Receiving an SBIR/STTR award notice is exciting.

 

It means the company is moving from proposal planning to funded work.

 

But before the first payroll run, vendor purchase, consultant invoice, drawdown, or reimbursement request, the company should pause and set up the award accounting correctly.

 

Federal award accounting is easier to manage when the system is built before spending begins. If project codes, budget categories, timekeeping, payroll, indirect costs, documentation folders, and drawdown procedures are set up late, the company may spend months trying to reconstruct records.

 

At Peter Witts CPA PC, we help SBIR/STTR awardees set up award accounting correctly so costs are tracked, documentation is organized, and financial records are ready for reporting, drawdowns, invoices, review, and closeout.

 

Why Award Setup Matters Before Spending Begins

 

The first few weeks after award notice can shape the entire financial life of the award.

 

If the company starts spending before accounting procedures are ready, problems can appear quickly:

• Payroll may not be coded to the award

• Founder time may not be separated by activity

• Vendor costs may be charged to the wrong account

• Consultant files may be incomplete

• Drawdowns may be based on estimates instead of support

• Indirect costs may be calculated inconsistently

• Unallowable costs may be mixed with award costs

• Budget-to-actual reports may require manual cleanup

• Closeout records may be hard to assemble later

SBIR.gov explains that an accounting system should distinguish direct costs from indirect costs, isolate unallowable costs, support timekeeping, and distribute labor appropriately. Those processes should be ready before award costs begin.

 

Step 1: Review the Official Award Documents

 

Start with the official award documents.

 

Do not set up the accounting system based only on the proposal draft or internal budget workbook. The agency may have changed the budget, terms, reporting requirements, payment method, or period of performance before issuing the award.

 

Review and save:

• Notice of Award or contract

• Approved budget

• Budget justification

• Statement of work

• Period of performance

• Terms and conditions

• Payment instructions

• Reporting requirements

• Prior approval requirements

• Indirect rate terms

• Cost share terms, if applicable

• Consultant or subaward approvals

• Equipment or travel restrictions

• Closeout requirements

The accounting setup should reflect the award the company actually received.

 

Step 2: Confirm the Award Type

 

The award type affects how costs should be tracked and supported.

 

An SBIR/STTR award may be structured as:

• Grant

• Cooperative agreement

• Fixed-price contract

• Cost-reimbursable contract

• Cost-plus-fixed-fee contract

• Milestone-based award

• Reimbursement-based award

• Advance-payment award

• Phase I

• Phase II

• Fast Track

• Direct to Phase II

A DoD cost-reimbursable Phase II contract may require a different level of accounting system readiness than an early Phase I grant.

 

DCAA’s pre-award accounting system checklist is used for contractors new to government contracting, contractors with cost-reimbursement contracts, or contractors receiving progress payments to document how their accounting system is designed to meet SF 1408 criteria.

 

Before spending begins, the company should understand what financial requirements come with the specific award type.

 

Step 3: Compare the Approved Budget to the Proposal Budget

 

The approved budget may not match the proposed budget.

 

Agencies may adjust labor, consultants, subawards, equipment, travel, indirect costs, fee, or other direct costs before award.

 

Compare:

• Proposed budget

• Approved budget

• Approved labor

• Approved fringe

• Approved consultants

• Approved subawards

• Approved materials and supplies

• Approved travel

• Approved equipment

• Approved other direct costs

• Approved indirect costs

• Approved fee or profit, if applicable

• Approved TABA, if applicable

• Cost share, if applicable

The approved budget should become the baseline for accounting, budget-to-actual reports, drawdowns, invoices, and closeout.

 

Step 4: Set Up a Separate Project Code

 

Each SBIR/STTR award should have its own project code.

 

Depending on the accounting system, this may be called a class, project, job, customer, contract, grant, department, cost center, or tag.

 

The project code should separate the award from:

• General business activity

• Internal R&D

• Commercialization activity

• Customer-funded work

• Fundraising

• Sales and marketing

• Other federal awards

• Other grants or contracts

• Unallowable activity

2 CFR 200.302 requires financial systems to maintain records identifying the amount, source, and expenditure of federal funds and compare expenditures with budget amounts for each federal award.

 

A separate project code helps create that award-level trail.

