An SBIR/STTR award does not just require good bookkeeping.

 

It requires consistent financial procedures.

 

A company may have accounting software, payroll records, project codes, and a budget spreadsheet, but if the team does not follow consistent procedures, award records can still become difficult to support.

 

Who approves timesheets? How are direct and indirect costs classified? Who reviews vendor invoices? How are unallowable costs identified? How are drawdowns supported? How long are records retained? What happens when a cost does not fit the approved budget?

 

A financial policies and procedures manual helps answer those questions before problems arise.

 

At Peter Witts CPA PC, we help SBIR/STTR companies build federal funding procedures that support timekeeping, cost classification, purchasing, expense approvals, unallowable costs, indirect rates, billing, drawdowns, reporting, and record retention.

 

Why Financial Policies and Procedures Matter

 

Financial policies and procedures help turn federal funding requirements into daily practices.

 

The manual does not need to be complicated. But it should clearly explain how the company manages award-related financial activity.

 

A strong manual helps the company:

• Apply rules consistently
• Train employees and founders
• Support accounting system readiness
• Document timekeeping expectations
• Separate direct, indirect, and unallowable costs
• Review purchases before spending
• Approve expenses properly
• Support invoices, drawdowns, or reimbursements
• Maintain documentation
• Prepare for agency or DCAA questions
• Reduce closeout stress

SBIR.gov explains that SBIR/STTR accounting systems should be able to distinguish direct from indirect costs, isolate unallowable costs, support timekeeping, and distribute labor appropriately. A policies and procedures manual helps the company explain how those activities happen in practice.

 

Start With the Award Requirements

 

The manual should reflect the company’s actual federal funding requirements.

 

Do not copy a generic accounting policy template and assume it will work for SBIR/STTR awards.

 

Before writing or updating the manual, review:

• Award type
• Agency
• Phase
• Approved budget
• Payment method
• Reporting requirements
• Indirect rate treatment
• Cost share or matching requirements, if applicable
• Consultant and subcontractor terms
• Prior approval requirements
• Record retention rules
• Closeout obligations
• DCAA or agency review expectations, if applicable

The manual should support the award the company is actually managing or pursuing.

 

Accounting System Overview

 

The manual should begin with a plain-language overview of the accounting system.

 

This section should explain:

• Accounting software used
• Chart of accounts structure
• Project or award codes
• Cost categories
• General ledger control
• Payroll system
• Timekeeping system
• Document storage process
• Monthly close process
• Reporting responsibilities
• Access controls

DCAA’s pre-award accounting system adequacy checklist is used to understand how a contractor’s accounting system is designed to meet accounting system criteria. That makes it helpful for SBIR/STTR companies to document how their accounting system is designed and who is responsible for each process.

 

Roles and Responsibilities

 

The manual should identify who does what.

 

Even small companies need clarity.

 

Define responsibilities for:

• Founder or CEO
• Principal investigator
• Project manager
• Finance lead
• Bookkeeper or accountant
• Payroll processor
• Timekeeping approver
• Purchasing approver
• Invoice reviewer
• Grant or contract administrator
• Outside CPA or advisor

For each role, explain what the person reviews, approves, prepares, or retains.

 

This helps prevent federal award tasks from falling between founders, technical teams, and finance support.

 

Timekeeping Policy

 

Timekeeping should be one of the clearest sections in the manual.

 

Labor is often one of the largest SBIR/STTR cost categories. The company should have written procedures explaining how employees and founders record time.

 

The timekeeping policy should address:

• Who must record time
• How often time must be recorded
• What system or form is used
• Required project or activity codes
• Direct award labor
• Indirect labor
• Non-award labor
• Founder time
• Commercialization activity
• Fundraising or investor activity
• Sales or customer work
• Internal R&D outside the award
• Supervisor approval
• Correction procedures
• Late timesheet handling
• Record retention

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

 

Labor Distribution Procedures

 

Timekeeping shows where people spent time.

 

Labor distribution shows where payroll costs belong.

 

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

 

Include procedures for:

• Importing or summarizing timesheet data
• Reconciling time to payroll
• Assigning labor to project codes
• Separating direct and indirect labor
• Coding founder labor
• Allocating fringe benefits
• Posting labor to the general ledger
• Reviewing labor distribution reports
• Correcting labor coding errors
• Supporting invoices, drawdowns, and reports

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

 

Direct Cost Policy

 

The manual should define direct costs.

