Three Perspectives on the SBIR Policy Directive

The SBA has invited the public to comment on the proposed revisions to the policy directive for the SBIR Program until June 18.  Because the draft document is dramatically different that past policy directives for the $1.2 billion program, and because so many state and local economic development programs are involved with SBIR, SSTI asked three tech-based economic development professionals if we could publish their comments with our newsletter. Their comments are provided below -- unedited and uncensored.

Contributors to this page include (links jump you to their perspectives) 

By taking this departure from our regular editorial policy, we hope to engage more state and local practitioner participation in the federal policymaking process. The opportunity to participate in shaping federal program policy directives does not happen often. For instance, the last revisions for the SBIR Program were written eight years ago.

The complete Federal Register text of the SBA's proposed policy directive can
be found on the accompanying webpage: http://www.ssti.org/Digest/Tables/051801t2.htm 

Please note, for comments to be considered by the Small Business Administration, they must be officially received by the SBA on or before the June 18 deadline.  This web page is not a part of the official record.  Please send your comments regarding the draft directive via email to technology@sba.gov  or to: 

Maurice Swinton
Assistant Administrator for Technology
Office of Technology
Office of Policy, Planning, and Liaison
Office of Government Contracting/Business Development
U.S. Small Business Administration
409 3rd Street, SW
Washington, DC 20416 

PERSPECTIVE ONE

COMMENTS ON SBA SBIR PROGRAM POLICY DIRECTIVE
Chris W. Busch
SBIR Consultant
Ronan, MT
4 June 2001

This note offers comments on the proposed SBA SBIR Program Policy Directive published in the 18 May 2001 Federal Register. This publication states that the proposed Policy Directive "reflects recently enacted statutory requirements" for the SBIR Program. However, there are serious variances and omissions in the Policy Directive from SBIR Program statutory requirements, and these are summarized below.

The publication states that SBA considered initial comments from all agencies required to have SBIR Programs. However, it appears more input from the small business community would be beneficial. They are the primary beneficiaries and focus of the SBIR Program.

A summary of specific comments on the proposed SBIR Program Policy Directive is presented immediately below, followed by a more detailed discussion on each of the comments.

The proposed SBIR Program Policy Directive:

  1. Ignores "Coordination of Technology Development Programs," a statutory requirement of the 2000 SBIR Reauthorization legislation. It must be included.
  2. Allows STTR Phase 1 awardees to submit SBIR Phase 2 proposals. This policy is not consistent with SBIR Program statutory requirements, effectively reduces funding for SBIR Phase 1 awards, and takes flexibility away from small businesses competing in the SBIR and STTR Programs. This provision must be deleted from the Policy Directive. This is a matter for Congress to consider in STTR Program reauthorization (now in process) if the concept has merit.
  3. Opens the door for subcontracting SBIR funds from small businesses back to the issuing agency or other Federal Government agency or unit. This inherently creates a serious conflict of interest problem for the issuing agency since it (or another agency) will benefit directly from a proposal it selects for award. This provision must be deleted from the proposed Policy Directive.
  4. Effectively removes the ceilings on dollar value and performance period of SBIR awards. This is not consistent with SBIR Program statutory requirements, gives far too much flexibility to agencies, and will have negative long-term impact on the SBIR Program. The number of small businesses able to win in the SBIR competition will be significantly reduced. The primary losers will be those at the margin of competition success (e.g., minority and women-owned, and rural state small businesses). This proposed policy will lead to fewer bigger winners, counter to the spirit and letter of the SBIR Program. This specific policy must be deleted from the final SBIR Program Policy Directive.
  5. Addresses profit, but does not address indirect cost recovery. Different indirect cost policies among the agencies often cause small businesses to effectively subsidize SBIR projects - an unintended consequence. SBA is urged to provide an indirect cost policy that is uniform across all the agencies.

 1. COORDINATION OF TECHNOLOGY DEVELOPMENT PROGRAMS

The proposed SBIR Program Policy Directive ignores a specific provision in the 2000 SBIR Program Reauthorization that requires "coordination of technology development programs." This issue is discussed below.

The Federal and State Technology (FAST) Program was included as part of the 2000 SBIR Program Reauthorization. A specific provision of the FAST Program requires agency "Coordination of Technology Development Programs." This "coordination" requires that agencies with SBIR Programs and "Technology Development Programs" establish a link between the two programs.

Specific "Technology Development Programs" cited in the FAST language include the Experimental Program to Stimulate Competitive Research (EPSCoR) Programs at NSF, DOD, DOE, EPA and NASA, and similar programs at NIH and USDA. Roughly twenty states participate in agency EPSCoR Programs, and eligibility is based on low participation in Federal R&D resources.

NSF initiated (on a voluntary basis) linkage between its SBIR and EPSCoR Programs in the mid 1990's. The linkage provided that SBIR proposals judged to have merit in the peer review process, but that fell below the NSF SBIR Program funding threshold, would be considered for funding by the EPSCoR Program. This process had a dramatic impact on enabling small businesses in "EPSCoR" states to achieve initial success in SBIR competition. Many of these small businesses now compete successfully at NSF (and other agencies) without EPSCoR support. The "linkage" process continues today, and is "transparent" to competing small businesses whose proposals are funded.

