We have all heard the old adage that “There’s no such thing as a free lunch!” Well that is true of funding alternatives, particularly in the case of government grants as a funding source.
From experience in an early stage technology company several years ago, I can speak to the day that the Defense Contract Audit Agency comes to review (a.k.a. “audit”) the accounting and timekeeping records. It is nearly impossible to retroactively fix your accounting and human resource records to provide the level of detail necessary to comply with recordkeeping requirements related to government grant audits.
Let’s lay some ground work; there are essentially two cost types of grants/contracts (for SBIR, STTR, NIH, NSF, and other agencies): fixed fee (price) and cost plus. With regard to proposals submitted for either type of grant, the projects can either be fully government funded or a cost-share agreement.
Key requirements to be aware of in dealing with all grants are cost tracking (overhead, direct labor, and direct materials) and timekeeping for EVERY person in the organization on a weekly basis. I won’t address specifics of timekeeping except to say that requirements include time by project and activity and supervisor and employee sign-offs. Accounting requirements include segregation of items that are excluded from overhead per regulatory requirement (e.g., certain entertainment expenses like alcohol).
Additional accounting complexity is added when businesses are “self-constructing” assets: machinery and equipment are related to proprietary technology and they apply grant dollars to labor and/or machine parts. In these instances, valuation of the asset for depreciation is impacted by the amount funded by the grant. In this general example, it should be understood that the disallowance of the grant funded portion of the equipment is to prevent “double dipping.” A company shouldn’t be able to utilize depreciation as an income tax shield when they have already received the benefit of direct funding.
In conclusion, be aware that while grants are excellent sources of funding that do not have to be repaid, there are costs associated with the funding related to establishing appropriate accounting and timekeeping mechanisms. Reporting and tracking requirements are more stringent for the cost plus contracts; however, all grants have specific recordkeeping requirements for accounting and employee time. It is far easier to establish your accounting and human resource systems to support data collection at the start of the process of writing grants and submitting proposals, rather than rushing to put in systems or change existing systems later. Take my word for it: I’ve dealt with both situations. I recommend to all my clients that it is easier to go from too much data in your accounting than to try to generate the detail later.