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ED/IES SBIR Program Fundamentals

The U.S. Department of Education deploys its SBIR program through the Institute of Education Services.

The U.S. Department of Education’s (ED) Small Business Innovation Research (SBIR) program is administered by the Institute of Education Services (IES). The ED/IES SBIR program funds the research and development of Education Technology (EdTech) meant to enhance the learning experience for students from early education through secondary education and beyond.

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The U.S. Department of Education (ED) stands apart from most other federal agencies in shaping the country’s future. This is because the department has a direct line to how we shape the minds of our next generation—and every generation that follows. 

The Small Business Innovation Research (SBIR) program fosters advancements in education, inspiring and funding talented product developers in their mission to develop products that take instruction to the next level. 

Administered by the Institute of Education Services (IES), ED/IES SBIR is a small business cause unlike any other.

This article will tell you everything you need to know about the ED/IES SBIR program. 

What Does ED/IES SBIR Stand For?

ED/IES SBIR is shorthand for the Small Business Innovation Research (SBIR) program at the U.S. Department of Education (ED), which is administered out of its research office, the Institute of Education Sciences (IES).


What are the ED/IES SBIR Program Priorities?

Education is not a one-size-fits-all phenomenon. Instead, education must change and shift with the times while also being flexible to serve the needs of specific age groups and populations.

The ED/IES SBIR program accepts proposals for research and development (R&D) in three key areas.

  • Priority 1: Education technology products used by students or teachers (or other instructional personnel) in authentic education settings.
  • Priority 2: Education technology products for infants, toddlers, or students with disabilities. Also, teachers (or other instructional personnel, related service providers, or family members) in early intervention or unique education settings.
  • Priority 3: Education technology products used by school administrators. Or technologies designed for use in early intervention or special education settings

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What are the ED/IES SBIR Eligibility Requirements?

The eligibility requirements for entry into the ED/IES SBIR program follow the same path as the other federal agencies that offer SBIR programs.

To be eligible for ED/IES funding, the small business applicant must be a for-profit organization with no more than 500 employees and must be independently owned and operated in the U.S. by at least 51 percent US citizens or lawfully admitted residents.

Each small business that applies for SBIR funding through the ED/IES must also have a Principal Investigator (PI), who must be employed by the small business at least 51 percent of the time.

Throughout the project up until the award itself (and during the life-cycle of the award), the small business will be asked to verify its eligibility requirements.

Meanwhile, applicants are encouraged to collaborate with partners on their SBIR projects, including nonprofit firms and institutions.

These partners can receive up to one-third of the funds in Phase I of the SBIR program and one-half of the funds in Phase II. But remember: the small business must lead the project.

And one more wrinkle in ED/IES SBIR eligibility. 

The Education Department’s SBIR program also accepts proposals from small businesses owned in majority by multiple venture capital operating companies and hedge funds or private equity firms. And you can allocate up to 15 percent of your ED/IES SBIR annual budget to such companies. 

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ED/IES SBIR Program Structure

Like other SBIR programs across other federal agencies, the ED/IES SBIR program is broken into multiple phases. Each phase boasts its own requirements, benchmarks, purposes, and awards.

The ED/IES SBIR program includes three phases, the first two of which are supported by government funds and provide up to $1.25 million combined. The third phase is reserved for the private sector commercialization of education technology products.

Let’s go through the details of each phase!


ED/IES SBIR Phase I

The first phase is where the rubber meets the road.

This is where the primary R&D efforts commence, with government funds fueling your team’s efforts. Officially, Phase is meant to determine the scientific or technical merit of the ideas submitted under the ED/IES SBIR program.

  • How much is ED/IES SBIR Phase I Award?
    • ED/IES SBIR Phase I awards amount to $250,000.

  • How Long is ED/IES SBIR Phase 1?
    • The award period for Phase I is up to 8 months for rapid prototype development and evaluation of new education technology prototypes.

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A successful ED/IES SBIR Phase I project develops a functioning prototype of a new education technology project or service and determines the usability, initial feasibility, and promise of that prototype. 


ED/IES SBIR Phase II

The second phase bolsters the efforts that commenced in Phase I, continuing the R&D efforts and furthering your project’s viability in eventual commercialization.

  • How much is the ED/IES SBIR Phase II Award?
    • ED/IES Phase II awards amount to $1 million.

  • How Long is ED/IES SBIR Phase II?
    • The award period for Phase II is up to 2 years for the full-scale development and evaluation of new education technology products.

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A successful ED/IES SBIR Phase II project successfully develops a commercially viable product in the education technology sphere. It also demonstrates clear usability and feasibility of implementation in an educational setting, where it delivers on the promise to improve education in a classroom setting.

A successful Phase II project develops a commercialization plan for the project or service and develops strategies to evaluate its efficacy. 

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ED/IES SBIR Phase III

As with other federal agencies’ SBIR programs, Phase III is somewhat of a particular case. This final phase of the ED/IES SBIR program is set for private sector commercialization of the products developed in phases I and II with SBIR funds.

ED/IES does not provide funding for Phase III. Instead, it’s up to the small business to commercialize the products through other sources of financing, such as the private sector. 

What is the Executive Order 13329 on Encouraging Innovation in Manufacturing?

Executive Order 13329 was signed into law by President George W. Bush in 2004. It officially defined the duties of all agencies and departments that participate in SBIR programs while also assigning the Small Business Administration (SBA) with its own set of responsibilities. It is meant to ensure that federal agencies continually assist the private sector in its manufacturing innovation efforts.

Dubbed “Encouraging Innovation in Manufacturing,” Executive Order 1339 underscored the importance of technological innovation in strengthening the manufacturing sector of the country’s economy. Under the executive order, the SBIR and STTR programs were lauded for stimulating the economy while recognizing that such programs have improved innovations in education, health and welfare, national defense, environmental efforts, and more. 

The ED/IES promotes and supports Executive Order 13329 by maintaining a notice on the ED SBIR site that describes the order and defines manufacturing-related projects in education. ED/IES also tracks projects and reports success stories to demonstrate the impact of the SBIR program. 

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How do I apply for an ED/IES SBIR Award?

To apply for an ED/IES SBIR award, you must first find out whether or not you’re eligible (see the “What are the ED/IES SBIR Eligibility Requirements?” section of this blog above). Once confirming your eligibility, it’s time to apply.

The next step in the application process is registering your small business on the SBIR/STTR Company Registry. This portal will open access to the SBIR.gov system, providing you with a unique control ID, which you will use for all your submissions. For more tips on the registration process, check out this guide published by America’s Seed Fund. 

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Who are the ED/IES SBIR Program Contacts?

There are two primary contacts for the ED/IES SBIR program. These contacts are:

Edward Metz, Ph.D.
ED/IES SBIR Program Manager
(202) 245-7550
Edward.Metz@ed.gov

Michael Leonard, Ph.D.
ED/IES SBIR Program Analyst
(202) 245-8133
Michael.Leonard@ed.gov

Technical Assistance Disclaimer

The ED/IES SBIR program personnel can address questions about the ED/IES SBIR program or provide technical assistance related to project ideas before releasing the annual solicitation. 

