Too often, small business funding recipients don’t realize what they don’t know can cost them dearly. They may pay out of pocket for mistakes. Or it may cost them their intellectual property rights or business. Here are a few indicators that you need an experienced SBIR/STTR Business Consultant who has a cross-functional perspective.

Difficulty Tracking Eligibility and Size Standards:

There are very specific eligibility requirements. Ownership structures, related companies under common control, and other factors impact your ability to participate in these programs. It is important to be sure you are eligible. Don’t struggle with employee counts or VC ownership risks, which can lead to ineligibility. Companies that submit proposals and accept awards that aren’t eligible may be deemed to have committed fraud. At a minimum, repayment of funds would be expected for organizations that receive funds but weren’t eligible for the program.

Consultants work with you to analyze your specific business structures, relationships, and status to make an informed determination on eligibility.

Real World: A Colorado corporation called me after they received over $2 million in SBIR Phase I and Phase II awards. They called about other compliance issues, but in the course of our conversation, it came out that they were a non-profit. Non-profits aren’t eligible for SBIR and STTR funding. We had to develop a plan and bring in an attorney to negotiate with the government on repayment, etc. Company officers and the principal investigator were held liable for failure to comply with eligibility, improper SAM and other certifications, and false filings of reports, etc., during the 3 years of funding.

Weak Financial Systems for Cost Compliance:

In my case study, Careless Accounting, I provide a real-world example of what happens when you don’t have an adequate accounting system. The ability to track allowable costs, project costs, risks, and calculate indirect rates is the minimum expectation for your accounting system. You can use QuickBooks or more complex accounting systems. The key is utilizing the functionality of your specific software and ensuring that transactions are properly recorded. I’ve worked with many companies that thought they were doing “enough” to “get by.” They were wrong.

Consultants who have a full understanding of government funding (SBIR, STTR, etc.) are crucial to maximizing your compliance and minimizing your risks. To set up a compliant accounting, you need to understand the program rules and requirements, GAAP and accrual accounting rules, and the specifics of your business’s financial, tax, legal, and other operational factors. One size doesn’t fit all, and a template is usually a starting point, not the destination.

Unclear Data Rights Management:

SBIR and STTR recipients obtain government funds to advance their R&D and intellectual property. So, the improper handling of SBIR/STTR funds, records, and intellectual property reporting could put the IP at risk.

Several years ago, I was brought in as an expert witness by a major US technology company (Omega) that had purchased a company (Beta) funded by SBIR and STTR funds. After the acquisition, Omega was served by Beta’s top competitor. The competitor alleged that the patents filed by Beta were invalid because they failed to include the specific language on government funding used in the patent application. The further alleged that Beta was unable to implement and maintain adequate accounting, recordkeeping, etc., while performing the research.

Unfortunately, the competitor was correct. Fortunately, the government had allowed Beta to cure (repair the default in the agreement) before the sale of the company. Beta had amended the patent to include the government funding and rights, spent thousands on getting the accounting and other records up-to-date and accurate, hired an independent auditor to review all financials, and much more. Beta’s cost to clean up their non-compliance before the acquisition by Omega was over $100,000.

Qualified, experienced consultants can enable companies to meet compliance requirements with a cost-effective investment. It is easier to start compliant than to dig yourself out of a compliance hole.

Audit Preparedness:

When the auditor comes, they rarely give you a warning. They also aren’t known for mercy and second chances. So, a lack of auditable records puts everything you’ve built and accomplished at risk. Audit readiness begins at the daily transactional level of doing business. It requires the timely recording of transactions backed up with support documentation.

Too many companies think, “We’re small, so the rules don’t apply,” or “We can’t afford the time or cost.” The reality is that even a one-person small business must comply with the rules. Auditors may even expect greater accuracy and recordkeeping, because the smaller your team, the less likely you are to have internal oversight and controls in place.

