For many SBIR and STTR teams, timekeeping feels like an administrative task that can wait until after funding is awarded. Founders, scientists, and engineers are often focused on the research, the prototype, the data, and the path to commercialization.

 

But in federal funding, labor is often one of the largest and most closely reviewed cost categories.

 

If your company is charging employee time to an SBIR/STTR award, you need a reliable way to show who worked, when they worked, what project they supported, and how that labor connects to the approved budget and accounting records.

 

At Peter Witts CPA PC, we help SBIR/STTR applicants and awardees build timekeeping and labor distribution processes that support proposal readiness, award management, reporting, and audit readiness.

 

Why Timekeeping Matters for SBIR/STTR Companies

SBIR/STTR funding is designed to help small businesses advance innovation, research, and commercialization. But once federal funds are involved, the company must be able to support the costs charged to the award.

 

Labor costs are especially important because technical work is often performed by founders, scientists, engineers, software developers, research staff, and project managers. If that labor is included in the budget, it should be tracked properly after award.

 

Strong timekeeping helps your company:

• Support labor costs charged to the award
• Connect employee effort to the project budget
• Separate direct, indirect, and unallowable labor
• Prepare accurate invoices, drawdowns, or reports
• Support indirect rate calculations
• Reduce risk during agency or audit review
• Give leadership clearer visibility into project performance

Timekeeping is not just a compliance requirement. It is part of the financial foundation that helps your company manage federal funding responsibly.

 

Timekeeping Should Start Before Problems Appear

Many startups and research-driven companies operate informally before federal funding. Founders may work across multiple projects, employees may shift between research and business development, and technical staff may not be used to recording time daily.

 

That may be common in a startup environment, but it can create problems under federal funding.

 

If time is not tracked consistently, the company may struggle to support labor charged to the award. It may also become difficult to separate project work from general business activity, indirect activity, commercialization activity, or unallowable work.

 

The best time to set up timekeeping is before award performance begins. For companies preparing a proposal, it is also helpful to think about timekeeping before the budget is submitted so the proposed labor effort can be tracked after award.

 

What Good Timekeeping Should Show

A strong timekeeping process should make labor activity clear and traceable.

 

Your records should show:

• Who performed the work
• The date the work was performed
• The project, contract, grant, or award supported
• The type of work or labor category
• Whether the time was direct, indirect, or unallowable
• Total hours worked
• Employee certification or submission
• Supervisor review and approval
• Any corrections or adjustments
• Connection to payroll and labor distribution records

The goal is to make the labor trail easy to follow. If someone reviews the records later, they should be able to understand how time was recorded, approved, charged, and reported.

 

Direct Labor vs. Indirect Labor

SBIR/STTR teams need to understand the difference between direct and indirect labor.

 

Direct labor is time spent working specifically on the funded project. This may include research, experiments, engineering, software development, testing, prototyping, data analysis, project-specific technical documentation, or other activities tied directly to the statement of work.

 

Indirect labor supports the business more broadly. This may include general management, accounting, administrative work, business operations, company-wide meetings, or activities that support multiple projects.

 

Both types of labor may be legitimate business costs, but they should not be mixed together. The accounting system should be able to separate direct labor from indirect labor so the company can support award costs, calculate rates, and prepare reports accurately.

 

What About Founder Time?

Founder time is one of the most common timekeeping challenges for SBIR/STTR companies.

 

Founders often work across everything: research, hiring, fundraising, commercialization, customer discovery, investor meetings, grant reporting, technical development, and general management. Not all of that time belongs on the federal award.

 

If a founder is charging time directly to the SBIR/STTR project, that time should be tied to project-specific work and supported by time records.

 

Founder time should be handled carefully because it can affect:

• Proposal budgets
• Labor distribution
• Direct cost support
• Indirect rate calculations
• Cash flow planning
• Agency review
• Audit readiness

A founder’s time should not be charged to the award simply because the founder is working hard. It should be charged based on the actual work performed and the funding source that work supports.

 

What Scientists and Engineers Need to Know

Scientists and engineers may not think of timekeeping as part of research, but accurate time records help protect the project.

 

Technical team members should understand:

• Time should be recorded daily, not reconstructed weeks later
• Time should be charged to the project actually worked on
• Direct project work should be separated from general company activity
• Corrections should be documented
• Timesheets should be submitted and certified on time
• Supervisor approvals matter
• Labor records should align with project milestones and reports

The goal is not to burden the technical team. The goal is to create a clean record of the work performed so the company can support the federal funding it receives.

 

Why Daily Time Entry Matters

Daily time entry is important because it reduces the risk of inaccurate or reconstructed records. When employees wait until the end of the week, month, or reporting period, details can be forgotten or estimated.

 

For federal funding, estimated time can create risk.

 

A stronger process is to have employees record time each day, using the correct project or cost code. This helps create a more accurate labor record and makes it easier to reconcile timekeeping, payroll, project costs, and reporting.

 

Daily time entry also helps leadership monitor whether the project is using labor as planned.

 

Labor Distribution: Connecting Timesheets to Accounting

Timekeeping is only one part of the process. The company also needs labor distribution.

 

Labor distribution is how time records flow into payroll, accounting, project costs, indirect rates, and billing or reporting. It helps show how employee labor was allocated across direct projects, indirect activities, and unallowable work.

 

A strong labor distribution process should connect:

• Timesheets
• Payroll records
• Employee compensation
• Project codes
• General ledger accounts
• Direct and indirect labor categories
• Budget-to-actual reports
• Invoices, drawdowns, or reimbursement requests

If timesheets do not connect to accounting records, the company may have time records but still struggle to support labor costs.

