If a federal award goes wrong for a small company on the compliance side, timekeeping is usually where. Labor is the largest cost on most SBIR projects, and labor is the one cost with no invoice or receipt behind it. The only evidence that an engineer spent thirty hours on the award last week is the timekeeping record, which is exactly why reviewers examine it first. This is general information, not accounting or legal advice.

What a compliant practice looks like

The expectations are unglamorous and consistent across agencies:

  • The employee records their own time, daily or as work is performed. Not the bookkeeper, not the founder, not a spreadsheet assembled at month end.
  • All hours are recorded, not only the hours charged to the award. Commercial work, internal projects, business development, and paid leave all get captured, because an indirect rate and a labor allocation are meaningless if the denominator is missing.
  • Time is charged to the right project code, including unallowable activity, which is recorded and then excluded from claims rather than left off the sheet.
  • A supervisor reviews and approves the record, and the approver is someone with actual knowledge of the work.

None of this requires expensive software. A simple system used honestly every day beats a sophisticated one filled in retroactively. The point is that the record was made close to the work, by the person who did it.

Corrections are made, not made to disappear

Mistakes happen and correcting them is normal. Correcting them properly means the original entry remains visible, the change is dated, the reason is stated, and the employee and supervisor sign off. On paper that is a line through the entry, not an eraser. In software it means an audit trail the system keeps automatically.

Overwriting an entry so the record simply reads differently is the version that causes real trouble, because it converts an honest error into something that looks like concealment. The same applies to a founder who edits an employee's hours after the fact to make a budget line work. If the allocation was wrong, correct it with a documented adjustment and a note explaining it, the same way you would explain a lumpy spend in a progress and financial report.

Why month-end reconstruction is indefensible

Sitting down on the last Friday of the month to decide how the team probably split its time is the most common practice at small companies and the least defensible one. It produces suspiciously round numbers, allocations that happen to match the budget exactly, and no contemporaneous evidence of anything. A reviewer who finds it will question the labor costs, and questioned labor on a labor-heavy project can put a large share of your claim at risk.

Start the habit on day one of the award, before there are three people and a subcontractor to untangle. It sits alongside the accounting structure and the budget discipline that federal work assumes, and it is one of the quieter costs of running a company that takes federal money at all, much like the other overheads founders discover late.

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