Small Business Research Programs: Challenges Remain in Meeting Spending and Reporting Requirements
Released: 2015-04-15T00:00:00

Letter

Background

The SBIR program was initiated in 1982 and has four main purposes: (1) stimulate technological innovation, (2) use small businesses to meet federal R&D needs, (3) encourage participation in technological innovation by small businesses owned by women and disadvantaged individuals, and (4) increase commercialization of innovations derived from federal R&D efforts. The purpose of the STTR program—initiated about a decade later in 1992—is to stimulate a partnership of ideas and technologies between innovative small businesses and research institutions through federally funded R&D. Legislation enacted in 2011 reauthorized the programs from fiscal year 2012 through fiscal year 2017. The Small Business Act requires agencies to spend a certain percentage on programs each year. 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 R&D 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 2.7 percent for fiscal year 2013 and will increase incrementally to 3.2 percent of extramural R&D obligations by fiscal year 2017, and the STTR allocation was set at 0.35 percent for fiscal year 2013 and will increase incrementally to 0.45 percent by fiscal year 2017.

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 6 to 9 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 from 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 has 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 obligations amount and the amount obligated for awards for the programs.

Each participating agency must administer its SBIR and STTR programs in accordance with program laws, regulations, and the policy directives issued by SBA. In general, the programs are similar across agencies. All of the 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 to design and manage the specifics of their 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 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 agency determines whether the funding for awards will be provided as grants or contracts. According to an agency program administrator, 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 highly focused topics 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 topics that allow for more flexibility.

SBA Cannot Fully Determine Compliance with Spending Requirements, but Data Submitted to SBA Indicate Most Agencies Met the Requirements

SBA cannot fully determine if all 11 agencies met their spending requirements for fiscal year 2013, as 9 of the 11 participating agencies did not follow SBA’s guidance in submitting data on their total extramural R&D obligations. Nevertheless, data the agencies submitted to SBA indicate that most agencies complied with their SBIR and STTR spending requirements for fiscal year 2013.

SBA’s Ability to Determine Compliance Is Limited by Incorrect Data

SBA cannot fully determine whether the participating agencies complied with their fiscal year 2013 spending requirements using the data that agencies submitted to SBA because 9 of the 11 agencies provided incorrect data. The Small Business Act requires agencies to calculate their spending requirements based on their extramural R&D budget, but it defines the extramural R&D budget as the actual obligations over the course of the year—which are not fully known until the end of the year— rather than the amount that agencies propose to spend on the program early in the fiscal year. For years before fiscal year 2013, most agencies provided the amount that they proposed to spend on extramural R&D and not the amount they actually obligated in their data submitted to SBA after the end of the fiscal year. SBA issued a revised template for data submission for fiscal year 2013 to clarify what information was needed to calculate spending requirements and directed agencies to submit data on their extramural R&D obligations. SBA officials said that they changed the template for data submission to respond to our past recommendations to provide additional guidance to agencies about submitting data and calculating spending requirements. SBA provided agency program managers with new guidance describing how to submit the relevant data and information to SBA. In addition, SBA officials told us that they discussed this issue at length with the agencies. However, SBA’s efforts did not fully address the problem, as NASA and the Department of Health and Human Services (HHS) are the only agencies that submitted data on extramural R&D obligations to SBA for fiscal year 2013, as requested by SBA in accordance with the law. The remaining nine agencies submitted incorrect data by providing their extramural R&D budget estimates.

Program officials said that the requirement to use extramural R&D obligations rather than extramural R&D budget makes it difficult for agencies 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 agency to a target that is not known until the end of the year, when it is not possible to obligate additional money. In addition, some program officials told us that they do not have systems in place to easily calculate extramural R&D obligations. For example, DOD officials said that it would likely not be possible to determine a final extramural R&D obligations figure until 6 months after the end of the fiscal year. Furthermore, some agency officials told us that their agency does not calculate total extramural R&D obligations. For example, officials at the Environmental Protection Agency (EPA) said that their financial system did not provide the level of detail necessary to calculate extramural R&D obligations, and modifying the current system would require a level of effort beyond what is justified for an agency with a small extramural R&D budget. Nevertheless, the Small Business Act requires agencies to use extramural R&D obligations to calculate their annual spending requirements. Moreover, SBA’s guidance for fiscal year 2013 continues to direct agencies to use this approach, and SBA officials told us that the best way to ensure compliance with spending requirements is to use obligations.

