An SBIR/STTR financial policies and procedures manual may sound like an administrative document.

 

But for a federally funded company, it can be one of the most important tools for accounting system readiness.

 

The manual explains how the company tracks costs, records time, charges payroll, reviews expenses, separates direct and indirect costs, excludes unallowable costs, prepares drawdowns or invoices, retains documents, and prepares for closeout.

 

Without written procedures, the company may depend too heavily on memory, spreadsheets, founder judgment, or one person’s process.

 

That can create problems when the company grows, hires employees, receives Phase II funding, prepares for DCAA-related questions, submits drawdowns, or responds to agency review.

 

At Peter Witts CPA PC, we help SBIR/STTR companies build federal funding procedures so their accounting systems, records, and internal processes are better prepared for award performance, reporting, review, and closeout.

 

Why a Financial Policies and Procedures Manual Matters

 

A financial policies and procedures manual helps turn federal accounting requirements into daily operating steps.

 

It tells the team:

• How costs should be coded

• How time should be recorded

• How payroll should be allocated

• How purchases should be approved

• How expenses should be documented

• How indirect costs should be calculated

• How unallowable costs should be identified

• How drawdowns or invoices should be supported

• How records should be retained

• How closeout should be prepared

SBIR.gov explains that a strong accounting system should distinguish direct costs from indirect costs, isolate unallowable costs, support timekeeping, and distribute direct and indirect labor appropriately.

 

A manual helps the company apply those expectations consistently.

 

Start With the Purpose of the Manual

 

The manual should not be written only to sit in a folder.

 

It should help employees, founders, bookkeepers, accountants, project managers, and outside advisors follow the same process.

 

The purpose should be clear:

• Support SBIR/STTR and federal award compliance

• Strengthen accounting system readiness

• Improve project cost tracking

• Support payroll and labor distribution

• Support indirect rate calculations

• Improve drawdown and invoice support

• Reduce unsupported costs

• Prepare records for agency or DCAA-related review

• Support accurate reporting and closeout

A good manual should be practical enough for the team to use.

 

Include Company and Award Overview

 

The manual should begin with a short overview of the company’s federal funding activity.

 

This section may include:

• Company name

• Primary federal funding programs

• Current awards

• Award types

• Accounting software used

• Payroll system used

• Timekeeping system used

• Primary finance contacts

• Internal approvers

• Outside accounting advisors

• Key federal accounting responsibilities

This gives context for the procedures that follow.

 

Define Roles and Responsibilities

 

The manual should explain who does what.

 

Roles may include:

• Founder or executive lead

• Principal investigator

• Project manager

• Finance lead

• Bookkeeper

• Payroll processor

• Timekeeping approver

• Purchasing approver

• Subaward manager

• Consultant manager

• External accountant

• Compliance advisor

For each role, define responsibilities such as:

• Reviewing award budgets

• Approving purchases

• Reviewing timesheets

• Preparing payroll allocations

• Reviewing invoices

• Preparing drawdowns

• Approving cost transfers

• Maintaining documentation

• Preparing reports

• Coordinating closeout

This helps avoid confusion when deadlines arrive.

 

Include Award Setup Procedures

 

The manual should explain what happens when a new SBIR/STTR or federal award is received.

 

Award setup procedures should cover:

• Reviewing the Notice of Award or contract

• Reviewing the approved budget

• Reviewing the statement of work

• Identifying the period of performance

• Identifying payment method

• Identifying reporting requirements

• Identifying prior approval terms

• Setting up project codes

• Mapping budget categories to accounts

• Creating documentation folders

• Setting up drawdown or invoice procedures

• Setting up consultant or subaward files

• Updating the reporting calendar

This helps ensure accounting is ready before spending begins.

 

Include Chart of Accounts Procedures

 

The manual should explain how the chart of accounts is used for federal funding.

