Learn how the AFWERX SBIR program works, how Air Force topics are structured, and how to manage an award with audit-ready accounting and timekeeping.
AFWERX manages the Department of the Air Force’s SBIR and STTR programs and awards contracts to small businesses developing technology for Air Force and Space Force needs. An award gives your company funding to prove feasibility or build a prototype, and it also brings federal contract requirements for how you track labor, project costs, and supporting records.
Those requirements apply from the first day of the contract, so your accounting should be in place before employees start charging time to the project.
This guide covers how the Air Force SBIR program works, what to expect from Phase I and Phase II funding, and how to manage the accounting behind an award, from indirect cost rates to audit readiness.
Understanding the Air Force SBIR Program
The Air Force SBIR program funds small businesses developing technology that can address Air Force and Space Force mission needs. AFWERX is the innovation arm of the Department of the Air Force and a directorate of the Air Force Research Laboratory (AFRL). It manages the Department of the Air Force’s SBIR and STTR programs and focuses on dual-use technologies with both defense and commercial applications.
What the Program Supports
AFWERX funds technology across a wide range of areas, including software, AI, autonomy, advanced manufacturing, advanced materials, cybersecurity, directed energy, and space systems. Each opportunity starts with a topic that describes an Air Force or Space Force need, and companies submit proposals through the Department of War’s SBIR/STTR Innovation Portal (DSIP).
AFWERX has also shifted more of its funding toward Phase II and higher-dollar awards to help technology move into operational use. For awardees, that means larger budgets, longer performance periods, and more labor and project costs to track.
How AFWERX Topics Work
AFWERX releases every SBIR and STTR opportunity as a topic through the Department of War’s solicitations. Each topic describes the Air Force or Space Force need, the phase it funds, the maximum award, and the period of performance. Space Force topics run through SpaceWERX, and our SpaceWERX SBIR accounting and funding guide covers those requirements.
Specific Topics
Specific Topics come from an Air Force or Space Force end user with a defined problem. The topic spells out the requirements and already names the customer. Some Specific Topics involve dual-use technology, while others address needs unique to the military. If your company wins a Phase I, Phase II, or Direct to Phase II award under a Specific Topic, you work with that end user on the problem described in the solicitation.
Focused Open Topics
Focused Open Topics name a capability gap and leave the technical approach open, so several different solutions can compete within the same mission area. AFWERX and SpaceWERX use this model in place of the traditional, technology-agnostic Open Topic, and AFWERX has said it expects fewer traditional Open Topic opportunities.
Direct to Phase II
Direct to Phase II (D2P2) topics are for technology that has already completed feasibility work outside the SBIR or STTR program and is ready for prototyping. Applicants generally need an identified Department of the Air Force customer and end user, along with a signed Customer Memorandum. Because D2P2 skips the smaller Phase I award, your accounting system needs to be ready for a larger contract from the first day.
Who’s Eligible to Apply
To apply for Air Force SBIR or STTR funding, your company must meet federal eligibility requirements:
- Be a for-profit business based in the United States
- Have 500 or fewer employees, including affiliates
- Be more than 50% owned and controlled by U.S. citizens, permanent resident aliens, or qualifying U.S. entities
- Have the principal investigator primarily employed (more than 50%) by the small business for SBIR awards
- For STTR, partner with a U.S. research institution, with the small business performing at least 40% of the work and the research institution at least 30%
SBIR funds generally must be spent on work performed in the United States. Before making an award, AFWERX also runs a Risk Based Analysis on proposals under consideration, and every proposal includes a foreign disclosure.
Prior defense experience is not required to apply. Many AFWERX awardees are first-time defense contractors, which often makes the accounting side of the contract, including timekeeping, cost tracking, and supporting records, the biggest adjustment after an award.
How Phase I and Phase II Funding Works
Each topic sets its own maximum award and period of performance, within the limits AFWERX publishes for each phase.
