Labor is often one of the largest cost categories in an SBIR/STTR award.

 

It is also one of the easiest areas to get wrong.

 

A company may have payroll records. It may have timesheets. It may have an accounting system. But if those records do not connect clearly, the company may still struggle to show which labor costs belong to the award, which labor costs are indirect, which costs belong outside the award, and how payroll ties to the general ledger.

 

That is where labor distribution reports matter.

 

A labor distribution report connects timekeeping, payroll, project costing, indirect rates, budget-to-actual reporting, and award support. It helps turn employee time into organized, supportable award cost data.

 

At Peter Witts CPA PC, we help SBIR/STTR companies review labor distribution processes so payroll, timekeeping, project codes, indirect rates, and award records work together.

 

What Is a Labor Distribution Report?

 

A labor distribution report shows how labor costs are assigned across projects, awards, cost categories, and activities.

 

It typically connects:

• Employee time
• Payroll costs
• Project codes
• Direct labor
• Indirect labor
• Non-award labor
• Fringe costs
• General ledger accounts
• Budget categories
• Indirect rate calculations
• Drawdown, invoice, or reimbursement support

In simple terms, timekeeping shows where people spent their time. Payroll shows what they were paid. Labor distribution shows where those payroll costs belong.

 

For SBIR/STTR companies, that connection is critical.

 

Why Labor Distribution Matters for SBIR/STTR Awards

 

SBIR/STTR awards often fund technical work performed by founders, employees, scientists, engineers, developers, and project staff.

 

Those same people may also work on fundraising, commercialization, internal R&D, customer projects, general operations, or other awards.

 

Labor distribution helps separate:

• Award-funded technical work
• Indirect business activity
• Internal R&D outside the award
• Commercialization activity
• Fundraising or investor activity
• Sales and customer work
• General administrative activity
• Other federal or non-federal projects

Without labor distribution, payroll may be recorded accurately but still fail to show how labor costs support the award.

 

Labor Distribution Connects Timekeeping to Payroll

 

Timesheets alone do not fully support labor costs.

 

Payroll alone does not fully support labor costs either.

 

The two need to connect.

 

A strong labor distribution process should show:

• Employee name
• Pay period
• Hours worked
• Project or activity code
• Direct award hours
• Indirect hours
• Non-award hours
• Hourly rate or salary allocation
• Gross payroll cost
• Fringe or benefit allocation
• General ledger posting
• Supervisor approval
• Corrections or adjustments

SBIR.gov identifies timekeeping and labor distribution as important accounting system elements for SBIR/STTR companies. It specifically describes labor distribution as a system that charges direct and indirect labor appropriately.

 

This is why labor distribution is more than an internal report. It is part of award accounting readiness.

 

Direct Labor Must Be Traceable

 

Direct labor is labor tied specifically to the SBIR/STTR award or project.

 

This may include time spent on:

• Research tasks
• Prototype development
• Engineering work
• Software development
• Testing
• Data analysis
• Project-specific design
• Technical reporting
• Award-specific project management
• Other approved statement-of-work activity

A labor distribution report should make direct labor traceable from the timesheet to payroll to the general ledger.

 

For each direct labor charge, the company should be able to show:

• Who performed the work
• When the work was performed
• What project or award benefited
• How many hours were charged
• What payroll cost was assigned
• How the cost was posted to the ledger
• How the cost appears in budget-to-actual reports

This makes labor easier to support during reporting, billing, closeout, or review.

 

Indirect Labor Must Be Classified Consistently

 

Indirect labor supports the company or multiple projects rather than one specific award.

 

This may include time spent on:

• General management
• Accounting and finance
• Payroll administration
• HR and recruiting
• Compliance support
• Company-wide operations
• General project coordination
• Internal administration

FAR explains that after direct costs are charged directly, indirect costs are those remaining to be allocated to intermediate or final cost objectives.

 

A labor distribution report helps show which labor was treated as indirect and how that labor flowed into the company’s indirect cost structure.

 

This matters because inconsistent treatment can distort rates, budgets, and award support.

 

Founder Time Needs Labor Distribution

 

Founder time is one of the most common problem areas for SBIR/STTR companies.

 

A founder may work on award-funded R&D in the morning, investor calls in the afternoon, and general company operations later that same day.

 

A labor distribution report helps separate founder time by actual activity.

