SBIR Accounting System Requirements: SF 1408, DCAA and Grants
Sooner or later an SBIR or STTR company hears the phrase "adequate accounting system." It can hold up a contract, a progress payment or an audit. It isn't a software brand or a certificate. It's a short list of things your books have to be able to do, and the government publishes the list. This guide walks through it: what the SF 1408 survey checks, where DCAA fits, how grants differ, and how to set the books up so the answer is yes.
Written by the licensed tax advisors at Framework Advisory. Sources are the form itself, DCAA's own guidance, the FAR, 2 CFR 200 and the SBIR/STTR Policy Directive, linked throughout. General information, not advice for your award; your award terms and your agency's rules control.
1. Why your accounting system gets reviewed
The government can only pay you based on your costs if your books can measure them. So the FAR allows a cost-reimbursement contract only when, among other conditions, "the contractor's accounting system is adequate for determining costs applicable to the contract or order" ( FAR 16.301-3).
SBIR companies run into this even on fixed-price work. SBA's SBIR/STTR Policy Directive notes that for certain agencies, qualifying for progress payments or an incentive-type contract means the small business's accounting system has to be audited, which can delay the award unless the company already has an approved system. Being ready before that request arrives is the difference between a formality and a delay.
2. What the SF 1408 survey checks
The review uses Standard Form 1408, Preaward Survey of Prospective Contractor (Accounting System). Its evaluation checklist first asks whether the system follows generally accepted accounting principles, then whether it provides for each of the items below. Plain-English meaning on the right.
| What the form asks | What it means in practice |
|---|---|
| Direct costs kept separate from indirect costs | Every expense is coded as either tied to one contract or shared, and the rule for which is which is written down and applied the same way every time. |
| Direct costs accumulated by contract | A job or project cost ledger: you can pull every cost charged to one award. |
| A logical, consistent way to allocate indirect costs | Shared costs go into pools and are spread to contracts on a base that reflects the benefit each one gets. |
| Costs accumulated under general ledger control | The job cost records reconcile to the general ledger. No side spreadsheet that the books don't agree with. |
| Timekeeping that identifies labor by cost objective | Employees record their hours against each project or indirect activity they worked on. |
| Labor distribution to the right cost objectives | Payroll cost follows the timesheets, so direct and indirect labor land where the hours say they belong. |
| At least monthly determination of costs charged to a contract | The books are posted and closed often enough to report contract costs monthly. |
| Exclusion of costs unallowable under FAR 31 or the contract | Unallowable costs are identified and kept out of anything billed to the government. |
| Costs by contract line item and unit, if the contract requires it | Some contracts want cost by line item, as if each were its own contract. |
| Preproduction costs kept separate from production costs | Where it applies, startup costs are tracked apart from production. |
Paraphrased from SF 1408 (Rev. 1/2014), Section II, with DCAA's explanations from its Information for Contractors manual. The form also asks whether the system produces the financial information needed for limitation-of-cost clauses and progress payments, whether records support pricing follow-on work, and whether the system is in full operation.
Two of these carry most of the weight for a small research company. The first is the split between direct and indirect costs: under FAR 31.202 a cost can't be charged directly to one contract if costs incurred for the same purpose in like circumstances sit in an indirect pool, and FAR 31.203 requires indirect costs to be grouped logically and allocated on the benefits each contract receives. The second is labor: salaries are usually the biggest cost on an SBIR award, and the only evidence of where the hours went is the timesheet.
3. DCAA's role on DoD contracts
The Defense Contract Audit Agency performs contract audits for the Department of Defense and other federal entities responsible for acquisition. Its Information for Contractors manual explains what happens:
- Before award. The contracting officer asks you to complete DCAA's Preaward Accounting System Adequacy Checklist, which documents how your system meets the SF 1408 criteria. DCAA then reviews the design of the system.
- Designed and ready, not necessarily running. A company with no government work yet doesn't have to be using the new system, but it must have designed one that is operable, be able to demonstrate it, and be ready to implement it before incurring costs on the contract.
- If it falls short. DCAA notifies you and the contracting officer of the deficiencies, usually with recommendations. It won't build the system for you; that's the contractor's job. A follow-up review can be done once it's fixed.
- After award. A postaward audit can test whether the system complies with the DoD accounting system clause (DFARS 252.242-7006), for example when the preaward survey recommended a follow-up or none was done.
- Other agencies. DCAA audits costs on non-DoD contracts only at the request of the agency, on a reimbursable basis. Many civilian agencies handle their own reviews.
