Congress Should Move to Establish and Strengthen a Permanent SBIR Authority

By Daniel Sennott and Heath Taylor

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Victory in war is not always guaranteed to the biggest force, but more often it’s the military with more innovative capabilities and a commitment to utilizing modern technologies.

Recent advancements by near-peer competitors, such as Russia and China, have called for historic funding levels for Pentagon research, development, test and evaluation. President Joe Biden’s budget request for fiscal year 2022 includes the largest ever funding for RDT&E at $112 billion, and, based on the House and Senate Armed Services Committees markups of the National Defense Authorization Act, that number is certain to grow by several billion dollars.

While the challenges from emerging threats are new, the necessity for utilizing innovation on the battlefield is not. From the Union Army’s use of the telegraph in the Civil War, the machine guns employed in the trenches of World War I, the Higgins boats carrying troops to storm the beaches of Normandy in World War II, to the current multibillion-dollar push for a more lethal and technically integrated military, innovation has been and will remain at the heart of the capabilities that give warfighters a winning edge on the battlefield.

Like the military and the service members who fill its ranks, if a small business is not competitive and adaptive, it fails. Driven by competitiveness and agility, small businesses are an essential source of innovative technology. The U.S. military has long recognized the critical role small businesses play in this regard.

The Small Business Innovation Research (SBIR) program, established in 1982, was designed to ensure the scientists and innovators so prevalent in small business have a meaningful way to access federal funding. It has been a tremendous pipeline for ingenuity, and the defense marketplace has been a particular beneficiary of this program. Success stories abound regarding the mutual benefit the program has for both the small business community and the federal government.

ML Mackey, chair of NDIA’s Small Business Division and chief executive officer of Beacon Interactive Systems, noted: “As the CEO of a nontraditional defense contractor, we found the SBIR program to be a small business friendly gateway into the defense marketplace, enabling us to successfully bring our commercial sector expertise to bear on DoD needs.”

Although the program has been reauthorized in the National Defense Authorization Act periodically, now is the time to make it permanent and improve aspects of this vital program.

The goal of the SBIR program is to encourage competitive small businesses to work in coordination with the federal government on agency research-and-development needs and expand private sector commercialization of the innovations stemming from this research.

The program is structured into three different phases of funding. The objective of Phase I is to establish the concept’s feasibility to government agencies. Phase II is initial prototype development. And Phase III includes any follow-on non-SBIR funds that extend, derive, or complete the prior SBIR investment. By supporting small business competition for these contracts, the program inspires technical innovation and injects an important sense of entrepreneurship into the defense enterprise.

Since its inception, Congress has reauthorized and extended the program several times. Most recently, the 2017 NDAA extended SBIR and related programs through September 2022.

Nearly 40 years after the program was first authorized in law, its value is clear. As of 2019, the program has provided over 179,000 awards totaling over $54.3 billion to small businesses. Just within the Defense Department, the SBIR and the Small Business Technology Transfer programs have resulted in a 22:1 return on investment, and it has had a significant impact on the economy.

By all accounts, the federal government and small businesses have benefitted immeasurably from SBIR; establishing it as a permanent program is the next logical step. The temporary nature of the current program sends a distinct message to both the federal agencies who administer it and small businesses hoping to participate.

To federal agencies, the current situation may discourage them from investing time and money into these initiatives. Government Accountability Office statistics show that, despite statutory minimum expenditure requirements, the majority of agencies participating in the SBIR program failed to comply with mandatory minimum expenditure levels. Given the uncertainty of federal funding, agencies naturally focus more on permanent programs over temporary programs that may or may not survive the next legislative cycle. This is a dynamic recognized by the congressionally chartered Section 809 Panel in their report released in 2018.

Making the program permanent will make clear that SBIR is a priority of Congress and should be a priority for federal agencies.

Similarly, the temporary nature of the program sends a discouraging message to small businesses. Current issues relating to budget uncertainty and the ever-increasing regulatory burdens already make small companies think twice before doing business with the federal government.