Following the FAR regulations, please note that when the annual solicitation is open, program personnel and other government officials are not permitted to provide technical assistance or respond to questions from individuals preparing proposals in response to the ED/IES SBIR program solicitation.

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What is ED/IES SBIR Program Solicitation?

ED/IES Program Solicitations refers to the open projects available through the SBIR program. To participate in the ED/IES SBIR program, you must respond to a funding solicitation from your target agency, as programs do not accept “unsolicited” proposals—or a proposal that does not address a current topic. 

Solicitations are also known as Request for Proposals (RFP), Funding Opportunity Announcement (FOA), or Broad Agency Announcement (BAA). Regardless of the name, the solicitation is the document that provides guidance and rules and regulations about how to prepare a proposal. Along with topic areas of interest, solicitation documents also include Proposal Preparation Instructions, Application and Submission guidance, and Evaluation criteria.

To browse open topics by agency, use this search tool developed by America’s Seed Fund.

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What is the ED Games Expo?

The ED Games Expo is an annual showcase of paradigm-shifting innovations in education technology (EdTech), all developed with the support of more than 30 programs at the education department and other federal agencies. 

The learning games and technologies featured at the expo are appropriate for children and students from early childhood to post-secondary education and special education. EdTech games and technologies touch on STEM, reading, civics, social studies, etc. The resources displayed are research-based, with studies demonstrating the usability, feasibility, and promise leading to intended outcomes.

Participants in the annual ED Games Expo include:

  • Educators and school decision-makers learn about education interventions and assessments.
  • Students demo learning games and EdTech and then ask experts pointed questions about the technology.
  • Developers, researchers, and stakeholders learn about the government programs that invest in new education technologies.
  • Government program representatives highlight the technologies developed through federal programs.

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Who has won ED/IES SBIR Phase II Awards?

Across all participating federal agencies, success stories abound in the world of SBIR programs. However, ED/IES SBIR Phase II award success stories take on a fundamentally special feeling, as the project’s success ultimately means success across an array of educational settings.

And while each project is unique, they all started as innovative ideas that eventually grew into commercially viable products that enhance education and address specific needs in various educational settings. The following ED/IES SBIR success stories are all currently in use by students and teachers.

Agile Mind, Inc.

Phase II Award: $750,000

A technology company that seeks to broaden student access, achievement, and persistence in mathematics and science courses, Agile Mind Inc., developed a comprehensive online instructional platform. The SBIR-funded project consists of 30 web-based, animated visualizations that support learning and help students understand various educational topics. The research consisted of a mixed-methods study completed with 19 teachers and more than 300 students in the 9th and 10th grades from eight schools in two states.

Zoo U

Phase II Award: $849,989

A web-based, social skills learning game for students in grades two through four, Zoo U simulates a school environment and helps students gain social and emotional skills through everyday scenarios, such as recess games and in-classroom group work. The game first establishes a baseline of six skills: impulse control, emotion regulation, empathy, communication, cooperation, and social initiation. Students then play in up to 30 scenarios to improve and reinforce those skills. After creating the prototype, the Zoo U team conducted usability tests with school personnel and students. Since its launch, Zoo U has been the subject of peer reviews and was even a finalist for the 2017 CASEL Design Award Challenge.

Schell Games' Happy Atoms

Phase II Award: $899,542

Developed by Schell Games, Happy Atoms is a physical molecular “ball and stick” modeling set that pairs with an interactive digital app. The game provides a modern alternative to the old-fashioned teaching methods about bonding. Students build atom models, then use the app to snap a photo and identify the molecule with proprietary vision-recognition algorithms. In the development of Happy Atoms, Schell Games partnered with the nonprofit research agency WestEd to assess the game’s usability, feasibility, and implementation. The game project has gone on to gain numerous awards and national recognition, with stories featured in Huffington Post, TIME, and more. 

Is it time to start your ED/IES SBIR program journey? We’re here to help. Reach out to Team 80 today.

Get A Free Consultation for Your ED/IES SBIR Accounting Services
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Team 80 Director of Governmental Accounting Ben Smith

Ben Smith

Director of Governmental Accounting

Ben has worked in and around small businesses for most of his career. But surprisingly, his professional path started in food service as a chef, not accounting. In 2009 he opened his own catering business. The accounting duties for the catering company fell on Ben’s shoulders, and that was when he realized accounting was a much better fit! Ben is passionate about helping small business owners make their companies successful and brings a highly varied set of experiences to the table to help in this pursuit. When he’s not crunching numbers, he can be found hanging out with his wife and their Miniature Pinscher Milo or pursuing his other passions, which include skiing, windsurfing, Brazilian Jiu Jitsu, playing guitar, and riding dirt bikes.


Glasses sitting on paper work for United States Patent for SBIR Data Rights

Does the Government Have a Stake in Your Product Once It Awards an SBIR Grant?

Startups must understand Data Rights. They must also understand who owns a product developed with SBIR funds.

The Small Business Innovation Research (SBIR) program includes contracts and clauses that explain who owns the rights to technology developed with SBIR funds. While protections exist for the federal government, Data Rights protect small businesses from having their research sold to a third party.

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Entrepreneurs who develop products with Small Business Innovation Research (SBIR) program funding might have one crucial question in mind: 

Who owns the rights to my research, data, and product?

It’s a straightforward question with a not-so-clear answer. 

Like most government funding aspects, a bevy of finer details must be explored before you begin your SBIR journey. 

To understand the nature of the government’s stake in your SBIR-funding product, you need to learn about Data Rights, Intellectual Property Rights, Computer Software Rights, Phase III specifics, and more.

Let’s jump into it and get this all sorted out!

What are SBIR Data Rights?

Certain rights to your data. However, your small business will be the preferred, singular source for delivering this technology for a substantial period.

SBIR Data Rights are essentially a nondisclosure agreement (NDA) with the federal government.

When one of the government’s participating agencies awards you with SBIR program funding, the agency makes a binding promise that it will not share or sell your eligible SBIR data to a competitor. SBIR Data Rights protect against unfair backroom deals between the government and a competing manufacturer.

Keep in mind that the federal government, in all likelihood, will not break this promise. However, Data Rights ensures the federal agency will incur monetary damages if they do. 

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What are the Three Basic Attributes of SBIR/STTR Data?

For your SBIR work to be protected as Data Rights, it must adhere to three essential attributes.

Every bit of research and development you perform under the auspices of an SBIR program must possess these attributes:

  1. Recorded Information
  2. Of a technical nature
  3. Generated under an SBIR or STTR funding agreement and appropriately marked with the SBIR/STTR Data Rights legend.

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“Recorded information”

Your SBIR data must be written into a document. 

This is mandatory for SBIR data existing as sketches, drawings, source code, equations, formulas, reports, SBIR final reports, descriptions of SBIR technologies, or any writing that meets related criteria. 

However, SBIR Data protections do not apply to ideas or concepts—that is, unless the ideas and concepts are reduced to writing. What does that mean? 

Essentially, protections governing SBIR data only cover ideas contained in a written document and not the idea itself. Therefore, to protect the idea or concept behind the written description, you need to consider patent protection.

“Of a technical nature”

Any data considered “non-technical” does not qualify for protection as SBIR Data. 

