Learn how National Science Foundation SBIR funding works and what financial systems, cost rules, and reporting practices companies must follow to stay compliant from Phase I to Phase II.
The NSF SBIR program gives early-stage science and technology companies a way to develop high-impact research without giving up equity. It funds exploratory work, helps teams build technical momentum, and creates a structured path from idea to prototype. This guide explains how the program works and what awardees must understand about the financial and compliance requirements that come with accepting federal funds.
What is the NSF SBIR Program?
The NSF SBIR program supports startups working on scientific and engineering innovations with strong commercial potential. It is part of America’s Seed Fund, a federal initiative that supports high-risk, high-reward research that is too early for private investment. The funding is non-dilutive and designed to help founders demonstrate technical feasibility, develop prototypes, and bring promising concepts to market.
Program Overview
National Science Foundation awards hundreds of SBIR grants each year across a wide range of technical domains, from advanced materials to artificial intelligence to environmental technologies. Unlike many federal agencies with mission-driven SBIR programs, NSF focuses on broad scientific advancement and the commercial potential of the work.
Key points include:
- NSF awards over $200 million annually through its SBIR and STTR programs.
- The program is open to U.S.-based, for-profit small businesses with fewer than 500 employees.
- Projects must demonstrate both technical merit and market opportunity.
STTR awards require collaboration with a research institution, while SBIR awards do not.
NSF’s role is to help founders push early research into a form that can attract customers and private investment. To do that, the agency uses a structured two-phase funding model.
Phase I and Phase II Funding
Phase I
NSF Phase I awards typically average about $295,000, with final amounts determined by the current solicitation. Funding supports feasibility work, early experiments, and proof-of-concept development over a performance period of up to 12 months.
Phase II
Phase II awards can be funded up to $1,250,000 for up to 24 months of research and development, prototype building, and commercialization planning. Exact limits follow the numbers published in each solicitation.
A successful Phase I project positions a company to apply for Phase II funding. NSF evaluates Phase II proposals not only on technical progress but also on the company’s ability to manage award funds responsibly, maintain accurate records, and meet federal compliance standards.
How NSF SBIR Differs from Other SBIR Programs
NSF uses a grant-based structure rather than contracts. This shifts the focus from government mission needs to scientific and commercial potential. It also changes the financial expectations, as NSF follows Uniform Guidance under 2 CFR 200, which governs how awardees track costs, establish indirect rates, record labor, and support every charge to the grant.
Eligibility: Who Can Apply?
To qualify for the NSF SBIR program, applicants must meet federal small business standards and demonstrate that their team can carry out the proposed research.
SBIR Eligibility Requirements
A company must meet the following criteria at the time of award:
- It is a for-profit U.S. business located and operating within the United States.
- It has fewer than 500 employees, including all affiliates.
- It is at least 51 percent owned and controlled by U.S. citizens or permanent residents.
- The work will be performed within the United States, except in rare cases where specialized capabilities are unavailable domestically.
The research must be innovative, rooted in science or engineering, and positioned for eventual commercial application. NSF funds early, high-risk work, but the project still needs a realistic path toward a viable product or service.
Principal Investigator Requirements
Every NSF SBIR proposal identifies a Principal Investigator who oversees the research. NSF evaluates both the PI’s technical background and the company’s overall capacity to execute the work.
The PI Must:
- Be primarily employed by the small business at the time of the award and throughout the project.
- Possess the technical expertise needed to lead the research.
- Commit a meaningful portion of their time to the project and document that effort in the company’s timekeeping system.
STTR Eligibility Notes
For companies applying to the related STTR program, an additional requirement applies:
- The small business must partner with a nonprofit research institution, such as a university or federal lab.
- The small business must perform at least 40 percent of the research effort, and the research institution must perform 30 percent.
How to Apply for NSF SBIR Funding
NSF uses a two-step application process that allows founders to validate their idea before preparing a full proposal. The process is straightforward and focuses on the technical merit of the research, the team’s qualifications, and the potential for commercial impact.
Step 1: Project Pitch
The Project Pitch is the initial submission and the only way to receive an invitation to apply. It is a short, structured description of your innovation that covers four elements:
- The technical innovation
- The technical objectives and R&D plan
- The market opportunity
- The company and team qualifications
NSF reviews the pitch to determine whether the proposed work fits the program’s goals. NSF occasionally updates the Project Pitch portal and its required fields, so applicants should always review the most current guidance before submitting.