Firms continue to leave the defense sector each year. The National Defense Industrial Association’s 2021 “Vital Signs” data around this trend is concerning. This year’s report graded innovation conditions within the defense industrial base a C-, revealing a two-point drop from previous reports. From fiscal years 2019 to 2020, the number of new entrants into defense federal contracting went from 6,000 to 3,000.

Permanency for the SBIR program creates the certainty to encourage small business participation in the industrial base, a direct counter to this disturbing trend.

The potential for SBIR to be discontinued adds to uncertainty and may dissuade small businesses from participating. Specifically, small businesses owners who have had to make hard decisions about whether to invest their finite resources in commercial versus defense markets may see the temporary nature of the program as a major risk.

Given the Pentagon’s current headwinds in keeping pace with technology, a program whose goal is to link small business innovation to the Defense Department and other government agencies should be made permanent.

Additional improvements to SBIR could help.

When making the program permanent, Congress should also consider strengthening it to ensure optimal use. The last several NDAAs have included modifications to the program, but there are a couple of additional improvements that should be made as a part of this year’s legislation.

One would be to enforce compliance.

The success of the SBIR program depends largely on federal agencies’ willingness to use it. To be compliant with SBIR’s statutory requirements, certain federal agencies are required to spend 3.2 percent of their extramural R&D accounts on SBIR projects. Despite this relatively modest standard, the majority of participating federal agencies do not meet these minimum spending requirements, according to the Small Business Administration.

The Defense Department, which accounted for 42 percent of SBIR spending in fiscal year 2018, had several components that did not comply, including the Air Force, Army, Missile Defense Agency, Defense Health Agency, Joint Task Force on Chemical and Biological Defense and the Office of the Secretary of Defense. In addition, the Small Business Administration was unable to determine whether the Navy complied with requirements.

Given these dismal results, additional enforcement mechanisms may be warranted. For example, Congress may consider placing additional oversight on the program, including further reporting or certification requirements to help lawmakers understand why the Defense Department in particular is unable to meet SBIR statutory obligations.

Another recommendation is to bridge the gap between Phase II contracts and programs of record.

As a part of the SBIR program, the Pentagon and other participating federal agencies are required to work with SBIR contract awardees to transition their Phase II technology to commercial production through Phase III contract awards. However, small companies do not always have the resources to stay adequately engaged when awaiting results and funding between the phases. This lack of timeliness is detrimental to both the department and small businesses, resulting in a product no longer relevant when it reaches commercialization and contributing to the lack of participation from small businesses.

A permanent authority would allow for authorizations that have previously been underutilized by the government, such as Section 1710 of the 2018 NDAA. This section authorizes a contract vehicle that would provide a pilot program for subsequent work from Phases I and II, allowing for a more standardized Phase III.

However, the Defense Department has a mixed record of successfully helping Phase II awardees obtain additional federal contract awards. In fact, some small business participants have reported being overlooked for Phase III contracts in favor of larger companies.

In a recent study on the SBIR/STTR program, the department found that of the Phase II contracts that resulted in sales, just 23 percent of the sales were to the military. Congress has taken notice, with the 2021 NDAA requiring the Pentagon to provide detailed reports on how often it transitions SBIR Phase II contracts to programs of record. This oversight is helpful, but lawmakers should also consider establishing goals for the percentage of Phase II contracts successfully transitioning to Phase III.

Given the stringent vetting of small businesses and their technology proposals when awarding Phase I contracts, it is not unreasonable to expect a good percentage of the resulting technology should transition to commercial production.

A permanent, strengthened Small Business Innovation Research program can drive the innovative potential and competitive nature of small businesses towards a more coordinated partnership with the federal government. As the U.S. military works to modernize and increase lethality, collaboration with small business innovators is essential. We must leverage all of our resources. Our adversaries certainly will.

Daniel Sennott is NDIA’s senior fellow for small business and a partner at Holland and Knight LLP. Heath Taylor is NDIA’s legislative policy associate.

Topics: Defense Contracting

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