One example of non-technical data is cost and pricing information, which is instead protected by the Freedom of Information Act, paragraph (b)(4)—a mandatory disclosure of such information by the government. 

Other non-technical information not protected by SBIR Data Rights is the data background of your company. 

Always keep that in mind when sharing any information about your company. Data “of a technical nature” must relate to the SBIR technology your team develops in phases I, II, and III. 

“Generated under an SBIR or STTR funding agreement … ”

Protected data must be explicitly generated under an SBIR/STTR funding agreement. 

This means that any SBIR data needing protection must be marked as such—proprietary data developed via private funds is not protected under Data Rights, nor is proposed information. 

But here’s an important note: if your project includes non-SBIR Data inextricably linked to SBIR Data, then all the data becomes subject to Data Rights protections. This typically occurs with source code and computer software. 

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What is the Duration of SBIR Data Rights Protections?

No less than two decades. 

SBIR and STTR Data Rights protect your project-related data from disclosure by participating government agencies for no less than 20 years. The protection begins during phase I, II, or III awards.

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What Changed with the SBIR Policy Directive on May 2, 2019?

The Small Business Administration (SBA) holds the authority to establish new, government-wide policies across the SBIR and STTR programs. 

On May 2, 2019, the SBA established an all-new policy directive to underscore the importance of adequately notating your SBIR Data to qualify for SBIR Data Rights protection.

The May 2, 2019, Policy Directive makes it clear that to qualify for Data Rights protection; the SBIR/STTR data must be appropriately marked

If data is unmarked, the government takes unlimited rights to that data. It can do whatever it wants with the information and even hand over that data to third parties for commercialization.

Additionally, before the new Policy Directive, small businesses had an indefinite grace period to correct inaccurately marked SBIR Data. However, as of the May 2, 2019, Policy Directive, you only have six months to make corrections.

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What is SBIR Data Marking?

SBIR Data Marking refers to attaching your SBIR Data legend to all information generated under an SBIR funding agreement. 

And a data legend is exactly what it sounds like—a representation of data on the plotted area of a graph or chart linked to a data table.

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Appendix I of the SBIR Policy Directive sets forth the legend that SBIR firms must affix to documents containing SBIR Data. 

Affixing the legend notifies the participating government agency that the document contains SBIR Data. This sets off the government’s obligation not to disclose the SBIR Data outside of the government for 20 years, starting on the award date.

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What are SBIR Intellectual Property Rights?

Intellectual property (IP) rights are legal parameters that control whether or not others can use a technology and how it could be applied if they are permitted to use said technology. 

Keep in mind that creators do not automatically obtain IP rights simply through developing the technology. Instead, you must take deliberate steps, such as filing a patent application. 

In terms of SBIR-specific Intellectual Property Rights, it works the same as with other IP rights processes. 

If you are a technology startup, you likely already have an IP rights strategy. The main difference is that as an SBIR program awardee, you are using government money to fund your R&D, which you then deliver to the federal agency.

That R&D is protected by SBIR Data Rights (if adequately marked). So, for all intents and purposes, your IP rights are effectively similar to other startups.

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Can I Have a Patent and SBIR Data Rights?

Yes! However, this requires some explanation, as SBIR Data Rights and patenting are essential, but each involves different types of protections. 

While patents protect concepts, ideas, designs, or methods considered “inventive,” SBIR Data Rights protect the public disclosure of properly recorded technical information. 

Further, patented data is public knowledge, while the government’s ability to disclose SBIR data remains limited. 

If you publish SBIR data in a patent, it relaxes the terms of the government’s nondisclosure obligation — a significant problem if you decide to pursue both government and commercial markets. 

SBIR Data Rights are not applicable in the commercial market. And if there’s a chance your innovative technology can be reversed engineered by the public, you should apply to protect it with a patent. This is your competitive advantage in the free market.

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What are Government Purpose Rights?

Government Purpose Rights bestow the federal government with unlimited rights over your research. These rights also allow the government to disclose your technical data outside the government, authorizing third parties to use, modify, reproduce, release, perform, display, or disclose the technical data for government purposes.

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What are SBIR Computer Software Rights?

Under the auspices of federal SBIR programs, Computer Software Rights are another form of Data protection.

These rights protect computer programs, source code, source code listings, object code listings, design details, algorithms, processes, flow charts, formulae, and related material that would enable the software to be reproduced, recreated, or recompiled by a third party.

Any technology deemed eligible for protection under Computer Software Rights must be developed or generated in the performance of an SBIR award.

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How do SBIR Contracts Work?

SBIR contracts are built to protect small businesses from governmental overreach. 

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Each contract boasts significant benefits to a startup, allowing them to maintain proprietary rights in the technical data (SBIR Data) developed during SBIR research. 

SBIR contracts ensure the federal agencies cannot take hold of SBIR data for commercial purposes, nor can they (the government) produce technology in the future that diminishes the rights of the small business that first developed the SBIR data. 

However, SBIR contracts also provide the government with a degree of access to evaluate the R&D work and effectively deploy the results. 

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What Does DFARS 252.227-7018 Mean for the Department of Defense (DoD)?

Always remember: Rights granted via SBIR Data rights are not automatic! 

Under the Department of Defense (DoD) clause for SBIR technical data and computer software (DFARS 252.227-7018), for your intellectual property to be protected under Data Rights, you must make these restrictions abundantly clear before development and apply Data Marking before you deliver it to the government agency. 

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How is SBIR Phase III Connected to SBIR Data Rights?

Phase III opens the door to your startup receiving SBIR Data Rights. This is why you must recognize a Phase III requirement and insist that SBIR Data Rights be accorded a Phase III.

“Recognizing” and “according” a Phase III is crucial. This is where the rubber meets the road. SBIR Data Rights are at stake here, as well as other Phase III rights and benefits. Section 4(c)(2) of the May 2, 2019, SBA SBIR Policy Directive states that “Phase III is by nature an SBIR, and must be accorded SBIR status, including SBIR Data Rights.”

In addition to SBIR Data Rights, Phase III status brings with it:

 

  • Exclusive rights to sole-source contracts
  • Exemption from SBA size standards
  • Rights to Phase III mandate
  • Right to be awarded a future Phase III award
  • Right to receive subcontracts for Phase III work
  • Ability to pursue R&D, services, products, and production

Phase III rights are valuable not only to the SBIR firm but also to the government.

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Team 80 CEO Sarah Sinicki

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.


The Department of Homeland Security

The Department of Homeland Security’s SBIR Program: What You Need to Know

Small businesses can positively impact the nation’s security through the Department of Homeland Security’s SBIR program.

The Department of Homeland Security (DHS) Small Business Innovation Research (SBIR) program encourages the research and development (R&D) of advanced technologies through government funds. In addition, the federally funded program helps startups achieve commercialization with their product or service. 

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It’s easy to hear “homeland security” and only think of counter-terrorism defense systems.

But while the Department of Homeland Security (DHS) was created in 2002 as a direct result of September 11, its responsibilities blanket a broad range of disciplines to protect national interests.

According to the DHS homepage, the department is responsible for counterterrorism but also “cybersecurity, aviation security, border security, port security, maritime security, administration and enforcement of our immigration laws, protection of our national leaders, protection of critical infrastructure, detection of and protection against chemical, biological and nuclear threats to the homeland, and response to disasters.”