 

Direct costs are costs that can be identified specifically with the award, project, contract, or cost objective.

 

The direct cost policy should explain:

• What types of costs may be charged directly
• How costs are tied to the approved scope
• How project codes are used
• Who approves direct costs
• What documentation is required
• How costs are reviewed before billing or drawdown
• How corrections are handled
• How direct costs are compared to the approved budget

Examples may include direct labor, project materials, approved consultants, approved subcontractors, project-specific travel, equipment, testing, and other costs tied to the statement of work.

 

The policy should make clear that a cost should not be charged directly to the award simply because the company incurred it.

 

Indirect Cost Policy

 

The manual should explain how indirect costs are identified and treated.

 

Indirect costs support multiple activities or the business as a whole. These costs may be allocated through fringe, overhead, G&A, or another approved structure.

 

The indirect cost policy should address:

• Indirect cost pools
• Allocation bases
• Fringe costs
• Overhead costs
• G&A costs
• Indirect labor
• Shared costs
• Unallowable cost exclusions
• Rate calculation timing
• Review responsibilities
• General ledger support
• Rate schedule retention

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

 

The manual should help show how the company turns accounting records into a supportable rate.

 

Unallowable Cost Policy

 

Unallowable costs should have their own policy.

 

These costs may still be legitimate business expenses, but they should not be charged to federal awards when rules or award terms prohibit them.

 

The policy should explain:

• How unallowable costs are identified
• Which accounts or codes are used
• Who reviews questionable costs
• How unallowable costs are excluded from billings, claims, drawdowns, proposals, and indirect rate calculations when required
• How employees ask questions before spending
• How documentation is retained

FAR requires unallowable costs to be identified and excluded from billings, claims, and proposals applicable to a government contract.

 

Examples requiring review may include certain fundraising, lobbying, entertainment, sales activity, non-award commercialization costs, unsupported expenses, or costs outside the period of performance.

 

Cost Classification Procedures

 

The manual should explain how the company decides whether a cost is direct, indirect, unallowable, non-award, or commercial.

 

A practical procedure may ask:

• Does the cost support the approved statement of work?
• Is it within the period of performance?
• Is it included in the approved budget?
• Is it necessary and reasonable?
• Does it benefit one award or multiple activities?
• Is it restricted by the award terms?
• Does prior approval apply?
• Is it related to fundraising, sales, or commercialization?
• What documentation supports the classification?

This section helps employees and finance staff classify costs consistently.

 

Purchasing Policy

 

The manual should include purchasing procedures.

 

This is especially important for materials, equipment, testing services, consultants, subcontractors, and larger purchases.

 

The purchasing policy should address:

• Purchase request process
• Budget review
• Project purpose documentation
• Required approvals
• Quote or pricing support
• Vendor selection
• Conflict of interest review
• Prior approval review
• Purchase order process, if used
• Receipt of goods or services
• Invoice review
• Payment approval
• Documentation storage

The policy should help the company show that purchases were reviewed before funds were spent.

 

Expense Approval Policy

 

Employee and founder expenses should be reviewed consistently.

 

The expense approval policy should cover:

• Who can incur expenses
• Required pre-approval
• Expense report timing
• Required receipts
• Business purpose notes
• Project coding
• Travel costs
• Meals, lodging, transportation, and mileage
• Conference costs
• Credit card charges
• Reimbursement timing
• Review before payment
• Documentation retention

This section helps prevent costs from being charged to the award without support.

 

Consultant and Subcontractor Procedures

 

Consultants and subcontractors are common in SBIR/STTR awards, so the manual should explain how they are reviewed and managed.

 

Procedures should address:

• Consultant versus subcontractor classification
• Approved budget review
• Scope of work
• Agreement requirements
• Rate support
• Deliverables
• Invoice detail
• Payment terms
• Period of performance
• Travel costs
• Budget limits
• Invoice approval
• Documentation files
• Closeout support

This section helps prevent consultant or partner costs from becoming unsupported after work begins.

 

Equipment and Property Procedures

 

If the company purchases equipment under federal awards, the manual should include equipment procedures.