The benefits and success of the NSF SBIR and EPSCoR Program linkage described above were extensively discussed at Congressional hearings and roundtables on SBIR Program reauthorization in 1998 and 1999. These included:

Dr. Kesh Narayanan (National Science Foundation) described the linkage between the NSF SBIR and EPSCoR Programs at the 4 August 1999 Senate Small Business Committee Roundtable.

It may be argued by agency representatives that the linkage required by the 2000 SBIR Program Reauthorization will add significant administrative burden to management of the SBIR Program. However, comments from the NSF SBIR Program Managers show that the administrative burden of this linkage is minimal.

Whether or not there is some additional administrative burden to carry out the mandated linkage between the SBIR and EPSCoR Programs, there is a statutory requirement that this linkage be established. Small businesses in states underrepresented in SBIR competition have benefited from this linkage at NSF, and will do so at other agencies when they establish this linkage. This statutory requirement must be included in the final SBIR Program Policy Directive.

2. STTR PHASE 1 AWARDS TO SBIR PHASE 2 PROPOSALS AND AWARDS

The proposed SBIR Program Policy Directive provides that awardees of STTR Phase 1 awards may submit a proposal for an SBIR Phase 2 award (Section 4(b)). Conversely, awardees of SBIR Phase 1 awards may submit a proposal for an STTR Phase 2 award. This mixing of SBIR and STTR Programs and funds clearly is contrary to statutory requirements for the two programs.

Agency representatives probably would value the "flexibility" to "blend" SBIR and STTR Program funds. While the proposed SBIR Program Policy Directive allows both "STTR Phase 1 to SBIR Phase 2" and "SBIR Phase 1 to STTR Phase 2," the agencies no doubt would use the former much more than the latter because of the relative program sizes.

This proposed policy and its likely practical implementation would allow SBIR funds to be used to fund STTR Phase 2 awards. It would increase funds available for STTR Phase 1 awards, and decrease funds available for SBIR Phase 1 awards. This takes away flexibility and resources from small business, because participation of research institutes is voluntary in the SBIR Program, but mandatory with the STTR Program. Research institutes (not small businesses) would be the primary beneficiaries of this proposed policy.

The concept of "blending together" the SBIR and STTR Programs was discussed in the process of the 2000 SBIR Program Reauthorization, and again currently as STTR reauthorization is moving forward in Congress (S. 856). However, to date, Congress has rejected the idea of any mixing of the SBIR and STTR Program funds. Current SBIR and STTR statutes clearly require that funds for the two programs be kept separate. The SBA SBIR Policy Directive should be consistent with current statutory requirements. Exceptions on this issue will set a precedent for other (and perhaps more ominous) exceptions.

The primary issue here is not about the relative merits of the SBIR and STTR Programs, but rather the statutory requirements of the two programs, and consistency of the SBIR Program Policy Directive with these requirements. If the notion of "combining" the SBIR and STTR Programs in any form has merit, these arguments should be conveyed to Congress as it progresses toward STTR reauthorization this year (S. 856).

Note: It appears that in Section 4 (Competitively phased Structure of the Program) of the proposed SBIR Policy Directive that the subsection titled "(a) Phase III" should be "(c) Phase II."

3. SUBCONTRACTING SBIR FUNDS BACK TO AGENCIES

Section 9(d)(2) of the proposed SBIR Policy Directive opens the door for subcontracting SBIR funds from small businesses back to the issuing agency or other Federal Government agency or unit. This inherently creates a serious conflict of interest problem for the issuing agency since it (or other agency) will benefit directly from a proposal that it selects for award.

Subcontracting SBIR funds from small businesses back to the issuing agency or other Federal Government agency or unit is to occur only when "such subcontracting is vital to its mission." If the proposed work is "vital to its mission," the agency surely has high priority for and access to other agency resources, and does need to recapture SBIR funds for its internal use. Collaboration between agencies and small businesses is possible without transfer of funds through Cooperative Research and Development Agreements (CRADA's) and similar mechanisms.

It is only natural to expect that agency representatives will be biased toward SBIR proposals that offer to subcontract funds back to issuing agencies. Small businesses will be tempted to offer subcontracted SBIR funds back to the agency as a strategy for winning an award. This provision has high risk of corrupting the SBIR competition process.

While the proposed SBIR Policy Directive states that "agency deviations are not expected to be routine," opening the door to exceptions is likely to spread rapidly. For example, early in the SBIR Program, all agencies adhered to the statutory limits on the performance period and dollar amounts of awards. Now, "exceptions" to these limits are common occurrences as noted in the following section (4).

The provision for subcontracting back to Federal Government agencies must be deleted from the proposed SBIR Policy Directive.

4. DOLLAR VALUE AND PERFORMANCE PERIOD OF AWARD

The proposed SBIR Program Policy Directive (Section 7(g),(h)) effectively removes the statutory ceilings on the dollar value and performance period of Phase 1 and Phase 2 awards. This proposed policy will lead to larger awards but fewer of them. Consequently, the number of small businesses that compete and win in the SBIR Program will be significantly reduced.

