Learn how the AFWERX SBIR program works, what dual-use tech qualifies, and how to manage your funding with audit-ready accounting and time tracking.
Securing an AFWERX SBIR grant puts your technology on the radar of the U.S. Air Force, but it also puts your business under financial scrutiny.
To keep your funding and remain eligible for future phases, you need airtight financial systems, clear cost tracking, and full compliance with federal rules.
This guide covers the essentials: how the Air Force SBIR program works, what to expect from Phase I and II funding, and how to manage your accounting properly, from indirect cost rates to audit readiness.
Understanding the Air Force SBIR Program
The Air Force SBIR program funds innovative technology from small businesses that can solve real operational challenges for the U.S. military. Administered through AFWERX and the Air Force Research Lab (AFRL), the program is designed to move fast, reduce barriers to entry, and support dual-use technologies that meet both defense and commercial needs.
What the Program Supports
AFWERX is focused on solutions that can be fielded quickly and scaled effectively. That includes software, AI, advanced manufacturing, cybersecurity, energy systems, and other technologies aligned with national defense priorities.
Unlike traditional SBIR programs, AFWERX uses an Open Topic approach. This allows companies to pitch novel ideas even if they don’t match a predefined technical requirement, giving startups and non-traditional vendors more flexibility to participate.
Two Ways to Apply: Open Topic vs. Specific Topic
AFWERX offers two distinct paths to funding, each designed for different stages of Air Force engagement and technology maturity.
Open Topic: Find Your Customer First
Open Topic is AFWERX’s front door for dual-use technologies. If you have innovative tech that could benefit the Air Force but haven’t yet identified a specific military customer, this is your route.
Phase I under Open Topic isn’t about building a prototype—it’s about customer discovery. You’ll receive $75,000 (SBIR) or $110,000 (STTR) for three months to identify an Air Force end-user, validate that your solution addresses a real mission need, and secure a Memorandum of Understanding (MoU) for Phase II work.
Without that MoU, you won’t advance. The Air Force wants proof that someone inside the organization is willing to adopt your technology before they invest in prototype development.
Open Topic accepts solutions across all industries and technology areas. The only requirement: a clear path to solving a Department of the Air Force mission need, whether that’s U.S. Air Force or U.S. Space Force.
Specific Topic: Solve a Known Problem
Specific Topic is for technologies that align with predefined Air Force or Space Force requirements. These solicitations come directly from program offices with an identified need and a built-in customer relationship.
Phase I here focuses on technical feasibility. You’ll receive up to $180,000 over 6–12 months to prove your solution works for the specific problem outlined in the topic. No customer discovery required—the connection is already made.
Topics are marked as either AF (Air Force) or SF (Space Force), and requirements are often defense-specific, not dual-use. If you see a Specific Topic that matches your capability, apply. The path to Phase II is more straightforward because the customer commitment is embedded in the solicitation.
Which Track Should You Choose?
If you’re building something innovative but don’t yet have Air Force relationships, start with Open Topic. If your technology directly addresses a stated military need and you’re confident in the technical approach, apply to Specific Topic.
Both tracks lead to the same Phase II funding—up to $1.8 million—but the Phase I objectives differ. Choose the path that fits where your technology and Air Force engagement currently stand.
Who’s Eligible to Apply
To apply for Air Force SBIR funding, your company must meet federal eligibility requirements:
- Be a U.S.-based, for-profit small business with no more than 500 employees
- Be at least 51% owned and controlled by U.S. citizens or permanent resident aliens
- Perform a majority of the work in the United States
You don’t need prior DoD experience, but you do need a strong technical concept, a capable team, and the ability to meet government contracting standards if selected.
How Phase I and Phase II Funding Works
Air Force SBIR funding is split into two early-stage phases:
Phase I: Feasibility Study
- Open Topic: $75,000 (SBIR) / $110,000 (STTR) | Duration: 3 months
- Specific Topic: Up to $180,000 | Duration: 6-12 months
- Purpose: Validate technical and commercial potential (Open Topic) or technical feasibility (Specific Topic)
Phase II: Prototype Development
- Award: Up to $1.8 million | Duration: 15–24 months
- Purpose: Build and test a working prototype with clear pathways for military transition or commercial scale.
Direct to Phase II (D2P2)
Companies with mature technology and established Air Force relationships may qualify for Direct to Phase II, which provides up to $1.25 million in SBIR funding without completing Phase I. This accelerated path is for solutions that have already demonstrated sufficient scientific and technical feasibility.
Follow-on options like Phase III, STRATFI, and TACFI can bring significantly more funding, but only if you’ve built strong traction during Phase II.
How to Apply Through AFWERX
Applications are submitted through the Defense SBIR/STTR Innovation Portal (DSIP) during open solicitation windows. Applications include seven required volumes covering your technical approach, cost proposal, company background, and required certifications. Here’s what the process typically involves:
- Review the Open Topic solicitation to ensure your technology fits the current cycle.
- Register early in required government systems (SAM.gov, DSIP, etc.).
- Submit a concise, focused proposal that clearly explains your tech’s use case, feasibility, and dual-use potential.
- If selected, begin your Phase I feasibility study and start building Air Force connections immediately.
The process moves quickly—AFWERX is built to fund promising tech fast. Be ready to engage with end-users and align your solution with mission-critical needs.