It’s a lot, which is why the department’s participation in the Small Business Innovation Research (SBIR) program is crucial to deploying new technologies across a spectrum of concerns.

What does DHS SBIR Stand for?

DHS SBIR stands for Department of Homeland Security Small Business Innovation Research.

It’s a federal program that funds small businesses, entrepreneurs, and startups to perform research and development (R&D) on an array of innovative technologies, with the ultimate goal of commercializing these technologies.

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How is the DHS Science and Technology Directorate involved with SBIR?

The budget for the DHS SBIR program is associated with two smaller organizations: The Science and Technology (S&T) Directorate and the Countering Weapons of Mass Destruction (CSMD) office. 

DHS SBIR solicitations contain topics relevant to both of these organizations.

The mission of the Science and Technology Directorate is “to deliver effective and innovative insight, methods and solutions for the critical needs of the Homeland Security Enterprise.”

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The Directorate States Five Visionary Goals:

  1. Screen at speed so that security matches the pace of life
  2. Provide a trusted “Cyber Future,” protecting privacy, commerce, and community
  3. Help decision-makers receive actionable information at the speed of thought
  4. Assure the “Responder of the Future” is protected, connected, and fully aware
  5. Disaster-proof society and create resilient communities

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How is DHS Countering Weapons of Mass Destruction involved with SBIR?

The DHS Countering Weapons of Mass Destruction (CWMD) is the result of consolidating various offices within the DHS. 

For example, the Domestic Nuclear Detection Office (DNDO), a jointly staffed national office established in 2005 to improve the nation’s capability to detect and report unauthorized attempts to import, possess, store, develop or transport nuclear or radiological material for use against the country and to further enhance this capability over time.

Today, the CWMD (established in December 2017) coordinates with domestic and international partners to safeguard the country against chemical, biological, radiological, nuclear (CBRN), and health security threats. 

Mainly, the CWMD works to:

  • Anticipate, identify, and assess current and emerging WMD threats
  • Strengthen detection and disruption of CBRN threats to the homeland
  • Synchronize homeland counter-WMD and health security planning and execution

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The CWMD at the DHS has an SBIR program office that focuses on their specific needs and collaborates with S&T to conduct outreach, explore new initiatives, and coordinate schedules so that all DHS SBIR topics are published in one annual solicitation.

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What are DHS SBIR Program Priorities? 

DHS SBIR Program Priorities constitute topics found in the department’s annual solicitations, covering DHS mission areas. 

DHS SBIR topics are solicited by the S&T and CWMD offices and address the needs in areas that include the

  • Federal Emergency Management Agency
  • Cybersecurity and Infrastructure Security Agency
  • Transportation Security Administration
  • U.S. Citizenship and Immigration Services
  • U.S. Coast Guard, U.S. Customs and Border Protection
  • U.S. Immigration and Customs Enforcement
  • U.S. Secret Service

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What are the DHS SBIR Topics?

The solicitations found in DHS SBIR typically consist of topics relevant to the following organization focus areas:


What are the DHS SBIR Eligibility Requirements?

The eligibility requirements for DHS SBIR follow the same track as other government agencies. 

The requirements necessary to apply for—and receive—SBIR funding include:

  • Must be a for-profit business
  • Must be based in the U.S.
  • Must have 500 or fewer employees
  • The Principal Investigator must be primarily employed (more than 50 percent) with the small business applicant

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Your SBIR proposal must offer quality research and develop new processes, products, and technologies to support the missions of the DHS and the U.S. government.

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DHS SBIR Program Phases

The DHS SBIR program consists of a three-phase, highly competitive award system that funds qualified small businesses to propose and develop innovative ideas and technologies. 

The overall effort must meet specific homeland security research and development technology needs.

Now, let’s examine each phase more closely.

DHS SBIR Phase I

DHS SBIR Phase I kicks off the program and is referred to as the “Scientific and Technical Feasibility Study.” In this Proof of Concept phase, specific funds are available to cover a set period.

How Much is the DHS SBIR Phase 1 Award?

Phase I typically funds up to $150,000.

How Long is DHS SBIR Phase 1?

Phase I covers five months to determine the proposed effort’s scientific and technical merit and feasibility. Phase I awards are typically made within 45 days after selection.

DHS SBIR Phase II

DHS Phase II continues your efforts and is referred to as “Full Research/R&D.” Known as the Prototype Demonstration phase, Phase II also has a set amount and timeframe. 

How Much is the DHS SBIR Phase II Award?

Phase II typically funds up to $1 million.

How Long is DHS SBIR Phase II?

Phase II covers 24 months to continue the R&D effort from the completed Phase I project and work towards a prototype demonstration.

Only SBIR Phase I awardees are eligible to participate in subsequent phases. However, options for S&T SBIR Phase II projects with firm commitments for follow-on funding may be exercised.

DHS SBIR Phase III

DHS Phase III is the outlier of the three SBIR phases. 

This Commercialization phase is funded with private or non-SBIR dollars with the goal of commercialization or continuing the development and testing that initially kicked off with SBIR funding. 

Since it’s non-SBIR funded, there’s no cap to Phase III dollar amounts and no set timeline for completion.

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How do I Apply for a DHS SBIR Award?

To apply for DHS SBIR, first develop a ground-breaking, innovative research idea that can be commercialized. 

You need to learn about eligibility, your proposal requirements, and more.

For a step-by-step guide through this SBIR application process, follow the federal government’s roadmap for applicants here.

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Who are the DHS SBIR Program Contacts?

The main point of contact for the DHS SBIR program is Dusty Lang, the SBIR Program Director for the DHS. 

To contact the director, email stsbir.program@hq.dhs.gov or call 202-254-7000. For information specifically regarding CWMD’s SBIR program, email cwmd.sbir@hq.dhs.gov.

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Who has Won DHS SBIR Phase II Awards?

Through its many years in operation, the DHS SBIR program has recognized numerous small businesses for stellar achievements, awarding them funds to develop innovative ideas and paradigm-shifting technology.

DHS SBIR success stories highlight small businesses that have made crucial contributions to protecting the country from various threats. 

These examples showcase several small businesses from around the nation that have worked with S&T to develop and support the technology needs of our nation and homeland security end-users.

N5 Sensors Inc.

Total DHS SBIR Investment: $850,000

Maryland-based N5 Sensors Inc. received an SBIR award from the DHS S&T to develop an ultra-small, low-cost hazardous gas and particulate matter detector using novel chip-scale chemical sensor technology that firefighters can use.

“In essence, we are harnessing the power of nanoscale materials and combining that with advanced semiconductor manufacturing techniques,” explains Dr. Abhishek Motayed, Founder & President of N5 Sensors. “The result is a wearable, ultra-low power microscale robust gas sensor that can save lives is easy to manufacture, and can dramatically drive down costs.”

Phase II funding was awarded through the DHS Commercialization Readiness Pilot Program (CRPP), which allowed the company to continue the development of the technology. 

N5 Sensors also received a $1.2 million contract from the Combating Terrorism and Technical Support Office (CTTSO) to advance beyond detecting toxic industrial chemicals.

