The Small Business Innovation Research (SBIR) program is a highly competitive federal program that encourages domestic small businesses with fewer than 500 employees to pursue technological advancements and engage in Federal Research/Research and Development. The SBIR program has stringent accounting procedures and regulations that grant recipients must adhere to. For some small businesses, the specialized accounting, reporting, and compliance requirements associated with SBIR funding can initially seem overwhelming to manage. But with the right SBIR accounting services in place, you can stay compliant, avoid unnecessary penalties or losses, and focus on what you do best — running your business.
SBIR Accounting Services: Guidelines and Requirements
SBIR grants are highly competitive, and winning one can be an enormous opportunity for a small business. If you’ve been awarded an SBIR grant, it’s essential to understand the financial and accounting regulations you must adhere to as a grant recipient.
What Is the SBIR?
The Small Business Innovation Research (SBIR) program is a government program that helps small businesses, particularly those in science and technology, receive financial support to research and develop innovative projects. The program is administered by the Small Business Administration (SBA) in collaboration with other government agencies such as the National Institutes of Health (NIH) and the Department of Defense (DOD).
SBIR Program Phases
The SBIR program has three phases: Phase I, Phase II, and Phase III. Phase I funding aims to establish a project’s merit, feasibility, and potential. Funding received in Phase I will generally range between $50,000 and $250,000 and is primarily used to fund feasibility studies and preliminary research.
If Phase I is successful, businesses can apply for Phase II funding to expand the research and development process that began in Phase I. The amount of Phase II funding that a business is eligible for is determined based on the results of Phase I, the project’s scientific and technical merit, and the project’s commercial potential. Phase II awards are usually $750,000 over two years; in most cases, funding will not exceed $1,000,000.
Phase III awards allow (where relevant or appropriate) small businesses to pursue commercialization objectives that may result from their Phase I and II R/R&D efforts. However, unlike the first two phases, Phase III funding does not come from the SBIR program.
SBIR Accounting Requirements
When a government contractor or grantee receives an SBIR award, the accounting requirements they must adhere to differ significantly between Phase I and II. Phase I awards are firm fixed price (FFP), primarily focusing on research and reporting. There are few accounting requirements in Phase I, and audit risk is extremely low. For these reasons, a simple accounting system is usually adequate for Phase I.
However, this changes if a Phase II contract is awarded. Accounting requirements for Phase II are rigorous and complex, making it essential to hire experts who can provide SBIR accounting services that are tailored to help awardees maintain compliance.
A few reasons that Phase II accounting standards are so much more rigid than Phase I include the following:
- Higher expectations following Phase I
- Higher award amounts
- Cost Plus Fixed Fee (CPFF) contracts (which create more inherent risk for the government)
- Different expectations regarding deliverables
Because the government takes on more risk with a Phase II award, contractors must rigorously adhere to strict accounting standards. Phase II awardees must have robust accounting systems that can accomplish all the following:
- Separate direct and indirect costs
- Calculate indirect rates
- Isolate allowable costs from unallowable costs
- Produce a detailed, thorough audit trail
- Allow the business to report how much has been billed and how much remains to be billed on a contract at any point
Since Phase II accounting requirements are so stringent, most federal agencies will first require the completion of Standard Form 1408 (SF 1408), Preaward Survey of Prospective Contractor (Accounting System). Businesses must use the SF1408 to self-certify that they have an accounting system in place that meets the requirements of Phase II. SF1408 forms may be audited by the Defense Contract Auditing Agency (DCAA).
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