SBA’s ability to conduct an accurate assessment of whether agencies are complying with spending requirements is dependent on agencies submitting the correct data. For example, during fiscal year 2013, NASA estimated its extramural R&D budget to be about $4.9 billion, and it developed a spending plan for the SBIR and STTR programs based on this budget. However, according to data submitted to SBA, NASA’s end- of-year extramural R&D obligations totaled about $5.2 billion, causing NASA’s actual spending requirements for the programs to be higher than anticipated at the beginning of the year, as shown in table 2. NASA spent $132.5 million on its SBIR program, which would have been enough to comply with its estimated spending requirement, but it was less than the actual spending requirement. NASA officials told us that they did not know what the final extramural R&D obligations would be until after the end of the fiscal year and, therefore, were unable to spend more to meet the higher-than-anticipated spending requirements. Consistent with our findings for fiscal year 2012, this increase in extramural R&D obligations compared with the budget contributed to NASA’s noncompliance with SBIR spending requirements in fiscal year 2013, according to program officials. NASA submitted the correct data to SBA, and our analysis showed it did not meet the spending requirements in fiscal year 2013. However, had NASA provided SBA with its extramural R&D budget rather than extramural R&D obligations, as other agencies provided, NASA would have—incorrectly—appeared to have met its SBIR spending requirement.

Other agencies that appeared to have met their spending requirement based on extramural R&D budget data may not actually have complied with their spending requirement if their extramural R&D obligations were higher than the amount they budgeted for the year. Conversely, an agency that appeared to spend less than the required amount on the programs could have actually met the spending requirements if the agency’s extramural R&D obligations at the end of the year were lower than the amount the agency budgeted at the beginning of the year. As discussed earlier, most agencies did not provide extramural R&D obligations data to SBA, which is a key piece of data for determining whether an agency met the spending requirements. SBA uses the data that agencies submit to determine the agencies’ compliance with spending requirements and reports this information to Congress as part of its annual report on the programs. However, without the correct data on the amount that agencies obligated for extramural R&D, SBA cannot fully determine agencies’ compliance with the spending requirements and cannot accurately report to Congress on their compliance. If SBA cannot fully determine agencies’ compliance based on data those agencies are submitting, then notifying Congress of this limitation would be important to help ensure that Congress receives critical information for overseeing these programs. Further, if SBA determines that calculating spending requirements based on extramural R&D obligations is not feasible, then developing a proposal for Congress to change the requirement could better position SBA and the agencies in determining requirements to help ensure that the intended benefits of these programs are being attained.

Agency Data Indicate Most Agencies Met SBIR and STTR Spending Requirements

While it was generally the wrong data, the data agencies did submit to SBA indicate that 9 of the 11 participating agencies met or exceeded their fiscal year 2013 spending requirements for the SBIR program, while the remaining 2 agencies did not meet the requirements. According to the agencies’ data, the 9 agencies that appeared to meet or exceed the requirements spent from 2.7 percent to 4.7 percent of their extramural R&D obligations for the program, and the remaining 2 agencies spent from 2.1 to 2.5 percent. In comparison, agency data indicated that 8 of the 11 agencies met or exceeded spending requirements in fiscal year 2012, 10 of the 11 agencies met or exceeded spending requirements in fiscal year 2011, and 3 of the 11 agencies met spending requirements each fiscal year from 2006 through 2011, as we found in our two prior reports. Figure 1 shows the percentage of extramural R&D obligations that agencies spent on the SBIR program, based on the data the agencies submitted to SBA. Appendix I provides additional detail.

The data agencies submitted to SBA indicated that four of the five participating agencies met or exceeded their fiscal year 2013 spending requirements for the STTR program, while the remaining agency did not meet the requirements. According to the agencies’ data, the four agencies that complied with the requirements spent from 0.35 percent to 0.38 percent of their submitted extramural R&D obligations on their STTR programs, and the agency that did not comply spent 0.34 percent. In comparison, as we reported in the past, the data that agencies submitted to SBA indicated that two of the five agencies complied in fiscal year 2011 and 2012, and only one of the agencies complied with spending requirements each fiscal year from 2006 through 2012. Figure 2 shows the percentage of extramural R&D obligations that agencies spent on STTR, based on the data the agencies submitted to SBA. Appendix II provides additional detail.

