Small Business Research Programs: Agencies Did Not Consistently Comply with Spending and Reporting Requirements
Published: 2014-04-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Federal agencies have awarded more than 156,000 contracts and grants, totaling nearly $40 billion through the SBIR and STTR programs to small businesses to develop and commercialize innovative technologies. The Small Business Act mandates that agencies, with extramural R&D budgets that meet the thresholds for participation, must spend a percentage of these annual budgets on the two programs. The agencies are to report to SBA and SBA is to report to Congress.
This testimony is based on a report GAO issued in September 2013 and addresses for fiscal years 2006 through 2011, (1) the extent to which participating agencies complied with program spending requirements, (2) the extent to which participating agencies and SBA complied with certain reporting requirements, (3) the potential effects of basing the spending requirements for the SBIR and STTR programs on agencies' total R&D budgets instead of their extramural R&D budgets, and (4) what is known about the amounts participating agencies spent for administering the programs. For that report, GAO reviewed agency calculations of spending requirements and required reports, and interviewed SBA and participating agency officials.
section_title: What GAO Found
paragraphs: Using data agencies had reported to the Small Business Administration (SBA), GAO found in its 2013 report that 8 of the 11 agencies participating in the Small Business Innovation Research (SBIR) program and 4 of the 5 agencies participating in the Small Business Technology Transfer (STTR) program did not consistently comply with spending requirements for fiscal years 2006 to 2011. SBA, which oversees the programs, provided guidance in policy directives for agencies on calculating these requirements, but the directives did not provide guidance on calculating the requirements when appropriations are late and spending is delayed. Some SBIR and STTR program managers told GAO that it can be difficult to spend the required amount because delays in receiving final appropriations can delay agencies' awarding of contracts. As GAO found in its 2013 report, when appropriations were received late in the year agencies used differing methodologies to calculate their spending requirements, which made it difficult to determine whether agencies' calculations were correct. GAO found that, without further SBA guidance, agencies would likely continue calculating spending requirements in differing ways.
GAO also found in 2013 that the participating agencies and SBA had not consistently complied with certain program reporting requirements. For example, participating agencies did not itemize each program excluded from the calculation of their extramural research or research and development (R&D) budgets and explain why the program was excluded, as required. (Extramural R&D is generally conducted by nonfederal employees outside of federal facilities.) Also, SBA's annual reports to Congress that were available at the time of GAO's review contained limited analysis of the agencies' methodologies, often not including information on particular agencies. By providing more analysis of the agencies' reports, as GAO recommended in its 2013 report, SBA can provide information to Congress on the extent to which agencies were reporting what is required.
In 2013, GAO found that the potential effects of basing each participating agency's spending requirement on its total R&D budget instead of its extramural R&D budget would increase the amount of the spending requirement—for some agencies more than others, depending on how the change was implemented. Also, if the thresholds of the spending requirements for participation in the programs did not change, changing the base to an agency's total R&D budget would increase the number of agencies required to participate.
In addition, GAO found in 2013 that the agencies' cost of administering the programs could not be determined because the agencies had not consistently tracked costs as they were not required to do so by the authorizing legislation of the programs. Estimates agencies provided to GAO indicated that the greatest amounts of administrative costs in fiscal year 2011 were for salaries and expenses, contract processing, outreach programs, technical assistance programs, support contracts, and other purposes. With the start of a pilot program allowing agencies to use up to 3 percent of SBIR program funds for administrative costs in fiscal year 2013, SBA planned to require participating agencies to track and report administrative costs paid from program funds.
section_title: What GAO Recommends
paragraphs: GAO is not making any new recommendations, but made several to SBA in GAO's 2013 report on this topic. SBA agreed with those recommendations and is taking steps to implement them.

section_title: Letter
paragraphs: I am pleased to be here today to discuss federal agencies’ compliance  with spending and reporting requirements for the Small Business  Innovation Research (SBIR) and Small Business Technology Transfer  (STTR) programs, as well as other aspects of the programs. Since the  early 1980s, federal agencies have awarded more than 156,000 contracts  and grants, totaling nearly $40 billion, to small businesses to develop and  commercialize innovative technologies. Federal agencies with a budget of  $100 million or more for extramural research or research and  development (R&D) are required to establish and operate an SBIR  program, while federal agencies with budgets of $1 billion or more for  extramural R&D are required to establish and operate an STTR program.  Currently, 11 agencies participate in the SBIR program and 5 of these  agencies also participate in the STTR program, as shown in table 1.
