Small Business Research Programs: Agencies Have Improved Compliance with Spending and Reporting Requirements, but Challenges Remain
Released: 2016-05-26T00:00:00

Letter

Background

The SBIR program was initiated in 1982 and, as described on the SBIR website, has four main purposes: (1) use small businesses to meet federal R&D needs, (2) stimulate technological innovation, (3) increase commercialization of innovations derived from federal R&D efforts, and (4) encourage participation in technological innovation by small businesses owned by women and disadvantaged individuals. The STTR program was initiated about a decade later in 1992 and, as described on the SBIR website, has three main purposes: (1) to stimulate technological innovation, (2) foster technology transfer through cooperative R&D between small businesses and research institutions, and (3) increase private sector commercialization of innovations derived from federal R&D. Legislation enacted in 2011 reauthorized the programs from fiscal year 2012 through fiscal year 2017.

The spending requirements for SBIR and STTR are to be calculated as a percentage of each agency’s extramural R&D obligations, provided their extramural obligations exceed the participation thresholds of $100 million for SBIR and $1 billion for STTR. Under the 2011 reauthorization, the SBIR extramural spending requirement was set at 2.8 percent for fiscal year 2014 and will increase incrementally to 3.2 percent of the extramural R&D obligations in fiscal year 2017. The STTR allocation was set at 0.40 percent in fiscal year 2014 and will increase to 0.45 percent in fiscal year 2016.

The SBIR and STTR programs each include the following three phases: In phase I, agencies make awards to small businesses to determine the scientific and technical merit and feasibility of ideas that appear to have commercial potential. Phase I awards normally do not exceed $150,000. For SBIR, phase I awards generally last up to 6 months. For STTR, these awards generally last 1 year.

In phase II, small businesses with phase I projects that demonstrate scientific and technical merit and feasibility, in addition to commercial potential, may compete for awards of up to $1 million to continue the R&D for an additional period, normally not to exceed 2 years.

Phase III is for small businesses to pursue commercialization of technology developed in prior phases. Phase III work derives from, extends, or completes an effort made under prior phases, but it is funded by sources other than the SBIR or STTR programs. In this phase, small businesses are expected to raise additional funds from private investors, the capital markets, or funding sources within the agency that made the initial award other than its SBIR or STTR program. While SBIR or STTR funding cannot be used for phase III, agencies can participate in phase III by, for example, purchasing the technology developed in prior phases.

SBA’s Office of Investment and Innovation is responsible for overseeing and coordinating the participating agencies’ efforts for the SBIR and STTR programs. As part of SBA’s oversight and coordination role, the agency issued SBIR and STTR policy directives to explain and outline requirements for agencies’ implementation of these programs. The policy directives include a list of the data that agencies must submit to SBA annually—such as their extramural R&D obligation amounts and the amount obligated for awards for the programs.

Each participating agency must manage its SBIR and STTR programs in accordance with program laws and regulations and the policy directives issued by SBA. In general, the programs are similar across participating agencies. All of the participating agencies follow the same general process to obtain proposals from and make awards to small businesses for both the SBIR and STTR programs. However, each participating agency has considerable flexibility in designing and managing the specifics of these programs, such as determining research topics, selecting award recipients, and administering funding agreements. At least annually, each participating agency issues a solicitation requesting proposals for projects in topic areas determined by the agency. Each participating agency uses its own process to review proposals and determine which proposals should receive awards. For those agencies that have both SBIR and STTR programs, agencies usually use the same process for both programs. Also, each participating agency determines whether the funding for awards will be provided as grants or contracts. According to a SBIR/STTR program manager at one of the participating agencies, agencies such as the Department of Defense (DOD), the Department of Homeland Security (DHS), and the National Aeronautics and Space Administration (NASA) typically issue contracts that address topic areas and include a number of requirements that small business must comply with, while agencies like the Department of Energy (DOE) and the National Science Foundation (NSF) often issue grants for less specified topic areas that allow for more flexibility.

Agency Data Indicate Most Met Spending Requirements, but Not All Submitted Correct Data and One Agency Did Not Establish a Required STTR Program

Agency data indicate that most participating agencies complied with their SBIR and STTR spending requirements for fiscal year 2014. The accuracy of these data remains an issue, but more agencies submitted correct data to SBA in fiscal year 2014 than in past years, providing extramural R&D obligations instead of their proposed budgets. However, one agency’s total extramural R&D obligations reached the $1 billion threshold for an STTR program, but it did not establish an STTR program as required by law.

Agency Data Indicate Most Agencies Met SBIR and STTR Spending Requirements, and More Agencies Submitted Correct Data

Agency data indicate that 9 of the 11 agencies participating in the SBIR program met or exceeded their fiscal year 2014 spending requirements, while the remaining 2 agencies did not (see fig. 1). According to the agencies’ data, the 9 agencies that appeared to meet or exceed SBIR spending requirements spent from 2.8 percent to 5.1 percent of their extramural R&D obligations for the program, and the remaining 2 agencies spent from 1.8 to 2.3 percent—less than the required 2.8 percent. As we previously found, the number of agencies that have complied with SBIR spending requirements—according to their data—has varied since fiscal year 2011, with 9 of the 11 agencies meeting these requirements in fiscal year 2013, 8 of the 11 agencies meeting them in fiscal year 2012, and 10 of the 11 agencies meeting them in fiscal year 2011. None of the agencies participating in the SBIR program were out of compliance for all 4 fiscal years.