Experienced consultants prepare you to have audit-ready systems. These systems include, but aren’t limited to: accounting, cost estimating, timekeeping, recordkeeping, procurement, and internal controls. With daily compliance, you can be audit-ready.

Subcontractor Management Issues:

Subcontractors play an important role in your company and projects. They can also lead to major compliance and execution issues. Here are just a few issues that client companies needed support to address.

Examples:

• The subcontractor went bankrupt during the project.
  • Issue: The small business failed to validate the vendor’s qualifications, financial status, or capability.
• The subcontractor was a fraudulent entity that did not exist.
  • Issue: The small business failed to validate the vendor’s qualifications, financial status, or capability.
• The subcontractor was not located in the United States.
  • Issue: SBIR and STTR scope of work, place of performance is limited to the United States.
  • Issue: Subcontractor was a foreign entity owned by a foreign government entity.
• Subcontractor performed 100% of the scientific work.
  • Issue: The recipient small business failed to meet the minimum level of effort requirement for the award. They essentially acted as a shell or front company that passed to another company that was not eligible for the SBIR or STTR programs.
    • Small businesses must perform 67% of the Phase I and 50% of the Phase II scope of work for SBIRs.
    • Small businesses must perform 40% of STTR, 30% of the effort from the research institution, and any of the parties can perform the remaining 30%.

Procurement Systems

Failure to ensure that your vendors (subcontractors) are qualified, financially stable, and capable of executing their portion of the scope of work puts your project and financial stability at risk. If you pay your subcontractor and they fail to perform, then you are responsible for getting the project executed. This may mean that you do the work yourself if you are qualified. Or you may need to find a replacement company. The funding already spent is rarely recoverable without legal action. So you will be funding the costs to complete the research and the project.

Unclear Procurement Policies for American-Made Goods:

The Buy American Act of 1933 is embedded in the terms and conditions of every government award. Your procurement practices should include a process to identify U.S.-manufactured goods when possible. The purchase of non-U.S. goods would be documented with a justification for the decision for audit purposes. Purchases of non-US goods risk a determination of disallowed costs.

Consultants work with you to develop robust procurement systems that include vendor validation and qualification. These systems include documentation, monitoring, and other tools to mitigate vendor non-performance risks.

Missed Agency and Award Specific Requirements:

The government has established specific rules for each type of entity with which they do business. For-profit entities focus on the Federal Acquisition Regulations FAR 31. However, many agencies have additional requirements embodied in agency-specific FARs, such as the Department of Defense’s DFARS. Failure to meet agency-specific rules (e.g., DoD cybersecurity) can halt funding.

In addition to the broad framework FAR and agency- FARs, each award letter and document. The consultant integrates requirements.

Poor Commercialization Tracking:

Did you know that you are required to report revenues on intellectual property funded by the government? Once your project is complete and you take it to market, you have an annual reporting requirement to let the government know the revenues generated. The government has several reporting systems, including iEdison to report the IP developed and NIH Commercialization History reports in Phase II, and DoE’s Company Commercialization Reports, to name a few.

Issue: Lack of reporting impacts future awards. Commercialization is the goal of SBIR and STTR funding. So, the government needs to determine how successful the program is by seeing the revenue results.

Consultants can guide you to establish a system, policies, and procedures to track IP by project and the related revenues. These tools can be embedded in accounting, ERP, or CRM systems.

References:

1. Small Business Administration. (2024). SBIR/STTR Policy Directive. https://www.sbir.gov/policy-directive
2. National Science Foundation. (2024). NSF SBIR/STTR Program Guidelines. https://www.nsf.gov/eng/iip/sbir/home.jsp
3. Code of Federal Regulations. (2024). 2 CFR Part 200 – Uniform Administrative Requirements. https://www.ecfr.gov/current/title-2/subtitle-A/chapter-II/part-200
4. National Aeronautics and Space Administration. (2025). NASA SBIR/STTR Program Solicitations. https://sbir.gsfc.nasa.gov/solicitations