 

Step 5: Map Budget Categories to the Chart of Accounts

 

The chart of accounts should support the approved budget.

 

The company should be able to report costs by award category, such as:

• Direct labor

• Fringe benefits

• Materials and supplies

• Consultants

• Subawards

• Travel

• Equipment

• Other direct costs

• Indirect costs

• Fee or profit, if applicable

• TABA, if applicable

• Cost share, if applicable

The company does not need to overbuild the chart of accounts, but it should be able to generate reports that align with the award budget.

 

If budget-to-actual reporting requires heavy manual cleanup, the accounting setup is not ready.

 

Step 6: Set Up Direct, Indirect, and Unallowable Cost Tracking

 

Before spending begins, define how costs will be classified.

 

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

 

Indirect costs support multiple activities or the company as a whole.

 

Unallowable costs should be identified and excluded from award charges when required.

 

The company should set up accounts or codes for:

• Direct award costs

• Indirect cost pools

• General and administrative costs

• Fringe costs

• Overhead costs

• Unallowable costs

• Non-award costs

• Commercial costs

• Internal R&D

• Fundraising and investor activity

• Sales and marketing

This helps prevent award funds from absorbing costs that belong elsewhere.

 

Step 7: Prepare Timekeeping Before Work Starts

 

Timekeeping should be ready before the first hour of award work is performed.

 

Employees, founders, scientists, engineers, developers, and technical staff should know how to record time by project and activity.

 

A timekeeping process should show:

• Employee name

• Date worked

• Hours worked

• Award or project code

• Direct award labor

• Indirect labor

• Non-award labor

• Founder time

• Internal R&D

• Commercialization activity

• Fundraising or investor activity

• Sales or customer activity

• Employee certification

• Supervisor approval

• Corrections or adjustments

SBIR.gov identifies timekeeping as a key accounting system requirement and explains that timesheets help document employee time across business activities, proposal work, commercialization planning, and other activities.

 

Timekeeping should not be reconstructed later from memory.

 

Step 8: Connect Payroll to the Award

 

Payroll should be aligned with the award setup before the first payroll period charged to the award.

 

Review:

• Employees working on the award

• Founder compensation

• Salary or wage rates

• Pay periods

• Payroll taxes

• Fringe benefits

• Payroll provider reports

• Payroll journal entries

• Project coding

• General ledger posting

• Labor distribution process

Payroll support should show what was paid, when it was paid, and how the labor cost was assigned to the award.

 

If payroll is processed without award coding, labor costs may need manual corrections later.

 

Step 9: Build Labor Distribution Reports

 

Labor distribution connects timekeeping, payroll, and accounting.

 

A labor distribution report should show:

• Employee name

• Pay period

• Hours by project

• Direct labor by award

• Indirect labor

• Non-award labor

• Salary or wage allocation

• Fringe allocation, if applicable

• Project code

• General ledger account

• Total labor cost charged to the award

SBIR.gov identifies labor distribution as an accounting system requirement that charges direct and indirect labor appropriately.

 

Without labor distribution, payroll may be recorded but not award-ready.

 

Step 10: Review Founder Time Coding

 

Founder time should be set up carefully before award work begins.

 

A founder may work on technical tasks, project management, fundraising, investor conversations, commercialization, customer discovery, and general company management in the same week.

 

Before charging founder time to the award, define codes for:

• Direct award technical work

• Award-specific project management

• Indirect company management

• Fundraising

• Sales and customer activity

• Commercialization outside the award

• Internal R&D

• General operations

Only founder time that supports the approved award should be charged directly to the award.

 

Step 11: Set Up Consultant Files

 

If the award includes consultants, create a support file before work begins.

 

Each consultant file should include:

• Approved budget reference

• Consultant agreement

• Scope of work

• Rate support

• Letter of commitment, if required

• Deliverables

• Invoice detail requirements

• Payment terms

• Period of performance

• Travel terms, if applicable

• Prior approval, if required

• Documentation requirements

Consultant costs can become difficult to support if work begins before agreements, rates, deliverables, and invoice expectations are clear.

 

Step 12: Set Up Subaward or Research Partner Files

 

If the award includes a university, research institution, lab, subcontractor, or research partner, set up the partner file before costs begin.

