rate an auditor can question or cap. We walk through building and documenting one in How to Build the Indirect Rate in Your SBIR Phase II Cost Proposal, and cover the underlying mechanics in How to Calculate Indirect Rates in QuickBooks Online.

Timesheets: the requirement that surprises founders

Of all the criteria a reviewer checks, timekeeping is the one most likely to catch a company off guard. The reason is direct: timesheets are the evidence behind your indirect rate. Time spent running the company, writing proposals, and managing the business is often a small firm's largest indirect cost, and without a daily record there is no way to support it, including for the people at the top of the company. Timesheets for SBIR Companies: Why Everyone, Including the CEO, Tracks Time goes into what that looks like day to day.

You can be ready before everything is running

The SF-1408 itself asks whether the accounting system is currently in full operation, and lets the reviewer note which parts are operating, set up but not yet active, or only planned. The form assumes a company may still be building its system, and a well-documented plan carries real weight. As Paul Calabrese, a former DCAA auditor, put it in one of our DCAA Ready sessions:

"What's nice about the SF-1408 review is that you can [...] have planned changes even though those changes are not in operation and the government may still accept it."

Paul Calabrese, former DCAA auditor

That is not a reason to wait, though. A plan is far more convincing when the timekeeping is already running and the chart of accounts is already structured, and only the cost-reimbursable billing pieces are waiting for an award to switch on. Here is how to use the form as a roadmap before you need it:

A readiness plan to work through during Phase I

Read the SF-1408 and confirm your expected Phase II terms. Check your solicitation or program office to see whether Phase II at your agency is likely to be a contract, and what type, or a grant.
Structure your chart of accounts. Separate direct costs, fringe, overhead, G&A, and unallowable costs. See Cost Pools Explained.
Set up each award as its own project or class. Your Phase I should already be tracked on its own, so its total cost can be pulled on demand.
Start daily timekeeping for everyone, including founders, admin time, proposal writing, and paid leave, with a supervisor approving each timesheet.
Distribute labor cost every pay period. Turn approved hours into dollars posted to projects and indirect accounts in your general ledger. See Labor Distribution for Government Contractors.
Calculate your indirect rates from actual data, and keep the calculation and its source transactions as documentation.
Put your policies in writing. A short, documented timekeeping policy shows a reviewer your system is designed, not improvised.

For steps 2 through 6 in more depth, see Setting Up Your Accounting System for Your First Cost-Type Contract.

What changed for SBIR in 2026

SBIR and STTR were reauthorized on April 13, 2026, through September 30, 2031 (see SBIR and STTR Explained). Two changes raise the stakes for Phase II: "strategic breakthrough" Phase II awards of up to $30 million at the largest SBIR agencies, and agency-set proposal caps from fiscal year 2027. An accounting gap that delays an award now costs more than it used to.

What we've seen in practice

The companies that move through a Phase II review smoothly tend not to be the ones with the most sophisticated systems. They are the ones whose daily records already exist when someone asks for them. Brian Wendroff, CPA, Co-founder of WiseCost and Managing Partner at Wendroff & Associates, CPA, described a recent example during a DCAA Ready session: a client had been using WiseCost for time entry only, with no indirect rates calculated at all. When rates were suddenly needed, months of approved time already in the system were enough to build them.

"All of a sudden they needed to create indirect rates, so we could backdoor in all the time they put in with the system, and it creates the calculations."

Brian Wendroff, CPA, Co-founder of WiseCost and Managing Partner at Wendroff & Associates, CPA

Clean time data collected early is what makes everything that follows possible. Reconstructing a year of hours from memory, after the fact, is not something an auditor will accept.

How WiseCost fits

WiseCost does not help a company win an SBIR award. It helps with what comes after: making your books ready for the questions a Phase II review asks.

It works alongside the QuickBooks Online account you already use, with no migration and no new general ledger to learn, and adds the three things QuickBooks does not do on its own:

Compliant timekeeping. Daily time entry by project and by indirect activity, with the approval rules and controls a DCAA review expects built in rather than bolted on.
Labor distribution. Approved hours become labor dollars posted to the right projects and indirect accounts each payroll period, so project cost and the general ledger stay in sync.
Indirect rates and cost visibility. Fringe, overhead, and G&A calculated from your actual books, with reporting that shows fully loaded cost by award and tracks spending against each award's budget.

Underneath all of it, every entry, edit, and approval is recorded, which is what turns a set of numbers into evidence a reviewer can follow.

What this does not replace: a written timekeeping policy, team training, and your CPA's judgment on provisional billing rates. A reviewer evaluates the whole system, including those pieces. To see where your own books stand today, start with the free DCAA Readiness Self-Assessment.

FAQ

No. A pre-award survey is most common when the Phase II will be a cost-reimbursable contract. Firm-fixed-price awards and most grants from NIH and NSF follow different rules, though granting agencies still expect timesheets and sound financial controls.

During Phase I. The survey happens before award, and missing documentation slows it down, which is one reason gaps can appear between the end of Phase I and the start of Phase II.

QuickBooks Online can be your general ledger, but on its own it does not keep compliant timesheets, distribute labor to projects, or calculate indirect rates. Many small companies add those capabilities on top of it rather than replacing it. See How to Make QuickBooks Online DCAA-Compliant.

The SF-1408 lets the reviewer record which parts are operating, set up, or planned. A system that is partly running with a clear plan is in a much stronger position than one that does not exist yet.

You bill against provisional indirect rates during the year and, under the Allowable Cost and Payment clause (FAR 52.216-7), submit a final indirect cost rate proposal after each fiscal year. That submission can lead to an incurred cost audit.

The Bottom Line

Phase I funds the science. Phase II, especially as a cost-reimbursable contract, also tests whether your books can prove what the science cost. The review itself is predictable: the criteria are public, the most common gaps are known, and most of the preparation is building habits (daily time, monthly posting, clean cost pools) that are easiest to start while the company is still small. Start them during Phase I, and the pre-award survey becomes a demonstration instead of a scramble.

You can run our free DCAA Readiness Self-Assessment in about five minutes, or book a demo to see a Phase II-ready setup on top of your own QuickBooks Online.

Official Sources

SBIR accounting expectations by phase and the pre-award survey: SBA, Accounting and Finance Tutorial 2
DARPA SBIR/STTR contract types and the SF-1408 requirement: DARPA SBIR/STTR Contracting FAQ
The SF-1408 form: GSA, Preaward Survey of Prospective Contractor (Accounting System)
DCAA guidance for contractors: dcaa.mil
Allowable Cost and Payment clause: FAR 52.216-7
2026 reauthorization summary: Crowell & Moring client alert