Best practices to avoid audit findings and funding clawbacks
1. Failing to Accurately Track Project Costs
Requirement: Having a system to accurately allocate costs between projects, indirects, internal R&D, commercial, and unallowables underpins every SBIR grantee’s ability to substantiate costs incurred, invoice the government, and produce meaningful reports.
Best Practice: SBIR grantees should set up and maintain a Project Cost Accounting system to facilitate tracking and reporting of costs by project and by GL account.
2. Not Substantiating Time Worked
Requirement: SBIR grantees need to be able to substantiate all costs that are being reimbursed by the government, including salaries and wages.
Best Practice: A combination of a payroll register, time sheets, and allocation calculations are necessary to support the wages being reimbursable by your SBIR grant.
3. Confusing Contracts with Grants
Requirement: There are critical differences between the terms of a contract and an SBIR grant that impact how they are managed. A contract is deliverable focused whereas an SBIR grant will generally be cost reimbursement based. In other words, a contract will involve negotiations ahead of time with clear deliverables outlined and a related price. Meanwhile, an SBIR grant is set up to reimburse you for certain costs that you incur for a specific activity or endeavor that you have agreed to undertake.
Best Practice: You should be familiar with all the compliance requirements of your SBIR grants and contracts, and should be especially diligent about the payment terms as well as the financial and scientific reporting requirements. Attention to detail is important as every grant or contract will have specific requirements.
4. Drawing Down Funds Before They Are Earned
Requirement: When preparing a drawdown or invoice, you must accurately calculate the total direct costs incurred within each budget category for each project. The total direct costs incurred within your budget will then be used to calculate the amount of indirect costs you can be reimbursed for. It is important that your drawdown does not exceed the actual total amount of costs incurred and that you have unlocked the amount of indirect costs you are requesting reimbursement for. Not having a project cost system or calculating incorrectly can result in pre-drawing funds on a cost reimbursement grant, which would result in an audit finding and potential claw back of funds.
Best Practice: Ensure that you have a proficient project cost accounting system and an SBIR project tracking schedule so that you are correctly calculating the direct and indirect costs incurred; the amount of indirect costs eligible for reimbursement, and ensuring your unallowable spend is excluded from your cost reimbursement pool.
5. Charging Unallowable Costs to Your SBIR Grant
Requirement: Federal Acquisition Regulation 31 (FAR Part 31) provides a detailed listing of costs that you may incur throughout your award period and explains what costs may or may not be reimbursable. Common unallowable costs for SBIR awardees include marketing expenses, IP, and travel that exceeds the government per diem. Receiving government funds for unallowable costs will result in those funds being clawed back and potential legal consequences.
Best Practice: Having a FAR 31 expert on your team or outsourcing to a grant accounting expert like EGC ensures you are accurately allocating costs and doing it in a streamlined approach.
6. Being Unprepared for an Audit
Requirement: Auditors will review documentation to verify that all compliance requirements were met and that the costs incurred align with the intended purpose of the federal funding. To this end, they will be scrutinizing your timesheets, payroll cost allocations, invoices, contracts with contractors, employee agreements, subaward contracts, and cash management procedures. While an audit is always required when your award spending exceeds $1 million in a fiscal year, you should be prepared for an audit or review at any time.
Best Practice: To have a smooth audit, you’ll need to have all related documentation saved and stored in an organized manner. Without support to substantiate compliance, your audit report will have multiple findings and questioned costs that get reported to your granting agency for potential further action.
7. Using Cash-Basis Instead of GAAP Accounting
Requirement: GAAP (Generally Accepted Accounting Principles) are foundational for any robust accounting system. GAAP utilizes the accrual basis of accounting, meaning that revenue and expenses are reported in the period during which they are incurred rather than the cash basis where reporting occurs when the underlying cash transaction occurs.
Best Practice: GAAP should be used by all federal awardees so as to allow for comparability across organizations, transparency for stakeholders such as the government and investors, and operational insight. Not to mention that it is also required by the government!
8. Misapplying Indirect Cost Rates
Requirement: Calculating the drawdown amount for your indirect costs is not as simple as multiplying all your direct costs by your indirect cost rate.
Best Practice: First, you need to understand what your indirect cost base is, which will be different for every grant! As you calculate your drawdowns you will multiply your indirect rate by the actual costs within your indirect cost base to determine the amount of indirect spend you have unlocked for reimbursement. It is important that you only draw down for actual indirect costs incurred. Just because you unlocked the indirect costs for reimbursement, does not mean you can draw it down.
9. Double Dipping – Charging the Same Cost to Multiple SBIR Grants
Requirement: Double dipping is the prohibited practice of charging the same cost to multiple SBIR grants and can result in your SBIR grant being terminated as well as legal consequences.
Best Practice: If you have multiple SBIR grants, it is particularly important that you have a Project Cost Accounting system and award tracker in place, you are taking a very big risk of accidentally double dipping!
10. Incorrectly Allocating Payroll Costs
Requirement: Total time accounting is required for allocating payroll costs in order to ensure the government is only reimbursing for its fair share of salaried employees’ wages. If not calculated correctly, a grantee may submit for reimbursement of more wages than they have earned, which could result in funds being clawed back by the government, loss of future funding, and potential legal consequences.
Best Practice: Ensure all time is accounted for on timesheets, and that the payroll is allocated according to the percentage of time worked on each project during each payroll period. Don’t forget to allocate time for PTO.