 

The file should include:

• Subaward or subcontract agreement

• Approved partner budget

• Scope of work

• Period of performance

• Deliverables

• Invoice requirements

• Payment terms

• Reporting requirements

• Cost share terms, if applicable

• Monitoring responsibilities

• Prior approval documentation

• Closeout requirements

Partner costs should not be treated like ordinary vendor bills.

 

Prime awardees should have a process to review partner invoices before payment and before including those costs in drawdowns, invoices, or reports.

 

Step 13: Set Up Vendor, Travel, and Equipment Documentation

 

Vendor purchases, travel, and equipment should have documentation procedures before spending begins.

 

For vendors, prepare to retain:

• Purchase approval

• Project purpose

• Invoice

• Receipt or proof of delivery

• Proof of payment

• General ledger entry

For travel, prepare to retain:

• Approved travel budget

• Project purpose

• Traveler

• Destination

• Dates

• Receipts

• Expense report

• Conference agenda, if applicable

• Prior approval, if required

For equipment, prepare to retain:

• Approved equipment budget

• Purchase approval

• Pricing support

• Invoice

• Capitalization treatment

• Property record

• Location and use documentation

• Disposition notes, if applicable

These files should be ready before costs are incurred.

 

Step 14: Set Up Indirect Cost Schedules

 

Indirect costs should be set up before billing, drawdowns, or budget reporting begins.

 

Review:

• Approved indirect rate

• Proposed indirect rate

• Fringe rate

• Overhead rate

• G&A rate

• Cost pools

• Allocation bases

• Direct labor base

• Total direct cost base, if applicable

• Unallowable cost exclusions

• Provisional billing rate, if applicable

• Actual rate monitoring process

SBIR.gov explains that indirect rates should be developed from the company’s own accounting system, annual budget, projected cost categories, or other company-specific cost information.

 

The indirect rate should not live only in the proposal spreadsheet.

 

Step 15: Set Up the Drawdown or Invoice Process

 

The payment process should be defined before funds are requested.

 

For grant-funded awards, the company may need to submit drawdowns or cash requests.

 

For contract-funded awards, the company may need to submit invoices, vouchers, or milestone payment requests.

 

For drawdowns, define:

• Who prepares the request

• Who reviews and approves it

• What costs support the amount

• How cash needs are calculated

• How federal cash on hand is reviewed

• How PMS or payment activity is reconciled

• How refunds, credits, or adjustments are handled

2 CFR 200.305 requires payment methods to minimize the time between the transfer of federal funds and disbursement for award purposes.

 

For invoices or vouchers, define:

• Billing frequency

• Required support

• Labor and payroll backup

• Vendor and consultant backup

• Indirect rate support

• Submission process

• Approval process

• Payment tracking

Payment requests should be supported before submission.

 

Step 16: Build Budget-to-Actual Reports

 

Budget-to-actual reports should be set up early.

 

The report should show:

• Approved budget by category

• Actual costs incurred

• Remaining budget

• Variances

• Labor burn rate

• Consultant and subaward spending

• Travel and equipment costs

• Indirect costs

• Drawdowns or invoices

• Cash flow notes

• Prior approval questions

• Documentation gaps

This report should be reviewed monthly.

 

It helps founders understand whether the award is financially on track.

 

Step 17: Create Documentation Folders

 

Documentation should be organized before files start accumulating.

 

Create folders for:

• Award documents

• Approved budget

• Budget-to-actual reports

• Payroll

• Timekeeping

• Labor distribution

• Vendor invoices

• Consultant files

• Subaward files

• Travel

• Equipment

• Indirect rate schedules

• Drawdowns or invoices

• Prior approvals

• Cost transfers

• Agency correspondence

• Reports submitted

• Closeout records

A clean folder structure helps the company respond faster when reports, reviews, or closeout requirements arise.

 

Step 18: Establish Prior Approval Procedures

 

Some changes or costs may require agency approval before spending.

 

Set up a process for identifying and documenting prior approval questions.

 

Review prior approval before:

• Changing scope

• Adding or changing subawards

• Rebudgeting restricted categories

• Purchasing equipment

• Incurring foreign travel

• Changing key personnel

• Extending the period of performance

• Charging unusual or sensitive costs

The company should not spend first and ask later.