The Small Business Administration’s (SBA) Office of Investment and  Innovation is responsible for overseeing and coordinating the participating  agencies’ efforts for the SBIR and STTR programs by setting overarching  policy and issuing policy directives, collecting program data, reviewing  agency progress, and reporting annually to Congress, among other  responsibilities. Each participating agency must manage its SBIR and  STTR programs in accordance with program laws, regulations, and policy  directives issued by SBA. Each participating agency has considerable  flexibility to design and manage the specifics of these programs, such as  determining research topics, selecting award recipients, and  administering funding agreements.
The Small Business Act, which authorizes the programs, establishes the  minimum percentage of an agency’s extramural R&D budget that must be  spent on the programs annually. spend at least 2.5 percent of their extramural R&D budgets on the SBIR  program in fiscal years 1997 through 2011 and at least 0.3 percent of  these budgets on the STTR program in fiscal years 2004 through 2011.  The 2011 reauthorization of the programs increased these minimum  percentages to 2.6 percent and 0.35 percent, respectively, for the SBIR  and STTR programs in fiscal year 2012, with additional increases in  future years.participating agencies to submit data to SBA each year on the amount of  their extramural R&D budgets and the amount obligated for awards,  among other information. The Small Business Act also establishes certain  reporting requirements for participating agencies and SBA. Among other  things, agencies are to report to SBA on their methodologies for  calculating their extramural R&D budgets within 4 months of the  enactment of their annual appropriations. Furthermore, SBA is to annually  report to Congress on all participating agencies’ SBIR and STTR  programs.
We refer to the amounts resulting from applying these mandated percentages to  extramural R&D budgets as “spending requirements.”
In 2013, we reported on the participating agencies’ compliance with  spending and reporting requirements for the programs, as well as other  aspects of the programs, for fiscal years 2006 through 2011. We are  currently examining these issues for fiscal year 2012, and we plan to  report on our findings in June 2014. My testimony today focuses on our  2013 report and addresses, for fiscal years 2006 through 2011, (1) the  extent to which participating agencies complied with program spending  requirements, (2) the extent to which participating agencies and SBA  complied with certain reporting requirements, (3) the potential effects of  basing the spending requirements for the SBIR and STTR programs on  agencies’ total R&D budgets instead of their extramural R&D budgets,  and (4) what is known about the amounts participating agencies spent for  administering the programs.
To determine the extent to which participating agencies complied with the  programs’ spending requirements for our 2013 report, we compared  spending requirements for fiscal years 2006 to 2011 with the amounts  agencies reported spending in each annual report to SBA. To determine  the extent to which participating agencies and SBA complied with certain  reporting requirements for calculating their extramural research budgets,  we compared the agencies’ methodology and annual reports to SBA and  SBA’s annual report to Congress for fiscal years 2006 to 2011, to the  extent available, with requirements in the Small Business Act and the  policy directives for the programs. To determine the potential effects of  basing spending requirements for the SBIR and STTR programs on an  agency’s total R&D budget, we calculated potential spending  requirements for each agency using data on total R&D budget authority  from the President’s budget.requirements with the spending requirements under the current law to  determine the potential effects of changing the methodology. To  determine what is known about the amounts participating agencies spent  for administering the programs, we collected existing administrative cost  data directly from agencies and interviewed program and financial  officials at each agency. We determined that the administrative cost data  were too incomplete and from such varied sources that an assessment of  the available data’s reliability was not possible and we could not use the  data in our report. More detail on our scope and methodology is included  in that issued product. The work on which this testimony is based was  conducted from April 2012 to August 2013 in accordance with generally  accepted government auditing standards. Those standards require that  we plan and perform the audit to obtain sufficient, appropriate evidence to  provide a reasonable basis for our findings and conclusions based on our  audit objectives. We believe that the evidence obtained provides a  reasonable basis for our findings and conclusions based on our audit  objectives.