Program managers told us that one reason agencies did not comply with spending requirements in fiscal year 2013 is because they reserved program funds that were appropriated in fiscal year 2013 and plan to spend those funds in future years. Specifically, program officials from one agency that did not comply with SBIR spending requirements— Commerce—and the agency that did not comply with STTR spending requirements—DOD—told us that they reserved the required amount for the program and spent the remaining funds in fiscal year 2014. In addition, agency officials told us that extenuating circumstances, such as late appropriations and spikes in funding related to natural disasters, also affected their ability to meet annual spending requirements in fiscal year 2013. For example, Commerce officials said that in fiscal year 2013 the National Oceanic and Atmospheric Administration received additional funding from supplemental appropriations related to Super Storm Sandy late in the fiscal year—after the agency’s internal deadline for issuing new contracts—which kept them from obligating enough money to meet the spending requirement that increased due to the supplemental funding. They said that the money not obligated in fiscal year 2013 was obligated in fiscal year 2014. Consistent with the findings from our June 2014 report, some program managers said their agency did not meet spending requirements, but the officials said they will spend all of the funding that was budgeted for the programs before the funding expires. However, they did not spend the minimum required amount in fiscal year 2013 and, therefore, did not comply with the spending requirements.

SBA officials agree that meeting the spending requirements for the SBIR and STTR programs requires agencies to spend at least the minimum required percentages on the programs each fiscal year. However, we found in our June 2014 report that SBA’s most recent SBIR policy directive states that agencies must reserve the minimum percentages for awards to small business, and we recommended that SBA revise its policy directives to correctly summarize the law. officials told us that they are planning to review and clarify the language in future policy directives, but, as the officials told us in January 2015, they disagree that the policy directive inaccurately summarizes the law. The officials told us that the inclusion of the word “reserve” in the policy directive does not lead agencies to reserve money for multiple years. However, we found that agencies continue to reserve money, and we continue to believe that a clarification is needed to help minimize this practice.

GAO-14-431.

Several agencies have also implemented certain practices designed to help ensure they meet their spending requirements. Examples of such practices include the following:

Budgeting more than the minimum required amount for the program. Education officials told us that they budget more than the minimum amount they calculate as required for the SBIR program, which increases the likelihood that the agency will meet or exceed the spending requirement. In addition, if appropriations are higher than anticipated, the officials review their planned budget for the SBIR program and determine if the program budget should be increased. DHS officials told us that their agency also obligates additional funds beyond those budgeted for the SBIR program. For example, DHS officials said that the agency obligated nearly $2.8 million in addition to the amount originally budgeted for the program for fiscal year 2013.

Tracking program obligations and centralizing funds. Officials from DOE and one component in DHS said that they review how much the agency has obligated for the programs each month to help ensure that they obligate all of the SBIR and STTR funds. DOE components also transfer funds directly to the centralized SBIR and STTR program office, making it easier for the program office to ensure that all funds are obligated.

Allowing voluntary participation. DOD officials said that some components within the agency voluntarily participate in the SBIR program even though they are not required to by law because the components see benefit in the program. Including these other components increases the total amount obligated toward the program.

Agencies Did Not Comply with All Methodology Reporting Requirements

Each of the agencies participating in the SBIR and STTR programs submitted the required reports describing the methodology used for calculating the amount of their extramural R&D budgets to SBA for fiscal year 2013, but agencies did not comply with all methodology reporting requirements. The act also requires SBA to include an analysis of the agencies’ methodology reports in its annual report to Congress. SBA has not yet issued its required report to Congress on the programs for fiscal year 2013, but the fiscal year 2012 report to Congress, which SBA submitted in November 2014, did not include the required analysis of agencies’ methodology reports.