 

Step 19: Set Up Cost Transfer Controls

 

Cost transfers may be needed when errors happen, but they should be controlled.

 

Before award activity begins, define:

• Who can request a transfer

• What documentation is required

• Who approves transfers

• How timing is tracked

• How the business reason is documented

• How drawdowns or invoices are affected

• Where support is stored

A transfer should explain what was wrong, what is being corrected, and why the receiving award or category is appropriate.

 

Step 20: Schedule Monthly Award Reviews

 

Award accounting should be reviewed monthly.

 

A monthly review should include:

• General ledger activity

• Project coding

• Payroll records

• Timesheets

• Labor distribution

• Vendor invoices

• Consultant invoices

• Subaward costs

• Travel and equipment

• Indirect costs

• Drawdowns or invoices

• Budget-to-actual reports

• Cost transfers

• Unallowable costs

• Prior approval questions

• Documentation gaps

• Cash flow

• Closeout items

Monthly review prevents small accounting issues from becoming major reporting problems.

 

Award Setup Checklist Before Spending Begins

 

Before the first award cost is incurred, review:

• Official award documents

• Award type

• Approved budget

• Project code setup

• Chart of accounts mapping

• Direct, indirect, and unallowable cost tracking

• Timekeeping system

• Payroll setup

• Labor distribution process

• Founder time coding

• Consultant files

• Subaward or partner files

• Vendor documentation procedures

• Travel documentation procedures

• Equipment documentation procedures

• Indirect cost schedules

• Drawdown or invoice process

• Budget-to-actual report

• Documentation folders

• Prior approval process

• Cost transfer controls

• Monthly review calendar

This checklist helps the company move from award notice to award performance with stronger financial control.

 

Common Award Setup Mistakes

 

SBIR/STTR awardees often run into problems because spending starts before accounting is ready.

 

Common mistakes include:

• Using the proposal budget instead of the approved budget

• Not setting up a separate project code

• Tracking award costs manually

• Starting payroll before timekeeping is ready

• Not connecting timekeeping to payroll

• Charging all founder time to the award

• Starting consultant work without complete files

• Treating subawards like ordinary vendor bills

• Drawing funds without support

• Using unsupported indirect rates

• Not creating documentation folders

• Not identifying unallowable costs

• Waiting until reporting deadlines to reconcile

• Not reviewing records monthly

These issues are easier to prevent before spending begins.

 

Questions to Ask Before the First Award Cost

 

Before charging the first cost to the award, ask:

• Have we reviewed the official award terms?

• Is the approved budget loaded into our reporting process?

• Is the project code active?

• Are budget categories mapped to the chart of accounts?

• Is timekeeping ready?

• Does payroll tie to project labor?

• Can we produce labor distribution reports?

• Are consultant and subaward files complete?

• Are indirect cost schedules prepared?

• Is the drawdown or invoice process documented?

• Are documentation folders set up?

• Are prior approval rules understood?

• Can we prepare a budget-to-actual report?

• Who will review award records each month?

If the answer to several of these questions is no, the company should slow down before spending begins.

 

Final Thoughts: Award Accounting Should Be Set Up Before the First Transaction

 

SBIR/STTR award setup should happen before money is spent.

 

The company should review the award, set up project codes, map the budget, prepare payroll and timekeeping, organize consultant and subaward files, build indirect cost schedules, define the drawdown or invoice process, and create documentation folders before the first transaction is recorded.

 

At Peter Witts CPA PC, we help SBIR/STTR awardees set up award accounting correctly so costs are clearer, records are organized, and payment requests are better supported from day one.

 

Need Help Setting Up Your Award Accounting Correctly?

 

If your company recently received an SBIR/STTR award notice, Peter Witts CPA PC can help set up your award accounting before spending begins. Our team can review the award terms, project codes, budget categories, payroll, timekeeping, consultant files, subaward records, drawdown process, indirect cost setup, and documentation folders.

 

Backed by 35+ years of government contract accounting experience and first-hand DCAA knowledge, our team helps innovator s build award accounting systems that support federal funding performance, reporting, and review.

 

Schedule a strategic consultation with Peter Witts CPA PC to set up your award accounting correctly.