Timekeeping may feel like an administrative task.

 

For SBIR/STTR companies, it is much more than that.

 

Timekeeping is one of the main records that connects people, payroll, project costs, indirect rates, drawdowns, invoices, budget-to-actual reports, and audit readiness.

 

Without accurate timekeeping, a company may know what it paid employees, but not where that labor belongs.

 

That creates problems when the company needs to support award costs, separate federal and commercial work, calculate indirect rates, prepare invoices, submit drawdowns, or respond to agency or DCAA-related questions.

 

At Peter Witts CPA PC, we help SBIR/STTR awardees strengthen timekeeping processes so labor costs are better supported from payroll to project reporting.

 

Why Timekeeping Matters for SBIR/STTR Companies

 

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

 

Founders, scientists, engineers, developers, project managers, and technical staff may spend time on award-funded R&D, internal R&D, commercialization, proposal work, fundraising, customer pilots, and general company operations.

 

That is why timekeeping matters.

 

A strong timekeeping process helps answer:

• Who worked on the award?

• When did they work?

• How many hours were charged?

• Which project or cost objective benefited?

• Was the work direct, indirect, or non-award?

• Did the time support payroll charges?

• Did the labor support the approved budget?

• Did the time affect indirect rates?

• Did the labor support drawdowns or invoices?

• Can the company explain the labor during review?

SBIR.gov explains that timekeeping is part of an adequate accounting system and that timesheets help document employee time across business activities, proposal work, commercialization plans, and other activities.

 

Timekeeping Connects People to Project Costs

 

A payroll register shows what employees were paid.

 

It does not automatically show which award, project, contract, or activity benefited from that labor.

 

Timekeeping fills that gap.

 

It connects employee effort to:

• SBIR/STTR award work

• Federal grants

• Government contracts

• Internal R&D

• Customer-funded work

• Commercialization activity

• Sales and marketing

• Fundraising

• General administration

• Indirect work

• Unallowable activity

Without timekeeping, labor costs may be allocated based on estimates, budget assumptions, or after-the-fact memory.

 

That is not a strong foundation for federal award accounting.

 

Timekeeping Supports Payroll

 

Payroll is usually one of the largest expenses charged to an SBIR/STTR award.

 

But payroll support requires more than proof that wages were paid.

 

The company should be able to show:

• Employee name

• Pay period

• Salary or wage rate

• Gross wages

• Employer payroll taxes

• Fringe benefits

• Hours worked

• Project or award coding

• Direct and indirect labor classification

• Labor distribution

• General ledger posting

2 CFR 200.430 addresses standards for documentation of personnel expenses and requires records to support the distribution of employee salary or wages across specific activities or cost objectives when employees work on multiple awards or activities.

 

Timekeeping helps payroll become award-ready.

 

Timekeeping Supports Labor Distribution

 

Labor distribution is the process that assigns payroll costs to the correct project, award, or indirect activity.

 

Timekeeping is the source record.

 

A labor distribution report should show:

• 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

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

 

Without timekeeping, labor distribution is weak.

 

Without labor distribution, payroll may be recorded but not fully supportable.

 

Timekeeping Supports Project Costing

 

SBIR/STTR companies need to track costs by award, project, phase, task, or cost objective.

 

Timekeeping helps ensure labor is charged to the correct project.

 

This is especially important when the company has:

• More than one SBIR/STTR award

• Phase I and Phase II activity

• Federal and commercial work

• Customer-funded pilots

• Internal R&D

• Subawards or subcontractor work

• Multiple technical aims

• Shared employees

• Founder involvement across activities

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

 

Timekeeping helps make those project-level records possible.

 

Timekeeping Supports Direct Cost Tracking

 

Direct labor should be charged to the award or project that benefited from the work.

 

A strong timekeeping process helps show which hours were spent on:

• Technical research

• Prototype development

• Testing

• Data analysis

• Engineering

• Software development

• Award-specific project management

• Approved reporting activity

• Other approved award work

This matters because direct labor often drives budget-to-actual reporting, invoicing, drawdowns, and indirect rate calculations.

 

If employees work on several activities but all time is charged to one federal award, the company may be mixing costs.

 

Timekeeping Supports Indirect Cost Tracking

 

Not all labor is direct award labor.

 

Some employee time supports the company as a whole or multiple projects.

 

Indirect labor may include:

• General management

• Accounting administration

• Payroll administration

• Compliance support

• Facility management

• General technical supervision

• Internal coordination

• Non-project administrative work

Timekeeping helps separate direct labor from indirect labor.

 

This matters because indirect labor may belong in an indirect cost pool rather than being charged directly to an award.

 

SBIR.gov explains that the ability to calculate a good indirect rate comes from an accounting system that differentiates direct from indirect costs and isolates unallowable costs.

 

Timekeeping Supports Indirect Rates

 

Indirect rates are only as reliable as the cost data behind them.

 

Timekeeping affects both sides of the rate calculation.

 

It may affect:

• Direct labor base

• Indirect labor pool

• Fringe calculations

• Overhead pool

• G&A pool

• Allocation base

• Unallowable cost exclusions

• Provisional billing rates

• Actual indirect rates

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.