Step 2: Full Proposal
Once invited, the company prepares a full SBIR proposal. This submission must present a clear technical plan, demonstrate the team’s ability to execute it, and make a strong case for commercial potential.
The core components include:
Technical Narrative
A detailed explanation of the innovation, the scientific or engineering problem it addresses, and the specific research tasks planned for Phase I. NSF looks for sound methodology, achievable goals within the award period, and evidence of technical feasibility.
Budget and Justification
A line-item budget that explains how the company will use NSF funds. The justification must support each cost, including labor, materials, equipment, subawards, travel, and indirect costs. All expenses must comply with the federal cost principles in 2 CFR 200.
Team Qualifications
Short biographies for key personnel that demonstrate technical expertise and the capacity to complete the work. The Principal Investigator’s background and involvement receive particular attention.
Step 3: Review Process and Timeline
NSF evaluates proposals in two stages. First, internal program staff review the project’s technical and commercial alignment. Second, external experts assess the scientific merit. Reviewers score proposals on intellectual merit, broader impacts, and commercial potential.
Timelines vary, but most applicants receive an official decision within 4 to 6 months of submission. Companies that receive an award must complete onboarding steps, establish compliant financial systems, and begin work in accordance with the approved budget.
Managing Your NSF SBIR Award: Accounting Essentials
An NSF SBIR award gives founders the room to pursue ambitious research, but it also brings financial expectations that must be met from the first day of performance. NSF follows federal cost principles and requires documentation, accurate timekeeping, and precise cost separation.
Required Accounting Systems
NSF expects every awardee to maintain a job cost accounting system that can track project expenses with clarity and accuracy. The system does not need to be complex, but it must align with federal standards, including 2 CFR 200.
A compliant system includes the ability to:
- Track costs by individual grant or project
- Separate direct costs from indirect costs
- Record labor distribution by employee, hours, and activity
- Maintain an audit trail for every cost charged to the award
- Produce reports that match reimbursement requests in NSF’s payment systems
NSF does not certify software, so the focus is on capability rather than platform. Many small businesses adopt simple tools supported by transparent internal processes that meet federal requirements.
Time Tracking Requirements
Accurate timekeeping is essential for any NSF SBIR award that includes personnel costs. Anyone whose salary or wages are charged to the project must maintain consistent, contemporaneous records of time spent on award activities.
A compliant process includes:
- Each employee records time on a daily or regular basis
- Charges that reflect actual effort on the project
- Supervisor review and approval
- Retention of timesheets for future review or audit
Time records support quarterly and annual reporting through NSF portals and must align with payroll, budgets, and the tasks described in the proposal.
Allowable and Unallowable Costs
NSF follows the federal cost principles in 2 CFR 200 when determining which expenses may be charged to an SBIR award. Costs must be reasonable, necessary for the project, and clearly allocable to the work described in the proposal.
Direct costs typically include:
- Salaries and wages for project personnel
- Materials and supplies used in the research
- Specialized equipment or testing services
- Subawards or consultants performing technical work
Indirect costs cover shared business expenses such as:
- Overhead
- Fringe benefits
- Administrative and facilities costs
Unallowable costs cannot be charged to the award or included in indirect cost pools. Common examples include entertainment, alcohol, advertising outside of participant recruitment, and any expense not tied to the approved project scope.
Understanding Indirect Rates for NSF SBIR Awards
NSF allows small businesses to charge indirect costs, but those rates must be reasonable, consistently applied, and supported by a written cost allocation plan. Companies may propose a provisional indirect rate in their Phase I or Phase II budget, and NSF often accepts it if the math and structure are clear. Indirect costs can include fringe, overhead, and administrative expenses, but they must exclude any unallowable costs listed in 2 CFR 200.
Financial Reporting Requirements
Financial and technical reporting throughout the life of the award enables the agency to compare spending with progress and confirm that work is moving in accordance with the proposal and budget.
Typical requirements include:
- Annual progress reports that document results, milestones, and use of funds
- A final financial report at the end of the performance period
- Ongoing ACM$ reimbursement requests that must align with internal accounting records
How NSF SBIR Payments Work
NSF SBIR awards use the ACM$ (Award Cash Management Service) system, which reimburses companies for actual project expenses rather than paying in advance. Awardees submit drawdown requests based on costs already incurred, and the accounting system must document each charge with timesheets, payroll records, and receipts.
Preparing for Phase II: The CAP Review Process
Before NSF issues a Phase II award, the agency conducts a financial and administrative review to confirm that the company can manage a larger grant. This process is known as the CAP review. It moves quickly, and companies must be ready to provide detailed records that show how Phase I funds were managed and whether the business has the systems needed for Phase II.