Agency data indicate that 4 of the 5 agencies participating in the STTR program met or exceeded their fiscal year 2014 spending requirements, while 1 agency did not (see fig. 2). According to the agencies’ data, DOE, the Department of Health and Human Services (HHS), NASA, and NSF appeared to meet or exceed STTR spending requirements, spending from the required 0.40 percent to 0.45 percent of their extramural R&D obligations on their STTR programs, while DOD did not comply, spending 0.21 percent. As we previously found, the number of agencies that have complied with STTR spending requirements—according to their data— has increased since fiscal year 2011. For example, data that agencies submitted to SBA indicated that 4 of the 5 agencies complied with spending requirements in fiscal year 2013, as compared to 2 of 5 agencies that complied with spending requirements in fiscal years 2011 and 2012. HHS is the only agency to comply with STTR spending requirements in each of the past 4 fiscal years.

Officials at those agencies that did not meet the spending requirement for the SBIR and STTR programs said that they were unable to do so because of multi-year funding and extenuating circumstances. Specifically, program managers at DOD told us that their agency did not comply with STTR spending requirements in fiscal year 2014 because their 2-year funding cycles enable them to spend funds across 2 years. This is consistent with the findings from our previous reports, when program managers said that their agency did not meet spending requirements in certain years because of multi-year funding, but they would spend the funding on the programs before it expires. As we have also found in previous reports, while some agencies receive multi-year appropriations, which may, generally, be carried forward from one year to the next, the Small Business Act nevertheless requires agencies to spend the required amount on the programs in each fiscal year. Officials at the Department of Commerce (Commerce) told us that they were unable to meet their SBIR spending requirement in fiscal year 2014 because they received more funding for their SBIR program than they had planned for, in addition to SBIR funding that they carried over from fiscal year 2013 from supplemental appropriations for Superstorm Sandy, and they did not include enough topics in their solicitation for applications to allow them to make enough awards to meet the spending requirement. This is consistent with what Commerce officials told us in fiscal year 2013. U.S. Department of Agriculture (USDA) officials said that they did not comply with SBIR spending requirements because their extramural R&D obligations—a key figure in calculating the spending requirement—nearly doubled from what they planned based on their proposed budget. In addition, the officials told us that they have multi-year funding, which enables them to spend funds in years other than when they were appropriated. Commerce and USDA officials said that they plan to spend all of their SBIR funds on the program before the funding expires.

In fiscal year 2014, 8 of the 11 participating agencies correctly submitted data on their actual extramural R&D obligations as opposed to their proposed budgets. The Small Business Act requires agencies to calculate their spending requirements based on their actual obligations over the course of the year, and SBA has requested that agencies submit obligations rather than proposed budget data. As we found in fiscal year 2013, 2 agencies reported their extramural R&D obligations, and the other 9 agencies provided the amount that they proposed to spend on extramural R&D to SBA, rather than the amount they actually obligated. Officials at the 2 agencies that submitted extramural R&D obligations for the first time cited our previous reports as leading to the change in the data they submitted to SBA. Three agencies did not submit data on extramural R&D obligations to SBA for fiscal year 2014—DOD, NSF, and the Environmental Protection Agency (EPA). Instead, these agencies continued to submit their proposed extramural R&D budgets. Agency officials from NSF and EPA said the requirement to use extramural R&D obligations rather than proposed extramural R&D budgets is a challenge for agencies trying to comply with spending requirements because extramural R&D obligations are not known until the end of the fiscal year. Several program managers told us that they believe it is unfair or impractical to hold their agencies to a requirement that is not known until the end of the year, when it is not possible to obligate additional money. In addition, DOD officials told us that they do not have systems in place to easily calculate extramural R&D obligations. For example, DOD officials said they are unsure if all their comptrollers track extramural R&D obligations. In contrast, the 8 agencies that reported obligations in fiscal year 2014 told us that they faced no challenges in reporting obligations. SBA officials told us that they were continuing to work with agencies to obtain extramural R&D obligations data for fiscal year 2014.

One Agency’s Obligations Exceeded the STTR Threshold, but It Did Not Establish a Program

In fiscal year 2014, USDA reported extramural R&D obligations of $1.1 billion but did not establish an STTR program as required. The Small Business Act and the STTR policy directive state that each federal agency with extramural obligations for R&D in excess of $1 billion must participate in the STTR program. USDA officials told us that they did not establish an STTR program because they did not expect their extramural R&D obligations to exceed $1 billion in fiscal year 2014. Specifically, USDA’s proposed extramural R&D budget for fiscal year 2014 was $682 million and the department was unaware of its actual obligations until after the end of the fiscal year, when it was too late to retroactively begin an STTR program. The officials said that they believe the agency’s obligations in fiscal year 2014 were an anomaly, and they did not expect them to reach this level in subsequent years. They told us that some of their agency’s subunits that have multi-year funding obligated funds in fiscal year 2014 that were appropriated in prior years. Additionally, they said that the agency received $1.3 million in additional R&D funds in fiscal year 2014, as well as increased appropriations for the Agriculture and Food Research Initiative. Agency officials said that setting up an STTR program at this point would not make sense, as they expected that USDA would be under the $1 billion threshold in fiscal year 2015. The preliminary data that USDA submitted to SBA in April 2016 indicated that its extramural R&D obligations for fiscal year 2015 totaled $904 million, which is below the threshold for participating in the STTR program.

