Introduction

Compliance with cost principles is a cornerstone of SBIR/STTR funding, ensuring federal dollars are spent appropriately. Governed by FAR Part 31, costs must be allowable, reasonable, and allocable to the funded project. This topic is a top search for small businesses due to the complexity of cost accounting and the risk of audit penalties. This article examines the cost compliance requirements, challenges, and strategies that help small businesses navigate the financial rules of SBIR/STTR.

Significance

SBIR/STTR recipients must justify all project costs as necessary, reasonable (prudent under the circumstances), and allocable (directly benefiting the project). Agencies like the DoD and NIH audit costs to ensure compliance, and non-compliant expenses can be disallowed, leading to financial penalties or loss of funding. Effective cost management demonstrates fiscal responsibility and supports the successful execution and commercialization of projects.

Common Challenges

Small businesses often struggle with cost compliance:

• Unallowable Costs: Claiming expenses like entertainment, lobbying, or excessive travel not tied to the project. For example, a lavish team dinner is unallowable under FAR 31.
• Reasonableness Issues: Failing to justify costs as comparable to market rates, such as overpaying for equipment.
• Improper Allocation: Allocating indirect costs (e.g., rent) across multiple projects without clear documentation.
• Lack of Documentation: Not maintaining receipts or justifications for expenses, risking audit disallowances.

These challenges can undermine funding and project outcomes.

Compliance Strategies

To ensure cost compliance, small businesses should:

1. Study FAR 31: Review FAR 31.201-2 to understand allowable costs and maintain detailed documentation for all expenses.
2. Justify Reasonableness: Provide market comparisons or quotes to demonstrate costs are prudent, such as obtaining multiple vendor bids for equipment.
3. Track Costs Separately: Use accounting software like QuickBooks to segregate direct and indirect costs for each SBIR/STTR award.
4. Conduct Internal Audits: Regularly review expense records to ensure compliance before agency audits.
5. Engage Experts: Hire accountants familiar with FAR 31 to set up compliant cost accounting systems and review budgets.

These strategies reduce audit risks and ensure the integrity of funding.

Conclusion

Cost compliance is crucial for SBIR/STTR success, as it protects funding and enables commercialization. Small businesses should implement robust accounting systems, thoroughly document expenses, and seek expert guidance. Check SBIR.gov for FAR 31 resources and consult accountants to avoid costly errors. By mastering cost compliance, businesses can focus on innovation and growth.