“The DHS S&T SBIR program was tremendously valuable, and the Program Managers were the reason we could connect and ultimately work with other agencies,” says Motayed. “Not only did it provide valuable next-round funding for the product development, but it gave us a platform to showcase the applicability of this technology.”

Polestar Technologies, Inc.

Total DHS SBIR Investment: $1.1 million

Massachusetts-based Polestar Technologies developed the capability of chemical identification of explosives hidden by a person at a distance. 

Originally designed to assist U.S. troops in conflict zones, the Self-Tracking and Reconnaissance of Explosives (STARE) System detects small amounts of explosive materials concealed beneath clothing, hidden in backpacks, or hand-carried baggage. 

“This is a very novel technology that doesn’t require an operator sitting by the instrument but could, in the future, be scaled up to meet other needs,” says Dr. Ranganathan Shashidhar, Senior Vice President of Research and Technology at Polestar Technologies.  “We’ve had talks with some major companies, including those in the sports and entertainment industry, and several venture capitalists are helping us take this to the commercial sector.”

Polestar partnered with DHS through another SBIR project called Portable Imager for Stand-Off Detection of Homemade Explosives; the project aimed to produce images positively identifying the presence of explosives while being able to detect and identify different types of military explosives and homemade explosives.

“The DHS SBIR program was a critical influx for us to take our product to the next level,” explains Dr. Shashidhar. “It opened up many applications since we automated the product under the DHS SBIR. We are now in talks with United States Special Operations Command, as well as the Army and the Navy.”

Applied Visions

Total DHS SBIR Investment: $2.2 million

In 2014, the DHS S&T released an SBIR topic seeking a hybrid analysis solution that combined  static and dynamic tools to locate vulnerabilities and security weaknesses in software and application code. 

Through its Secure Decisions Division, New York-based Applied Visions won a DHS SBIR Phase I award and subsequent Phase II award to develop Code Ray. This tool combines static and dynamic analyzers to locate more source code weaknesses.

Code Ray was the first tool that helped prioritize vulnerabilities by mapping them to industry standards and regulations. Applied Visions leveraged its developments from the SBIR project and provided customers with a first-of-its-kind technology to prioritize and manage application security risk.

“The SBIR allowed us to integrate the Code Ray technology into our existing Code Dx product line,” explains Ken Prole, CTO of Code Dx, a spinoff of Applied Visions developed under DHS SBIR. “This was a huge advancement in technology. There is more information from the dynamic findings, and now developers know where to focus their efforts to fix the problems.”

You Could Be The Next DHS SBIR Success Story

From the standpoint of protecting national interests—and American citizens—from various threats, the DHS is one of the most crucial federal departments. 

As such, the country’s decision-makers will continue to look to the innovative minds behind small businesses for new technologies geared toward the DHS’s ultimate goal.

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Get A Free Consultation for Your DHS SBIR Accounting Services
Team 80 Director of Governmental Accounting Ben Smith

Ben Smith

Director of Governmental Accounting

Ben has worked in and around small businesses for most of his career. But surprisingly, his professional path started in food service as a chef, not accounting. In 2009 he opened his own catering business. The accounting duties for the catering company fell on Ben’s shoulders, and that was when he realized accounting was a much better fit! Ben is passionate about helping small business owners make their companies successful and brings a highly varied set of experiences to the table to help in this pursuit. When he’s not crunching numbers, he can be found hanging out with his wife and their Miniature Pinscher Milo or pursuing his other passions, which include skiing, windsurfing, Brazilian Jiu Jitsu, playing guitar, and riding dirt bikes.


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Preparing for a World of Government Compliance

The federal government has strict compliance requirements for any small business seeking contracts, grants, or funding. 

Government Compliance for Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs consists of a challenging array of benchmarks. Aligning with these laws and regulations can help you secure government contracts, while failing to comply can lead to loss of funds and even stiff penalties.

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Securing a government contract isn’t easy.

It takes a dynamic combination of dedicated team members, work ethic, and perseverance to face the challenge head-on and come out on top. But skills and talent in your chosen field only get you so far—you must also possess the ability to thrive in the world of government compliance.

The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs offer the opportunity for entrepreneurs to engage in federal research and development (R&D), with the potential for commercialization.

These highly competitive programs often result in multi-million dollar contracts or grants. Any participating small business will face a gauntlet of certifications, audits, and regulations.

It can be complicated and stressful—but Team 80 has the insight you need to confidently step into the government limelight. This blog runs down many of the government’s requirements in a handful of different contracting scenarios.

SBIR Certifications

First things first; let’s take the 30,000-foot view of certifications you’ll need for SBIR Phase I and Phase II.

Known as “Award and Life Cycle Submissions Certificants,” these benchmarks must be met to move forward in the SBIR process, no matter which government agency your project is intended for.

Phase I And II Award and Life Cycle Submissions Certifications include:

  • Principal Investigator’s (PI) primary employment: The PI must spend more than half of their time (based on a 40-hour workweek) as an employee of the awardee.
  • Essentially Equivalent Work: Cannot be funded by another federal agency. (Essentially, Equivalent Work is a significant point of compliance all on its own. More on it later in this article).
  • Phase II Mid-Effort Certification: Upon completion of the effort, the small business will have performed the required portion of the work.
  • Phase I and II Final Certification: Work is completed, and the small business has performed the required portion of the work.
  • Location of the Small Business: Any awarded R&D must be performed in the U.S.
  • Further Location-based certification: Performance is taking/has taken place at the small business’ facilities with the company’s employees.

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Preparing for Government Audits

There’s no two ways about it; the phrase “government audit” sounds terrifying. Conjuring images of federal agents rifling through your company’s most personal financial records, those words alone could cause entrepreneurs to balk at even entering into the SBIR process.

The old saying goes, “By failing to prepare, you are preparing to fail.” However, with a few steps toward preparation, you can make the entire government auditing process smooth. Here are some tips to prepare for a successful SBIR government audit.

Outline any changes in these areas:

  • Management
  • Operations
  • Technology
  • Personnel
  • Industry developments
  • Accounting systems
  • Risk reports

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However, the government will likely deploy an array of compliance audits depending on the type of work you’ve conducted, which agency is awarded the funds, and other variables. So next, let’s look at some specific compliance audits and regulations.

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What is a Government Compliance Audit?

In short, a government compliance audit ensures your business is compliant with financial, technological, environmental, and safety regulations.Whether your SBIR project provides products or services, there are government-mandated rules that must be satisfied. These audits confirm a particular standard is being met—and it takes many files, documents, and internal processes to verify your compliance.

Federal compliance investigators will evaluate IT security issues, taxation, accounting standards, health and safety regulations, and environmental protection. These actions measure how your organization follows specific rules related to government regulatory requirements.

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Essentially Equivalent Work

When competing for an SBIR award, participants often submit duplicate or similar proposals to more than one federal agency when solicitation involves identical topics.

However, it’s unlawful for applicants to submit “Essentially Equivalent Work” and receive funding for that work from SBIR or other federal programs.

Essentially Equivalent Work is wholly prohibited.