Although the legislation is clear about the dollar threshold for starting an SBIR or STTR program, neither the law nor SBA’s guidance specifies when an agency should establish a program, such as whether the agency should begin its program at the beginning of the year, partway through the year, or at the end of the year. SBA’s policy directive provides guidance on when an agency may exit the programs, as required by the Small Business Act, but does not provide specific guidance on when it should set up a program beyond the requirement to do so when the agency’s extramural R&D obligations are above the thresholds for participating. Specifically, the policy directives state that an agency may be considered by SBA for a phased withdrawal from participation in the SBIR or STTR program over a period of time sufficient to minimize any adverse impact on small businesses, and any withdrawal will be accomplished in a standardized and orderly manner. This could potentially be a model for SBA to follow in updating guidance for starting up a program.

One potential challenge identified by officials is that in setting up a new program, total extramural R&D obligations may be difficult to calculate until after the end of the fiscal year, as agencies can obligate extramural R&D funding through the end of the fiscal year. Therefore, according to USDA and SBA officials, USDA would not have been in a position to know that it needed to start an STTR program in fiscal year 2014, in accordance with the law and program policy directive. Moreover, SBA officials said they did not urge USDA to implement an STTR program because it was unclear if the department’s extramural R&D obligations in fiscal year 2014 would be maintained in future years. The officials told us that it takes approximately 2 years to establish and implement a robust STTR program. SBA officials agreed with USDA that it would not be worthwhile for the department to begin an STTR program one year and close it the following year, as it would negatively affect the small businesses involved with the program. The purpose of the policy directives is to provide guidance on how to conduct the programs, and agencies are required to comply with both the law and the additional details in the policy directives. If SBA provided more information on the timing of starting an SBIR or STTR program, agencies may have more certainty about when to establish a program.

Some Agencies Have Taken Steps to Meet Certain Reporting Requirements, but Most Agencies Are Still Not Fully Compliant

All of the agencies participating in the SBIR and STTR programs submitted methodology reports to SBA for fiscal year 2014, and some agencies provided more detail than they did in fiscal year 2013. However, many agencies did not provide all the required information and most were late in submitting their reports. Additionally, SBA has not issued its required report to Congress on the programs for fiscal year 2014.

All Agencies Submitted Methodology Reports, but Most Did Not Provide All of the Required Information and Continued to Submit Reports Late

Each participating agency submitted a methodology report to SBA for fiscal year 2014, and some agencies submitted additional information about their exclusions in their methodology reports, as compared to fiscal year 2013. As discussed in the policy directive, agencies are required to submit reports to SBA each year that itemize the programs excluded from their extramural R&D calculations and the reasons for the exclusions. For fiscal year 2014, 10 of the 11 participating agencies submitted at least partially itemized exclusions from their calculations of extramural R&D, and 9 of the 11 agencies at least partially explained these exclusions (see table 2). In addition, 5 agencies provided additional information in fiscal year 2014 that they did not provide in fiscal year 2013.

Most agencies did not provide dollar amounts for their exclusions in fiscal year 2014. Five agencies—USDA, HHS, NSF, DOD, and DHS— provided partial information on their exclusions but did not fully itemize or explain them. For example, USDA’s report listed exclusion information for four of its seven sub-units. In addition, 1 agency, NASA, did not list whether it had exclusions. Agencies are not explicitly required to state that they have no exclusions. However, without such information SBA cannot determine whether agencies are accurately reporting whether they have exclusions to their extramural R&D calculations. Officials at SBA told us that they are developing written guidance in their policy directive on how agencies should complete the methodology report.

In fiscal year 2014, 5 of the 11 participating agencies—Commerce, DHS, the Department of Education (Education), EPA, and USDA—provided some or all of the dollar amounts associated with each of their exclusions. As we reported in June 2014, SBA officials told us that they would like agencies to include more information about exclusions in their methodology reports. SBA has requested dollar amounts of exclusions in the past, but it is not explicitly required by statute or in the policy directive. However, in fiscal year 2014, the guidance requesting agencies to provide dollar amounts for their exclusions was removed from the annual report template, leading some agencies to omit information that they provided in the past, according to officials at 2 of the participating agencies. Specifically, in fiscal year 2013, the Department of Transportation (DOT) provided an itemized description of its exclusions, including dollar amounts. However, in fiscal year 2014, DOT itemized exclusions but did not report the dollar amounts excluded. DOT officials told us that these amounts were not provided because SBA removed language requesting that agencies list the programs excluded from the extramural R&D obligations calculation from the guidance for their fiscal year 2014 methodology reports. In addition, USDA officials told us that they did not provide dollar amounts for all exclusions in fiscal year 2014 because SBA did not request this information in its guidance for submitting the annual report.