The primary losers will be those at the margin of competition success (e.g., minority and women-owned, and rural state small businesses). This proposed policy will lead to fewer bigger winners, counter to the spirit and letter of the SBIR Program.

The proposed policy ignores the statutory requirements for the maximum amount and performance period for Phase 1 and Phase 2 awards ($100,000 and $750,000, and 6 months and 24 months, respectively). The proposed policy will lead to SBIR award amounts and performance periods well in excess of the statutory requirements.

Indeed, NIH already has implemented this policy, resulting in multi-million dollar awards. This writer is aware of one NIH Phase 2 SBIR award in excess of $3 million dollars and for approximately 4 years in duration. Some NIH SBIR Special Program Announcements now offer SBIR awards with no limit on the dollar amount of the award. DOD awards now also routinely exceed the statutory performance period and dollar amount limits. The proposed SBIR Policy Directive will encourage agencies to fund large R/R&D activities over extended periods of time through the SBIR Program.

The mission-oriented agencies (e.g., DOD and NASA) are likely to engage most frequently in the practice of larger and longer SBIR awards to satisfy their Research and R&D requirements. The smaller agencies may be less likely to make awards that exceed the statutory requirements for performance period and dollar amount. However, the opportunity to do so will be available if they decide to exercise it.

It is surprising that the proposed SBIR Program Policy Directive does not prescribe some limits on the dollar amount and performance period of awards.

The proposed policy directive on dollar amount and performance period of awards is not consistent with SBIR Program statutory requirements, gives far too much flexibility to agencies, and will have negative long term impact on the SBIR Program. This specific policy must be deleted in the final SBIR Program Policy Directive.

5. PROFIT AND INDIRECT COSTS

The SBIR Program Policy Directive states that agencies "…must provide for a reasonable fee or profit on SBIR funding agreements…" (Section 7(f)). However, the issue of indirect cost recovery is not addressed adequately. Differences in allowable indirect cost policies among the agencies frequently require small businesses to subsidize SBIR projects with their own resources. This effectively reduces profit or may lead to a loss on SBIR projects. The SBIR Program Policy Directive should provide for a uniform policy on the issue of indirect cost.

For example, some agencies treat Independent Research and Development (IR&D) as an allowable indirect cost (e.g., DOD and NASA). Others do not (e.g., NSF and NIH). A small business that has an established IR&D indirect cost category effectively must subsidize this cost when accepting an award from agencies that do not recognize it as an allowable cost.

Another indirect cost problem is the NIH policy of limiting indirect cost to 40% of direct costs for small businesses that do not have an established indirect cost rate structure with the federal government. For companies that have indirect costs higher than the 40% threshold and no established indirect cost structure with the Federal Government, the small business again must make up the difference.

The cost recovery limitation examples cited above and related ones are contrary to the spirit of the SBIR Program legislation, and cause hardships for small businesses that encounter them. SBA is encouraged to provide a set of indirect cost policies for the SBIR Program that is uniform for all agencies.

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PERSPECTIVE TWO

Federal Register Policy Directive Re: SBIR
Bob Kispert
Director of Federal Programs
Massachusetts Technology Collaborative
Boston, MA
June 4, 2001

Overall, the policy directive is well thought out, and represents a significant step forward. The latest SBIR reauthorization legislation covers a great deal of new ground. The policy directive appears to be generally consistent with the intent of the legislation and takes a common sense approach to balancing the concerns of the various constituencies. At the same time, I have a few fundamental concerns that I think that those of us in state organizations who work with the SBIR community should consider.

My first set of concerns can be lumped under the general heading of reporting requirements in the "Annual Report of Agencies to the SBA."

In general, I don’t see the above as major problems. However, I would like to see SBA consider alternative approaches.

The second set of issues can be grouped under the general heading of "SBA Databases." These are much more fundamental, in my opinion, and the current proposed directive is not acceptable in my opinion.

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PERSPECTIVE THREE

Patrick Brown
Associate Director for Sponsored Programs and Technology Management
The University of Mississippi
University, Mississippi
June 4, 2001

1. At first I was somewhat concerned about the proposed flexibility policy that allows the agency to fund Phase II projects under either the program the Phase I was funded or allow a switch to the other, SBIR or STTR.

My concern was that the entity submitting the proposal should be involved directly in this decision making but after reading the regs it seems that it is up to the proposer to request the switch after the Phase I is funded under either category by requesting approval from the agency.

2. I have concern about the flexibility under Section 7 that would allow an agency to approve extended periods of performance for an awardee and also allow an agency to request of SBA approval to add more than the approved limits of $100,000 in Phase I or the $750,000 in Phase II to an awardee. I believe this would cause an imbalance in the fairness for competitive opportunity, especially for those smaller start-up businesses in rural states.

3. Has the SBIR/STTR policy always allowed "...a royalty-free license for Government use of any technical data delivered under an SBIR funding agreement whether patented or not." as listed in Section 8.b.?

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