From your description, it sounds like you are applying for a Phase II SBIR with one of the DOD agencies? There is quite a degree of variation between the different components (Navy, Army, AF, etc.) so be sure to read the relevant proposal guidelines in detail for your final answer. However, in general, if you are required to have matching funds lined up for a Phase II proposal, the total amount (gov. award + matching funds) will be considered your budget and will be subject to the R/R&D spending requirements outlined by the mechanism you are applying to. There might be some flexibility in this spending requirement, but it will require prior approval from your Contracting Officer in that case.
Let me know if you have any additional questions!