The annual report template requested that agencies provide their accounting procedure used to determine their obligations, but did not explicitly require agencies to provide dollar amounts of exclusions. According to SBA officials, SBA and several of the participating agencies interpreted “accounting procedure” to include reporting the dollar amount associated with exclusions. SBA officials told us that they planned to contact the agencies that did not provide information on exclusions for fiscal year 2014 and planned to update the guidance to request dollar amounts for exclusions in future reports in the future. Inclusion of this instruction could have reminded agency officials to provide the information, which may have helped SBA fully evaluate and report to Congress on the accuracy of DOT or USDA’s methodologies. Federal standards for internal control state that management should communicate with, and obtain quality information from, external parties using established reporting lines so that external parties can help the entity achieve its objectives and address related risks.

Additionally, 9 of the 11 agencies submitted their methodology reports for calculating extramural R&D to SBA later than the date required by the Small Business Act, as shown in table 2. According to the Small Business Act, agencies must submit their methodology reports to SBA within 4 months of enactment of their annual appropriations. Agency appropriations for fiscal year 2014 were enacted in January 2014, so the methodology reports were due by May 2014. For fiscal year 2014, 2 agencies—HHS and DOD—complied with the reporting requirement by submitting their methodology reports to SBA in May 2014. Several of the agencies provided their methodology reports to SBA as a part of their annual data submissions to SBA, which were generally submitted to SBA from January through April 2015. Most agency officials told us that they submitted their methodology reports late because SBA did not request the reports at an earlier date. Officials from 5 of the 9 agencies that submitted their reports late said that they could have provided the reports to SBA within 4 months of appropriations if SBA had requested them. SBA is not required to request the reports from agencies. In contrast, officials at 2 agencies told us that they submitted their methodology reports late because each of their agencies requires an approved spend plan before officials can calculate extramural R&D obligations and provide them in the methodology report, and those plans were not approved in enough time to submit the methodology reports on time.

As we found in our September 2013 report, the late submission of the methodology reports makes it difficult for SBA to promptly analyze these methodologies and provide agencies with timely feedback to assist them in accurately calculating their spending requirements. Without such review and feedback, agencies may be calculating their extramural R&D obligations incorrectly, which could lead to agencies spending less than the required amounts on the programs. In that report, we recommended that SBA request that the agencies submit their methodology reports within 4 months of the enactment of appropriations, and SBA agreed with the recommendation. When we followed up on SBA’s response to the recommendation, we were told that SBA officials sent an e-mail to participating agencies in February 2016 requesting that they submit their fiscal year 2015 methodology reports to SBA in a time frame that meets the 4 month requirement. We will continue to monitor the extent to which agencies submitted their methodology reports within the required 4-month time frame in fiscal year 2015 as part of our next mandated review.

SBA Has Not Submitted Its Required Report to Congress for Fiscal Year 2014

The Small Business Act requires SBA to report to certain congressional committees on the SBIR and STTR programs—including an analysis of the agencies’ methodology reports—not less than annually, but the act does not specify a date that the report is due. SBA issued its required report to Congress on the SBIR and STTR programs for fiscal year 2013 in March 2016, but it has not issued its report for fiscal year 2014.

In our September 2013 report, we concluded that without more rigorous oversight by SBA and more timely and detailed reporting on the part of both SBA and participating agencies, it would be difficult for SBA to ensure that intended benefits of the SBIR and STTR programs are being attained and that Congress was receiving critical information to oversee these programs. 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. SBA agreed and stated that it planned to implement the recommendation. However, SBA has not yet done so, and as we found in this review, it continues to lag in its submissions to Congress. Specifically, each year agencies are required to report their data to SBA by March following the end of the fiscal year. SBA’s fiscal year 2012 report to Congress, issued in November 2014, was submitted 19 months after the agencies’ data were due to SBA. Similarly, SBA submitted its fiscal year 2013 report to Congress in March 2016, two years after the agencies’ data were due to SBA. At the time of our review, SBA officials said that they had not set a date for submitting the fiscal year 2014 report. SBA officials told us that they have undertaken steps to address developing the required reports to Congress, including reporting improvements to the SBIR website that they expected would expedite the verification of agencies’ data and lead to faster reporting. In addition, the officials said that fiscal years 2013 and 2014 were transitional periods for reporting due to changes in reporting requirements and the creation of new databases.

Changing the Calculation Methodology Could Increase Spending Requirements and Participation with Potential Benefits and Drawbacks

Changing the methodology for determining SBIR and STTR spending requirements could increase agencies’ spending requirements and increase the number of agencies required to participate in the programs. Agency officials identified several benefits and drawbacks that changing the calculation methodology could have on their agencies’ SBIR and STTR programs.