  • It is unlawful to enter into multiple contracts or grants requiring essentially equivalent work. Therefore, SBIR/STTR awardees must certify at the time of proposal submission and during the lifecycle of the award that they do not have any essentially equivalent work funded by the federal government.

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But what is considered unlawful Essentially Equivalent Work? There are mainly two definitions that government compliance investigators follow:

  • Work that is substantially the same research, which is proposed for funding in more than one contract proposal or grant application submitted to the same federal agency or submitted to two or more different federal agencies for review and funding consideration.
  • Work where a specific research objective and the research design for accomplishing the goal are the same or closely related to another proposal or award, regardless of the funding source.

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The bottom line is, absent any specific authorization in writing from a government agency, it’s considered a type of fraud to accept payment from multiple agencies for the same, or essentially equivalent, work. 

Suppose you think you might have submitted similar work to another agency. In that case, it’s crucial that you immediately disclose any similar proposals or awards to your target federal agency. Applicants submitting multiple proposals describing duplicate or essentially equivalent work must include a statement in each submission indicating:

  • Name and address of each agency to which proposals were submitted or from which awards were received.
  • Date of proposal submission or date of the award.
  • Title, number, and date of solicitations under which each proposal was submitted or awards received.
  • Specific relevant research topics for each proposal submitted or award received.
  • Titles of research projects.
  • Name and title of the principal investigator or project manager for each proposal submitted or award received.

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And this is no empty threat. 

There have been numerous incidents involving Essentially Equivalent Work, with the government proceeding with legal actions against small businesses that knowingly received multiple monetary awards for duplicate work. 

One such incident involved a small business owner applying for funding from NASA for a proposal after receiving funding from the Air Force for the same proposal. 

The small business owner subcontracted out significant portions of the grants and contracts, violating the written terms. 

The owner pleaded guilty to mail fraud and tax evasion after an investigation and was sentenced to 12 months of home confinement and five years probation. He also had to pay $1.4 million in restitution to the government and received a five-year ban on receiving federal grants or contracts. 


What is CAS (Cost Accounting Standards)?

While accounting standards exist throughout multiple contracting sectors, government contracting exists in a world all its own. It’s so singular in form and function that government contracting has its own set of accounting standards.

Known as CAS (Cost Accounting Standards), this government-focused accounting compliance requirement consists of a set of 19 standards that are designed to achieve complete uniformity and consistency in cost accounting practices. Configured by the Cost Accounting Standards Board (CASB), these standards establish costs on negotiated acquisitions.

The 19 accounting standards of CAS are as follows:

  1. Consistency in Estimating, Accumulating and Reporting Cost
  2. Consistency in Allocating Costs Incurred for the Same Purpose
  3. Allocation of Home Office Expenses to Segments
  4. Capitalization of Tangible Assets
  5. Accounting for Unallowable Costs
  6. Cost Accounting Period
  7. Use of Standard Costs for Direct Material and Direct Labor
  8. Accounting for Costs of Compensated Personal Absence
  9. Depreciation of Tangible Capital Assets
  10. Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives
  11. Accounting for Acquisition Costs of Material
  12. Composition and Measurement of Pension Costs
  13. Adjustment and Allocation of Pension Cost
  14. Cost of Money as an Element of the Cost of Facilities Capital
  15. Accounting for the Cost of Deferred Compensation
  16. Accounting for Insurance Cost
  17. Cost of Money as an Element of the Cost of Capital Assets Under Construction
  18. Allocation of Direct and Indirect Costs
  19. Accounting for Independent Research and Development Costs and Bid and Proposal Costs (IR&D and B&P)

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The main advantage of CAS is that it brings a level of consistency to accounting, with more accurate cost allocations and a higher degree of reliance on accounting systems. This reduces the risks of incorrect charging or the misallocation of funds. 

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What is FAR (Federal Acquisition Regulation)?

Federal Acquisition Regulation (FAR) is another set of government compliance standards focusing on how contractors can charge the government for specific contracts.

FAR is all about “allowability.” 

It states what you can charge to the government through a contract and what you cannot. FAR safeguards government contracts with consistent, uniform policies and procedures within the acquisition process. It’s a set of accounting standards that defines when costs can be recovered under a federal contract. 

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For the full scope of FAR, check out this page on Acquisition.gov.

Though FAR and CAS sound similar, remember this primary difference between the two:

  • FAR deals with the allocability and allowability of cost.
  • CAS deals with the allocability of costs.

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What is DCAA (Defense Contract Audit Agency)?

For the most part, federal agencies rely on the Defense Contract Auditing Agency (DCAA) to perform the in-depth auditing process of any small business conducting research for SBIR.

DCAA auditing components typically include a review of your company’s financial stability and your company’s overall accounting system. What’s more, DCAA also evaluates your proposed indirect rates and confirms your payroll tax deposits.

And although there are multiple pre-award and post-selection audits to contend with, here are three of the most crucial audits you’ll experience with DCAA.

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Accounting System Adequacy (SF 1408)
The government will need to evaluate the configuration of your accounting system to ensure you’re following the necessary guidelines. This audit is intended for contracts that include:

  • Cost-sharing
  • Cost reimbursement
  • Cost-plus incentive fee
  • Cost-plus award fee
  • Cost-plus fixed fee
  • Fixed-price

Real-Time Labor Evaluations (Floor Check)

In this audit, DCAA will gauge the integrity of your timekeeping system, measuring if it accurately states labor costs and adequately identifies the time allocated to that labor. In addition, since labor costs are billed directly to the government, federal auditors will check and re-check your timekeeping system to ensure it holds up to rigid standards. 

The “floor check” refers to the element of surprise inherent in real-time labor evaluations. This audit happens with no advanced warning and will consist of employee interviews and timesheet examinations. The unannounced nature of this type of audit means you should have your timesheets in order and properly vetted!

Incurred Cost Submission

Establishing the final annual indirect costs rate and determining over/under billing over a given period, Incurred Cost Submission includes direct and indirect costs incurred by the contractor during the fiscal year. 

The Allowable Cost and Payment clause FAR 52.216-7 states that “a contractor must submit an adequate final indirect cost rate proposal to the contracting officer and auditor within six months of the conclusion of each fiscal year.”

This type of audit is conducted so that the government can either accept the proposed contractor’s final indirect rates or make adjustments as needed before issuing the final payment.

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What is DFARS (Defense Federal Acquisition Regulation Supplement)?

For any organization to conduct business with the Department of Defense (DoD)—and other federal agencies—they must comply with stringent prerequisites. 

These rules and regulations limit who can access specific data, ensures participants have sufficient security education and training and protect the government’s investment with identity and access management (IAM) while also enlisting physical security safeguards in the workplace.

It all comes together in DFARS (Defense Federal Acquisition Regulation Supplement).

DFARS is a set of rules followed by the government to oversee the purchase of goods, services, and technology. 

The requirements and regulations that constitute DFARS guarantee the integrity of sensitive information—also known as Controlled Unclassified Information (CUI)—that belongs to the government. 

