Cost-Plus Grant Accounting for Biotech and Deeptech Startups: Complete Implementation

Cost-Plus Grant Accounting: A Complete Implementation Guide

Winning your first major government grant, whether from the NIH in the US or Innovate UK, is a massive validation for your biotech or deeptech startup. The celebration, however, is quickly followed by a critical question: how do we actually get the money? This isn't venture capital or sales revenue; it’s a reimbursement for costs you will incur, and funders require a rigorous level of proof. The fear of mismanaging these funds, leading to cash flow gaps or painful clawbacks during an audit, is real. Setting up a compliant system feels daunting, especially without a dedicated finance team. The key isn't buying expensive software, but building a disciplined process using the tools you already have. This guide provides a step-by-step approach to how to track costs for government grants, ensuring you get paid for every allowable dollar and stay audit-ready from day one.

Foundational Understanding: The Cost-Plus Mindset

A cost-reimbursement grant is fundamentally different from any other money your startup brings in. You do not get a lump sum to spend as you see fit. Instead, you spend your own capital on project-related expenses and then submit claims to the government for reimbursement. The “plus” in cost-plus refers to an additional amount you can claim to cover general business overhead. This model operates on a “trust but verify” relationship. The funder trusts you to perform the research, but they will verify that every dollar was spent appropriately.

For any expense to be reimbursable, it must meet three core criteria: it must be allowable, allocable, and reasonable. This three-part test is the foundation of grant compliance.

• Allowable: The cost is permitted under the specific grant's terms and relevant government regulations.
• Allocable: The cost can be directly and specifically attributed to the grant’s objectives.
• Reasonable: The cost reflects what a prudent person would pay in a similar circumstance.

Understanding this mindset is the first step in building a compliant cost reimbursement grant setup. Every financial decision related to the grant must pass this test. For detailed federal guidance on allowability, US entities can refer to 2 CFR 200.403.

Step 1: Segregating Reimbursable Costs (Direct vs. Indirect)

To effectively manage grant spending and track costs, you must segregate every cost into one of two buckets: direct or indirect. Confusion over this segregation is a primary cause of disallowed reimbursements during audits. The distinction is simple: if the grant did not exist, would you still have incurred this specific cost?

Direct Costs

Direct costs are expenses incurred specifically and exclusively for the grant project. They have a clear, one-to-one relationship with the grant-funded work. For a biotech or deeptech startup, typical examples include:

• Salaries and wages for researchers, scientists, and technicians working directly on the project.
• Lab supplies, chemicals, and reagents used only for the grant-funded experiments.
• A specialized piece of equipment required for the project and approved in the grant budget.
• Fees paid to a Contract Research Organization (CRO) for specific project-related services.
• Travel costs for attending a conference to present grant-funded research, if approved.

Indirect Costs (Overhead)

Indirect costs are general business expenses that support the entire organization, including the grant work. They are real, necessary costs of doing business that are not tied to a single project. Examples include:

• Rent for your lab and office space.
• Utilities like electricity, water, and internet.
• Salaries for administrative staff (e.g., CEO, operations, finance).
• General liability insurance premiums.
• Subscriptions to your accounting software like QuickBooks or Xero.

Crucially, some costs are never allowed, regardless of how you classify them. These unallowable costs represent expenses that public funds are not permitted to cover. The Federal Acquisition Regulation (FAR), specifically Part 31, governs cost principles for federal grants and contracts in the US. As a baseline, remember that common unallowable costs for startups under FAR include alcohol, entertainment, interest on debt, and lobbying expenses.

Step 2: Building Your Grant-Ready Financial Engine

You do not need a specialized, expensive government accounting system to achieve compliance. For most Pre-seed to Series B startups, a well-structured setup in your existing accounting software, combined with disciplined time tracking, is all you need. A pragmatic approach using QuickBooks (for US companies) or Xero (for UK startups) is perfectly sufficient.

1. Reconfigure Your Chart of Accounts (CoA): This is the backbone of tracking grant expenses. Your CoA must be modified to isolate and categorize costs by grant and by type (direct vs. indirect). This allows for clean reporting and easy invoice preparation. Create parent accounts for direct and indirect costs, with specific sub-accounts for each grant.A simple yet effective CoA structure could look like this:
   • 5000 - Grant Direct Costs
     • 5010 - Grant A: Personnel
     • 5011 - Grant B: Personnel
     • 5020 - Grant A: Lab Supplies
     • 5021 - Grant B: Lab Supplies
     • 5030 - Grant A: Equipment
   • 6000 - Indirect Costs (Overhead)
     • 6100 - Rent
     • 6200 - Utilities
     • 6300 - Admin Salaries
     • 6400 - General Office Supplies
2. Implement Contemporaneous Time Tracking: Labor is often the largest direct cost, and you must have detailed records to support your claims. This is a non-negotiable requirement. Every employee charging time to the grant, including founders, must track their hours daily or weekly against specific projects (e.g., “Grant A,” “Internal R&D,” “Admin”). Retroactively created timesheets are a major red flag for auditors. Tools like Clockify or TSheets can integrate with your payroll system to streamline this process. For more, see our guide on Time Tracking for Grant Compliance.
3. Use Modern Expense Management Tools: Services like Ramp or Expensify empower your team to support compliance. Employees can capture receipts and tag expenses to the correct grant project and CoA account at the moment of purchase. This proactive approach prevents a frantic month-end scramble to categorize expenses and find missing documentation.