subsections: section_title: Data Indicated Most Agencies Did Not Consistently Comply with Spending Requirements
paragraphs: In 2013, we found that most agencies did not comply with spending  requirements for the SBIR or STTR programs in all 6 years, based on  data the agencies submitted to SBA for fiscal years 2006 to 2011.  Specifically, 8 of the 11 agencies did not consistently meet annual  spending requirements for SBIR. Data from 3 of the agencies—DHS,  Education, and HHS—indicated that they met their spending  requirements for all 6 years. For STTR, 4 of 5 agencies did not  consistently meet annual spending requirements. Data from 1 agency— HHS—indicated that it met its STTR spending requirements for all 6  years. Figure 1 shows the number of years that each agency complied  with spending requirements for fiscal years 2006 through 2011. Additional  data on each agency’s spending on the programs is included in our 2013  report.
SBIR and STTR program managers identified reasons why spending the  required amount in a given fiscal year could be difficult, which we  described in our 2013 report. For example, in that report, we found that  delays in receiving final appropriations can delay agencies’ awarding of  contracts for SBIR or STTR projects. Some program managers said that  they tend to wait to award some grants and contracts until receiving their  final appropriations in case the agency’s extramural R&D budget—and,  therefore, its SBIR or STTR spending requirement—differs significantly  from the expected amount. Because the award process can be lengthy, a  delay can push the awards and spending into the following fiscal year.
As we found in our 2013 report, when appropriations were received late in  the year, agencies used differing methodologies to calculate their  spending requirements, making it difficult to determine whether agencies’  calculations were correct. Although SBA provided guidance in policy  directives on calculating their spending requirements, we found that the  policy directives did not provide guidance to agencies on how to calculate  such spending requirements when agency appropriations are delayed.  We found that, without such guidance, that agencies would likely continue  to calculate spending requirements in differing ways. In our 2013 report,  we recommended that SBA provide additional guidance on how agencies  should calculate spending requirements when agency appropriations are  received late in the fiscal year. SBA has since begun taking steps to  address this recommendation.
section_title: Agencies and SBA Did Not Consistently Comply with Certain Reporting Requirements
paragraphs: We also found in 2013 that agencies participating in the SBIR and STTR  programs did not consistently comply with requirements in the Small  Business Act to annually report a description of their methodologies for  calculating their extramural R&D budgets to SBA and that SBA did not  consistently comply with the act’s requirements for annually reporting to  Congress.
With the exception of NASA in certain years, agencies did not submit their  methodology reports to SBA within the time frame required by the Small  Business Act for fiscal years 2006 through 2011 for the SBIR and STTR  programs. As noted earlier, the act requires that agencies report to SBA  their methodologies for calculating their extramural budgets within 4  months after the date of enactment of their respective appropriations  acts. However, most participating agencies documented their  methodologies for calculating their extramural R&D budgets for these  fiscal years and submitted them to SBA after the close of the fiscal year  with their annual reports. SBA officials said that they did not hold the  agencies to the act’s deadline for submitting methodology reports, in part  because delays in receiving annual appropriations pushed the required  reporting date until late in the fiscal year and it was more convenient for  agencies to submit their methodology reports with their annual reports. By  not having the methodology reports earlier in the year as specified by law,  however, SBA did not have an opportunity to analyze these  methodologies and provide the agencies with timely feedback to assist  agencies in accurately calculating their spending requirements. By not  providing such feedback, SBA was forgoing the opportunity to assist  agencies in correctly calculating their program spending requirements  and to help ensure that they spent the mandated amounts.
More significantly, we found in 2013 that the majority of the agencies did  not include an itemization of each R&D program excluded from the  calculation of the agency’s extramural budget and a brief explanation of  why it was excluded, as required. We found that it was difficult for SBA to  comprehensively analyze the methodologies and determine whether  agencies were accurately calculating their spending requirements without  having more consistent information from agencies. We also found that  agencies could have benefited from guidance on the format of  methodology reports, and that without such guidance, participating  agencies might continue to provide SBA with broad, incomplete, or  inconsistent information about their methodologies and spending  requirements. We recommended that SBA provide additional guidance to  agencies on the format that they are to include in their methodology  reports. We also recommended that SBA provide timely annual feedback  to each agency following submission of its methodology report on  whether its method for calculating the extramural R&D budget complies  with program requirements, including an itemization of and an explanation  for all exclusions from the basis for the calculations. SBA is in the process  of taking steps to address these recommendations.