 

This section should describe how the company tracks:

• Direct labor

• Fringe benefits

• Materials and supplies

• Consultants

• Subawards

• Travel

• Equipment

• Other direct costs

• Indirect costs

• Unallowable costs

• Commercial costs

• Internal R&D

• Fundraising

• Sales and marketing

• General and administrative costs

The manual should also explain who can create new accounts and how account changes are approved.

 

The goal is consistency.

 

Include Project Code Procedures

 

Project codes are critical for award accounting.

 

The manual should explain how project codes are created, used, reviewed, and closed.

 

Project code procedures should cover:

• Each federal award

• Each contract or grant

• Each phase, if applicable

• Each customer-funded project

• Internal R&D

• Commercialization activity

• General business activity

• Fundraising

• Sales and marketing

• Unallowable activity

2 CFR 200.302 requires financial systems to maintain records that identify federal award expenditures and compare expenditures with budget amounts for each award. A project code process helps support that requirement.

 

Include Direct Cost Procedures

 

The manual should define direct costs.

 

Direct costs are costs that can be identified specifically with a federal award, contract, grant, project, or other cost objective.

 

Direct cost procedures should explain how the company handles:

• Direct labor

• Project materials

• Prototype supplies

• Testing services

• Consultants

• Subawards

• Project travel

• Equipment

• Other direct costs

The manual should require documentation showing why the cost benefits the award.

 

A direct cost should not be charged to an award simply because budget remains.

 

Include Indirect Cost Procedures

 

The manual should explain how indirect costs are classified and calculated.

 

Indirect cost procedures should cover:

• Fringe costs

• Overhead costs

• G&A costs

• Indirect labor

• Facility costs

• Insurance

• Accounting support

• Payroll processing

• Administrative software

• General management

• Allocation bases

• Rate calculations

• Rate review timing

• Proposal rate support

• Billing rate support, if applicable

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 manual should explain how those records are maintained.

 

Include Unallowable Cost Procedures

 

Unallowable costs should be identified and separated.

 

The manual should explain how the company tracks costs that should not be charged to federal awards or included improperly in indirect pools.

 

Examples may include:

• Fundraising

• Investor relations

• Certain lobbying costs

• Entertainment

• General sales activity

• Non-award commercialization

• Personal or non-business costs

• Unsupported costs

• Costs outside the period of performance

• Costs restricted by award terms

SBIR.gov identifies isolation of unallowable costs as part of a strong accounting system.

 

The manual should explain how these costs are coded, reviewed, and excluded from drawdowns, invoices, and indirect rate calculations.

 

Include Timekeeping Procedures

 

Timekeeping should have its own section.

 

This section should explain:

• Who must record time

• When time must be entered

• How often timesheets are submitted

• Which project and activity codes are used

• How total work activity is tracked

• How direct labor is recorded

• How indirect labor is recorded

• How non-award activity is recorded

• How founder time is recorded

• How corrections are made

• Who approves timesheets

• Where timekeeping records are retained

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

 

The manual should make timekeeping expectations clear before award work begins.

 

Include Labor Distribution Procedures

 

Labor distribution connects timekeeping, payroll, and the general ledger.

 

The manual should explain how the company prepares labor distribution reports showing:

• Employee name

• Pay period

• Hours by project

• Direct award labor

• Indirect labor

• Non-award labor

• Salary or wage allocation

• Fringe allocation, if applicable

• Project code

• General ledger account

• Total labor cost charged to each award

DCAA’s pre-award checklist includes whether the accounting system identifies employee labor by cost objective and distributes direct and indirect labor appropriately.

 

The manual should explain how labor distribution is prepared, reviewed, reconciled, and retained.

 

Include Payroll Procedures

Payroll procedures should explain how labor costs are supported.

 

This section should cover:

• Payroll schedule

• Payroll provider

• Salary or wage records

• Payroll registers

• Employer payroll taxes

• Fringe benefits

• Payroll journal entries

• Payroll reconciliation

• Payroll approval

• Founder compensation

• Labor distribution tie-out

• General ledger posting

Payroll should not be disconnected from timekeeping and project costing.