Some Agencies Did Not Provide All Required Information, and Most Submitted Methodology Reports Late

As we found for previous years in past reports, some agencies did not provide all the information required in their methodology reports for fiscal year 2013. As discussed in the SBIR policy directive, agencies are required to submit reports to SBA each year that itemize the programs excluded from their extramural R&D calculations and explain the reasons SBA also requested that agencies provide the dollar for the exclusions.amounts of the programs excluded from their extramural R&D.

For fiscal year 2013, all 11 agencies submitted a methodology report to SBA. However, three agencies did not itemize the specific programs they excluded from their extramural R&D, or did not explain the reasons for the exclusions from their calculations of extramural R&D, or both. Specifically, DOD, EPA, and NSF either did not itemize the specific programs that they excluded, did not explain the reasons why they excluded the programs, or both. Two of these three agencies’ methodology reports—DOD and EPA—included general categories of exclusions but did not itemize the programs that were excluded. For example, DOD’s fiscal year 2013 report stated that some of its programs were exempted by the Small Business Act, which exempts programs in the intelligence community. However, DOD’s report did not itemize the specific programs or subunits that were excluded, as required by the policy directives. In addition, four agencies did not indicate to SBA whether they had exclusions for some or all of their programs. Specifically, the Departments of Agriculture (USDA), Education, and Commerce, and HHS did not indicate in their methodology reports to SBA whether they had exclusions for some or all of their programs. Agencies are not explicitly required to state if they have no exclusions, but without that information it will be difficult for SBA to determine whether these agencies may have had exclusions that were not included in their reports to SBA. Two of the participating agencies— the Department of Transportation (DOT) and DHS—provided the dollar amounts associated with each of their exclusions, consistent with SBA guidance.

Additionally, 10 of the 11 agencies submitted their methodology reports for calculating extramural R&D to SBA later than the date required in the Small Business Act. According to the Small Business Act, agencies must submit their methodology reports to SBA within 4 months of enactment of their annual appropriations. Fiscal year 2013 appropriations for each of the participating agencies were enacted in March 2013, so the methodology reports were due in July 2013. However, for fiscal year 2013, nine 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 June through September 2014—about a year after the deadline for the methodology reports. One agency, HHS, met the deadline by submitting its methodology report to SBA in July 2013. 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 9 of the 10 agencies that submitted their reports late said that they could have provided the reports to SBA within 4 months of their appropriation if SBA had requested them. SBA is not required to request the reports from agencies, and SBA officials told us that they did not request the methodology reports for fiscal year 2013 sooner because they were focused on updating the template that the agencies used to submit program data to SBA.

The agencies’ late submission of the methodology reports makes it difficult for SBA to promptly analyze their 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 incorrectly, which could lead to agencies spending less than the required amounts on the programs. We previously recommended in June 2014 that SBA request that the agencies submit their methodology reports within 4 months of the enactment of appropriations, as required by the Small Business Act and the program policy directives, and SBA agreed with the recommendation. However, SBA has not yet taken action to address this recommendation. We continue to believe this recommendation has merit and should be fully implemented. Doing so could better position SBA to analyze agencies’ methodologies and provide timely feedback.

SBA Has Not Submitted Its Required Report to Congress for Fiscal Year 2013

SBA has not issued its report to Congress on the programs for fiscal year 2013. The Small Business Act requires SBA to report to certain congressional committees on the SBIR and STTR programs not less than annually, but the act does not specify a date that the report is due. In October 2014, SBA officials told us that they had recently begun reviewing the agencies’ annual data submissions for fiscal year 2013 and anticipated that it would take 6 to 9 months to complete their report and submit it to Congress. Officials said that their review of the data submissions was delayed because of changes SBA had made to the data submission template, which prompted SBA to extend the reporting date for agencies from March 2014, as required by SBA’s policy directives, to June 2014. We previously concluded in September 2013 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 these programs are being attained and that Congress was receiving critical information to oversee these programs. In our September 2013 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.with our recommendation and stated in its comments on that report that it planned to implement the recommendation. Although SBA officials told us in January 2015 that they were still in the process of verifying the data they had requested from agencies for SBA’s fiscal year 2013 report to SBA agreed Congress, they said that that they plan to provide a more timely report to Congress in the future.