 

This section should address:

• Approved equipment budget
• Prior approval review
• Purchase timing
• Project use
• Pricing support
• Capitalization policy
• General ledger coding
• Property records
• Location tracking
• Condition tracking
• Shared-use equipment
• Closeout review
• Disposition requirements

This helps connect equipment purchasing to both accounting and property management.

 

Billing and Invoicing Procedures

 

For contract-based awards or reimbursement requests, the manual should explain how invoices are prepared and reviewed.

 

Billing procedures should include:

• Billing schedule
• Responsible preparer
• Review and approval process
• General ledger support
• Payroll and timekeeping support
• Vendor invoice support
• Consultant and subcontractor support
• Indirect rate support
• Unallowable cost review
• Prior payment reconciliation
• Submission process
• Record retention

The goal is to make sure every invoice has a support file before it is submitted.

 

Drawdown Procedures

 

For grant-based awards, the manual should explain how drawdowns are handled.

 

Drawdown procedures should address:

• Payment system access
• Authorized users
• Drawdown timing
• Cash needs review
• General ledger support
• Payroll and vendor support
• Reconciliation to expenditures
• Review before submission
• Cash-on-hand review
• Refunds or adjustments
• PMS or agency records
• Monthly reconciliation
• Documentation retention

2 CFR 200.302 requires financial systems to track federal expenditures and support required reporting, and 2 CFR 200.305 addresses federal payment timing and cash management rules.

 

The manual should make clear that drawdowns must be supported and reconciled.

 

Budget-to-Actual Review Procedures

 

The manual should require regular budget-to-actual review.

 

This procedure should explain:

• How often reports are prepared
• Who prepares the report
• Who reviews the report
• Approved budget baseline
• Actual cost categories
• Remaining budget
• Variance thresholds
• Labor burn rate
• Indirect cost review
• Consultant and subcontractor tracking
• Drawdowns or invoices
• Cash flow impact
• Documentation of explanations
• Follow-up actions

2 CFR 200.302 requires financial systems to compare expenditures with budget amounts for each federal award.

 

A monthly review helps catch problems before they become reporting or closeout issues.

 

Prior Approval Procedures

 

Some costs or changes may require prior written approval.

 

The manual should explain how the company identifies and documents prior approval questions.

 

Procedures should cover:

• Who reviews award terms
• When prior approval may be needed
• How questions are documented
• Who communicates with the agency
• How approvals are saved
• How accounting records are updated
• How budget-to-actual reports reflect approved changes

2 CFR 200.407 explains that recipients may seek prior written approval before incurring costs to avoid later disallowance or disputes over reasonableness or allocability.

 

This section helps prevent the company from spending first and asking questions later.

 

Record Retention Policy

 

The manual should explain how long records are kept and where they are stored.

 

Federal award records may include:

• Award documents
• Approved budgets
• Budget narratives
• Financial reports
• General ledger detail
• Payroll records
• Timesheets
• Labor distribution reports
• Vendor invoices
• Consultant agreements
• Subcontractor records
• Equipment records
• Indirect rate schedules
• Drawdown or invoice support
• Prior approvals
• Agency correspondence
• Closeout records

2 CFR 200.334 generally requires federal award financial and supporting records to be retained for three years from the date of submission of the final financial report, with exceptions for certain situations.

 

The policy should also explain who is responsible for maintaining the files.

 

Document Storage Procedures

 

Record retention is easier when the company has a clear document storage structure.

 

The manual should specify where files are stored and how they are organized.

 

A practical folder structure may include:

• Award documents
• Approved budget
• Payroll and timekeeping
• Labor distribution
• Vendor invoices
• Consultant files
• Subcontractor files
• Travel
• Equipment
• Indirect rates
• Drawdowns or invoices
• Budget-to-actual reports
• Prior approvals
• Agency correspondence
• Closeout

The goal is to make records easy to find when a report, invoice, audit question, or closeout requirement appears.

 

Month-End Close Procedures

 

The manual should include a monthly close process for award accounting.

