Winning an SBIR/STTR award is an important milestone.

 

But after the award, the financial questions often become more serious.

 

For some awardees, especially those working with DoD or cost-reimbursable Phase II awards, DCAA-related questions may become part of the funding journey. Those questions may focus on whether the company’s accounting system can track costs properly, whether labor is supported by timekeeping, whether indirect rates are reasonable and documented, whether invoices are supported, and whether unallowable costs are identified and excluded.

 

The best time to prepare is before questions arrive.

 

At Peter Witts CPA PC, we help SBIR/STTR awardees strengthen DCAA readiness by reviewing accounting system design, timekeeping, labor distribution, indirect rates, invoices, unallowable costs, and cost documentation.

 

Why DCAA Questions Matter for SBIR/STTR Awardees

 

Not every SBIR/STTR awardee will go through the same type of DCAA review.

 

The level of review depends on the agency, award type, contract structure, phase, payment method, and specific award terms. But for companies pursuing DoD SBIR/STTR awards, cost-reimbursable contracts, or Phase II funding, DCAA readiness can become very important.

 

DCAA-related questions may affect:

• Accounting system adequacy
• Timekeeping practices
• Labor distribution
• Direct and indirect cost tracking
• Indirect rate support
• Billing or voucher support
• Unallowable cost treatment
• Documentation retention
• Cost-reimbursable contract readiness
• Future federal funding opportunities

A company should not wait until an auditor, contracting officer, or agency representative asks for records to begin organizing them.

 

Start With the Award Type

 

The first step is to understand what kind of award the company received.

 

DCAA questions are more likely to arise when the award involves cost-based reimbursement, DoD contracting, progress payments, or accounting system review.

 

Review whether the award is:

• A grant
• A cooperative agreement
• A fixed-price contract
• A cost-reimbursable contract
• A cost-plus-fixed-fee contract
• A time-and-materials contract
• A milestone-based award
• A Phase II SBIR/STTR contract
• A DoD-related award

The award type affects the financial records the company may need to support.

 

For cost-reimbursable work, the company should be prepared to show actual costs, timekeeping, labor distribution, indirect rate support, invoices, and cost documentation.

 

Review the Accounting System Design

 

DCAA questions often begin with the accounting system.

 

The question is not simply whether the company uses accounting software. The question is whether the system can track federal award costs properly.

 

DCAA’s pre-award accounting system adequacy checklist is used to help auditors understand how a contractor’s system is designed to meet accounting system criteria. The DCAA checklist is especially relevant for contractors new to government contracting, contractors with cost-reimbursement contracts, or contractors receiving progress payments.

 

A DCAA-ready accounting system should support:

• Separate accumulation of direct costs
• Identification of indirect costs
• Identification and exclusion of unallowable costs
• Project cost tracking
• Cost tracking by contract, award, or cost objective
• Timekeeping
• Labor distribution
• Payroll reconciliation
• Indirect rate support
• Billing support
• General ledger control
• Documentation retention

If the accounting system cannot produce these records, the company may struggle when questions arise.

 

Make Sure Costs Are Tracked by Project or Award

 

Federal award costs should not be mixed with general company expenses or other projects.

 

The company should be able to show which costs belong to the SBIR/STTR award and which do not.

 

Project cost tracking should identify:

• Direct labor
• Materials and supplies
• Consultants
• Subcontractors
• Travel
• Equipment
• Other direct costs
• Indirect cost allocations
• Unallowable costs
• Non-award activity

SBIR.gov explains that a strong accounting system should distinguish direct from indirect costs, isolate unallowable costs, and maintain costs under general ledger control.

 

This is one of the most important ways to prepare for DCAA-related questions.

 

Understand Direct Costs

 

Direct costs are costs that can be identified specifically with the award or contract.

 

Examples may include:

• Technical labor
• Project-specific materials
• Prototype supplies
• Testing services
• Approved consultant work
• Approved subcontractor work
• Project-specific travel
• Other costs tied directly to the approved scope

The company should be able to explain why each direct cost belongs to the award.

 

For each direct cost, keep support such as:

• Invoice or receipt
• Purchase approval
• Project code
• Statement of work connection
• Period of performance
• Payment record
• General ledger entry

The goal is to make the cost easy to trace from the accounting records back to the supporting documentation.

 

Understand Indirect Costs

 

Indirect costs support more than one project or the business as a whole.

 

FAR explains that after direct costs are charged directly to contracts or other work, indirect costs are the remaining costs allocated to intermediate or final cost objectives.

 

For SBIR/STTR companies, indirect costs may include:

• Accounting support
• Payroll administration
• Rent
• Insurance
• Software
• General management
• Administrative labor
• Compliance support
• Company-wide operations

A DCAA-ready system should show how indirect costs are grouped, allocated, and supported.

 

The company should maintain:

• Cost pool detail
• Allocation bases
• General ledger support
• Fringe, overhead, or G&A schedules
• Unallowable cost exclusions
• Rate calculations
• Written description of the rate structure

Indirect costs should not be treated as a guess. They should be calculated using supportable records.