- Phase I: Feasibility Study
- Funding: Up to $323,000
- Period of performance: Up to six months
- Purpose: Show the technical merit, feasibility, and commercial potential of your solution for a Department of the Air Force stakeholder
- Phase II: Prototype Development
- Funding: Up to $2.1 million
- Period of performance: Up to 24 months
- Purpose: Develop and demonstrate a prototype with a Department of the Air Force technical point of contact and end user, and complete milestone deliverables on the approved schedule
- Direct to Phase II (D2P2)
D2P2 awards follow the same Phase II limits. Companies with a mature solution, an identified customer and end user, and a signed Customer Memorandum can start at Phase II without a prior Phase I award.
Read the topic limits closely. AFWERX does not consider proposals that exceed a topic’s maximum period of performance and has named this the most common reason for disqualification. Your budget, staffing plan, and indirect rates all need to fit within the topic’s dollar and time limits. Team 80 can review a proposal budget with you before submission so the numbers match the topic and your company’s actual costs.
Companies with successful Phase II work can pursue follow-on funding through STRATFI, TACFI, and Strategic Breakthrough awards, which are covered later in this guide.
How to Apply Through AFWERX
AFWERX follows the Department of War’s monthly solicitation schedule. New topics typically go into pre-release on the first Wednesday of the month, then open for proposals about a month later. All Phase I, Phase II, and D2P2 proposals go through the Defense SBIR/STTR Innovation Portal (DSIP).
- Register early. Your company needs an active SAM.gov registration, an SBA Company Registry number, and a DSIP account before you can submit.
- Use the pre-release period. During pre-release, you can contact the topic author directly with questions. After the topic opens, questions go through the Topic Q&A in DSIP.
- Submit one proposal per topic. AFWERX limits each company to one proposal per topic. If you submit more than one proposal to the same topic, only the most recent one submitted before the deadline gets evaluated. Our DOD SBIR guide explains how these limits work across defense components.
- Prepare all seven volumes. A proposal includes a cover sheet, technical volume, cost volume, company commercialization report, supporting documents, fraud, waste, and abuse training certificate, and foreign disclosure. Check the topic for its required Cybersecurity Maturity Model Certification (CMMC) level as well.
- Wait for the contracting officer. AFWERX sends an email for each selected proposal and instructs companies not to begin work until a contract negotiator or contracting officer reaches out.
The time between selection and contract award gives your company a window to set up its accounting. Team 80’s onboarding takes about two weeks, so you can have timekeeping, project cost tracking, and a chart of accounts in place before employees charge their first hours to the contract.
You Won an AFWERX Award: What to Do Next About Accounting
An AFWERX award comes with federal contract requirements for how you record labor, track project costs, and support the amounts you bill. The contract type and the clauses in your award determine how formal those requirements are, so start by reading the award documents closely.
Set Up a DCAA-Compliant Accounting System
Not every AFWERX award requires a formal DCAA accounting system review. Cost-reimbursement, time-and-materials, and some other contract types require an adequate accounting system, and the government may request a review before or after award. A firm-fixed-price award may not trigger a review, but your company still needs records that show what the project costs and support every charge.
A system that meets DCAA expectations should:
- Track costs by contract or project
- Separate direct costs from indirect cost pools
- Identify unallowable costs and exclude them from billings
- Connect employee timesheets to payroll and project labor costs
- Keep an audit trail from source documents to the general ledger and invoices
Many small businesses already use QuickBooks or similar software. Whether it can support a government contract depends on the setup, including the chart of accounts, job costing, and how timekeeping feeds labor costs into each project. Team 80’s standard chart of accounts separates direct costs from indirect cost pools for fringe benefits, facilities, administration, and research.
One space company Team 80 spoke with was negotiating a Direct to Phase II contract with a Department of War agency that required a DCAA-compliant accounting system. Its existing accounting software had compliance gaps, and the company also needed to know whether a subcontractor’s accounting would have to meet the same standard. Once Team 80 completes a client’s setup, the company is ready for a DCAA review.