The information in the agencies’ methodology reports may not be adequate for SBA to provide Congress with its required analysis of how agencies calculated their extramural R&D for fiscal year 2013. The Small Business Act requires agencies to submit a report to SBA describing the methodology used for calculating the amount of their extramural R&D budgets. The act also requires SBA to include an analysis of the agencies’ methodology reports in its annual report to Congress. The fiscal year 2012 report to Congress, which SBA submitted to Congress in November 2014 and is the most recent report available, did not include the required analysis of agencies’ methodology reports. SBA officials told us that they did not provide clear guidance to the agencies about the information to submit to SBA in their fiscal year 2012 methodology reports and, therefore, it could be unclear how agencies calculated their extramural R&D. For fiscal year 2013, SBA provided agencies with additional guidance requesting the identification of all R&D programs excluded from the determination of extramural R&D and the dollar amounts of those programs, but they have not yet assessed whether the information is adequate to determine whether agencies are calculating their extramural R&D correctly. Currently, each of the agencies submits methodology reports of varying detail, with some providing limited information on how they calculated their extramural R&D budgets that make it difficult for SBA to determine how the agencies are calculating their extramural R&D. For example, one agency submitted a methodology report that states that agency budget officers estimate funds available for extramural R&D and use a formula to calculate the spending requirement. The methodology report does not provide additional information on how the budget officers made the calculation. Program officials from this agency told us that they need SBA to tell them whether additional information is needed in the methodology report before they can obtain it from their budget office. Without assessing whether the information it collects is adequate to analyze agencies’ methodology reports, SBA cannot provide Congress with an accurate analysis of how agencies calculate their extramural R&D.

In January 2015, SBA officials told us that they had begun to analyze the methodology reports for fiscal year 2013 and said that they plan to include an analysis of the methodology reports in the fiscal year 2013 report, but the officials did not provide GAO with any documentation of the analysis and did not discuss their preliminary findings. In addition, officials from most of the agencies told us that their methodologies for determining their extramural obligations have not changed for years, and they report similar information to SBA every year. We previously concluded in September 2013 that, without guidance from SBA, participating agencies are likely to continue to provide SBA with broad, incomplete, or inconsistent information on their methodologies for calculating their extramural R&D, and we recommended that SBA provide timely annual feedback to each agency following the submission of its methodology report. SBA agreed with our recommendation and stated in its comments on our report that it planned to implement the recommendation but, as of January 2015, it has not provided agencies substantive feedback on their fiscal year 2013 methodology reports. We continue to believe our recommendation has merit and should be fully implemented.

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

Potential effects of changing the methodology to calculate the SBIR and STTR spending requirements based on each agency’s total R&D budget instead of its extramural R&D obligations include an increase in the amount of each agency’s spending requirement—for some agencies more than others—and an increase in the number of agencies required to participate. 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 to Use an Agency’s Total R&D Budget 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 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 rather than its extramural R&D obligations using the same percentages and participation thresholds defined in current law, total spending requirements in fiscal year 2013 would have increased from $2.3 billion to $3.9 billion, an increase of roughly $1.6 billion or 70 percent, according to our analysis of budget data and data submitted to SBA. This increase would have occurred both because agencies that currently participate would be required to spend more on the programs—because an agency’s total R&D budget is larger than its extramural R&D budget—and because additional agencies would be 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 budgets. These effects are consistent with our findings in previous reports on these issues.

As shown in figure 3, some agencies’ spending requirements would increase 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 also affected by the inclusion of programs in total R&D that were excluded from extramural R&D by statute. Agencies that fund primarily extramural research would see smaller increases to their spending requirements under the alternative scenario, while agencies that fund more intramural research would see larger increases in their spending requirements, a finding consistent with those of our previous reports. Examples are as follows:

NSF used more than 95 percent of its total R&D budget to fund extramural research in fiscal year 2013 and was required, based on data submitted to SBA, to spend $131.7 million on its SBIR program that year. Under the alternative scenario, NSF’s SBIR spending requirement would have been $133.6 million, an increase of about 1 percent.