All applicants seeking contract work with the DoD and other federal agencies must be DFARS compliant. This goes for small businesses, as well as large defense contractors. There are 14 critical areas of DFARS compliance, and these are as follows:

  1. Audit and Accountability
  2. Awareness and Training
  3. Access Controls
  4. Incident Response
  5. Identification and Authentication
  6. Configuration Management
  7. Media Protection
  8. Maintenance
  9. Personnel Security
  10. Physical Protection
  11. Security Assessment
  12. Risk Assessment
  13. System and Information Integrity
  14. System and Communications Protection

Illustration of computer laptop with security in place

Becoming compliant with DFARS begins with a comprehensive security assessment. If you are contracting work with the DoD, you should create a compliance team to monitor CUI and identify sensitive information, security shortfalls, and improvements that can be implemented.

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How to Prepare for Government Compliance

Government compliance and federal audits are a necessary, if stressful, part of the government contracting process. 

 

Whether you’re an SBIR or STTR applicant, you must prepare your organization and team for the rigorous rules and regulations. So start by making government compliance a fundamental part of your daily operations. 

 

Team 80 can step in and handle ALL of your accounting processes, doing the work necessary to ensure you comply with all of the federal government’s many accounting requirements. So enlist us to keep your records in order while you and your team aim for that all-important federal funding.


Is it time to start your SBIR/STTR government compliance journey? We’re here to help. Reach out to Team 80 today.

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Get A Free Consultation for Your Government Compliance Accounting Services
Team 80 Director of Governmental Accounting Ben Smith

Ben Smith

Director of Governmental Accounting

Ben has worked in and around small businesses for most of his career. But surprisingly, his professional path started in food service as a chef, not accounting. In 2009 he opened his own catering business. The accounting duties for the catering company fell on Ben’s shoulders, and that was when he realized accounting was a much better fit! Ben is passionate about helping small business owners make their companies successful and brings a highly varied set of experiences to the table to help in this pursuit. When he’s not crunching numbers, he can be found hanging out with his wife and their Miniature Pinscher Milo or pursuing his other passions, which include skiing, windsurfing, Brazilian Jiu Jitsu, playing guitar, and riding dirt bikes.


Black Female accountant working at her desk

Accounting by the Numbers: Basic Requirements for SBIR Projects

To secure government funding for Small Business Innovation Research (SBIR) programs, entrepreneurs must have their accounting in order. 

Small Business Innovation Research (SBIR) funding requires a solid compliant accounting system, no matter which federal agency awards grants or contracts. Small businesses must deliver Direct and Indirect Costs, as well as timesheets, to receive funding. Contracts such as Firm-Fixed Price (FFP) and Cost-Plus Fixed Fee (CPFF) denote the type of funding companies can receive. 

Illustration of accountant sitting at a table holding pencil and typing on calculator

You’ve done it! After weeks, months, or even years of technically challenging work, you’ve scored an award through the Small Business Innovation Research (SBIR) program from one of the 11 participating federal agencies. 

But now is not the time to rest on your laurels—instead, it’s time to crunch the numbers and adequately manage your funds. 

A fully fleshed-out accounting system ensures you use your SBIR funds correctly, guarding against any sort of government audit. This keeps your small business out of trouble and in the position to receive additional funding down the road. 

In this blog, we’ll blueprint all of the SBIR accounting basics you need—no matter which government agency is delivering your well-deserved funds. 

What is an Acceptable SBIR Accounting System?

Think of it like this: when you receive funds through an SBIR program, you are entering into a business relationship with the U.S. government, which just so happens to be the largest purchaser of goods and services in the world. 

With the sheer volume of business it undertakes, the government boasts a lot of rules—both written and unwritten—in a highly sophisticated system with stiff penalties for any financial transgressions. 

You want to be organized, with all of your government billings and annual incurred cost submissions laid out in detailed job cost reports. Forming the foundation of this information is one easy-to-reference document called a Chart of Accounts (COA), an index of the financial accounts in a company’s general ledger. 

An all-encompassing COA organizes your business’ financial activity into assets, liabilities, income, and expenses. It creates simple, consistent language across your organization so that you can face any government audit with confidence and have the paperwork to back you up.

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What’s the Difference Between Direct, Indirect, and Unallowable Expenses?

At its core, and in the eyes of a government auditor, an acceptable SBIR accounting system demonstrates your ability to segregate the different kinds of expenses listed in your general ledger. These are separated as either Allowable or Unallowable expenses. Breaking it down even further, these expenses (or costs) are organized as:

Let’s define each of these expenses for your SBIR/STTR cost proposal.

Direct Costs

This constitutes the bulk of your government funding and includes the cost of goods and services that are specifically for the benefit of your SBIR project. 

Direct costs constitute expenses incurred by performing specific work on a project, contract, or grant objective. These costs, often engineering or research labor-related, are geared specifically to fulfill a contracted goal. Direct costs also can include materials and equipment, subcontractor costs, and travel expenses directly related to the research project.

Indirect Costs

Indirect Costs are supportive expenses that buoy the success of the project and your organization. Generally speaking, Indirect Costs should not exceed 40 percent of the direct costs. 

These expenses include (but are not limited to) utilities, administrative labor costs, accounting fees, telephone and internet expenses, rent, employer’s portion of payroll taxes, some legal fees, and indirect labor, which refers to vacation, holiday, and sick time. 

Depending on the federal agency, Indirect Costs are often referred to as “Overhead (OH),” “General and Administrative (G&A),” or “Selling, General, and Administrative (SG&A).”

Both Direct Costs and Indirect Costs are considered Allowable under the federal government’s SBIR guidelines. As opposed to …

Unallowable Expenses

There are some expenses the government will absolutely not reimburse, as these components do not bestow any benefits on the federal agencies doling out the funds. Examples of unallowable expenses could include federal income taxes, donations, fines, penalties, and late fees, along with first-class travel and alcohol. 

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What are Indirect Rates?

Part of the accounting process when dealing with government-funded SBIR programs involves calculating your business’ Indirect Cost Rate. Your Indirect Rate determines the amount of money the government will award your entity for any Indirect Costs incurred during your SBIR project. 

Indirect Rates are unique to each small business and startup—this means you should never use another company’s Indirect Rate, and you should also readjust yours frequently. 

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Who is the Principal Investigator?

All ships need a captain, and in the world of SBIR programs, that individual is known as the Principal Investigator (PI). 

Every SBIR proposal must designate a single individual to take on the overall responsibility of the project, including all coordinating and executing efforts. This person must possess the education, work ethic, and project management experience necessary to see the project to the finish line. 

No matter the federal agency awarding the funds, the PI must be primarily employed by the small business in question during the award period. The PI cannot be used full-time anywhere else during the SBIR award process.

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What is Federal Acquisition Regulation (FAR) Part 31 in SBIR Accounting?

Earlier in this article, we discussed the potential for stiff penalties should your SBIR accounting not be in order. All government contractors—that is, for-profit companies that produce goods and services under contract with the government—need to know exactly which costs are reimbursable and how these costs should be accounted for. 

The Federal Acquisition Regulation (FAR) Part 31 (Cost Principles and Procedures) establishes the cost principles and procedures that guide small businesses in SBIR programs and government contractors. This set of protocols works to maintain consistency between the varied accounting methods used by contractors—and all funding applicants must follow these protocols so that federal agencies can swiftly review costs and approve reimbursements of appropriate expenses.