Build and Track an SBIR Budget
The cost volume you submitted becomes the starting point for tracking the contract. Once work begins, compare actual spending against that budget every month so you can spot problems while there’s still time to adjust.
How an overrun affects your company depends on the contract type. On a firm-fixed-price award, the price stays the same even if labor or materials cost more than planned. On a cost-reimbursement contract, the government generally won’t reimburse costs above the funded amount without a contract modification. In both cases, you need to know where the project stands each month.
A monthly budget review should cover:
- Actual costs by category compared with the approved budget
- Actual indirect rates compared with the rates used in the proposal
- Remaining funds compared with the work left to complete
- Contract modifications or funding changes that affect the budget
Team 80 prepares a project cost report for each contract every month and compares each client’s actual indirect rates with the rates in the budget. Clients share contract modifications and funding updates so the reports stay current. Team 80 only needs the financial sections of a contract to do this work, which helps defense companies that handle sensitive technical information.
Record Time and Labor Correctly
Labor is often the largest cost on an AFWERX contract, and timekeeping is one of the first areas DCAA looks at in a review. Your time records need to support every hour charged to the project.
A timekeeping process that holds up in a review includes:
- Daily time entry by every employee
- All hours worked, including indirect work such as administration or proposal writing
- Time tracking for salaried employees and founders as well as hourly staff
- Supervisor review and approval of each timesheet
- A record of every change made after a timesheet is submitted
The timesheets then need to tie to payroll. This connection, called labor distribution, assigns each employee’s pay to the contracts and indirect activities they worked on, so the labor cost on the project matches the hours recorded.
Team 80’s timesheet process locks each timesheet once it’s approved. Any later change requires notifying the employee’s manager, which leaves a record of each change.
Independent contractors need a way to document their hours too. When a government contracting client asked Team 80 how to handle contractors working alongside its W-2 employees, Team 80 recommended separate time tracking for the contractors and monthly invoices that match those hours.
Prepare for Financial Reports and Audits
Each AFWERX contract lists its own reporting requirements. Phase II contracts tie deliverables to the approved Proposal Milestone Schedule, and invoices go through the payment system named in the contract. The numbers in your reports and invoices need to match your accounting records.
A review of your accounting can happen at several points. Before awarding a cost-reimbursement contract, the government may request a pre-award review of the accounting system. During performance, auditors may test invoices against timesheets, payroll records, and receipts. Cost-reimbursement contracts can also require an annual incurred cost submission, which DCAA may audit.
Keep financial records, including timesheets, payroll records, invoices, receipts, and the contract and its modifications, for at least three years after final payment. The retention period runs longer while an audit, appeal, or claim remains open.
Team 80 keeps client records review-ready through a weekly and monthly routine. The team processes bank and credit card activity and vendor bills every week, and each month closes with financial statements and a project cost report for each contract by the 15th. Every close goes through two levels of review, first by the client’s Chief Accounting Officer and then by their manager.
When DCAA requests a review, Team 80 handles the process with the client, including walking the auditor through the accounting system on a screen share and providing written accounting policies and procedures tailored to the company.
Key Compliance Rules for SBIR Awardees
The rules below apply from the first month of your contract, in Phase I and Phase II. Building them into your monthly accounting takes far less work than correcting them right before a review.
FAR Part 31 determines which costs your company can charge to an AFWERX contract, either directly or through indirect rates.