 

The manual should explain how payroll becomes award-ready.

 

Include Founder Compensation Procedures

 

Founder compensation often needs extra structure.

 

The manual should explain how founder time and pay are handled.

 

This section should cover:

• Approved founder role

• Approved level of effort

• Payroll support

• Timekeeping requirements

• Direct award work

• Indirect management time

• Fundraising time

• Commercialization work

• Customer-funded work

• Internal R&D

• Labor distribution

• Salary cap or agency-specific review, if applicable

• Documentation retained in the award file

Founder pay should not be charged to an award simply because the founder works hard or the budget includes compensation.

 

It should be supported by approved effort, actual work, payroll, and timekeeping.

 

Include Purchasing Procedures

 

Purchasing procedures should explain how award-related purchases are requested, approved, documented, and recorded.

 

This section should cover:

• Purchase requests

• Approval thresholds

• Vendor selection

• Price reasonableness

• Project purpose

• Budget category

• Prior approval review

• Receipt or proof of delivery

• Invoice review

• Payment approval

• General ledger coding

• Documentation retention

Purchasing procedures help prevent unsupported or misclassified costs from entering the award records.

 

Include Expense Approval Procedures

 

Employee and founder expenses should be reviewed before reimbursement.

 

Expense procedures should cover:

• Allowable expense types

• Required receipts

• Business purpose

• Project code

• Travel approvals

• Mileage or transportation

• Meals, if allowed under policy and award terms

• Equipment or supplies

• Approval process

• Submission deadline

• Reimbursement process

• Documentation retention

The manual should make clear that expenses must support the award and be documented.

 

Include Consultant Procedures

 

Consultant costs need more than invoices.

 

The manual should explain how consultant relationships are set up and monitored.

 

Consultant procedures should cover:

• Approved budget reference

• Consultant agreement

• Scope of work

• Rate support

• Deliverables

• Invoice detail

• Dates of service

• Payment terms

• Prior approval, if required

• Travel reimbursement, if applicable

• Project coding

• Documentation retention

A consultant should not begin award work before the file is complete.

 

Include Subaward and Subcontract Procedures

 

If the company works with universities, labs, research institutions, subcontractors, or subrecipients, the manual should include partner procedures.

 

This section should cover:

• Subaward or subcontract setup

• Scope of work

• Approved budget

• Period of performance

• Flow-down terms, if applicable

• Invoice requirements

• Deliverables

• Monitoring responsibilities

• Payment review

• Cost share, if applicable

• Prior approval review

• Closeout records

• Documentation retention

Partner costs should not be treated like ordinary vendor bills.

 

Include Travel Procedures

 

Travel can create review questions if the purpose is not clear.

 

Travel procedures should explain:

• Travel approval process

• Project purpose requirements

• Budget category review

• Prior approval review

• Traveler documentation

• Receipts

• Conference agendas

• Mileage or airfare

• Lodging

• Meals and per diem treatment, if applicable

• Expense report requirements

• General ledger coding

• Documentation retention

Travel tied to sales, fundraising, investor activity, or non-award commercialization should be reviewed carefully before being charged to an award.

 

Include Equipment Procedures

 

Equipment procedures should explain how equipment is approved, purchased, tracked, and documented.

 

This section should cover:

• Approved equipment budget

• Purchase approval

• Project purpose

• Price support

• Invoice support

• Proof of payment

• Capitalization treatment

• Property records

• Serial numbers

• Location tracking

• Use documentation

• Disposition requirements

• Closeout records

Equipment purchased with federal funds should be tracked carefully from purchase through closeout.

 

Include Billing and Invoice Procedures

 

For contract-based awards, the manual should explain how invoices or vouchers are prepared and supported.