 

Timekeeping for Remote and Hybrid Teams

Many SBIR/STTR companies operate with remote or hybrid technical teams. That can work, but the timekeeping process still needs to be clear and consistent.

 

Remote and hybrid teams should have:

• Written timekeeping procedures
• Clear project and cost codes
• Daily time entry expectations
• Electronic approval workflows
• Documentation for corrections
• Supervisor review
• Training for new employees and contractors
• Consistent treatment across locations

A remote work environment does not remove the need for labor support. It makes clear procedures even more important.

 

Contractors, Consultants, and Subcontractors

Timekeeping rules may differ for employees, consultants, and subcontractors, but all labor-related costs should still be supported.

 

For consultants and subcontractors, the company should maintain documentation such as:

• Agreements or statements of work
• Approved rates or fees
• Invoices
• Description of services performed
• Period of performance
• Deliverables
• Approval records
• Evidence that the work relates to the funded project

If consultant or subcontractor costs are included in the SBIR/STTR budget, the company should be able to show how those costs support the award.

 

Common Timekeeping Mistakes

SBIR/STTR teams often run into problems because they wait too long to formalize timekeeping.

 

Common mistakes include:

• Recording time only at the end of the month
• Charging all founder time to the award
• Mixing direct project work with indirect company activity
• Using vague project codes
• Failing to track uncompensated or extra hours when required by policy
• Not documenting corrections or changes
• Missing supervisor approvals
• Treating timekeeping as optional for technical staff
• Failing to reconcile timesheets to payroll
• Not separating employee labor from consultant or subcontractor work
• Recreating time records after an agency request

These issues are easier to prevent than to correct after the fact.

 

How Timekeeping Supports Indirect Rates

Timekeeping also affects indirect rates.

 

If employees split time between direct project work and indirect company activity, the accounting system needs to capture that split accurately. Otherwise, indirect rates may be distorted, labor costs may be misclassified, and proposals or billings may become harder to support.

 

For companies preparing for Phase II or larger awards, this becomes especially important. The company’s labor records should support both the direct costs charged to the award and the indirect cost structure used in the budget.

 

A clean timekeeping process gives leadership better visibility into the true cost of performing the work.

 

How Timekeeping Supports Billing, Drawdowns, and Reporting

If labor costs are included in invoices, reimbursement requests, drawdowns, or financial reports, the company should be able to support those costs with timesheets, payroll records, and labor distribution reports.

 

This means the accounting records should connect clearly to the labor records.

 

For example, if an invoice includes project labor for a specific period, the company should be able to show the timesheets, payroll support, labor allocation, and general ledger activity that support that amount.

 

The stronger the connection between timekeeping and accounting, the easier it is to respond to questions.

 

What a Timekeeping Policy Should Include

A written timekeeping policy helps employees understand what is expected and helps the company apply the process consistently.

 

A practical timekeeping policy should address:

• Who must record time
• How often time must be entered
• Which system or form should be used
• How project or cost codes should be selected
• How direct and indirect labor should be classified
• How corrections should be handled
• Who approves time
• When timesheets are due
• How payroll and accounting use time records
• What employees should do if they are unsure where to charge time

The policy should be clear enough for founders, scientists, engineers, and administrative staff to follow.

 

Training Matters

Even a good timekeeping system can fail if employees do not understand why it matters.

 

SBIR/STTR teams should train employees on:

• Why timekeeping is required
• How to enter time correctly
• Which project codes to use
• How to distinguish direct and indirect activity
• What to do when work supports multiple projects
• How to correct mistakes
• Why approvals must be timely
• How time records support federal funding

Training helps make timekeeping part of the company culture, not just a compliance task.

 

Timekeeping Readiness Checklist

Before award performance begins, SBIR/STTR companies should ask:

• Do we have a written timekeeping policy?
• Is daily time entry required?
• Are project and cost codes clearly defined?
• Can employees separate direct and indirect work?
• Are supervisors reviewing and approving time?
• Are corrections documented?
• Does timekeeping connect to payroll?
• Does labor distribution connect to the general ledger?
• Can we produce labor reports by award or project?
• Can we support labor costs used in invoices, drawdowns, or reports?
• Have founders, scientists, and engineers been trained?

If the answer to several of these questions is no, the company may need to strengthen timekeeping before award activity grows.

 

Final Thoughts: Timekeeping Protects the Innovation

SBIR/STTR teams are built around innovation, not paperwork. But when federal funding supports the work, timekeeping becomes part of protecting the project.

 

Good timekeeping helps show that labor costs are real, reasonable, and tied to the funded work. It also supports accounting system adequacy, indirect rates, billing, reporting, and audit readiness.

 

For founders, scientists, and engineers, the goal is not to create unnecessary administrative burden. The goal is to build a reliable financial record that supports the company’s research, funding, and growth.

 

At Peter Witts CPA PC, we help SBIR/STTR applicants and awardees build timekeeping and labor distribution processes that support federal funding from proposal planning through award management and audit readiness.

 

Need Help Strengthening Your Timekeeping Controls?

If your company is preparing for SBIR/STTR funding, Phase II growth, or a federal accounting system review, Peter Witts CPA PC can help assess your timekeeping process, labor distribution, accounting system, and documentation practices.

 

Backed by 35+ years of government contract accounting experience and first-hand DCAA knowledge, our team helps innovators build the financial foundation to pursue funding, manage awards, and grow with confidence.

 

Schedule a strategic consultation with Peter Witts CPA PC to strengthen your SBIR/STTR timekeeping controls.