A cost is allowable when it is:
- Reasonable in amount
- Allocable to the contract, either directly or through an indirect cost pool
- Recorded consistently with your accounting practices
- Permitted under the contract terms and the limits in FAR Part 31
Common allowable costs:
- Wages for employees working on the project, supported by timesheets
- Materials and supplies used in the work
- Consultant and subcontractor costs included in the approved budget
- Indirect costs such as fringe benefits and administrative expenses, applied through your indirect rates
Common unallowable costs:
- Alcohol
- Entertainment
- Lobbying
- Most advertising
- Fines and penalties
- Interest on borrowed money
- Federal income taxes
Unallowable costs still belong in your books. Team 80’s chart of accounts records them in separate accounts so they stay out of government invoices and indirect rate calculations. If you’re unsure whether a cost qualifies, check FAR Part 31 before charging it to the contract.
Keep Commercial and Government Work Separate
A common problem for small businesses with both private funding and government awards is recording everything in the same accounts. When investor-funded development, commercial sales, and contract costs run through one set of accounts with no way to separate them, the company can’t show which costs belong to the contract.
This problem often starts before the first award. One satellite startup Team 80 spoke with had raised a pre-seed round and planned to pursue government funding. Setting up project-level accounting before an award lets a company like this keep investor-funded work separate from contract work from the beginning. Team 80 also proposed catching up the company’s bookkeeping from the start of the year so its records would be complete.
If you’re unsure whether your current accounting would hold up in a review, have it checked before you submit your first invoice.
Working with Subcontractors and Consultants
Your company can use subcontractors and consultants on an AFWERX award, within set limits. For SBIR, your company must perform at least two-thirds of the research or R&D work in Phase I and at least half in Phase II. For STTR, your company must perform at least 40% of the work and your research institution partner at least 30%. Some topics set stricter requirements, so check the solicitation.
Subcontractor and consultant costs also need:
- Disclosure in your proposal or approval from the contracting officer
- A written agreement that describes the work and how it’s priced
- Invoices that show the work performed and match the agreement
- Their own line on the project cost report, so you can track work share against the budget
The work-share percentages generally depend on how costs are split in the budget, so your accounting needs to show your company’s own labor and expenses separately from outside work.
Team 80 processes vendor and subcontractor invoices each week and sends the payments to the client for approval, which keeps the company in control of what gets paid. The team also collects W-9s from consultants and vendors and tracks subcontractor costs separately on each project cost report.
Get Ready for STRATFI, TACFI, Strategic Breakthrough, or Phase III
Companies that have completed successful SBIR or STTR work have several options for follow-on funding.
- STRATFI: $3 million to $15 million in SBIR or STTR funding, matched by government or private investment
- TACFI: $375,000 to $2 million, with 1:1 cost sharing
- Strategic Breakthrough: Up to $30 million, with a required 1:1 match
- Phase III: Sole-source contracts that extend earlier SBIR or STTR work, funded outside the SBIR and STTR programs
Matching funds add an accounting requirement. Your company has to show how SBIR or STTR dollars, private investment, and other government funding were each spent, so every funding source needs its own tracking in your books.
Team 80: Accounting for Air Force SBIR Phase I & II Awardees
Team 80 handles the recurring accounting work behind Phase I and Phase II SBIR and STTR contracts, so your team can stay focused on the technology and the Air Force or Space Force customer. Each client works with a dedicated Chief Accounting Officer who manages the monthly accounting and serves as the main point of contact.
Accounting Support for AFWERX SBIR and STTR Contracts
Team 80’s SBIR and government contract accounting services include:
- Accounting system setup with a chart of accounts that separates direct, indirect, and unallowable costs
- Bookkeeping and monthly financial reporting
- Timekeeping and labor allocation
- Project cost tracking and budget-to-actual reporting
- Indirect rate calculations
- Accounts payable and subcontractor cost tracking
- Payroll through Gusto, when included in your service agreement
- Support during DCAA accounting system reviews and audits
With more than 25 years of experience supporting government contractors and SBIR and STTR awardees, Team 80 builds the accounting around the requirements in your contract. Monthly reviews of project costs and indirect rates give you a current view of each award, from the first Phase I invoice through a larger Phase II contract.
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.
