Defense Department officials are bracing themselves for a potential lapse in small business grant programs -- a key pillar of the military's broader innovation environment -- as lawmakers work to hammer out a deal ahead of a looming deadline.
With less than a month to go before the complementary Small Business Innovation Research and Small Business Technology Transfer programs reach their Sept. 30 expiration, the Pentagon is already warning current and future participants that solicitations won’t be posted and ongoing or new projects won’t be funded without congressional reauthorization.
Meanwhile, current SBIR awardees and small business lobbyists say even a short-term pause will hurt vendors participating in the decades-old effort that seeks to develop and commercialize new technologies and potentially deter companies from wanting to be involved going forward.
“With the uncertainty, we have to take into account that a lapse does send a signal to industry about where we should be investing our own [research and development] funding,” said Rob Watson, Clarifai’s vice president of public-sector sales. The artificial intelligence company has won multiple SBIR phase I and II awards since 2020.
On Capitol Hill, the so-called “six corners” consisting of the House and Senate small business panels and the House science committee have spent recent weeks negotiating a potential SBIR extension agreement, including possible front-end programmatic changes.
But it’s unclear whether a compromise could be reached and then approved by both chambers in time. That leaves lawmakers eying other available legislative avenues for reauthorization, such as the annual defense policy bill or a continuing resolution.
“The bottom line is we cannot afford a program shutdown,” Rep. Nydia Velázquez (D-NY), the House small business committee chair, told Inside Defense in a statement.
Navigating an uncertain environment
In the lead-up to SBIR’s expiration date, at least one DOD outfit has opted not to participate in the most recent program solicitations, in part because of the uncertain future military officials and industry executives alike are trying to guard against.
Naval Air Systems Command remained on the sidelines for the SBIR and STTR broad agency announcement period earlier this summer, command spokeswoman Amy Behrman confirmed in an email Thursday to Inside Defense.
“A major driver for this decision was the uncertainty associated with congressional reauthorization of the program,” she added, noting that without lawmaker action, NAVAIR won’t be able “to obligate SBIR and STTR funds on new and existing contracts.”
The landscape has also impacted the department’s approach. Though DOD typically posts SBIR and STTR phase I solicitations three times each year, with the third one supposed to open this month, a banner on DOD’s SBIR website warns the Pentagon won’t publish those BAAs this year, although topic releases will continue under an ongoing annual notice that began last October and spans through the end of December.
DOD spokesman Lt. Cmdr. Tim Gorman said that while officials decided not to publish the latest solicitation, the department hasn’t stopped making awards and will continue to do so “until the authority expires.”
The decision comes as Pentagon leaders have pushed for congressional action to extend the programs, with acquisition head William LaPlante and chief technology officer Heidi Shyu urging lawmakers in a letter earlier this summer to swiftly reauthorize SBIR and STTR.
The June 3 letter, first reported by Defense News and later obtained by Inside Defense, touted the programs’ “vital role in enabling the U.S. to maintain technological dominance and provide the innovation to allow the U.S. to remain ahead of our adversaries.”
“Failure to reauthorize the programs will result in approximately 1,200 warfighter needs not being addressed through innovative research and technology development,” the two wrote. “In addition, any lapse could result in thousands of small businesses being forced to lay off workers, or drive them to other sources of funding, to include foreign investment.”
Between SBIR and STTR, DOD has a $2.2 billion fiscal year 2022 budget for the two programs, Gorman told Inside Defense this week, though officials anticipate some $1.7 billion of that sum “would potentially be unavailable” for contract awards if the efforts aren’t reauthorized by the end of the month. The figure, he said, is based on FY-21 obligation metrics.
Begun in 1982, SBIR aims to expand the pool of small innovation companies that receive federal R&D funding. STTR came online a decade later, and both programs were most recently reauthorized in 2016 under the FY-17 National Defense Authorization Act.
Both programs include three phases, as laid out in a recent Congressional Research Service overview: the first, which funds feasibility-related R&D; the second, which supports follow-on R&D; and the third, which doesn’t receive SBIR or STTR dollars but focuses on commercialization.