Changing the Calculation Methodology Could Increase Spending Requirements and Participation in the Programs

Changing the methodology for determining SBIR and STTR spending requirements to use an agency’s total R&D budget authority rather than its extramural R&D obligations could increase spending requirements. For example, if the spending requirements were calculated based on an agency’s total R&D budget authority rather than its extramural R&D obligations using the same percentages and participation thresholds defined in current law, we estimate that total spending requirements in fiscal year 2014 for the SBIR and STTR programs would have increased from $2.3 billion to $4.2 billion, an increase of roughly $1.9 billion, or 83 percent, based on our analysis of budget authority data and data submitted to SBA. This increase would have occurred for two reasons: (1) an agency’s total R&D budget authority is larger than its extramural R&D obligations therefore agencies that currently participate would have been required to spend more on the programs and (2) additional agencies would have been required to participate. Figure 3 shows the effects of changing spending requirements at each agency from current law, which is based on a percentage of extramural R&D obligations, to an alternative scenario that applies the same percentages to total R&D budget authority. These effects are consistent with our findings in previous reports.

As shown in figure 3, some agencies’ spending requirements would have increased more than others under the alternative scenario. This variation is due primarily to differences in the relative proportions of the agencies’ extramural and intramural R&D obligations, but is also affected by how many programs are excluded by statute. Agencies that fund primarily extramural research would have seen smaller increases to their spending requirements for the SBIR and STTR programs under the alternative scenario, while agencies that fund more intramural research would have seen larger increases in their spending requirements, a finding consistent with those of our previous reports. Examples are as follows:

NSF used 86.3 percent of its total R&D budget authority to fund extramural research in fiscal year 2014 and was required, based on data it submitted to SBA, to spend $131 million on its SBIR program that year. Under the alternative scenario, NSF’s SBIR spending requirement would have been $152 million, an increase of about 16 percent.

Commerce, on the other hand, used 22.2 percent of its total R&D budget authority to fund extramural research in fiscal year 2014 and was required to spend about $8 million on its SBIR program in that year. Under the alternative scenario, Commerce’s spending requirement would have more than quadrupled to $38 million. Furthermore, assuming that the thresholds for participating in the program did not change, this scenario would have required Commerce to spend approximately $5 million on a new STTR program in fiscal year 2014. The alternative scenario would have required Commerce to spend an additional $34.6 million on the SBIR and STTR programs in fiscal year 2014, an increase of more than 400 percent.

As noted above, changing the calculation methodology from basing the spending requirement on extramural R&D obligations to total R&D budget authority would also require additional agencies to participate in the SBIR and STTR programs, assuming that the dollar thresholds for participation remain the same. Two additional agencies—the Departments of Veterans Affairs (VA) and the Interior—would have been required to participate in SBIR during fiscal year 2014 under the alternative scenario. Adding these agencies to the SBIR program would have increased total federal SBIR spending requirements by $54 million, in addition to the $1.6 billion increase in spending requirements at the 11 agencies that currently participate in the SBIR program. Likewise, three additional agencies— USDA, Commerce, and VA—would have been required to participate in STTR under the alternative scenario. Adding these three agencies to the STTR program would have increased total federal STTR spending requirements by $18.8 million, in addition to the spending requirement increases of $214 million at the five agencies that currently participate in STTR.

Alternatively, basing the SBIR and STTR spending requirements on an agency’s total R&D budget authority and applying a lower percentage than under current law could result in a total federal commitment to the programs that is similar to what would result under current law. However, our analysis shows that such a scenario would lower spending requirements at some agencies and raise them at others. As shown in figure 4, if the percentage applied to an agency’s total R&D budget authority had been 1.6 percent for the SBIR program and 0.2 percent for the STTR program in fiscal year 2014, and the thresholds for participating had remained the same, total required federal spending on the programs would be similar to required federal spending under current law. Using these lower percentages, spending requirements would have increased at agencies that primarily fund intramural research, such as EPA and Commerce. In contrast, spending requirements would decrease at agencies, such as HHS and NSF, which primarily fund extramural research. In this scenario, the spending requirement reductions, including $230.7 million at HHS and $53.9 million at NSF, were large enough to offset increases in spending requirements at other agencies.

Program Managers Identified Potential Benefits and Drawbacks to Changing the Calculation Methodology

As we found in our previous review on these programs, agencies identified potential benefits and drawbacks to changing the calculation methodology for their SBIR and STTR spending requirements from extramural R&D obligations to total R&D budget authority. For example, officials at DOD told us in the past that changing the calculation method would simplify administration of their program. As we found in previous reports, officials said that it can take months for DOD’s program managers to receive funding for the SBIR and STTR programs from the comptrollers of all three military departments and approximately 21 other components that conduct R&D. However, in technical comments on a draft of this report, a DOD official told us that, based on additional analysis, the Office of Small Business Programs believes that changing the calculation methodology would complicate the administration of the programs because services and components would still need to calculate their extramural R&D budgets and DOD would need to apply different percentages to the services and components to compensate for the wide variation in extramural budgets within the department. In addition, program managers at one agency told us that basing the spending requirement on total R&D would result in more SBIR program awards, and officials at another agency said that the change would allow the agency to set up an STTR program. If spending requirements were based on total R&D budget authority, DOD officials told us that the percentages for the SBIR and STTR spending requirements should be lowered to offset using total R&D.