 

Founder labor may include:

• Direct technical work
• Award-specific project management
• General management
• Fundraising
• Investor relations
• Sales or customer discovery
• Commercialization planning
• Internal R&D outside the award
• Administrative work

Only the portion of founder time that supports the approved award should be charged as direct award labor.

 

The rest should be classified properly based on the activity and award terms.

 

Technical Staff May Work Across Multiple Projects

 

Technical employees may also split time across several activities.

 

For example, an engineer may work on the SBIR award, internal product development, a commercial customer pilot, and general troubleshooting in the same pay period.

 

A developer may support award-funded software development and non-award product features.

 

A scientist may support federally funded research and company-funded testing.

 

Labor distribution helps separate these costs so award records do not absorb labor that belongs elsewhere.

 

This is especially important when the company has:

• Multiple SBIR/STTR awards
• Federal and commercial work
• Internal R&D
• Customer-funded pilots
• Cost share or matching activity
• Phase I and Phase II overlap
• Shared employees across projects

The more the company grows, the more labor distribution matters.

 

Labor Distribution Supports Project Costing

 

Project costing depends on accurate labor allocation.

 

If labor is the largest award cost, project cost reports are only as reliable as the labor distribution process behind them.

 

Labor distribution supports project costing by showing:

• Direct labor by award
• Labor by task or phase
• Labor by employee or role
• Labor by pay period
• Labor by budget category
• Indirect labor activity
• Non-award labor
• Remaining labor budget

This helps leadership understand whether the project is using labor as planned.

 

It also helps identify when the project is burning labor too quickly or when work is falling behind.

 

Labor Distribution Supports Budget-to-Actual Reporting

 

Budget-to-actual reporting compares the approved budget to actual costs incurred.

 

For labor, that comparison should be based on real payroll and timekeeping data.

 

A labor distribution report helps show:

• Budgeted labor by person or role
• Actual direct labor charged
• Actual indirect labor recorded
• Remaining labor budget
• Labor burn rate
• Founder effort
• Variances by employee or category
• Payroll timing
• Fringe or benefit impact
• Indirect rate impact

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

 

Labor distribution helps make that comparison more reliable.

 

Labor Distribution Supports Indirect Rates

 

Labor assumptions often affect indirect rates.

 

Many SBIR/STTR companies use labor as an allocation base or as part of fringe, overhead, or G&A calculations.

 

Labor distribution can affect:

• Direct labor base
• Indirect labor pool
• Fringe allocation
• Overhead allocation
• G&A base
• Total direct cost base
• Unallowable labor exclusions
• Actual versus proposed rates
• Indirect cost recovery

If labor is misclassified, indirect rates may be distorted.

 

For example, if founder management time is charged directly to the award when it should be indirect, the direct labor base and indirect cost pool may both be wrong.

 

If technical staff are working on commercial projects but all time is charged to the SBIR award, project costs and indirect rates may be misstated.

 

Labor Distribution Supports Drawdowns, Invoices, and Reimbursements

 

Payment requests should be supported by accounting records.

 

For grant drawdowns, reimbursement requests, contract invoices, or vouchers, labor costs may need to tie back to:

• Timesheets
• Payroll registers
• Labor distribution reports
• General ledger detail
• Project cost reports
• Budget-to-actual reports
• Indirect rate schedules
• Award terms

If labor distribution is weak, the company may struggle to support payment requests.

 

A drawdown or invoice should not be based only on estimated labor. It should be supported by actual labor records when required by the award terms.

 

Labor Distribution Supports DCAA Readiness

 

Labor distribution is directly tied to accounting system adequacy.

 

DCAA’s pre-award accounting system checklist is used to help auditors understand whether a contractor’s system is designed to meet accounting system criteria. SBIR.gov also identifies labor distribution as one of the requirements by which DCAA may evaluate an accounting system for certain contractors.

 

For companies pursuing DoD Phase II awards, cost-reimbursable contracts, or other federal contract opportunities, labor distribution may become especially important.

 

A DCAA-ready labor distribution process should show that:

• Labor is recorded by employee and pay period
• Timekeeping supports labor charges
• Direct labor is charged to the correct project
• Indirect labor is classified appropriately
• Payroll costs reconcile to accounting records
• Labor costs flow to the general ledger
• Labor supports indirect rate calculations
• Corrections are documented

This is one of the clearest ways SBIR/STTR companies can move from informal bookkeeping toward federal award readiness.

 

Labor Distribution Helps Identify Unallowable or Non-Award Activity

 

Not all employee time belongs on the award.