 

Prepare Indirect Rate Support

 

Indirect rates are a common area of review.

 

SBIR.gov explains that an indirect rate is unique to each company and tends to change over time. SBIR.gov also warns that companies should not copy another company’s rate because it does not reflect their own costs.

 

To prepare for DCAA-related questions, organize:

• Proposed indirect rate schedules
• Actual indirect cost schedules
• Fringe, overhead, and G&A pools
• Allocation base calculations
• Direct labor or total direct cost base support
• General ledger tie-outs
• Payroll records
• Excluded unallowable costs
• Explanation of rate methodology
• Prior submissions, if applicable

If the company is billing using provisional rates, it should also understand how those rates are supported and updated.

 

Timekeeping Should Be Ready Before Work Begins

 

Timekeeping is one of the most important DCAA readiness areas.

 

SBIR.gov identifies timekeeping as a key accounting system requirement and notes that labor distribution should charge direct and indirect labor appropriately. SBIR.gov’s audit guidance also explains that for labor, an auditor may trace a transaction through the accounting system back to an approved timesheet and paycheck support.

 

A strong timekeeping process should show:

• Employee name
• Date worked
• Hours worked
• Project or activity code
• Direct award labor
• Indirect labor
• Non-award labor
• Employee certification
• Supervisor approval
• Corrections or adjustments
• Timekeeping policy

Timekeeping should be current, accurate, and completed consistently.

 

The company should not wait until month-end, quarter-end, or invoice preparation to reconstruct labor.

 

Founder Time Needs Clear Support

 

Founder time can be especially sensitive.

 

Founders often work across technical activity, company management, fundraising, commercialization, customer conversations, investor relations, and general operations.

 

Not all founder time belongs on the award.

 

Founder time should be separated into categories such as:

• Direct technical work
• Award-specific project management
• Indirect company management
• Fundraising
• Sales or customer discovery
• Commercialization activity
• Internal R&D outside the award
• Non-award operations

If founder labor is charged to the award, it should be supported by payroll, timekeeping, labor distribution, and the approved budget.

 

The founder’s title is not enough support. The activity matters.

 

Labor Distribution Should Tie to Payroll

 

Labor distribution connects timekeeping to accounting.

 

It shows how payroll costs were charged to awards, projects, direct labor accounts, indirect labor accounts, and non-award activity.

 

DCAA’s audit program materials note that labor cost distribution records should be reconcilable to payroll records and to cost accumulation records in labor subsidiary or general ledger accounts.

 

A strong labor distribution process should connect:

• Timesheets
• Payroll registers
• Employee compensation
• Labor categories
• Project codes
• Direct labor
• Indirect labor
• Fringe costs
• General ledger entries
• Indirect rate schedules
• Billing or voucher support

If payroll is correct but cannot be allocated by project or cost objective, the company may still have a DCAA readiness problem.

 

Invoices and Vouchers Should Be Supported

 

For cost-reimbursable contracts, invoices and vouchers should be tied to actual allowable costs.

 

FAR 52.216-7 states that the government makes payments as work progresses in amounts determined allowable by the contracting officer under FAR Subpart 31.2 and the contract terms. It also references applying allowable indirect costs using established indirect cost rates.

 

Before submitting invoices or vouchers, the company should confirm:

• Costs are recorded in the general ledger
• Costs belong to the contract or award
• Costs are within the period of performance
• Payroll ties to timekeeping
• Vendor invoices are available
• Consultant and subcontractor invoices are supported
• Indirect costs are calculated correctly
• Unallowable costs are excluded
• Prior payments are reconciled
• Supporting schedules are saved

Every invoice should have a documentation trail.

 

Vendor and Consultant Costs Need Documentation

 

Vendor and consultant costs should be easy to trace.

 

For each cost, organize:

• Agreement or purchase order
• Scope of work
• Approved budget category
• Invoice
• Description of work performed
• Deliverable support, if applicable
• Internal approval
• Payment record
• Project code
• General ledger entry
• Period of performance support

A consultant invoice that only says “services rendered” may not be enough to explain why the cost belongs to the award.

 

The documentation should show what was provided and how it supported the approved work.

 

Subcontractor and Research Partner Costs Need Extra Review

 

Subcontractors, subrecipients, universities, and research partners can create additional documentation requirements.

 

The company should maintain:

• Executed agreement
• Scope of work
• Approved budget
• Partner invoices
• Deliverables
• Payment records
• Budget-to-actual tracking
• Cost reasonableness support
• Agency approvals, if required
• Closeout documentation
• Correspondence

For STTR awards, research partner documentation is especially important because the partner’s role is central to the award structure.

 

Do not treat partner costs like ordinary vendor bills. They should be connected to scope, budget, performance, and documentation.

 

Unallowable Costs Must Be Identified

 

Unallowable costs should not be hidden or ignored.

 

They should be recorded in the accounting system and identified so they are excluded from billings, claims, and proposals when required.

 

FAR requires expressly unallowable costs and mutually agreed unallowable costs, including related directly associated unallowable costs, to be identified and excluded from any billing, claim, or proposal applicable to a government contract.