 

If labor is not coded correctly, the indirect rate may be distorted.

 

For example, if indirect management time is charged as direct award labor, the direct labor base may be overstated. If direct technical time is treated as indirect, award costs may be understated.

 

Timekeeping Supports Invoices and Vouchers

 

For contract-based SBIR/STTR awards or federal contracts, invoices and vouchers may require labor support.

 

A company may need to support invoices with:

• Payroll records

• Timesheets

• Labor distribution reports

• Direct labor detail

• Indirect rate schedules

• Project codes

• General ledger reports

• Billing rate support

• Contract line-item detail

• Prior payment history

DCAA’s pre-award accounting system checklist is used to understand whether a contractor’s system is designed to meet SF 1408 criteria, including timekeeping and labor distribution.

 

If invoice support depends on labor, timekeeping should be accurate before the invoice is prepared.

 

Timekeeping Supports Drawdowns

 

For grant-funded awards, drawdowns should be based on supported award costs and cash needs.

 

If payroll is included in a drawdown, timekeeping should help support which labor costs belong to the award.

 

Drawdown support may include:

• Payroll records

• Timesheets

• Labor distribution

• General ledger detail

• Fringe calculations

• Indirect cost calculations

• Budget-to-actual reports

• Cash needs analysis

Timekeeping helps show that labor costs included in a drawdown were connected to the approved award work.

 

Timekeeping Supports Budget-to-Actual Reporting

 

Budget-to-actual reports compare approved award budgets to actual spending.

 

Labor time affects:

• Direct labor spending

• Fringe costs

• Indirect costs

• Remaining budget

• Burn rate

• Forecasted staffing needs

• Consultant or subcontractor decisions

• Cash flow planning

• No-cost extension planning

• Closeout readiness

If timekeeping is inaccurate, the budget-to-actual report may be misleading.

 

A company may think it is under budget, over budget, or on track when the labor data is actually incomplete.

 

Timekeeping Supports Founder Compensation

 

Founder time is one of the most common SBIR/STTR accounting challenges.

 

A founder may work on:

• Direct technical award work

• Award-specific project management

• General company management

• Fundraising

• Investor meetings

• Sales conversations

• Customer pilots

• Commercialization

• Internal R&D

• Proposal planning

• Hiring and administration

Not all founder time should be charged directly to the federal award.

 

Timekeeping helps separate founder activities so compensation charged to the award is supported.

 

The founder’s title does not make all founder time award labor.

 

Timekeeping Supports Multi-Award Tracking

 

As companies grow, they may manage multiple awards at once.

 

A company may have:

• NIH Phase I funding

• NSF Phase II funding

• DOE award work

• DoD contract activity

• NASA subaward activity

• Customer-funded pilots

• Commercial product work

• Internal R&D

Timekeeping helps prevent labor from being mixed across awards.

 

Each employee’s time should be coded based on the actual work performed and the project that benefited.

 

This is especially important when the same employee supports more than one award in the same pay period.

 

Timekeeping Supports Commercial Cost Separation

 

SBIR/STTR companies often pursue commercialization while federal awards are active.

 

That may include:

• Customer demos

• Paid pilots

• Product launch planning

• Sales calls

• Investor conversations

• Marketing

• Customer onboarding

• Commercial product development

These activities may be important, but they should not automatically be charged to the federal award.

 

Timekeeping helps separate award-funded R&D from customer-funded work, commercialization, fundraising, and internal business activity.

 

Timekeeping Supports Unallowable Cost Identification

 

Some labor activity may need to be excluded from award charges or indirect calculations depending on the circumstances and award terms.

 

This may include time spent on:

• Fundraising

• Investor relations

• Certain lobbying activity

• General sales activity

• Non-award commercialization

• Unsupported non-project work

• Personal or non-business activity

SBIR.gov identifies isolation of unallowable costs as part of an adequate accounting system.

 

Timekeeping helps make labor-related unallowable or non-award activity visible.

 

Timekeeping Supports Cost Transfers

 

Cost transfers often happen when time is coded incorrectly.

 

For example:

• An employee charged time to the wrong award.

• A founder charged time to direct labor when the work was fundraising.

• A technical employee coded customer work to the federal award.

• Administrative time was charged as direct project labor.

• Phase I and Phase II time were mixed.

When corrections are needed, the company should document:

• Original time entry

• Corrected project or activity

• Reason for correction

• Date corrected

• Approval

• Impact on payroll, labor distribution, drawdowns, invoices, and reports

A strong timekeeping process reduces the number of corrections needed.

 

Timekeeping Supports Audit Readiness

 

Timekeeping is often central to agency, funder, or DCAA-related review.

 

Reviewers may ask:

• Who worked on the award?

• Were hours recorded daily or timely?

• Were timesheets approved?

• Were corrections documented?

• Did timekeeping tie to payroll?

• Did labor distribution tie to the general ledger?

• Were direct and indirect labor separated?

• Were unallowable activities excluded?

• Did labor charges support invoices or drawdowns?