The Department of Commerce, on the other hand, used more than 20 percent of its total R&D budget to fund extramural R&D in fiscal year 2013 and was required to spend about $7 million on its SBIR program in that year. Under the alternative scenario, Commerce’s spending requirement would have more than quadrupled to $30.9 million. Furthermore, assuming that the thresholds for participating in the program did not change, this scenario would have required Commerce to spend $4 million on a new STTR program in fiscal year 2013. Consequently, the alternative scenario would have required Commerce to spend an additional $27.9 million on SBIR and STTR programs in fiscal year 2013, an increase of about 400 percent.

As noted above, changing the calculation methodology from basing the spending requirement on extramural R&D obligations to total R&D budget would also require additional agencies to participate in SBIR and STTR, assuming that the dollar thresholds for participation remain the same. Two additional agencies—the Departments of Veterans Affairs and the Interior—would have been required to participate in SBIR during fiscal year 2013 under the alternative scenario. Adding these agencies to the SBIR program would have increased total federal SBIR spending requirements by $52.5 million, in addition to the $1.3 billion increase in spending requirements at the 11 agencies that currently participate in the SBIR program. Likewise, three additional agencies—USDA and the Departments of Commerce and Veterans Affairs—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 $15.2 million, in addition to the spending requirement increases of $163 million at the five agencies that currently participate in STTR.

Basing the SBIR and STTR spending requirements on an agency’s total R&D budget, 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, 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 had been 1.6 percent for SBIR and 0.2 percent for STTR in fiscal year 2013, 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 or the Department of Commerce. In contrast, spending requirements would have decreased at agencies, such as HHS and NSF, which primarily fund extramural research. In this scenario, spending requirement reductions, including $175.8 million at HHS and $59.7 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 of these programs, agencies identified several 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. For example, several program managers said that basing the SBIR and STTR spending requirements on total R&D would reduce the complexity of calculating spending requirements since agencies would no longer have to identify the extramural portion of their total R&D budgets. Some agency officials said that extramural R&D obligations are not calculated for any purpose beyond determining SBIR and STTR spending requirements. DOD program managers also told us that changing the calculation method would significantly simplify administration of their program. Currently, DOD’s program managers receive funding for SBIR and STTR from the comptrollers of all 3 military departments and about 21 other components that conduct R&D. According to DOD program officials, receiving money from all of these components can take months. If the spending requirements were calculated based on total R&D budgets, DOD program officials said that the SBIR program could receive funding from a single comptroller, which would allow DOD to make awards faster and better align SBIR and STTR awards with DOD-wide priorities.

Program officials also identified potential drawbacks to changing the methodology, as we found in our previous reviews. In particular, several program managers said that increasing the amount of money that goes to SBIR could potentially reduce the amount of resources directed toward intramural research and extramural research outside of the SBIR and STTR programs. Program managers at one agency told us that the goals of extramural and intramural R&D spending are different since spending on intramural R&D is driven directly by an agency’s mission, while spending on extramural R&D provides special expertise that may not exist in the agency. These officials said that shifting money away from intramural R&D to small businesses that may not have the necessary expertise could diminish an agency’s ability to address specialized areas of R&D. Furthermore, program officials at another agency said they did not think it would make sense to calculate spending requirements for SBIR and STTR based on total R&D budgets since small businesses are only involved in extramural R&D, and total R&D budgets include funding for both intramural and extramural R&D. These officials said that structuring the spending requirements in this way could result in intramural research programs paying to support research at small businesses that does not directly benefit the programs, depending on how agencies decide to implement the change. In addition, some program managers raised concerns that a significant increase in the funding for the programs could be a challenge in the short term because they do not currently receive enough quality applications to meet the potential increased spending requirements, and it could take several years before they would have enough quality applications to meet the new spending requirements.

Total Administrative Spending in Fiscal Year 2013 Is Unknown, but Six Agencies Spent $12.3 Million on the Administrative Pilot Program

Little is known about total administrative spending for fiscal year 2013 because the agencies that participate in the SBIR and STTR programs are not required to and do not fully track these costs. Agencies participating in the administrative pilot program reported spending $12.3 million on various new administrative and oversight activities in fiscal year 2013, but this amount does not represent total administrative spending. Furthermore, officials at some agencies expressed concern about the temporary nature of the pilot.