Agency officials also identified potential drawbacks to changing the methodology, which is also consistent with our findings in previous reports. In particular, some program managers said that increasing the amount of money that goes to the SBIR and STTR programs could reduce the amount of resources available for other R&D conducted by the agency. Furthermore, program managers from one agency told us that basing the SBIR and STTR spending requirements on total R&D would not substantially reduce the time required to calculate their spending requirements. For example, officials at one agency said that they would still have to request data from all of their line offices during the year, as total R&D obligations can fluctuate. Some program managers also said that basing the spending requirement on total R&D would put an unsustainable strain on their programs and make it difficult to find high- quality awardees in the near term.

Total Administrative Spending in Fiscal Year 2014 Is Unknown, but Seven Agencies Spent $19.1 Million on the Administrative Pilot Program

Little is known about total administrative spending for fiscal year 2014 because the agencies that participate in the SBIR and STTR programs do not—and are not required to—fully track these costs. The seven agencies that participated in the administrative pilot program reported spending $19.1 million to address the six program goals in fiscal year 2014, but this amount does not represent total administrative spending. Furthermore, officials at some agencies identified constraints to participation in the administrative pilot program.

Little Is Known about Total Administrative Spending

Little is known about the total amount that the 11 participating agencies spent to administer their SBIR and STTR programs for fiscal year 2014 because the agencies do not—and are not required to—fully track these costs. For example, as we reported in the past, officials told us that it is challenging to accurately estimate total administrative costs because many staff and contractors help administer the program part time.

Program managers also told us that many of their staff and contractors spend time on different programs, and they do not have systems in place to track their time specifically to the SBIR and STTR programs.

In response to our requests for data on their fiscal year 2014 administrative costs, 9 of the 11 participating agencies provided information on some categories of administrative costs and partial estimates of costs. These estimates ranged from about $8,500 to $2,200,000. As with the cost data for fiscal years 2011, 2012, and 2013 provided for our previous reports, these data were incomplete and unverifiable.

Seven Agencies Participated in the Administrative Pilot Project in Fiscal Year 2014 and Spent $19.1 Million

Seven agencies—DOD, DOE, HHS, NSF, USDA, Commerce, and DOT— participated in the administrative pilot program in fiscal year 2014, and these agencies reported spending $19.1 million on administrative and oversight activities as part of the program. The 2011 reauthorization of the SBIR and STTR programs directed SBA to allow agencies to spend up to 3 percent of SBIR funds on program administration and similar costs in fiscal years 2013 through 2015. In November 2015, the National Defense Authorization Act for Fiscal Year 2016 extended the program through September 30, 2017.

According to the programs’ policy directives, funding for the pilot program cannot replace current agency administrative funding. SBA’s policy directives require each agency to submit a work plan to SBA that includes, among other information, a prioritized list of initiatives, the estimated amounts to be spent on each initiative, and the expected results to be achieved. The policy directives require SBA to evaluate the work plan and provide initial comments within 15 calendar days of receipt of the plan. If SBA does not provide initial comments within 30 calendar days of receipt of the plan, the work plan is deemed approved. In our April 2015 report, we found that SBA requested that agencies submit data on the total amount spent on the administrative pilot program, but did not request that agencies submit information on how they used the funds. In that report, we recommended that SBA request that agencies participating in the administrative pilot program provide data on the use of the funds, rather than a total cost for all the activities under the pilot. SBA generally agreed with our recommendation and, in fiscal year 2014, requested that agencies provide additional information on how they spent administrative pilot program funds. SBA is required to use the information from the agencies to report on the pilot program to Congress.

Agencies participating in the administrative pilot program used funds towards six goals developed by SBA in consultation with agency officials, as shown in table 3.

Under the administrative pilot program, some goals received more attention than others based on our review of the funds spent on each goal. In particular, all seven of the agencies that participated in the administrative pilot program spent funds to increase outreach to underserved communities. For example, officials at one agency told us that they spent approximately $1 million under the administrative pilot program to expand assistance, through budget support and proposal review, among other assistance, to women-owned small businesses, minority-owned small businesses, and small businesses from states that are underrepresented in the SBIR and STTR programs. According to agency officials, their efforts resulted in 43 applications from companies that received such assistance. Other agencies also took steps to improve outreach, including traveling to underserved states, launching websites, enhancing social media platforms, or attending trade shows. On the other hand, only two agencies used funds for congressional and inter-agency reporting. Officials at one agency told us that it is not clear from the law or SBA guidance if all six goals require equal attention.

In fiscal year 2014, agencies proposed that they would spend $55.5 million on the administrative pilot program, but our analysis of the agencies’ work plans and data submitted to SBA shows that agencies obligated $19.1 million, or 34 percent of the proposed amount (see table 4). This compares with obligations of $12.3 million in fiscal year 2013, or 21 percent of the proposed amount. Of the seven agencies that participated in the administrative pilot program, DOE obligated most of what it estimated it would spend, and Commerce obligated the lowest percentage of what it planned to spend. Program managers at Commerce told us that they originally planned to spend money on a joint SBA database, but agencies faced difficulties in getting permission to use the money for the database and the project was completed with other funds. In addition, they said that the agency received appropriations late in fiscal year 2014, requiring them to reserve money they planned to spend for outreach efforts in fiscal year 2014.