 

Examples that may need careful review include:

• Certain fundraising costs
• Certain lobbying costs
• Entertainment
• Some sales and marketing activity
• Non-award commercialization costs
• Unsupported costs
• Costs outside the period of performance
• Costs not related to the approved scope

The company should have accounts or codes that make unallowable costs visible.

 

Cost Documentation Should Be Organized Monthly

 

DCAA readiness is harder when documentation is organized only after a question arrives.

 

A monthly documentation process should include:

• General ledger detail
• Payroll records
• Timesheets
• Labor distribution reports
• Vendor invoices
• Consultant invoices
• Subcontractor invoices
• Payment records
• Indirect rate schedules
• Budget-to-actual reports
• Invoice or voucher support
• Unallowable cost review
• Prior approvals
• Agency correspondence

This process helps the company respond faster if questions arise.

 

It also supports management visibility and closeout readiness.

 

Reconcile Budget to Actuals

 

Budget-to-actual reporting helps the company monitor award performance.

 

A useful report should show:

• Approved budget by category
• Actual costs incurred
• Remaining budget
• Labor burn rate
• Consultant and subcontractor spending
• Indirect cost activity
• Unallowable costs
• Invoice or voucher history
• Cash flow impact
• Variance explanations

Budget variances should be reviewed before they become billing, reporting, or closeout issues.

 

Prepare Written Policies and Procedures

 

Policies help show that the company’s accounting process is consistent.

 

Written procedures may cover:

• Timekeeping
• Labor distribution
• Direct and indirect costs
• Unallowable costs
• Purchasing
• Expense approvals
• Consultant and subcontractor review
• Indirect rate calculations
• Billing and invoicing
• Drawdowns or vouchers
• Record retention
• Month-end close

Policies do not need to be overly complicated. They need to reflect what the company actually does and help employees follow the process consistently.

 

Know What Questions May Be Asked

 

DCAA-related questions may include:

• How does your accounting system track costs by award?
• How do you separate direct and indirect costs?
• How do you identify unallowable costs?
• How do employees record time?
• Who approves timesheets?
• How does labor distribution tie to payroll?
• How are indirect rates calculated?
• How are invoices supported?
• How are consultant and subcontractor costs documented?
• How do you reconcile costs to the general ledger?
• How do you ensure costs are within the period of performance?
• Where are records stored?
• What written procedures guide the process?

The company should be ready to answer these questions with both explanations and records.

 

Common DCAA Readiness Mistakes

 

SBIR/STTR companies often run into trouble because they wait too long to prepare.

 

Common mistakes include:

• Treating Phase II like Phase I
• Using basic bookkeeping without project cost tracking
• Not setting up timekeeping before work begins
• Reconstructing timesheets after the fact
• Not tying payroll to labor distribution
• Charging all founder time to the award
• Using unsupported indirect rates
• Mixing direct and indirect costs
• Not tracking unallowable costs separately
• Submitting invoices without support
• Treating consultant invoices too casually
• Waiting until closeout to organize documentation
• Having no written policies or procedures
• Assuming accounting software alone is enough

These issues are easier to prevent before the first invoice, voucher, or review.

 

DCAA Readiness Checklist for SBIR/STTR Awardees

 

A practical readiness checklist should include:

• Review award type and payment terms
• Confirm accounting system setup
• Set up project codes
• Separate direct and indirect costs
• Identify unallowable cost accounts
• Implement timekeeping
• Connect payroll to labor distribution
• Build indirect rate schedules
• Organize invoice and voucher support
• Review vendor and consultant files
• Review subcontractor and partner documentation
• Prepare budget-to-actual reports
• Reconcile costs monthly
• Write practical policies and procedures
• Save agency correspondence
• Maintain closeout documentation

This checklist should be adapted to the award type, agency, and contract requirements.

 

Final Thoughts: DCAA Readiness Is Built Before Questions Arrive

 

DCAA questions are easier to handle when the company has already built the right financial foundation.

 

That means project cost tracking, timekeeping, labor distribution, indirect rate support, invoice documentation, unallowable cost controls, and organized cost records.

 

For SBIR/STTR awardees, especially those pursuing DoD Phase II or cost-reimbursable work, DCAA readiness is not just an audit concern. It is part of managing the award properly.

 

At Peter Witts CPA PC, we help SBIR/STTR companies strengthen DCAA readiness so records are clearer, invoices are better supported, labor is traceable, indirect rates are more defensible, and award documentation is organized before questions arise.

 

Need Help Strengthening Your DCAA Readiness?

 

If your company has received an SBIR/STTR award or is preparing for Phase II, Peter Witts CPA PC can help review your accounting system design, timekeeping, labor distribution, indirect rates, invoices, unallowable cost controls, consultant and subcontractor records, and cost documentation.

 

Backed by 35+ years of government contract accounting experience and first-hand DCAA knowledge, our team helps innovators prepare financial records that support federal award performance and review.

 

Schedule a strategic consultation with Peter Witts CPA PC to strengthen your DCAA readiness.