Learn how the DOD SBIR program operates and what financial requirements every awardee must follow from Phase I through audit readiness.
The DOD SBIR program is one of the strongest pathways for small businesses working on advanced research with national impact. It offers funding, structure, and a clear route for turning technical ideas into solutions the government can deploy. This guide explains how the program works and what teams should understand as they move from early research to real-world application.
The department now issues SBIR and STTR solicitations under the Department of War (DoW) name. Because DOD is still the more familiar name, this guide uses DOD throughout. With that context in mind, here is what innovators should know as they navigate the path from concept to contract.
From Innovation to Implementation
Sentient Science began with a simple question that kept Navy maintainers up at night: how do you know a critical component in a Black Hawk helicopter will last one more mission? Their early SBIR awards helped them build physics-based models that could forecast bearing failures with remarkable accuracy. The work evolved into a tool now used to guide maintenance decisions across military fleets and prevent failures before they occur.
Stories like this highlight what small teams can accomplish with the proper support. They also reveal a side of the journey that many innovators underestimate. The research may be cutting-edge, but the financial requirements of a federal contract can feel unfamiliar. Timekeeping rules, cost allocation, and documentation standards often become the first real obstacles after an award is announced.
The sections ahead explain both the program itself and the accounting expectations that follow. You will see how the DOD SBIR process works and which financial systems are required to remain compliant throughout the award.
What is the DOD SBIR Program?
The DOD SBIR program funds early-stage research and development that supports national security priorities. Small businesses use it to test new ideas, build working prototypes, and move technology into defense or commercial use.
Program Overview
The DOD runs the largest SBIR program in the federal government, with a budget of more than $2 billion a year. More than a dozen defense components participate, including the Army, Navy, Air Force, Space Force, DARPA, CBD, SOCOM, and the Missile Defense Agency. Each one releases topics tied to its own mission needs.
The DOD releases topics through four annual solicitations: an SBIR Broad Agency Announcement, an SBIR Commercial Solutions Opening, an STTR Broad Agency Announcement, and an STTR Commercial Solutions Opening. New topics typically pre-release on the first Wednesday of each month, and all proposals go through the Defense SBIR/STTR Innovation Portal (DSIP).
To apply, your company must qualify as a small business under SBA rules, including 500 or fewer employees with affiliates and more than 50% ownership by U.S. citizens or permanent residents. STTR also requires a partnership with a nonprofit research institution, with your company performing at least 40% of the work and the institution at least 30%.
Three-Phase Funding Structure
The DOD uses a phased approach that aligns funding with technical progress.
Phase I
Federal policy allows Phase I awards up to $323,090. This represents the maximum that any SBIR agency may issue without a waiver. Within the DOD, however, individual components set their own amounts by topic, and some, such as the Navy, structure Phase I as a base period with an optional follow-on period. Most Phase I efforts run between three and 12 months and focus on feasibility and early technical validation. Phase I awards are typically firm-fixed-price contracts, though some components use Other Transaction agreements.
Phase II
The policy cap for Phase II awards is $2,153,927, with larger amounts possible through approved waivers. Actual budgets vary by component and topic, and projects typically run 15 to 24 months to support full research and development, prototyping, and testing. Depending on the component, Phase II may be a cost-plus-fixed-fee contract, a firm-fixed-price contract, or an Other Transaction agreement. Companies that have already completed feasibility work outside the SBIR program can pursue Direct to Phase II, which the DOD now offers for STTR as well as SBIR topics.
Phase III
Phase III marks the transition to commercialization and does not use SBIR funds. A Phase III award can come from any defense component or a commercial customer and supports activities such as product delivery, scaling, and deployment. The data rights protections earned in Phases I and II continue into Phase III and strengthen a company’s position when pursuing follow-on contracts.
DOD SBIR Proposal Limits
DOD limits SBIR and STTR proposals on a per-topic basis. A small business may submit one proposal to each topic. If a company submits more than one proposal to the same topic, only the most recent proposal submitted before the deadline is evaluated.