To be considered reimbursable under FAR Part 31, costs have to meet a set of criteria:

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  • Costs must be reasonable. The PI and their team need to ensure that materials and equipment are purchased at a reasonable price.
  • Funds must be appropriately allocated. Expenses are only reimbursable if you can prove that the cost is necessary and beneficial to the project.
  • Costs must be recorded and submitted. Expenses should be duly noted according to Cost Accounting Standards (CAS), a set of 19 government-authored standards.
  • Expenses should adhere to the terms of the contract. Costs that are expressly unallowable should be left out, with no exceptions. However, some questionable expenses are considered circumstantial and are subject to review.

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What are Firm-Fixed Price (FFP) and Cost-Plus Fixed Fee (CPFF) Contracts Under SBIR?

There are two primary forms of contracts used in SBIR programs: Firm-Fixed Price (FFP) and Cost-Plus Fixed Fee (CPFF). These types of contracts are awarded by the Department of Defense and other agencies that focus on construction, as opposed to other agencies like the National Science Foundation, which issues SBIR STTR awards in the form of grants. 

The differences between FFP and CPFF contracts boil down to when they apply (Phase I or Phase II) and how they define the reimbursement process.

Firm-Fixed Price (FFP)

For the most part, Phase I contracts are FFP. Under this contract, the government and the contractor (the small business) agree to a fixed price that cannot be adjusted no matter what costs befall the project. With FFP contracts, the contractor bears all the cost risk and must deliver the product even if it costs more than the amount of the contract. This means that all deliverables must be precisely accounted for.

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Cost-Plus Fixed Fee (CPFF)

Phase II contracts can be either FFP or CPFF, a cost-reimbursement contract. Under a CPFF contract, the federal agency reimburses the contractor for allowable costs, along with a fee. As such, a CPFF sees the government bear the bulk of the risk. However, the contractor must make satisfactory progress and deliver the end product described in the contract to earn the fee. 

There’s generally more government oversight at the completion of a CPFF contract, and an “incurred cost” audit is required before the fees are paid. And to be paid, the contractor must submit an approved invoice. This makes a CPFF contract more complex to administer while attaching more cost regulations for contractors to sort through. Another reason why a competent accounting system is a must!

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What is the Defense Contracting Audit Agency (DCAA), and How Does it Factor Into SBIR?

When a federal agency considers awarding you Phase II funding to continue your research, your company will be subject to an auditing process. Many of 11 federal agencies that dole out SBIR awards—except for the National Institutes of Health (NIH) and the National Science Foundation (NSF)—rely on the Defense Contract Auditing Agency (DCAA) to perform this auditing task. 

The DCAA includes two mandatory components in its evaluation:

  • An assessment of your company’s financial stability.
  • An evaluation of the adequacy of your accounting system. 

There are also two optional components that the DCAA might dig into:

  • An evaluation of the indirect rates you propose to charge on a Phase II project.
  • A confirmation that you are up-to-date on your payroll tax deposits. 

The DCAA offers a guide, Information for Contractors, to give small businesses a window into how these “pre-award surveys” are conducted. Though not specific to SBIR, this guide is helpful to any contractor with a pending government audit.

In terms of your accounting system, there are 10 requirements that you must meet to satisfy DCAA. Those requirements are:

  1. Proper segregation of direct costs from indirect costs.
  2. Identification & accumulation of direct costs by contract.
  3. Logical & consistent method for allocating indirect costs.
  4. Accumulation of costs under general ledger control.
  5. A timekeeping system.
  6. A labor distribution system charging direct and indirect labor appropriately.
  7. Interim determination of costs charged to a contract.
  8. Exclusion of unallowable costs.
  9. Identification of cost by contract line item.
  10. Segregation of pre-production from production costs.

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The one accounting requirement that seems to cause the most heartache among small businesses is #5—the dreaded timekeeping system. So let’s dig into that one a bit more.

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SBIR Agencies and Timesheets

There are horror stories about small businesses being unaware of the timesheet requirement until after the government auditor shows up and asks to evaluate indirect rate charges. Imagine the panic and utter despair of that situation!

Small businesses that receive federal contracts and grants must keep timesheets, with no exceptions. Without timesheets as part of your accounting arsenal, you have no way to prove how much of your employees’ time was spent writing proposals, preparing and updating commercialization plans, and more. And guess what? Your employees’ time is the most significant single indirect cost your small business will incur during the SBIR program.

And timesheets are not only required by agencies such as the Department of Defense (DoD), which issues awards as contracts. Even agencies that award funds in the form of grants, like the NIH and NSF, expect timecards as part of your accounting practices. 

Check out this example of an NIH timesheet to get an idea of what is expected of you and your team as you track your indirect costs.

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What is the Division of Financial Advisory Services (DFAS), and How Does it Relate to SBIR?

The Division of Financial Advisory Services (DFAS) is related to the NIH. Responsible for negotiating and establishing indirect cost rates, DFAS works exclusively with small businesses that receive federal awards from the Department of Health and Human Services (HHS), which deploys the NIH.

More specifically, the DFAS Indirect Cost Branch is responsible for calculating the federal awards from the HHS. The Indirect Cost Branch works with small businesses to zero in on reimbursement rates for contracts and grants, ensuring these figures are based on actual costs and are adjusted according to standards and rules as they are applied to SBIR programs.

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Working With Your SBIR Accountant and CPA

When word comes down that you’re about to receive an SBIR grant or contract, the excitement can overwhelm even the most seasoned innovative minds. After all, this is what you’ve been working toward for months, if not years! But that excitement is tempered when the government auditors come calling. 

There’s one surefire way to prove your SBIR accounting system and ensure that you and your team are entirely audit-ready—partner with an accounting firm with extensive experience in the world of SBIR programs and government contracts and grants. 

Most accounting firms and CPAs are general practitioners graced with a wealth of tax knowledge. However, most do not specialize in government award accounting. 

This means they aren’t well-versed in FAR Part 31 and have never represented a client during a pre-award audit with the DCAA or DFAS. They might also not understand the nuances of different indirect rate structures, nor do they know how to approach a government official when a structural error in an indirect rate is discovered.

Team 80 specializes in government contract and grant accounting. We have represented numerous companies during DCAA, and DFAS audits and know what to look for in negotiating incurred cost rate agreements. And yes, we know what to do when it comes to those ever-present SBIR project timesheets. 

Our systems, deployed and managed by government grant and contract experts, take the accounting specifics off of your desk. This empowers you to focus on the project and increases your chances of securing government funding for your innovative idea.

Team 80 Director of Governmental Accounting Ben Smith

Ben Smith

Director of Governmental Accounting

Ben has worked in and around small businesses for most of his career. But surprisingly, his professional path started in food service as a chef, not accounting. In 2009 he opened his own catering business. The accounting duties for the catering company fell on Ben’s shoulders, and that was when he realized accounting was a much better fit! Ben is passionate about helping small business owners make their companies successful and brings a highly varied set of experiences to the table to help in this pursuit. When he’s not crunching numbers, he can be found hanging out with his wife and their Miniature Pinscher Milo or pursuing his other passions, which include skiing, windsurfing, Brazilian Jiu Jitsu, playing guitar, and riding dirt bikes.