What Triggers the CAP Review
A CAP review begins when NSF recommends a company for Phase II funding. The review assesses the company’s financial controls, documentation practices, and overall administrative capacity. NSF must be confident that the business can manage the higher award amount and the extended performance period.
During the review, NSF evaluates:
- Accuracy of Phase I spending
- Adequacy of the accounting system
- Administrative and operational capability
- Financial viability
These factors determine whether the company is ready to receive and manage a Phase II award.
Documentation NSF Requires
In a CAP review, NSF provides specific forms and requests records demonstrating compliance with federal cost principles and internal controls.
Typical documentation includes:
- NSF Forms 357, 358, and 359, which summarize Phase I spending and financial practices
- Financial statements, including balance sheets and income statements
- A cost allocation plan that explains how indirect costs are assigned
- Organizational charts that show the structure of the company and key personnel
- Supporting documents for labor charges, indirect rate calculations, and project expenses
Some companies may also be required to submit an external CPA review of their financial statements, particularly if the business is young or if internal controls need additional verification.
Timeline and What to Expect
Once NSF initiates the review, companies typically receive a short window to submit all required documents. The review is not an audit, but it is rigorous and requires accurate records that align with Phase I spending and federal cost rules. NSF may request clarification or additional information before completing the review.
Common CAP Review Challenges
Several issues frequently create delays or complications during the CAP process:
Inadequate Cost Tracking Systems
Systems that cannot separate direct and indirect costs or cannot produce clear reports make it challenging to demonstrate spending accuracy.
Missing or Insufficient Documentation
Gaps in timesheets, payroll support, receipts, or allocation schedules often lead to follow-up requests or negative findings.
Incorrect Indirect Rate Calculations
Indirect rates that lack supporting detail or do not follow the company’s stated cost allocation plan can raise concerns.
Tight Submission Timelines
Many companies underestimate how quickly NSF expects the documentation and struggle to assemble complete records.
Early preparation matters because the CAP process evaluates spending that has already occurred. Companies that maintain clear records throughout Phase I move through the review more smoothly and position themselves well for Phase II funding.
Team 80's NSF SBIR Accounting Services
Managing an NSF SBIR award requires strong financial systems, consistent reporting, and a clear understanding of federal cost principles. Team 80 supports companies at every stage of the grant so they can stay compliant while keeping their focus on the research that drives their work.
What We Do for NSF SBIR Winners
System Setup for NSF Compliance
Team 80 builds accounting systems that align with federal standards, including the cost tracking and documentation capabilities NSF expects for both Phase I and Phase II awards.
Month-to-Month Accounting Support
A dedicated team handles cost tracking, bookkeeping, documentation organization, and the financial side of project performance. This keeps records up to date throughout the grant period.
Compliance Guidance and Reporting Support
Quarterly reports, cost allocation questions, allowability concerns, and documentation reviews are handled with clear guidance that reflects federal cost rules and NSF-specific expectations.
CAP Review Readiness
For Phase II candidates, Team 80 prepares the documentation for the CAP review, coordinates with CPAs as needed, and guides companies through the submission process.
Expert Advisory on Federal Cost Principles
Clients receive ongoing support for indirect rates, cost structures, timekeeping, and federal allowability rules. This reduces confusion and helps businesses stay prepared for NSF reviews.
Common Accounting Mistakes NSF SBIR Awardees Make
Several recurring issues disrupt SBIR performance: missing timesheets, inconsistent labor charges, indirect rates without supporting documentation, and expenses that do not match the approved budget.
Another frequent problem is waiting until Phase II to build compliant accounting systems, which creates gaps that appear during the CAP review. Companies also run into trouble when reimbursement requests do not align with payroll or internal records.
Addressing these issues early protects the award and simplifies post-award monitoring.
Why Partner With Us
NSF SBIR awards create essential opportunities for small businesses, but managing the financial and administrative side of the program can be challenging. Team 80 meets that challenge with clear systems, consistent reporting, and economic practices that stand up to federal review.
A well-prepared accounting structure protects the award, supports accurate reporting, and overcomes the issues that often arise during CAP reviews or post-award monitoring. Most importantly, working with a team that understands NSF expectations allows researchers to stay focused on their technology and the impact it aims to create.
Strong accounting is a core part of successful SBIR performance. With the right systems in place, companies can move confidently through the program and stay ready for each stage that follows.
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.
