Compliance Readiness
Winning a grant like an SBIR or STTR is a significant milestone, but don’t be fooled: the proposal is not the hardest part. The real challenge begins after the award when you must meet the grant’s technical, administrative, and financial requirements. While small businesses often excel at the technical side, many stumble on the administrative and financial controls needed for compliance. Here’s how to master the post-award phase and avoid costly missteps.
The Post-Award Reality: It’s About Control and Accountability
Compliance Is Non-Negotiable
Accepting an award means the recipient will maintain “effective control and accountability for all funds, property, and other assets.” Therefore, awardees must implement internal controls and business systems that ensure they use funds solely for authorized purposes. Those systems must be in place from the first day of the award period. While the government doesn’t dictate specific systems, they do dictate the outcomes and outputs of those systems. It’s up to you to deliver.
Audits Target Financial Non-Compliance
One of the most common audit failures is improper cost identification, classification, and reporting. Getting this wrong can lead to disallowed costs, penalties, or even repayment of funds. Robust systems are your defense against these risks.
Mastering Indirect Cost Rates
Why Indirect Rates Matter
Indirect cost rates determine how much of your fringe, overhead, and general and administrative (G&A) expenses the government will reimburse. Recipients calculate these rates based on indirect cost pools for each category and a selected direct cost base (Total Cost Input, Modified Total Direct Costs, etc.). Miscalculation will result in you either leaving money on the table or facing audit scrutiny.
Support Documentation Is Key
To justify your indirect cost rates, you’ll need:
- Organizational charts
- GAAP and accrual-based financial statements
- Budgets, company-wide, project, etc.
- Certifications from key personnel verifying cost accuracy
- Narrative descriptions of indirect cost pools
- Summary schedules of rates
- A cost policy: cost accumulation, tracking, application, allocation, and documentation.
These documents prove your rates reflect reality and align with grant requirements.
Building Financial and Internal Controls
The Foundation: Accounting Systems
Adequate financial and internal controls start with your accounting policies, procedures, and systems. Every transaction, from initiation to execution to recording, must be authorized, tracked, and reported. Whether the transaction is a $10 expense or a $100,000 purchase, it must have documentation and a record in your accounting system.
Consistency Across All Activities
Your business must apply the same level of control to all financial and operational activities, whether federally funded or commercial. Policies and procedures should ensure consistent treatment of costs across projects, as outlined in organizational charts, manuals, and other documentation.
Documenting Compliance: The Paper Trail
Tangible Evidence Is Critical
Compliance hinges on documentation, including:
- Internal Documents: Organizational charts, policy manuals, payroll records, timecards, and expense reports.
- Third-Party Documents: Receipts, purchase orders, and shipping records.
These show how your business authorizes, reviews, and reports transactions. Written policies aren’t enough—they must be followed, with “adequate documentation” to prove it.
Why Documentation Matters
A strong paper trail ensures consistency, facilitates audits, and supports accurate cost allocation. Without it, you risk disallowed costs or failed audits, even if your expenses were legitimate.
Strategies for Success
Real World Example: Compliance Failure
One client I worked with brought me in after they had received multiple DoD and NIH awards and a government audit.
The government required them to get compliant. So, the project scope included:
- Revise the chart of accounts and other tracking capabilities in the existing accounting system.
- Review 100% of their transactions for the past two calendar years when the awards began.
- Validate every cost on every invoice/drawdown of government funds.
- Trace all direct costs to each project, government, and commercial.
- Locate documentation for all costs; any cost without documentation is unallowable.
- Reconcile labor costs to payroll and timesheets; any undocumented labor cost (no timesheet, W-2, guaranteed payment, etc.) was unallowable.
The cost of modifying their accounting system and training the accounting team on the cost rules was about $5,000. Reviewing transactions and properly recording them under those rules was over $50,000, including legal fees. The company also had to pay fines and penalties. The even bigger cost was the repayment of funds for items made unallowable by failure to comply, including failure to document transactions. The unallowable costs included direct (labor, materials, consultants, etc.) and indirect costs (fringe and G&A). When actual indirect rates were calculated correctly and applied to allowable direct costs, the company had to repay over half of its awards. Also, any pending awards were canceled, and the company had to complete all existing projects and pass annual audits before submitting new proposals.
Compliant System Design
Build or refine your accounting and control systems to capture detailed transaction data as it happens. You may need to invest in new software and training or modify your existing setup to be compliant. Remember, it’s far cheaper to set things up correctly from the beginning than to retroactively reconstruct records during an audit.
Systems should:
- Track direct and indirect costs accurately.
- Allocate costs fairly across programs.
- Provide real-time data for reporting and forecasting.
Negotiate Realistic Rates
You must use well-documented actual or forecasted costs to negotiate indirect rates. The resulting financial statements, budgets, etc., should reflect your business’s current and planned expenses. Well-developed budgets developed using robust forecasting methods and documented assumptions ensure you recover your fair share of costs without exceeding agency caps.
Audit Readiness
Audits are inevitable. Maintain organized, reviewable records to demonstrate consistent cost treatment and compliance. Tangible evidence, paper, and signatures prove your systems work as intended. Compliant accounting systems that track and segregate costs is a crucial element of compliance. Companies must prioritize compliance from day 1. When you submit a proposal, you are making promises about your business capability and following the rules. Keep those promises!
Final Word: Compliance Drives Success
Winning a grant is just the beginning. The real work lies in meeting the administrative and financial requirements that ensure your business thrives. Invest in robust systems, document every transaction, and negotiate realistic rates. By prioritizing compliance, you protect your funds, pass audits, and position your business for long-term success.
