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
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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

Ben Smith

Director of Governmental Accounting

Ben has worked in and around small business for the majority of his career. Ben didn’t start out as an accountant, but was actually a chef. 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 for him! 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 Maaike and their Miniature Pinscher Milo, or pursuing his other passions which include skiing, windsurfing, Brazilian Jiu Jitsu, playing guitar and riding dirt bikes.

Been with Team 80: Since Sept 2018

Education
Colorado State University-Global Campus
Degree Name: Bachelor of Science (BS)
Field Of Study: Accounting
Graduated: 2016

Colorado State University
Degree Name: BA
Field Of Study: English
Graduated: 1995

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