Your company can still submit proposals to more than one topic, including topics from different defense components such as the Army, Navy, Air Force, and Space Force. Some topics or solicitations set additional limits, so check the topic instructions before submitting.
How DOD SBIR Differs from Other Programs
NSF and NIH fund most of their SBIR awards as grants. The DOD awards SBIR through contracts and Other Transaction agreements, and the award type sets the accounting requirements. A firm-fixed-price award pays a set price, usually on a schedule tied to time or deliverables. A cost-plus award reimburses documented costs plus a fixed fee, and it brings the closest review of your accounting system.
The Defense Contract Audit Agency may review accounting systems, indirect rates, timekeeping, and cost allocation practices before or after award. For most SBIR companies, that review comes with the first cost-plus Phase II.
Managing Your DOD SBIR Award: Accounting Essentials
Every DOD SBIR award comes with requirements for how your company tracks labor, costs, and supporting documents. The award type determines how formal those requirements are, and the expectations apply to companies of every size.
Required Accounting Systems
A cost-plus DOD contract requires an accounting system that meets the standards in the Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulation Supplement (DFARS), and DCAA may review it. A firm-fixed-price award usually doesn’t bring a formal review, but the same practices give your company the records to support its costs and prepare for a cost-plus Phase II.
Asystem that meets DOD expectations can:
- Track costs by contract or project
- Separate direct costs from indirect costs
- Record labor by employee, hours, and activity
- Show an audit trail for every cost recorded
- Produce reports that match the amounts invoiced
- Support incurred cost submissions when the contract requires them
DCAA doesn’t certify accounting software. It reviews whether your system follows FAR Part 31 and DFARS requirements. Many small businesses use QuickBooks with separate timekeeping and job costing tools, and the setup of those tools determines whether the system holds up.
Time Tracking Requirements
Timekeeping is one of the most heavily scrutinized areas in a DCAA review. Every employee who charges time to a DOD contract needs accurate records entered as the work happens, and daily timesheets are the standard.
A timekeeping process that holds up in a review includes:
- Daily time entry by each employee
- Hours charged to the correct project or indirect account
- Supervisor review and approval
- A documented reason for any change after a timesheet is submitted
- Timesheets kept on file for audit
Team 80’s timesheet process locks each timesheet once it’s approved, and any later change requires notifying the employee’s manager. When labor isn’t supported by time records, DCAA may question the charges, and the government may deny payment or ask for money back.
Understanding Allowable vs Unallowable Costs
The DOD uses the cost principles in FAR Part 31 to decide which costs it will pay. Costs must be reasonable, allocable, and allowable under the contract.
Direct costs support the SBIR project specifically, such as project labor, materials, subcontracts, and equipment the technical work requires.
Indirect costs include fringe benefits, overhead, facilities, and general and administrative expenses. Your company pools these costs and allocates them to contracts through its indirect rates.
Unallowable costs such as alcohol, entertainment, most advertising, and lobbying, can stay in your books but must be kept out of invoices and indirect cost pools. Recording them in separate accounts makes that easy to show.
DCAA often reviews how a company assigns costs and calculates indirect rates. Mixing unallowable costs into billed or pooled costs is one of the most common audit findings.
Financial Reporting Requirements
Typical requirements include:
- Invoices through the payment system named in the contract, which for most DOD contracts is Wide Area Workflow in the Procurement Integrated Enterprise Environment (PIEE)
- Progress or status reports tied to contract deliverables
- A final report at the end of the period of performance
The numbers in every invoice and report need to match your accounting records, because that’s the first thing a DCAA review tests.
Preparing for DCAA Audits of DOD SBIR Awards
Most DCAA reviews of small SBIR companies go smoothly when the accounting system and supporting documents are in order. Knowing when DCAA gets involved and what it checks lets your company prepare before a request arrives.