Little Is Known about Total Administrative Spending

Little is known about the total amount that agencies spent to administer their SBIR and STTR programs for fiscal year 2013 because the agencies are not required to and do not fully track these costs. For example, officials we interviewed told us that they do not have systems in place to accurately track the cost of all personnel who participate in the SBIR and STTR programs on a part-time basis, such as those who review applications or monitor contracts. Officials at three agencies said that tracking total administrative costs for the SBIR and STTR programs would require that they develop a more accurate time accounting system with codes for the programs. In response to our requests for data on their fiscal year 2013 administrative costs, most agencies provided information on some categories of administrative costs and partial estimates of costs. We received estimates for administrative costs from 9 of the 11 agencies participating in the programs. These estimates ranged from about $388,000 to $27 million. As with the data for fiscal years 2011 and 2012 provided for our previous reports, these data were incomplete and unverifiable.

Six Agencies Participated in the Administrative Pilot Project in Fiscal Year 2013 and Spent $12.3 Million

Six agencies—DOD, DOE, HHS, NSF, USDA, and the Department of Transportation—participated in the administrative pilot program in fiscal year 2013, and these agencies reported spending $12.3 million on administrative and oversight activities as part of the program. Under the 2011 reauthorization of the SBIR and STTR programs, agencies could spend up to 3 percent of SBIR funds on program administration and similar costs beginning in fiscal year 2013. 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. SBA is supposed to use the information to report on the pilot program to Congress.

Program officials at four agencies that participated in the pilot program said they used funding from the administrative pilot program to, for example, hire new staff; conduct outreach to previously underserved populations such as minority-owned small businesses; take steps to reduce fraud, waste, and abuse; and upgrade internal data systems. Of the five agencies that chose not to participate in the administrative pilot program—Commerce, Education, EPA, DHS, and NASA—three said that participation in the program would take money away from making awards to small businesses. Another agency that chose not to participate, DHS, submitted a program proposal to SBA for the administrative pilot program, but agency officials told us that they decided not to participate because internal policies kept them from hiring a dedicated contracting officer/specialist, and a conference they planned to attend to conduct outreach to underserved communities was cancelled.

Program officials at most of the agencies that participated in the pilot program told us that SBA’s approval of the work plans after the fiscal year started or late appropriations from Congress contributed to agencies spending less than they planned to spend in fiscal year 2013. In fiscal year 2013, agencies estimated that they would spend $58.2 million on the administrative pilot program, but our analysis of the agencies’ work plans and data provided to SBA shows that agencies obligated $12.3 million or 21 percent of the proposed amount (see table 3). Of the six agencies that participated, DOE obligated most of what it estimated it would spend. One program manager said that the small amount of money the agency spent through the administrative pilot program in fiscal year 2013 is somewhat misleading, as many of the agency’s activities were just getting started, and agency officials expected to spend more in the future on allowable administrative pilot activities. Another agency official told us that the agency did not participate in the administrative pilot program in fiscal year 2013 because the agency drafted its plan late in the fiscal year and could not make planned expenditures, but that the agency participated in the pilot program in fiscal year 2014. Finally, officials at one agency raised concerns that it was challenging to find new activities, in part because the agency was already doing or had recently done some things that they wanted to fund. For example, program managers for one agency told us that they wanted to use funds from the administrative pilot program to reinstate in-person award review panels, which were discontinued due to lack of funding. However, SBA refused to allow it, stating that funds from the administrative pilot program could only be used to support new activities. The agency officials said that they understand SBA’s reasoning but believed that restoring discontinued administrative activities should be considered new activities and allowed.

In fiscal year 2013, SBA requested that agencies submit data on the total amount spent on the administrative pilot program, but it did not request agencies to submit information on how they used the funds. The 2011 reauthorization of the programs requires SBA to provide Congress with a report on the use of administrative pilot program funds.was the first year of the pilot program, and SBA officials said they were still determining the information they needed to report to Congress. SBA officials told us that they did not have information about how agencies used their funds for the administrative pilot program and acknowledged Fiscal year 2013 that it would be useful to have. A list of the activities agencies initiated and the costs of each of these activities is one way that SBA could obtain further information on the use of funds. In response to our questions, SBA officials sent an e-mail to the 11 participating agencies requesting that they provide SBA with a summary of how funds for the administrative pilot program were used. In March 2015, the SBA officials said that they were in the process of receiving and clarifying the agency responses. Ten of the agencies told us that they could provide the information to SBA if requested. Because SBA has not required agencies to submit information on how they used the funds, SBA cannot undertake a comprehensive evaluation of the performance of the administrative pilot program and provide greater transparency when reporting to Congress.