 

This section should cover:

• Billing schedule

• Invoice preparer

• Invoice reviewer

• Contract line items

• Labor support

• Vendor support

• Consultant support

• Subcontractor support

• Indirect rate support

• Unallowable cost review

• Prior payment reconciliation

• Submission process

• Approval process

• Support file retention

Each invoice should be supported before submission.

 

Include Drawdown Procedures

 

For grant-funded awards, the manual should explain how drawdowns are prepared and reviewed.

 

Drawdown procedures should cover:

• Payment system used

• Drawdown preparer

• Drawdown reviewer

• Immediate cash need calculation

• Ledger support

• Payroll support

• Timekeeping and labor distribution

• Vendor and consultant support

• Subaward support

• Indirect cost support

• Federal cash on hand review

• Refunds and credits

• PMS reconciliation

• Approval

• Support file retention

2 CFR 200.305 requires payment methods to minimize the time between receiving federal funds and disbursing them for award purposes.

 

The manual should make clear that drawdowns should be tied to supported costs and cash needs.

 

Include Budget-to-Actual Reporting Procedures

 

Budget-to-actual reporting helps leadership monitor award performance.

 

The manual should explain how often reports are prepared and what they include.

 

Reports should show:

• Approved budget

• Actual costs incurred

• Remaining budget

• Variances

• Labor burn rate

• Consultant spending

• Subaward spending

• Travel and equipment costs

• Indirect costs

• Drawdowns or invoices

• Prior approval questions

• Notes on significant changes

The manual should explain who reviews these reports and how issues are resolved.

 

Include Cost Transfer Procedures

 

Cost transfers should be controlled.

 

The manual should explain when transfers are allowed and what documentation is required.

 

Cost transfer procedures should include:

• Original charge

• Corrected charge

• Reason for correction

• Date error was discovered

• Date transfer was posted

• Benefit explanation

• Supporting documentation

• Approval

• Impact on drawdowns or invoices

• Impact on budget-to-actual reports

• Indirect rate impact, if applicable

Cost transfers should be corrections, not budget management tools.

 

Include Monthly Close Procedures

 

A monthly close process helps prevent award accounting problems from building over time.

 

The manual should require monthly review of:

• General ledger activity

• Project coding

• Payroll

• Timekeeping

• Labor distribution

• Vendor invoices

• Consultant invoices

• Subaward invoices

• Travel and equipment

• Indirect costs

• Drawdowns or invoices

• Budget-to-actual reports

• Cost transfers

• Unallowable costs

• Documentation gaps

• Cash flow

• Prior approval questions

Monthly review helps records stay ready for reporting and review.

 

Include Document Retention Procedures

 

Federal award records should be retained and organized.

 

The manual should explain what records are kept, where they are stored, and who is responsible.

 

Records may include:

• Award documents

• Approved budgets

• General ledger reports

• Payroll records

• Timesheets

• Labor distribution reports

• Vendor invoices

• Consultant files

• Subaward files

• Travel support

• Equipment records

• Indirect rate schedules

• Drawdown support

• Invoice support

• Cost transfer records

• Prior approvals

• Agency correspondence

• Reports submitted

• Closeout records

2 CFR 200.334 addresses record retention requirements for federal awards.

 

The manual should align retention procedures with award and agency requirements.

 

Include Reporting Procedures

 

The manual should explain how financial reports are prepared and reviewed.

 

Reporting procedures may cover:

• Federal Financial Reports

• SF-425 reports

• Budget-to-actual reports

• Drawdown reconciliation

• Contract invoices

• Reimbursement requests

• Agency financial reports

• Subaward reports

• Indirect rate reports

• Closeout reports

The manual should explain who prepares reports, who reviews them, what records support them, and where final versions are saved.

 

Include Closeout Procedures

 

Closeout should not be an afterthought.

 

The manual should explain how the company prepares for award closeout.

