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SBIR & STTR· · 8 min read

The SBIR Phase II Readiness Guide: Accounting From Phase I to Getting Paid

A complete guide to the accounting side of an SBIR or STTR award: the program, the pre-award review, agency rules, timesheets, unallowable costs, indirect rates, the Phase II budget, TABA, and billing. A summary of each step, with a link to the full article.

The SBIR Phase II Readiness Guide: Accounting From Phase I to Getting Paid

A Small Business Innovation Research (SBIR) award funds the science. A Phase II, especially a cost-reimbursable one, also asks whether your books can prove what the science cost. This guide puts the whole accounting side in one place, in the order most companies meet it: what the program is, what changes before Phase II, the rules that apply, how to build the budget, and how to get paid. Each section is a short summary with a link to the full article.

The short answer

To be ready for an SBIR or STTR Phase II, a company needs an accounting system that tracks every cost by award, separates direct from indirect costs, keeps unallowable costs out, and is backed by daily timesheets from everyone, including the CEO. On top of that system it builds an indirect rate from its own books, a Phase II budget with a source for every line, and the monthly habits that make invoicing a cost-reimbursable award routine. Most of this is easiest to start during Phase I, while the company is still small.

The practical takeaway: build your Phase II accounting system during Phase I. Every step in this guide is easier when daily records already exist by the time someone asks for them.

1. Understand the program

SBIR and STTR fund research and development at small businesses in three phases: Phase I tests feasibility, Phase II does the main R&D work, and Phase III moves the result toward the market, sometimes through government contracts. STTR adds one requirement: a partnership with a research institution, which must perform at least 30% of the work while the company performs at least 40%. Both programs were reauthorized on April 13, 2026, through September 30, 2031.

Full article: SBIR and STTR Explained

2. Get your accounting ready during Phase I

Phase I rarely tests a company's books. Phase II often does: at contracting agencies, it is commonly a cost-plus-fixed-fee contract, and before award the agency may request a pre-award survey of the accounting system, often performed by DCAA against the criteria in the SF-1408. The survey covers financial stability and the accounting system, and can also look at how proposed indirect rates were calculated and whether payroll taxes are current. The form lets a reviewer note which parts of a system are operating and which are planned, but a plan is far more convincing when timekeeping and the chart of accounts are already running.

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

3. Know your agency's rules

Not every SBIR is a contract. The Department of Defense and NASA generally award contracts, and a cost-reimbursable Phase II there can bring a DCAA review. NIH, NSF, and DOE fund most SBIR work as grants and do not rely on DCAA for a pre-award survey, but the bar does not disappear: NIH applies the same federal cost rules used on contracts to grants to for-profit companies, and NSF requires adequate timekeeping systems. A company that builds for the stricter standard is ready for either.

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

4. Start daily timesheets for everyone

Timesheets are the evidence behind both the hours charged to an award and the indirect rate. Everyone keeps one, including the president or CEO, with entries made daily in actual hours, not percentages of the day. Each award and each indirect activity, such as proposals, admin, and paid leave, gets its own line, and a supervisor approves each timesheet. Researchers coming from universities often have to unlearn percentage-of-effort reporting.

Full article: Timesheets for SBIR Companies: Why Everyone, Including the CEO, Tracks Time

5. Keep unallowable costs out

Some costs the government will not pay on a contract or an NIH grant: entertainment, alcohol, interest, the costs of raising capital, lobbying, donations, and fines, among others. They have to be excluded from every billing, claim, and proposal. The practical answer is to record them in their own accounts from the first day, so they never land in overhead or G&A and never inflate the rates you bill on.

Full article: Unallowable Costs for SBIR Companies: What the Government Will Not Pay

6. Build your indirect rate

An indirect rate spreads the shared cost of running the company (fringe, overhead, and G&A) over the work. It has to be your own, derived from your books, never another company's or a university's. In our worked example, an engineer paid $50 an hour actually costs the company $107.38 an hour once fringe, overhead, and G&A are added, before any fee. Keep the calculation and the transactions behind it, and resist the pressure to shave the rate to look competitive.

Full article: How to Build the Indirect Rate in Your SBIR Phase II Cost Proposal

7. Build your Phase II budget

A Phase II budget has three layers: direct costs, indirect costs from your own rates, and a fee where the agency allows one. The award ceiling is not your research budget, because the fee and indirect costs come out of it first. Each direct cost line (labor, materials, equipment, travel, subcontracts and consultants) needs a source a reviewer can check, and in SBIR Phase II the company must perform at least half of the research, which generally limits subcontracts and consultants to 50% of the total.

Full article: How to Build Your SBIR Phase II Budget

8. Use TABA for outside help

Technical and Business Assistance (TABA) lets a company request up to $6,500 per Phase I project and up to $50,000 per Phase II project for help such as intellectual property protection, market research, regulatory and manufacturing plans, and cybersecurity. Since 2026 it can pay for your own vendors or for hiring and training staff. It has to be requested, usually in the proposal, and it cannot pay for the fee, audits, or bookkeeping and accounting services.

Full article: TABA: How SBIR Companies Can Use Technical and Business Assistance Funds

9. Get paid on a cost-reimbursable award

On a cost-plus-fixed-fee Phase II, you invoice recorded, allowable costs as the work progresses: direct costs at actual, indirect costs at provisional billing rates, and a share of the fixed fee. Within six months after each fiscal year ends, you submit a final indirect cost rate proposal, and what you billed is trued up to your actual rates. Closing the books every month and distributing labor every pay period are what make that cycle routine.

Full article: Getting Paid on a Cost-Reimbursable SBIR Phase II

How WiseCost fits

Most of this guide is judgment that stays with you and your CPA: which agency, which rate structure, which costs are allowable, what goes in the budget. What WiseCost provides is the system underneath it, on top of the QuickBooks Online books you already keep: daily timesheets with supervisor approval, labor distribution that turns approved hours into labor cost by award, indirect rates calculated from your own books with the transactions behind them, and a budget for each award with actual spending tracked against it.

FAQ

During Phase I. A pre-award survey can happen before a Phase II award, and daily timesheets, a structured chart of accounts, and indirect rates from actual data are all easier to show when they are already running.

No. A pre-award survey is most common when the Phase II will be a cost-reimbursable contract, as is typical at the Department of Defense. NIH and NSF fund most SBIR work as grants and do not rely on DCAA for that review, though they still expect real cost tracking and timesheets.

DCAA reports the most errors in four areas: separating direct from indirect costs, timekeeping, determining contract costs at least monthly, and excluding unallowable costs.

No. The fee and your indirect costs come out of the award ceiling first. What remains is the budget for labor, materials, equipment, travel, and subcontracts.

It can be the general ledger, but on its own it does not keep compliant timesheets, distribute labor to awards, or calculate indirect rates. Many small companies add those capabilities on top of QuickBooks Online rather than replacing it.

The Bottom Line

The accounting side of an SBIR or STTR award is predictable. The criteria are public, the common gaps are known, and most of the work is building habits: daily time for everyone, costs tracked by award, unallowable costs kept apart, rates calculated from real books, and the books closed every month. Start them in Phase I, and each step of Phase II, from the pre-award review to the last invoice, builds on records that already exist.

If your Phase II will be cost-reimbursable, you can run our free DCAA Readiness Self-Assessment to see whether your accounting system is ready for it.

Official Sources