While these processes are practical, they must adhere to recognized accounting standards. Depending on your location, this could include FRS 102 (UK) or US GAAP. Your setup must also consider tax regulations like Section 174 for R&D capitalization in the US or the UK's HMRC R&D scheme. For companies following International Financial Reporting Standards, IAS 20 provides specific guidance on accounting for government grants.

Step 3: Calculating Your 'Plus' with an Indirect Cost Rate

Once you have your costs properly bucketed, you can calculate the “plus”—the amount you claim for overhead. This is done using an indirect cost rate, which is a percentage applied to your direct costs. A scenario we repeatedly see is startups leaving money on the table by failing to claim these legitimate overhead costs. Without this reimbursement, your other revenue sources are effectively subsidizing the grant work.

The standard formula is straightforward: Indirect Cost Rate = Total Pool of Indirect Costs ÷ Direct Cost Base.

However, negotiating an official rate can be complex for a first-time grantee. Fortunately, there is a much simpler option. In the US, a 10% de minimis indirect cost rate can be used on 'modified total direct costs' if your organization has never held a federally negotiated indirect cost rate. This is the easy button for startups, allowing you to recover a portion of your overhead without a formal rate negotiation.

“Modified Total Direct Costs” (MTDC) is a specific base used for this calculation. It typically includes all direct costs except for capital equipment, patient care costs, and the portion of any sub-award over $25,000.

To illustrate, let’s consider a fictional biotech startup, “GenoVation,” in its first grant period. Their costs are as follows:

• Direct Salaries & Wages: $80,000
• Direct Lab Supplies: $15,000
• Sub-award to a University: $40,000
• Rent & Utilities (Indirect): $20,000
• Admin Salaries (Indirect): $10,000

To calculate the reimbursable indirect amount, GenoVation first determines its MTDC base. This includes the $80,000 in salaries, the $15,000 in supplies, and only the first $25,000 of the university sub-award. Therefore, their MTDC base is $120,000. Using the 10% de minimis rate, GenoVation can claim an additional $12,000 ($120,000 x 10%) for indirect costs. The principles governing these calculations are detailed in regulations like The Federal Acquisition Regulation (FAR), Part 31.

Step 4: Getting Paid and Staying Audit-Ready

Preparing your reimbursement request, or invoice, is a critical step where errors can have serious consequences. Mistakes can lead to delayed payments, creating cash-flow gaps, or even require you to return funds during an audit. The key is to invoice only for actual, incurred costs, not for what you budgeted. Your budget was an estimate; reimbursement is based on reality.

Your invoicing process should be a direct output of the financial engine you built. Using your accounting system, you will run a report for the billing period showing all expenses coded to the grant’s direct cost accounts. You then apply your indirect cost rate to the appropriate direct cost base to calculate the overhead reimbursement. Your submission must include this summary along with supporting documentation, which your system now has neatly organized.

In the US, the Standard Form 270 (SF-270) is a common form used for reimbursement requests. UK organizations like Innovate UK use a similar portal-based system for submitting claims. This disciplined, system-driven approach is what keeps you perpetually audit-ready. When an auditor asks for justification for a specific charge from 18 months ago, there is no panic. The detailed time logs, categorized expenses, and separated accounts in your CoA form a robust, contemporaneous record. Your system *is* your audit trail.

Practical Takeaways for Founders

Successfully managing grant funding is not about becoming a federal accounting expert overnight. It is about implementing a simple, robust system that ensures compliance and protects your cash flow. What founders find actually works is focusing on a few core principles from the very beginning.

First, shift your mindset. This isn't revenue; it's a reimbursement for documented, allowable expenses. Every decision and process should flow from that fundamental understanding.

Second, configure your systems *before* you start spending. Modify your Chart of Accounts in QuickBooks or Xero and mandate company-wide, contemporaneous time tracking from day one. This foundational work prevents months of costly cleanup and potential lost funds.

Third, if you are eligible, embrace the 10% de minimis indirect rate. It’s a powerful simplification tool that allows you to recover overhead costs without the administrative burden of negotiating a custom rate with a government agency.

Finally, remember that clear documentation is your strongest defense. A clean, organized financial system with traceable records for every transaction is the key to getting paid quickly and navigating any future audit with confidence. By implementing these processes, you create the financial control needed to turn that grant award into groundbreaking innovation. Find more resources in our Government Grants & Contract Accounting hub.

Frequently Asked Questions

Q: Can I use grant funds to pay for founder salaries?
A: Yes, founder salaries are an allowable cost, provided the founders are directly working on the grant-funded project. Their time must be meticulously tracked and documented just like any other employee. The salary rate must be reasonable and consistent with what the company would pay for similar work.

Q: What is the biggest mistake startups make with their first cost-plus grant?
A: The most common and costly mistake is failing to implement contemporaneous time tracking from day one. Labor is usually the largest expense, and without detailed, daily or weekly timesheets, startups cannot prove how much effort was spent on the grant, putting the entire payroll claim at risk during an audit.

Q: Do I really need special government accounting software like Deltek?
A: No, not for most early-stage startups. While dedicated systems are powerful, a properly configured general accounting system like QuickBooks or Xero is sufficient for managing one or two grants. The key is disciplined process, including a detailed Chart of Accounts and rigorous time tracking, not the specific software brand.

Q: How long should I keep grant-related financial records?
A: The standard rule is to retain all grant-related records for at least three years after the grant's official closeout date. This includes everything from invoices and receipts to timesheets and payroll records. Check your specific grant agreement, as some agencies or awards may require a longer retention period.