SBIR.gov notes that DCAA involvement for DoD SBIR/STTR awardees may include pre-award surveys, post-award accounting system audits, and incurred cost audits.

 

Timekeeping is one of the records that can help the company respond with more confidence.

 

What a Strong Timekeeping Process Should Include

 

A strong timekeeping process should be simple enough for employees to use and detailed enough to support award accounting.

 

It should include:

• Written timekeeping policy

• Employee training

• Project and activity codes

• Daily or timely time entry

• Total time worked, not just award time

• Direct labor codes

• Indirect labor codes

• Non-award activity codes

• Unallowable or restricted activity codes

• Employee certification

• Supervisor approval

• Documented correction process

• Payroll reconciliation

• Labor distribution reports

• Monthly review

The goal is not just to collect hours. The goal is to create reliable labor support.

 

Timekeeping Should Track Total Activity

 

One common mistake is tracking only federal award hours.

 

That is not enough when employees also work on indirect, commercial, administrative, fundraising, or internal R&D activity.

 

A useful timekeeping system should capture total work activity so labor can be distributed properly.

 

This helps prevent the federal award from absorbing more labor cost than it should.

 

It also supports indirect rate calculations because indirect labor must be identified separately from direct project labor.

 

Timekeeping Should Use Clear Codes

 

Employees need clear timekeeping codes.

 

Codes may include:

• Award direct labor

• Award project management

• Internal R&D

• Commercial product work

• Customer-funded project

• Proposal work

• General administration

• Indirect management

• Sales and marketing

• Fundraising

• Paid time off

• Unallowable activity, if applicable

Codes should be specific enough to support reporting but not so complex that employees avoid using them correctly.

 

Timekeeping Should Be Reviewed Monthly

 

Timekeeping should not be ignored until reporting, billing, or closeout.

 

Each month, the company should review:

• Missing timesheets

• Late entries

• Unapproved time

• Incorrect project codes

• Founder time classification

• Direct versus indirect labor

• Commercial activity

• Internal R&D

• Labor distribution reports

• Payroll reconciliation

• Budget-to-actual impact

• Drawdown or invoice support

Monthly review helps prevent labor problems from building over time.

 

Common Timekeeping Mistakes

 

SBIR/STTR companies often run into problems when timekeeping is informal.

 

Common mistakes include:

• No formal timekeeping process

• Timesheets completed after the fact

• Time recorded from memory

• Only federal award hours tracked

• Founder time charged entirely to the award

• Employees using vague project codes

• Payroll processed without labor distribution

• Direct and indirect labor mixed

• Commercial work charged to federal awards

• Fundraising or sales time not separated

• Corrections made without documentation

• Timesheets not approved

• Timekeeping not reconciled to payroll

• Reports prepared manually from incomplete records

These issues are easier to prevent before award activity begins.

 

Timekeeping Readiness Checklist

 

A strong SBIR/STTR timekeeping process should include:

• Written policy

• Employee training

• Project codes

• Activity codes

• Daily or timely entry

• Total activity tracking

• Direct labor codes

• Indirect labor codes

• Non-award labor codes

• Founder time coding

• Commercial activity codes

• Internal R&D codes

• Approval process

• Correction process

• Payroll reconciliation

• Labor distribution reports

• Monthly review

• Documentation retention

This checklist helps companies determine whether timekeeping is ready to support award accounting.

 

Questions to Ask About Your Timekeeping Process

 

Before relying on timekeeping for SBIR/STTR accounting, ask:

• Do employees record time by project and activity?

• Do founders separate award work from fundraising, sales, and management?

• Does timekeeping capture total work activity?

• Are direct and indirect labor codes clear?

• Are commercial and internal R&D activities separated?

• Are timesheets completed timely?

• Are timesheets approved?

• Are corrections documented?

• Does timekeeping tie to payroll?

• Does payroll tie to labor distribution?

• Do labor reports support invoices or drawdowns?

• Can labor costs support budget-to-actual reports?

• Could the company explain labor charges during review?

If the answer to several of these questions is no, the company should strengthen its timekeeping process before the next drawdown, invoice, report, or review.

 

Final Thoughts: Timekeeping Holds the Labor Record Together

 

Timekeeping is the backbone of SBIR/STTR accounting because it connects people to projects, payroll to labor distribution, labor to indirect rates, and award activity to invoices, drawdowns, reports, and review readiness.

 

Without reliable timekeeping, labor costs become difficult to support.

 

With a strong process, the company can better manage project costs, payroll, indirect rates, budget-to-actual reports, billing support, and audit readiness.

 

At Peter Witts CPA PC, we help SBIR/STTR awardees strengthen timekeeping so labor records support the full financial side of federal funding.

 

Need Help Strengthening Your Timekeeping Process?

 

If your SBIR/STTR company is preparing for an award, managing active funding, pursuing Phase II, or moving into federal contracts, Peter Witts CPA PC can help review your timekeeping process, labor distribution reports, payroll support, project codes, indirect rate impact, drawdown or invoice support, and documentation procedures.

 

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

 

Schedule a strategic consultation with Peter Witts CPA PC to strengthen your timekeeping process.