You Won an AFWERX Grant—What to Do Next About Accounting
Winning an AFWERX SBIR award is a significant milestone, with plenty of financial oversight. To stay compliant and unlock future funding, you need to handle accounting with the same precision you bring to your tech.
Set Up a DCAA-Compliant Accounting System
The Department of Defense expects SBIR recipients to follow DCAA-compliant accounting practices. That means your system must:
- Track costs by project and category
- Separate direct and indirect expenses
- Support detailed audit trails
- Include a timekeeping system tied to labor costs
Manual spreadsheets or off-the-shelf software rarely work. Before you start billing, invest in systems built for government contract accounting.
Build and Track an SBIR Budget
Your approved cost proposal is your spending blueprint. Budget management under AFWERX means:
- Sticking to federal grant cost principles
- Applying indirect cost rates properly
- Avoiding unapproved reallocations or overages
Update your forecasts regularly and keep documentation on how each cost supports the project.
Record Time and Labor Correctly
Labor is heavily scrutinized under SBIR. To stay compliant:
- Employees must track time daily by project and task
- Timesheets must show only actual hours worked
- Supervisors should review and approve entries promptly
This is called labor distribution reporting, and it’s required—even in Phase I. Poor time records are a common audit failure.
Prepare for Financial Reports and Audits
Expect to submit periodic reports through the DSIP. Be prepared to:
- Justify all claimed costs with supporting documentation
- Provide reports that align with your accounting records
- Show that all spending follows DoD and SBIR guidelines
Even in early phases, audits and system reviews can happen. Strong documentation now prevents bigger problems later. Keep all financial records—timesheets, invoices, receipts, contracts, and correspondence—for at least three years after final payment. Air Force contracts often require longer retention, and auditors can request documentation at any time during that window.
Key Compliance Rules for SBIR Awardees
Air Force SBIR funding comes with strict accountability. Even in early phases, your costs must follow federal guidelines, and your documentation must be audit-ready.
Allowable costs are those that are:
- Directly tied to your SBIR work
- Reasonable in amount
- Allocable to the project
- Consistently treated under your accounting system
Examples include:
- Salaries for employees working on the grant
- Materials and supplies
- Consultant fees (if pre-approved)
- Approved indirect costs
Unallowable costs include:
- Marketing or advertising
- Lobbying
- Entertainment or alcohol
- Equipment not approved in your proposal
Know the difference, and if you’re unsure, consult the Federal Acquisition Regulation (FAR) Part 31 before charging anything to your award.
Watch Out for These Common Compliance Failures
Even experienced businesses make mistakes that trigger audit findings. The most frequent issues:
- Inadequate timekeeping: Missing daily time records, entries made weeks later, or insufficient detail on what employees actually worked on
- Poor cost segregation: Mixing direct and indirect costs together, or failing to exclude unallowable expenses from billing
- Weak documentation: Lost receipts, missing invoices, or no clear audit trail connecting costs to your accounting records
- Indirect rate errors: Applying rates inconsistently across projects or calculating them incorrectly
Strong systems prevent these problems. If you’re not confident your accounting can survive scrutiny, get help before you bill your first invoice.
Working with Subcontractors and Consultants
You’re allowed to work with subcontractors or consultants under SBIR, but there are rules:
- They must be disclosed in your proposal or formally approved by the contracting officer.
- You must maintain written agreements, clear invoices, and proof of work.
- Costs must be reasonable and well-documented.
In Phase I, no more than one-third of the work may be subcontracted. Up to 50% can be subcontracted in Phase II—but only with proper approvals and cost controls.
Get Ready for Phase III, STRATFI, or TACFI
If your technology shows strong potential, follow-on funding may be available:
- Phase III: No SBIR funds—this is where your tech transitions to DoD programs or commercial markets, supported by other funding sources.
- STRATFI: Strategic financing (up to $15M) for mature, high-impact solutions with strong defense and private-sector interest.
- TACFI: Tactical funding (up to $3M) to bridge between Phase II and initial transition, often tied to a specific DoD customer.
You’ll need clean books, audit-ready documentation, and proof that your funding was managed correctly to qualify.
Team 80: Accounting for Air Force SBIR Phase I & II Awardees
AFWERX funding moves fast—and so do the compliance requirements. From day one, you’re expected to track costs, document labor, and follow federal rules that aren’t always easy to interpret. That’s why small businesses work with Team 80.
Specialized Support for SBIR Grant Compliance
We help Air Force SBIR awardees stay aligned with DoD standards through every grant phase. Our team supports:
- DCAA-compliant system setup
- Budget tracking and indirect cost rate support
- Accurate labor distribution and timekeeping
- Audit prep and DSIP reporting
We don’t generalize—we focus on federal grant accounting, and we understand the pressure that comes with innovation tied to defense timelines. If you’ve won an award, we’ll help you keep it—and stay ready for what’s next.
Sarah Sinicki
Team 80 CEO
Sarah is a leader focused on serving small businesses in various industries. She has worked with a multitude of companies over the last 25 years and loves helping business owners find success. Sarah is genuinely committed to unburdening Team 80 clients so that they have the freedom to focus on their business. In her free time, you can find her spending time with her husband, two kids, and her Yorkies, Marley and Ziggy. When she is not helping business owners, you can find her in a Reb3l Groove class dancing it out. Sarah is also an avid Colorado Avalanche fan, so if you ever want to talk about hockey, she’s your gal.
