Grant Accounting for SBIR, STTR and Federal Awards: A Practical Guide
A federal award is some of the best money a young company can get, and some of the easiest to get wrong. The science or the product is rarely the problem. The problem is that grant money comes with its own accounting rules, and most companies' books were built for a business, not for an award. This guide covers where first-year awardees go wrong, and how we track each piece in Sequence, our client portal.
Written and reviewed by the licensed tax advisors at Framework Advisory. General information, not advice for your specific award; your award terms and your agency's rules control.
1. Who this is for
Grant funding isn't one industry. We see it across very different businesses, and each brings its own weak spot:
| Industry | Common funding | What we watch |
|---|---|---|
| Life sciences & medical devices | NIH SBIR/STTR (often with a clinical study) | Human-subjects costs, subaward invoices, effort on personnel |
| Software & technology | NSF SBIR/STTR | Contractor vs. in-house work, cloud and license costs |
| Advanced manufacturing | DOE and DoD awards (DoD SBIR is usually a contract) | Equipment vs. supplies, invoicing on contract terms |
| Agriculture & food tech | USDA SBIR | Field-trial costs split across seasons and budget periods |
| Any grant-funded company | State matches and foundation grants | Keeping each funder's money and rules separate |
General patterns, not a list of our clients. Your agency and award type decide the exact rules.
2. The rules that trip up first-year awardees
Every cost has to be allowable, allocable and documented. Federal awards follow the Uniform Guidance (2 CFR 200). Some ordinary business costs can never be charged to an award, such as entertainment, alcohol, interest and lobbying, and anything that is charged needs support that ties it to the project.
Draw only what you need, when you need it. Federal cash rules expect the time between drawing funds and spending them to be as short as possible. Drawing ahead "to have it" is how a company ends up holding federal money it can't yet back with costs.
Salaries need records, not just payroll. Charging someone's pay to an award takes support showing the time they actually spent on it.
SBIR has its own tests. A Phase II company must perform at least half of the research itself, and the award can include a fee of up to 7% of total costs. Both are easy to lose track of once outside engineers, labs or subawards get involved.
3. Every draw, broken down and backed by costs
Each draw request is really three numbers: direct costs, indirect costs at the award's rate, and the fee. In Sequence we rebuild every draw from those parts, so a draw that doesn't reproduce to the cent stands out immediately, and we match each draw to the invoices and payroll behind it.
| Draw | Direct | Indirect (15%) | Fee (7%) | Total drawn | Backed by costs |
|---|---|---|---|---|---|
| Draw 1 | $12,000.00 | $1,800.00 | $966.00 | $14,766.00 | Yes |
| Draw 2 | $25,500.00 | $3,825.00 | $2,052.75 | $31,377.75 | Yes |
| Draw 3 | $18,200.00 | $2,730.00 | $1,465.10 | $22,395.10 | Partly: payroll support missing |
| Draw 4 | $30,000.00 | $4,500.00 | $2,415.00 | $36,915.00 | Not yet: waiting on invoice |
Example rates: indirect at 15% of direct, fee at 7% of direct plus indirect. Your award sets your own rates. The last column is the point: draws 3 and 4 are federal cash not yet matched to costs, which is exactly what to fix before anyone asks.
4. The in-house work test, measured as you go
For SBIR, the question isn't only what was spent, it's who did the work. Outside engineering firms, labs and subawards all count against the company's share. We track the split every budget period, so it never becomes a surprise at the end.
| Amount | Share | |
|---|---|---|
| Performed by the company (salaries, fringe, supplies) | $61,700 | 72.0% |
| Performed by others (engineering firm, lab, subaward) | $24,000 | 28.0% |
| Total research effort | $85,700 | 100% |
A Phase II SBIR company must perform at least half the research itself. In this example it's comfortably over. The warning signs are a growing outside share, or outside work that nobody is counting.
5. Deadlines computed from the award
Progress reports, financial reports and payment-system reporting all run on dates set by the award and the agency. Sequence computes them from the award's own dates, so they appear on the calendar the day the award is set up, not when someone remembers.
| What | Due | Status |
|---|---|---|
| Payment-system quarterly report | Oct 30 | Upcoming |
| Annual progress report | Jun 1 | Upcoming |
| Federal financial report | Nov 28 | Upcoming |
| Effort certifications (staff on the award) | Every 6 months | Due for first period |
Example dates only. Each agency and award sets its own deadlines.
6. Kentucky companies: the state match
Kentucky runs a matching-funds program for companies that win federal SBIR or STTR awards, covering Phase I and Phase II. It's a real advantage for Kentucky companies, and it adds a second funder with its own rules and reporting, which is one more reason to keep each source of money separate in the books from day one. See the Kentucky Cabinet for Economic Development for current terms.
7. Getting set up right
The cheapest time to get grant accounting right is before the first draw: set up the award's budget, separate the funders, decide how time will be documented, and put the reporting dates on the calendar. The second-cheapest time is now. We do this for grant-funded companies in Louisville and across the states we're licensed in. More on how we work: grant accounting for SBIR and STTR awards.
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