Timekeeping: Why Hours Are Required (Not Just Percentages)
Federal guidance, especially from FAR (Federal Acquisition Regulation) and 2 CFR Part 200, requires documentation of actual time worked. Documentation has to be verifiable. So, your timekeeping system must include a formal timesheet for all employees. Adequate recordkeeping in support of your labor costs is crucial. If the government performs an invoice audit, you will need to be able to trace all costs back to supporting documentation. Auditors prefer third-party documentation for expenses. However, payroll, by its nature, doesn’t provide a third-party document for hours worked. Therefore, auditors pay particular attention to the integral documentation related to payroll (labor costs), not just for the SBIR or STTR, but also for wage and hour laws and rules at the state and federal levels.
This article focuses on SBIR/STTR requirements. Specifically, 2 CFR § 200.430(i) states:
Charges to Federal awards for salaries and wages must be based on records that accurately reflect the work performed. These records must… reasonably reflect the total activity for which the employee is compensated… and support the distribution of the employee’s salary or wages among specific activities or cost objectives.”
The DCAA (Defense Contract Audit Agency) guidance and audit procedures reinforce the requirements, which include:
- Daily timekeeping
- Total hours worked per day
- Work broken down by agency, award, project, task code, etc.
Why Percentage of Time Isn’t Enough
Using “percentage of time” instead of actual hours can cause issues like:
| Issue | Why It’s a Problem |
| Lack of an audit trail | No document indicates the work performed and when. |
| Inaccurate labor distribution | Overstates/understates actual costs. |
| Non-compliance with federal rules | Costs are disallowed without support documents. |
| Risk of questioned indirect rates | Challenges to budgets and indirect rates may occur. |
Even if you’re a small team or solo founder, you must track actual hours if you charge salary or wages to a federal award (like an SBIR Phase I or II).
Best Practice for Small Businesses
Even with a small team, you can:
- Use affordable electronic timekeeping (like Clockify or Toggl)
- Record actual daily hours worked, even if it’s just for yourself
- Train employees and contractors to use project codes for direct, indirect, or unallowable activities
If you work 40 hours per week and 25 of those are on your SBIR award, you must show 25 hours, not just “62.5% SBIR work.”
Final Answer
No, a percent of the time is not sufficient. You must record actual hours worked to comply with SBIR/STTR and federal cost principles. You must use either software that meets the DCAA timekeeping system requirements or a manual (paper) system. If you decide to use a manual system, comply with the specific recordkeeping requirements for those systems.