DCAA singles out timekeeping as an area of "utmost concern", because labor, unlike a purchase, has no outside document behind it. The employee recording their own time is the key control, and where the company is big enough, timekeeping and payroll should be handled by different people.
4. Grants are judged against 2 CFR 200
Many SBIR and STTR awards are grants rather than contracts. A grant is not a FAR contract, so it isn't reviewed with an SF 1408, which the FAR prescribes, but the expectations are similar. The Uniform Guidance (2 CFR 200) is written for non-federal entities, and 2 CFR 200.101 lets agencies apply it to for-profit companies through their own regulations or program terms, so your award terms tell you which parts apply. Its financial management standard, 2 CFR 200.302, asks for:
- Identification of each federal award received and spent, with its award number and agency.
- Records showing the amount, source and use of federal funds, all backed by source documentation.
- Effective control over funds, property and assets.
- A comparison of spending with the budget for each award.
- Written procedures for drawing cash and for deciding whether a cost is allowable.
Labor has its own rule. Under 2 CFR 200.430(g), salary charged to an award must be based on records that accurately reflect the work performed, cover all of the person's paid activity, and support the split when they work on more than one award or on both direct and indirect work. Budget estimates alone don't count as support; they can be used for interim charges only if they're reviewed after the fact and corrected.
The practical upshot: the same set-up that passes an SF 1408 (costs by award, clean direct/indirect split, real timesheets, unallowables walled off) is what a grant-funded company needs too. For draws, the in-house work test and reporting dates on grants, see our guide to grant accounting for SBIR, STTR and federal awards.
5. Setting up the books: a practical checklist
None of this needs expensive software. It needs a structure decided before the first cost is booked, and the discipline to keep using it.
| Piece | How it's set up |
|---|---|
| Project / class | One per award (for example “SBIR Phase II, award number”), plus one for internal R&D and one for commercial work |
| Direct labor | Salaries and wages charged from timesheets, by project |
| Direct materials and supplies | Bought for one award and coded to it |
| Subcontracts and consultants | Outside work on an award, kept apart from in-house labor |
| Indirect pools | For example fringe, overhead and general and administrative (G&A), each with its own accounts |
| Unallowable | Separate accounts for costs that can't be billed, such as entertainment, so they never mix into a pool |
An illustrative structure, not a client's books. Your pools and accounts depend on how your company is organized and what your awards require.
- Write down your direct-versus-indirect policy and apply it the same way to every award and every other project, including your commercial work.
- Track cost by award with a project or class on every transaction, and reconcile the project totals to the general ledger each month.
- Use timesheets that record hours by project, filled in by the employee, including time on indirect work such as proposals and administration.
- Drive payroll cost from the timesheets, so labor charged to each award matches the hours recorded against it.
- Close the books monthly and produce a cost-by-contract report from them.
- Keep unallowable costs in their own accounts. DCAA gives entertainment, bad debts, and contributions or donations as examples of expressly unallowable costs under FAR 31.205.
- Decide how indirect costs will be pooled and charged, which drives your rates. Our guide to SBIR indirect cost rates and fees covers pools, provisional and final rates, the de minimis rate and fee.
We set this up for SBIR and STTR companies, and clean it up for companies whose books grew before the awards did. More on how we work: SBIR and STTR grant accounting services.
6. Common questions
What is the SF 1408?+
Standard Form 1408, Preaward Survey of Prospective Contractor (Accounting System), is the government's checklist for deciding whether a company's accounting system is acceptable for a prospective contract. It asks whether the system separates direct and indirect costs, accumulates costs by contract, tracks labor by project through timekeeping, determines contract costs at least monthly, and excludes unallowable costs, among other items.
Does DCAA audit SBIR grants?+
DCAA is the Defense Contract Audit Agency. It audits contracts for the Department of Defense and, on request and on a reimbursable basis, for other federal agencies. SBIR grants are generally governed by the agency's grant rules, which build on the Uniform Guidance (2 CFR 200), rather than by a DCAA preaward survey. When an SBIR award is a DoD contract, that is where DCAA comes in.
Do I need an adequate accounting system before my first contract?+
For a cost-reimbursement contract, the FAR allows one only when the contractor's accounting system is adequate for determining costs applicable to the contract. DCAA's guidance says a new contractor's system has to be designed and operable, though not necessarily in use yet, and ready to implement before any costs are incurred on the contract.
Can a small company pass with QuickBooks?+
The SF 1408 doesn't name software. It asks what the system does: separate direct from indirect costs, accumulate cost by contract under general ledger control, tie labor to projects through timesheets, and exclude unallowable costs. What matters is how the software is set up and the written procedures around it, not the product name.
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