 

A monthly close checklist may include:

• Reconcile bank accounts
• Review general ledger activity
• Confirm project coding
• Reconcile payroll to timekeeping
• Prepare labor distribution
• Review vendor invoices
• Review consultant and subcontractor costs
• Calculate or review indirect costs
• Identify unallowable costs
• Reconcile drawdowns or invoices
• Prepare budget-to-actual reports
• Update support files
• Review open prior approval questions
• Document management review

Monthly close procedures help keep federal award records current.

 

Internal Review and Approval Controls

 

The manual should describe internal review controls.

 

Even small companies should separate duties where possible.

 

Controls may include:

• Timesheet approval by supervisor or project lead
• Expense approval before reimbursement
• Purchase approval before spending
• Invoice review before payment
• Billing review before submission
• Drawdown review before request
• Bank reconciliation review
• Budget-to-actual management review
• Access controls for accounting and payroll systems

If the team is small, compensating controls can help. For example, the founder may review monthly reports prepared by an outside accountant.

 

Training and Updates

 

A financial policies and procedures manual is only useful if the team understands it.

 

The company should train:

• Founders
• Employees
• Technical staff
• Project managers
• Timekeeping approvers
• Finance staff
• Consultants or partners, when needed

The manual should also be updated when:

• The company receives a new award
• The agency changes terms
• The payment method changes
• The indirect rate structure changes
• New staff are hired
• New systems are implemented
• The company adds subawards or partners
• A review identifies gaps

Procedures should evolve as the company grows.

 

Common Manual Mistakes

 

SBIR/STTR companies often make mistakes when they create financial policies too late or too generically.

 

Common mistakes include:

• Copying a generic template
• Not matching procedures to the award terms
• Leaving out timekeeping
• Not explaining labor distribution
• Not separating direct and indirect costs
• Ignoring unallowable costs
• Not defining purchase approval
• Not reviewing prior approval requirements
• Not documenting drawdown or billing support
• Not requiring budget-to-actual review
• Not explaining record retention
• Creating a manual that no one follows
• Waiting until an agency asks for procedures

A useful manual should reflect the company’s real process and federal funding responsibilities.

 

Financial Policies and Procedures Manual Checklist

 

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

• Accounting system overview
• Roles and responsibilities
• Timekeeping policy
• Labor distribution procedures
• Direct cost policy
• Indirect cost policy
• Unallowable cost policy
• Cost classification procedures
• Purchasing policy
• Expense approval policy
• Consultant and subcontractor procedures
• Equipment and property procedures
• Billing and invoicing procedures
• Drawdown procedures
• Budget-to-actual review procedures
• Prior approval procedures
• Record retention policy
• Document storage procedures
• Month-end close procedures
• Internal review controls
• Training and update process

The manual should be practical enough for the team to use, not just formal enough to sit in a folder.

 

Questions to Ask Before Finalizing the Manual

 

Before finalizing the manual, ask:

• Does it reflect the actual award requirements?
• Does it explain who is responsible for each process?
• Does it cover timekeeping and labor distribution?
• Does it explain direct, indirect, and unallowable costs?
• Does it address purchasing and expense approvals?
• Does it explain consultant and subcontractor documentation?
• Does it address indirect rate support?
• Does it explain billing, invoicing, or drawdowns?
• Does it require budget-to-actual review?
• Does it include record retention and document storage?
• Can employees follow it?
• Would it help answer agency or DCAA questions?

If the manual cannot answer these questions, it likely needs more work.

 

Final Thoughts: Procedures Make Federal Funding Manageable

 

Federal funding readiness is not only about having accounting software or clean books.

 

It is about having consistent procedures that the company can follow throughout the award.

 

A strong SBIR/STTR financial policies and procedures manual helps founders, employees, and finance teams manage timekeeping, cost classification, purchasing, expense approval, unallowable costs, indirect rates, billing, drawdowns, reporting, documentation, and record retention.

 

At Peter Witts CPA PC, we help SBIR/STTR companies build federal funding procedures that support accounting system readiness, award management, agency review, and closeout.

 

Need Help Building Federal Funding Procedures?

 

If your company is preparing for or managing SBIR/STTR funding, Peter Witts CPA PC can help review and strengthen your financial policies and procedures for timekeeping, labor distribution, direct and indirect costs, purchasing, expense approval, unallowable costs, indirect rates, billing, drawdowns, budget-to-actual reporting, documentation, and record retention.

 

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

 

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