SBA Has Not Evaluated Potential Constraints in the Administrative Pilot Program

More agencies participated in the administrative pilot program in fiscal year 2014 than in the previous year, but some agencies identified potential constraints that limited their participation, including the temporary nature of the program and the requirement to expend funds only on new activities. First, officials at 2 agencies told us that the temporary nature of the administrative pilot program constrained them from using the funds to make new hires. For example, officials at one agency said that they could have used the funds to hire a new contract specialist but were concerned that they would not have funding to pay the employee after the end of the pilot program. Program officials at another agency, which did not participate in the administrative pilot program, told us that if they hired additional contractors, they could not continue to pay them after the administrative pilot ended. Program managers at 10 of the 11 agencies supported making the administrative pilot program permanent, including 3 of the 4 agencies that did not participate in the pilot program. For example, officials at one agency told us that the administrative pilot program gives them opportunities to experiment with different approaches to promote their programs. While NSF officials said that the agency already has substantial programs in place, administrative funds enabled them to start new ones, particularly around social media. SBA officials told us that administrative pilot program funding is necessary to increase staff levels. Officials at the 1 agency that did not support making the administrative pilot program permanent at this time said that it is too early to tell whether the pilot program is successful and that more information is needed to decide whether the administrative pilot program should be made permanent.

Second, program officials at 2 agencies told us that the requirement to expend funds on only new activities constrained their ability to participate in the program. Officials at one of the agencies that did not participate in the administrative pilot program told us that the requirement to spend money on only new initiatives restricted them from using funds for existing administrative activities, whereas agencies that do not already have these types of activities are not constrained from using their funds for the same activities. The officials also told us that the requirement puts a heavy burden on offices with smaller budgets, as they must start up new activities as well as continue existing activities with limited budgets.

As we discussed previously, SBA is required to provide Congress with an annual report each fiscal year. In addition to addressing issues in the annual report such as agencies’ methodologies to calculate extramural R&D obligations, SBA is also required to collect data and report on the funds used to achieve the objectives of the administrative pilot program. Such a report could include an evaluation of the constraints that have hindered agencies’ participation in the program. As outlined in GAO’s guide for designing evaluations, an evaluation gives an agency the opportunity to refine the design of a program and provides a useful tool for determining whether program operations have resulted in the desired benefits for participants. In its fiscal year 2013 report to Congress on the programs, SBA identified some potential constraints to the amounts that agencies spent on the program, including the amount of time available for making obligations after the necessary budget information was received.

SBA officials told us that they plan to include information on the administrative pilot program in their annual report to Congress. However, as we previously noted, SBA submitted its fiscal year 2013 report 2 years after agencies’ data were due and has not submitted its fiscal year 2014 annual report to Congress in a timely manner. Until SBA submits its fiscal year 2014 report and includes information on the administrative pilot program, SBA and Congress will not have the information they need to know whether the administrative pilot program has met its goals or whether there are constraints to participating, such as those that we identified. Further, an assessment of the effect of potential constraints on agencies’ abilities to participate in the pilot program and the steps needed to address these constraints may help to eliminate inconsistencies in the activities that agencies can currently consider new and help address agencies’ views that they are limited in their ability to hire individuals for administrative purposes.

Conclusions

Federal agencies have spent billions of dollars with small businesses under the SBIR and STTR programs to develop and commercialize innovative technologies. In our previous reports on these issues, we identified some areas where SBA could take actions to better ensure agencies’ compliance with spending and reporting requirements, as well as management of the administrative pilot program. SBA has taken actions to address some of these recommendations and SBA officials have told us of their plans to address others. As SBA takes steps to address issues we previously identified, we found three additional issues that could continue to affect compliance with spending and reporting requirements in the future. First, because SBA’s guidance does not address the timing for when an agency should start up programs, agencies may not know when to start a program. Such information may help ensure that agencies will establish programs when required and ensure that the required amount of money is available for small businesses participating in the programs. Second, because SBA removed language requesting agencies to list the dollar amounts of exclusions from the guidance for submitting data for fiscal year 2014, some agencies did not provide this information. Restoring this guidance could help SBA fully evaluate and report to Congress on the accuracy of agencies’ methodology reports. Third, because SBA has not submitted a report on the administrative pilot program to Congress for fiscal year 2014, it has not evaluated the effects of potential constraints on agencies’ ability to participate in the pilot program for that year and the steps needed to address these constraints. As a result, some agencies may not have implemented the administrative pilot program to the fullest extent. Performing such an analysis and notifying Congress of constraints may help to eliminate inconsistencies in the activities that agencies can currently consider new and help address agencies’ views that they are limited in their ability to hire individuals for administrative purposes.

Recommendations for Executive Action

To ensure full compliance with SBIR and STTR spending and reporting requirements and improve participation in the administrative pilot program, we recommend that the SBA Administrator take the following three actions:

Review SBA guidance regarding when an agency is required to start up an SBIR or STTR program, and if necessary, update the guidance to provide greater clarity to agencies with R&D obligations greater than the thresholds for participating.

Restore guidance requesting that agencies provide dollar amounts for exclusions in agency methodology reports to SBA.