 

Closeout procedures should cover:

• Final ledger review

• Final payroll review

• Final timekeeping review

• Final vendor invoices

• Final consultant invoices

• Final subaward invoices

• Final drawdowns or invoices

• Refunds or credits

• Equipment records

• Final financial reports

• Final technical reports

• Invention reports, if applicable

• Cost share support, if applicable

• Record retention

• Final support file review

2 CFR 200.344 addresses closeout after the period of performance ends.

 

Closeout is easier when procedures are followed throughout the award.

 

Include Review and Update Procedures

 

A financial policies and procedures manual should be reviewed regularly.

 

The manual should be updated when:

• A new award is received

• A new agency is added

• A Phase II award begins

• Payment method changes

• New accounting software is implemented

• Timekeeping changes

• Payroll process changes

• Indirect rate structure changes

• New consultants or subawards are added

• A financial review identifies gaps

• Closeout issues arise

The manual should reflect how the company actually operates.

 

Common Manual Gaps

 

SBIR/STTR companies often have written procedures that are too generic or incomplete.

 

Common gaps include:

• No project code policy

• No timekeeping detail

• No labor distribution process

• No founder compensation guidance

• No unallowable cost policy

• No indirect rate procedure

• No drawdown support process

• No invoice backup process

• No cost transfer approval process

• No documentation folder structure

• No monthly close procedure

• No closeout checklist

• No assigned responsibilities

A manual that does not explain daily procedures will not support accounting readiness.

 

Financial Policies and Procedures Manual Checklist

 

An SBIR/STTR financial policies and procedures manual should include:

• Purpose and scope

• Roles and responsibilities

• Award setup

• Chart of accounts

• Project codes

• Direct costs

• Indirect costs

• Unallowable costs

• Timekeeping

• Labor distribution

• Payroll

• Founder compensation

• Purchasing

• Expense approvals

• Consultants

• Subawards and subcontracts

• Travel

• Equipment

• Billing and invoices

• Drawdowns

• Budget-to-actual reporting

• Cost transfers

• Monthly close

• Document retention

• Reporting

• Closeout

• Review and update process

This checklist helps determine whether the manual is useful for federal funding management or only a general accounting document.

 

Questions to Ask About Your Manual

 

Before relying on a financial policies and procedures manual, ask:

• Does it explain how award costs are coded?

• Does it explain timekeeping requirements?

• Does it connect timekeeping to labor distribution?

• Does it explain payroll support?

• Does it define direct and indirect costs?

• Does it address unallowable costs?

• Does it explain consultant and subaward files?

• Does it explain drawdown or invoice support?

• Does it explain cost transfer documentation?

• Does it include monthly review procedures?

• Does it address record retention?

• Does it include closeout steps?

• Does the team understand and follow it?

• Would it help answer agency or DCAA-related questions?

If several answers are no, the manual should be strengthened.

 

Final Thoughts: Procedures Make the Accounting System Repeatable

 

A strong SBIR/STTR accounting system is not just software.

 

It is a repeatable process supported by written procedures, consistent coding, timekeeping, labor distribution, documentation, review, and reporting.

 

A financial policies and procedures manual helps the company move from informal bookkeeping to federal funding readiness.

 

At Peter Witts CPA PC, we help SBIR/STTR companies build federal funding procedures so accounting records are stronger, payment requests are better supported, and agency or DCAA-related questions are easier to answer.

 

Need Help Building Federal Funding Procedures?

 

If your SBIR/STTR company is preparing for federal funding, managing an active award, pursuing Phase II, or strengthening accounting system readiness, Peter Witts CPA PC can help build or review your financial policies and procedures manual.

 

Our team can help address timekeeping, labor distribution, purchasing, expense approvals, direct and indirect costs, unallowable costs, billing, drawdowns, documentation, reporting, record retention, and closeout procedures.

 

Backed by 35+ years of government contract accounting experience and first-hand DCAA knowledge, we help innovators build financial procedures that support federal funding from proposal to performance.

 

Schedule a strategic consultation with Peter Witts CPA PC to build federal funding procedures.