When DCAA Gets Involved
DCAA usually becomes involved when a company moves into a cost-plus Phase II or its total awards grow. The two most common reviews are pre-award surveys and incurred cost audits.
Pre-award surveys
Before awarding a cost-plus contract, the contracting officer may request a review of your accounting system, often using the SF 1408 pre-award survey checklist. DCAA checks whether the system can track costs by contract, record labor, segregate unallowable costs, and keep an audit trail.
Incurred cost audits
Cost-reimbursement contracts require an annual incurred cost submission, due six months after the end of your fiscal year. DCAA may audit it to confirm that billed costs were allowable, reasonable, and allocated according to your indirect rate structure.
In either review, DCAA typically tests:
- Whether invoices match the accounting records
- Whether the accounting system can support those invoices
- Whether labor hours, timesheets, payroll, and billed costs reconcile
- How indirect rates were calculated and allocated
- Whether every claimed cost has supporting documentation
Required Documentation
DCAA reviews rely heavily on documentation. A well-organized system speeds up the process and reduces the likelihood of questioned costs.
Have these ready before a review:
- Written accounting policies and procedures
- Daily timekeeping records for every employee charging to the contract
- A consistent method for allocating costs
- Receipts, purchase orders, payroll records, subcontract agreements, and other support for every billed cost
- Indirect rate calculations and the schedules behind them
- Reconciliations that tie timesheets to payroll and invoices
How Team 80 Prepares Clients for DCAA Reviews
Team 80’s onboarding takes about two weeks, and once a client’s setup is complete, the company is ready for a DCAA review. Each month, the client’s Chief Accounting Officer reviews the books and then their manager reviews them again, so errors get corrected before they reach an invoice or an auditor. When DCAA requests a review, Team 80 handles it with the client, walking the reviewer through the accounting system on a screen share and providing written accounting policies and procedures tailored to the company.
Common DCAA Audit Challenges
Inadequate accounting systems
Systems that can’t track costs by contract or separate direct and indirect costs create risk. DCAA looks for structure and consistency, and even a simple system can meet the standard when it’s set up correctly.
Poor timekeeping practices
Missing timesheets, edits made after the fact, shared logins, and inconsistent approvals are common findings. Timekeeping is one of the first areas auditors test.
Incorrect indirect rate calculations
Small businesses often struggle to define fringe, overhead, and general and administrative pools. Misclassified expenses and inconsistent methods lead to questioned costs.
Missing or insufficient documentation
DCAA expects a complete audit trail for every cost. Receipts, labor records, subcontractor invoices, and allocation schedules need to be easy to find and tied to the amounts billed.
Many of these issues start long before an audit. When the accounting is set up correctly from the first award, a review becomes routine.
Team 80's DOD SBIR Accounting Services
Team 80 manages the recurring accounting behind Phase I and Phase II DOD SBIR and STTR awards, from a company’s first firm-fixed-price contract through the cost-plus Phase II that brings a DCAA review. Each client works with a dedicated Chief Accounting Officer who manages the monthly accounting and serves as the main point of contact.
What Team 80 Does for DOD SBIR Awardees
System setup
A chart of accounts that separates direct, indirect, and unallowable costs, along with timekeeping and an indirect rate structure built to meet DCAA requirements
Weekly processing
Bank and credit card activity and vendor bills processed every week, with the client approving each payment
Monthly close and reporting
Financial statements and project cost reports by the 15th of each month, reviewed with the client on a monthly call
Indirect rate tracking
Actual indirect rates compared with the rates in your proposal each month
Invoicing and payroll
Contract invoicing and payroll through Gusto, when included in your service agreement
DCAA review support
Help during pre-award surveys and incurred cost audits, including walking the reviewer through the accounting system
With more than 25 years of experience supporting government contractors and SBIR and STTR awardees, Team 80 keeps the books current every month, so your company can answer a DCAA request with records that are already in order.
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.