Without a reauthorization, DOD won’t be able to make new phase I or II awards for efforts, options or increments, Gorman said. The department also won’t be able to dole out phase III sole-source contracts after Sept. 30 -- a key benefit for previous phase contract winners, who are able to avoid competing for another award.
The divide between phases II and III of the program is often likened to the so-called acquisition “valley of death,” which small businesses must cross to find a component customer and scale their solutions.
Not being able to make those awards, Gorman said, would be an “additional lost opportunity for transition and commercialization.”
Potential for a prolonged lapse
For DOD, one of 11 agencies that operates the SBIR program, the potential ramifications of a lapse vary depending on its length.
For example, if the SBIR and STTR programs were to go unauthorized for three months or less, the military would still be able to award contracts using FY-22 funding once those efforts resume, Gorman said.
SBIR and STTR are funded through a portion of participating agencies’ R&D budgets -- a mechanism that contributes to an ever-present stream of dollars that fall outside of the budget process and thus aren’t able to be touched by congressional appropriators.
If a lapse were to pass the four-month threshold, which Gorman noted would go “beyond the normal authorization/appropriation timeline,” DOD wouldn’t have the authority to collect the extramural R&D appropriations that fund the programs for FY-23.
“In that case, it is possible that the SBIR/STTR programs would be unfunded for the entire 2023 fiscal year and be resumed in 2024,” he said.
There’s a number of ways the programs could be extended; language could again be included in the NDAA; the so-called “six corners” could reach agreement on a deal that would then have to win approval from both chambers; or, a short-term continuing resolution may be approved.
Nate Ashton, executive director of the Alliance for Commercial Technology in Government, told Inside Defense in a recent interview that his lobbying group, which was founded in 2020 and represents startups and the commercial technology sector, is “very focused on making sure” reauthorization happens in any form.
“A lapse in the program means that there are companies out there that will have to lay off staff and refocus their businesses,” he noted. “From a bigger picture, if I’m a startup and I’m looking at different ways to work with the government, if the last I’ve heard about SBIR is that it lapsed or it’s at risk, that’s not where I’m going to be focusing any of my time or energy.”
Gorman noted the program most recently experienced a lapse in 2008. But he said DOD’s ability to get through that period “is completely contingent on how soon after any lapse the programs are reauthorized.”
Running down the clock
With just four weeks and a limited set of votes until the programs are set to expire, the Hill is poised to redouble its efforts to find agreement post-Labor Day.
Though negotiations spanned much of the summer, the August recess period seemingly paused any momentum among the House and Senate small business committees and House science panel -- the arms that oversee the Small Business Administration, which helps coordinate and review both SBIR and STTR.
Sen. Rand Paul (R-KY), the ranking member on the Senate small business committee, has been identified as a sticking point in those conversations. An advocate for limiting so-called SBIR mills, a term that refers to contractors who repeatedly win phase I and II awards but fail to commercialize their technology solutions, Paul in a hearing last fall called on Congress to “stop the abuse” of the program by those companies.
A committee aide indicated to Inside Defense in a statement that the negotiations had included a proposed cap on awards and changes to tighten the commercialization benchmark, a previously established standard that seeks to require repeat phase II winners to hit a minimum level of commercialization activity before they can be eligible for a new phase I deal. Breaking Defense first reported the details of those proposals last month.
“While our team has continued to push for a deal and work toward a compromise, Democrats are now the ones backing away from their own proposal to establish a benchmark for commercialization rather than a cap on awards” following a span of “bipartisan bicameral negotiations,” the aide said.
Sen. Ben Cardin (D-MD), the chair of the panel, praised the programs in a statement this week and called on Congress to reauthorize them “to avoid disrupting” those participating.
“I will continue working in good faith with my colleagues to reach a bipartisan compromise that will reauthorize SBIR and STTR before they expire while protecting our national security and bringing more of the programs’ technologies to market,” he added.
On the House small business side, Velázquez, the chair, said in a statement to Inside Defense that she and her staff “have been diligently working to address the issues that stand in the way of reauthorization and reach an agreement with our colleagues in the House and Senate.”
“Even a temporary lapse of SBIR/STTR would hurt small businesses, weaken national security, and stifle American innovation,” she added.