Complete the required reporting on the administrative pilot program for fiscal year 2014, which could include an evaluation of the potential constraints that may hinder agencies’ participation and any steps to address these constraints.

Agency Comments and Our Evaluation

We provided a draft of this report to SBA and the 11 participating agencies for review and comment. In an e-mail response, SBA generally agreed with our recommendations. SBA also provided technical comments, as did DHS, DOD, DOE, HHS, and NASA, which we incorporated, as appropriate. As part of its technical comments, SBA provided additional information on steps it has taken to identify why its annual reports to Congress have taken so long to complete and corrective actions it has taken to address the delays. Based on this information, we deleted a proposed recommendation on this issue. Five of the agencies—Commerce, DOT, Education, EPA, and NSF—had no technical or written comments. The remaining agency, USDA, provided written comments, which we reproduced in appendix III.

In written comments, the Chief Scientist for USDA raised three issues. First, USDA raised issues with how we determine compliance with spending requirements in the report. USDA explained that it uses a two- step process to determine its annual spending requirement—first, USDA determines a “set aside” based on appropriations, and second, USDA calculates end-of-year total obligations. USDA said that we focused only on the end of year obligations process in determining whether agencies met the spending requirements and omitted the calculations that show compliance at the front-end of the process. The Small Business Act defines extramural R&D budget in terms of obligations, however. As we found in our April 2015 report, nothing in the Act indicates that “obligations” should be construed as “planned obligations.” Because extramural R&D budget is defined as actual obligations over the course of the year, we therefore use end-of-year obligations to determine whether an agency has met its annual spending requirement. Further, in its comments, USDA states that the spending compliance calculation needs further review and it appears that neither we nor SBA have recommended a change to the calculation methodology. However, in our April 2015 report, we recommended that SBA notify Congress in its annual report if it cannot determine agency compliance with program spending requirements when agencies that participate in the SBIR and/or STTR programs do not report extramural R&D obligations data, or develop a proposal to Congress that would change the requirement. In response to this recommendation, SBA reported to Congress in its fiscal year 2013 report that it could not determine compliance with spending requirements and has worked with the agencies to collect obligations data.

Second, in its written comments, USDA states that it was not possible to initiate an STTR program in fiscal year 2014 based on end of year obligations. We recognize in this report that one potential challenge for agencies setting up a new STTR program is that total extramural R&D obligations may be difficult to calculate until after the end of the fiscal year, as agencies can obligate extramural R&D funding through the end of the fiscal year. To address this potential challenge, we recommend in this report that SBA review guidance regarding when an agency is required to start up an SBIR or STTR program and, if necessary, update the guidance to provide greater clarity to agencies with R&D obligations greater than the thresholds for participating.

Third, in its written comments, USDA stated that it can spend multi-year or no-year funds in years other than when they were appropriated, which can have a negative effect on the ability of the SBIR program to comply with spending requirements under the current calculation. USDA raised concerns that footnote 18 in the report, which restates the spending requirements, could lead to a misinterpretation of USDA’s authority. We agree with USDA that the Small Business Act does not supersede the authority USDA has to use multi-year or no-year funds in general. However, the Small Business Act imposes more specific yearly spending requirements for the SBIR and STTR programs. We clarified the cited footnote to make clear that the referenced spending requirements only pertain to the SBIR and STTR programs.

We are sending copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, and Transportation; the Administrators of the Small Business Administration, the Environmental Protection Agency, and the National Aeronautics and Space Administration; the Director of the National Science Foundation; and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, 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 report. GAO staff who made key contributions to this report are listed in appendix IV.

Appendix I: Agencies’ Compliance with Spending Requirements for the Small Business Innovation Research Program for Fiscal Year 2014, according to Agency Data

The data that the agencies submitted to the Small Business Administration (SBA) indicate that 9 of the 11 participating agencies spent amounts for the Small Business Innovation Research (SBIR) program that met or exceeded their fiscal year 2014 spending requirements, while spending for the remaining 2 agencies did not meet the requirements. For the purposes of this report, we defined compliance as spending at least 2.8 percent of an agency’s reported extramural research or research and development obligations on the SBIR program in fiscal year 2014, as required by the Small Business Act. This method is consistent with SBA’s approach for calculating spending requirements in its reports to Congress on the program (see table 5).

Appendix II: Agencies’ Compliance with Spending Requirements for the Small Business Technology Transfer Program for Fiscal Year 2014, according to Agency Data

The data that the agencies submitted to the Small Business Administration (SBA) indicate that four of the five participating agencies spent amounts for the Small Business Technology Transfer (STTR) program that met or exceeded their fiscal year 2014 spending requirements, while 1 agency did not. For the purposes of this report, we defined compliance as spending at least 0.4 percent of an agency’s reported extramural research or research and development obligations on the STTR program in fiscal year 2014, as required by the Small Business Act. This method is consistent with SBA’s approach for calculating spending requirements in its reports to Congress on the program. (See table 6.)

Appendix III: Comments from the U.S. Department of Agriculture

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Hilary Benedict (Assistant Director), Jeffrey Barron, Lisa Brown, Antoinette Capaccio, Cindy Gilbert, Jordan Kudrna, Alison O’Neill, and Sara Sullivan made key contributions to this report.