 

Labor distribution can help identify time spent on:

• Fundraising
• Investor relations
• Sales and marketing
• Non-award commercialization
• Internal R&D outside the award
• General business development
• Entertainment-related activity
• Other unallowable or non-award activity

These activities may still be legitimate business activities, but they should not be automatically charged to the award.

 

The labor distribution process should make non-award labor visible so the company can classify it correctly.

 

Labor Distribution Should Tie to the General Ledger

 

A labor distribution report should not live in isolation.

 

It should tie to the general ledger.

 

That means the total labor cost in the labor distribution report should reconcile to payroll records and the labor accounts in the accounting system.

 

Each month, the company should confirm:

• Payroll register totals
• Timesheet hours
• Labor distribution totals
• Direct labor by award
• Indirect labor by cost pool
• Fringe allocation
• General ledger labor accounts
• Adjusting entries
• Corrections or transfers

If the labor distribution report does not tie to the ledger, the company may have a reporting problem.

 

Labor Distribution Should Be Reviewed Monthly

 

Labor distribution should be part of the monthly close process.

 

A monthly review should include:

• Timesheet completion
• Supervisor approvals
• Payroll reconciliation
• Labor distribution report
• Direct labor by award
• Indirect labor by cost pool
• Founder time
• Technical staff allocations
• Non-award labor
• Fringe benefit allocation
• Budget-to-actual variances
• Indirect rate impact
• Documentation gaps
• Corrections needed

Monthly review helps catch errors before they affect invoices, drawdowns, reports, or closeout.

 

Common Labor Distribution Mistakes

 

SBIR/STTR companies often make labor distribution mistakes because they rely on payroll alone.

 

Common mistakes include:

• Tracking payroll but not project labor
• Having timesheets that do not tie to payroll
• Charging all founder time to the award
• Treating all technical labor as direct labor
• Not separating indirect labor
• Not tracking non-award activity
• Using project codes inconsistently
• Reconstructing labor distribution after the fact
• Not reconciling labor reports to the general ledger
• Not reviewing labor variances monthly
• Not documenting corrections
• Forgetting how labor affects indirect rates

These issues are easier to prevent than fix later.

 

Questions to Ask About Your Labor Distribution Process

 

Before relying on your labor records, ask:

• Do employees record time by project or activity?
• Are timesheets approved?
• Does timekeeping tie to payroll?
• Does payroll tie to the general ledger?
• Can direct and indirect labor be separated?
• Can founder time be supported?
• Can technical staff time be split across projects?
• Are non-award activities visible?
• Does labor distribution support indirect rates?
• Can labor costs be included in budget-to-actual reports?
• Can labor support drawdowns, invoices, or reimbursements?
• Are corrections documented?
• Is the process reviewed monthly?

If the answer to several of these questions is no, the company may need to strengthen its labor distribution process.

 

Labor Distribution Report Checklist

 

A practical labor distribution report should include:

• Employee name
• Pay period
• Project or award code
• Activity code, if used
• Direct labor hours
• Indirect labor hours
• Non-award hours
• Salary or wage allocation
• Payroll cost by project
• Fringe allocation, if applicable
• General ledger account
• Budget category
• Supervisor approval status
• Corrections or adjustments
• Report total tied to payroll
• Report total tied to the general ledger

The exact format may vary, but the report should clearly show how labor moved from timekeeping to payroll to project costs.

 

Final Thoughts: Labor Distribution Makes Labor Costs Supportable

 

Labor distribution reports are not just accounting paperwork.

 

They are the bridge between timekeeping, payroll, project costing, indirect rates, budget-to-actual reporting, and award support.

 

For SBIR/STTR companies, especially those preparing for Phase II, DoD awards, cost-reimbursable contracts, or DCAA-related questions, labor distribution is a key part of financial readiness.

 

At Peter Witts CPA PC, we help SBIR/STTR companies review labor distribution processes so employee time, payroll costs, project codes, indirect rates, and award records are clearer, more consistent, and better supported.

 

Need Help Reviewing Your Labor Distribution Process?

 

If your company is preparing for or managing an SBIR/STTR award, Peter Witts CPA PC can help review your timekeeping, payroll support, labor distribution reports, project costing, indirect rate impact, budget-to-actual reporting, and award documentation.

 

Backed by 35+ years of government contract accounting experience and first-hand DCAA knowledge, our team helps innovators strengthen labor records before they become reporting, billing, or review problems.

 

Schedule a strategic consultation with Peter Witts CPA PC to review your labor distribution process.