We also found in 2013 that SBA had not consistently complied with the  requirement to report its analysis of the agencies’ methodologies in its  annual report to Congress, as required by the Small Business Act.  Over the 6 years covered in our review, SBA reported to Congress for 3  of those; fiscal years 2006, 2007, and 2008. We found that these  reports contained limited analyses of the agencies’ methodologies, and  some of the analyses were inaccurate. For example, SBA’s analysis was  limited to a table attached to the annual report to Congress that often did  not include information on particular agencies. In our 2013 report, we  found that, without more comprehensive analysis and accurate  information on participating agencies in SBA’s annual report, Congress  did not have information on the extent to which agencies are reporting  what is required by law. In that report, we recommended that SBA provide  Congress with a timely annual report that includes a comprehensive  analysis of the methodology each agency used for calculating the SBIR  and STTR spending requirements, providing a clear basis for SBA’s  conclusions about whether these calculations meet program  requirements. SBA is in the process of taking steps to address this  recommendation.
section_title: Changing the Calculation Methodology Could Increase Spending Requirements and Participation
paragraphs: In 2013, we also found that changing the methodology to calculate the  SBIR and STTR spending requirements based on each agency’s total  R&D budget instead of each agency’s extramural R&D budget would  increase the amount of each agency’s spending requirement for the  programs, some much more than others, depending on how the change  was implemented. Also, such a change would increase the number of  agencies that would be required to participate in the programs if the  threshold for participating in the programs remained the same. For  example, two additional agencies—the Departments of Veterans Affairs  (VA) and the Interior—would have been required to participate in SBIR in  fiscal year 2011 if total R&D budgets had been the criteria because these  agencies reported total R&D budgets in excess of $100 million. For  STTR, three additional agencies—Commerce, USDA, and VA—would  also have been required to participate in the program for fiscal year 2011  if total R&D budgets had been the criteria because these agencies  reported total R&D budgets in excess of $1 billion.
Some agencies told us in 2013 that changing the methodology to  calculate the SBIR and STTR spending requirements could have effects  on their R&D programs and create challenges. For example, changing the  base would increase SBIR and STTR budgets and could result in  reductions in certain types of intramural R&D, with corresponding  reductions in full-time equivalent staffing of these programs. In addition,  some agency officials said there would potentially be changes in the  content of the agency’s extramural R&D effort because of changes in the  types of businesses that receive grants and contracts.
section_title: Administrative Costs Could Not Be Determined Because the Agencies Did Not Identify or Track All Costs
paragraphs: We found in 2013 that the participating agencies’ cost of administering  the SBIR and STTR programs could not be determined because the  agencies neither collected that information nor had the systems to do so.  Neither the authorizing legislation for the programs nor SBA policy  directives require agencies to track and estimate all administrative costs,  and neither the law nor the policy directives define these administrative  costs. Estimates agencies provided for our report indicated that the  greatest amounts of administrative costs in fiscal year 2011 were for  salaries and expenses, contract processing, outreach programs, technical  assistance programs, support contracts, and other purposes. With the  implementation in 2013 of a pilot program allowing agencies under certain  conditions to use up to 3 percent of SBIR program funds for certain  administrative costs, SBA expected to require agencies in the pilot  program to track and report the spending of that 3 percent but not all of  their administrative costs.
Chairwoman Cantwell, Ranking Member Risch, and Members of the  Committee, this completes my prepared statement. I would be pleased to  respond to any questions that you may have at this time.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staff have any questions about this testimony, please  contact me at (202) 512-3841 or neumannj@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this statement. GAO staff who made key contributions  to this testimony are Hilary Benedict, Assistant Director; Antoinette  Capaccio; Cindy Gilbert; Rebecca Makar; Cynthia Norris; and Daniel  Semick.
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