Navigating the transition from an SBIR Phase I to a Phase II award is a critical growth period for any small business. However, it also introduces a minefield of compliance risks—specifically regarding compensation reasonableness, DCAA-compliant accounting systems, and indirect rate calculations.
Incorrectly handling these financial elements doesn't just mean "leaving money on the table"—it can lead to accusations of fraud, disallowed costs, and severe penalties during a DCAA audit.
In this FAQ guide, we dissect the most common questions from SBIR awardees, backed by regulatory requirements like FAR 31.205-6 (Compensation for Personal Services) and the SF1408 pre-award survey, to help you ensure your general ledger is audit-proof.
Compensation & Salary: Avoiding the "Fraud" Trap
One of the most frequent areas of confusion—and risk—is owner compensation.
1. Can I forego my salary during Phase I to save money?
The Short Answer: No. Do not do this.
The Detailed Explanation: We often hear from owners who want to "reinvest" their salary into research. While noble, this is dangerous.
- Fraud Risk: If you proposed a salary in your budget but do not pay it, you are effectively misrepresenting your costs to the government. If the budget was approved based on that salary, failing to pay it can be seen as fraud.
- Proof of Work: Without a payroll record, how do you prove you performed the work? A compliant timekeeping system is essential, but a lack of salary payment raises immediate red flags about whether the work was actually performed.
- Recommendation: Pay yourself as proposed. If you want to reinvest, loan the money back to the company or retain it as equity after you have been paid.
2. Can I increase my salary from $60k to $200k for Phase II?
The Scenario: You took a low salary ($60k) during Phase I for tax purposes or cash flow, but now want to return to your market rate ($200k) for the Phase II proposal.
Compliance Reality:
- Red Flag: A 230% salary jump will trigger scrutiny.
- FAR 31.205-6 (Compensation for Personal Services): This regulation demands that compensation be "reasonable" for the work performed. If you were an executive earning $200k previously, and you are performing equivalent duties, you have a defensible case.
- Strategy: You must document that the $200k is your "market rate." If you were taking $60k plus distributions, ensure your total compensation history supports the new rate.
Tip: "Distribution of profits" is unallowable per FAR. Ensure your compensation is structured as W2 wages or guaranteed payments to be allowable.
3. How do I handle a part-time Office Manager (G&A)?
The Scenario: Your Office Manager is salaried at $30k/year but only works ~3 hours/week.
The Fix:
- Total Time Accounting: DCAA requires "Total Time Accounting." You cannot book 40 hours to G&A if they only worked 3.
- Unallowable Costs: Booking "idle time" or "on-call" time to G&A is generally not acceptable unless it is a specific requirement. Book actual hours worked to G&A. Book the remainder to an Unallowable account if you must pay the full salary, or adjust the salary to an hourly rate that reflects actual effort.
DCAA Compliant Accounting Systems: Fact vs. Fiction
Myth: "I need a DCAA Compliant System for Phase I."
Fact: You do not need a fully DCAA-compliant system (passing an SF1408 audit) for Phase I.
- Phase I Requirement: You simply need to track all direct costs and time spent on the award. A simple system (even Excel, if extremely disciplined) can suffice, though we recommend Quickbooks or similar.
- Phase II Requirement: If you win a Cost-Type Phase II award, you will need a compliant system. You must be ready to pass the SF1408 Pre-award Survey shortly after selection.
Warning: Do not let consultants sell you expensive "DCAA Implementation" packages for a Phase I grant unless you are preparing specifically for a Phase II transition.
What is the SF1408?
The Standard Form 1408 is the checklist DCAA auditors use to verify your system can:
- Segregate Direct vs. Indirect costs.
- exclude Unallowable costs (FAR 31.205).
- Accumulate costs by project/contract.
Indirect Rates & The Phase II Proposal
Question: How do I bid indirect rates for Phase II if I don't have a history? Answer: You must forecast your rates.
- Project Revenue & Costs: Estimate your total expenses for the proposal year.
- Calculate Pools: Separate costs into Fringe, Overhead, and G&A buckets.
- Provisional Billing Rates: Once awarded, you will submit "Provisional Billing Rates" to DCAA. These are temporary rates used for billing purposes until you settle strict "Final Indirect Rates" via your annual Incurred Cost Proposal (ICP).
Vendors: 1099s vs. Consultants vs. Subcontractors
Classification matters for your budget and your audit risk.
| Category | Description | Autonomy | Budget Location | | :--- | :--- | :--- | :--- | | 1099 | Individual paid hourly. | High autonomy. | Consultant/Vendor | | Consultant | Subject Matter Expert (SME). | High autonomy; brings specific expertise. | Consultant Line Item | | Subcontractor | Major contributor (Company/University). | Critical to R&D success. | Subcontractor Line Item |
- Key takeaway: Never list these in the "Personnel" section. That is for W2 employees only. Do not apply Fringe benefits to these costs (but you can usually apply G&A).
Visual Content Opportunities
Alt Tag: Illustration showing the path from SBIR Phase I to Phase II with DCAA compliance checkpoints like SF1408 and Incurred Cost Proposals.
Recommendation 2: A "Salary Allowability" decision tree graphic helping owners decide if their compensation model meets FAR regulations. Alt Tag: Decision tree for government contractors to determine if executive compensation is allowable under FAR 31.205-6.
Frequently Asked Questions
Do I need to track time in Phase I?
Yes. Creating a habit of "Total Time Accounting" is crucial. If you don't track time, you cannot accurately calculate indirect rates for your Phase II proposal, and you risk your labor costs being questioned.
Can I use Quickbooks Online for DCAA Compliance?
Technically yes, but it is difficult. Most government accounting firms prefer Quickbooks Desktop (Enterprise) because it handles job costing and "unallowable" segregation much more natively. Quickbooks Online often requires complex workarounds to be DCAA compliant.
Stop Guessing. Start Verifying.
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