Some program managers told us that they planned to spend more money on the administrative pilot program in fiscal years 2014 and 2015, but there is concern about the future of the pilot beyond fiscal year 2015. Specifically, officials at 7 of the 11 agencies that participated in the SBIR and STTR programs told us that they would prefer that the administrative pilot program were either extended or made permanent. Some officials said that the program should be extended to give SBA enough time to track whether pilot-funded initiatives were successful, while other officials were concerned about hiring new staff when the funding for the positions might not be available after fiscal year 2015.

Conclusions

Federal agencies have awarded billions of dollars to 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. For example, in our last report, we recommended that SBA clarify in the SBIR and STTR policy directives that agencies are supposed to spend the required amount each year, rather than reserving funds for future years to meet spending requirements. We also recommended that SBA request that agencies submit their methodology reports within 4 months of appropriations, as required by law. SBA officials said that they plan to take actions to address both of these recommendations but had not done so before agencies submitted their fiscal year 2013 data, and we found that these issues continue. Thus, we continue to believe the recommendations have merit and should be fully implemented.

In addition to issues that could be addressed by implementing our prior recommendations, we identified three issues that—if left unaddressed— could affect compliance with spending and reporting requirements in the future. First, most agencies continued to provide SBA with data on their extramural R&D budgets, rather than the amounts they actually obligated for extramural R&D. In doing so, agencies have limited SBA’s ability to accurately assess whether they complied with program spending requirements. Without information on how much agencies obligated for extramural R&D, SBA cannot accurately determine and report to Congress on compliance with spending requirements. Program managers told us that they face challenges in submitting obligations data to SBA. For example, they cited difficulties in calculating their actual extramural R&D obligations and challenges in complying with spending requirements based on a figure that is not known until after the end of the fiscal year— when it is too late to obligate additional funds to comply with the requirements. Nevertheless, the Small Business Act defines the annual spending requirements as a percentage of their extramural R&D obligations. Without SBA notifying Congress or developing a proposal for Congress to change the requirement, agencies are likely to continue to face challenges in submitting the correct data to SBA and in complying with the law. Second, SBA did not include an analysis of agencies’ methodology reports in its most recent report to Congress for fiscal year 2012, and SBA officials told us it was not clear from the methodology reports how agencies were calculating their extramural R&D. Moreover, some program managers told us that the purpose of the methodology reports is not clear. The law requires SBA to include an analysis of the agencies’ methodology reports to Congress. However, each of the agencies submits methodology reports of varying detail, with some providing limited information on how they calculated their extramural R&D budgets, making it difficult for SBA to analyze the agencies’ methodology reports. Without assessing whether the information it collects is adequate to analyze agencies’ methodology reports, SBA cannot ensure that it is providing Congress with an accurate analysis of how agencies calculate their extramural R&D. Third, the administrative pilot program provides agencies with an opportunity to expand their oversight and administration of the programs. In fiscal year 2013, SBA requested the total amount that agencies spent on the administrative pilot program from the agencies but did not require agencies to submit information on how they used the funds. Without this additional information, SBA cannot undertake a comprehensive evaluation of the performance of the administrative pilot program allowing it to provide greater transparency on the program to Congress.

Recommendations for Executive Action

To ensure full compliance with SBIR and STTR spending and reporting requirements, we recommend that the SBA Administrator take the following three actions:

Notify Congress in SBA’s 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.

Assess the methodology reporting requirement to determine whether it generates adequate information for SBA to analyze the accuracy of agencies’ calculations of their extramural R&D. If SBA finds that the information is inadequate, SBA should update its guidance to require adequate information.

Provide greater transparency for the administrative pilot program by requiring participating agencies to provide data on the use of the funds, rather than a total cost for all of the activities under the pilot.

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 agreed with our recommendations. SBA also provided technical comments, as did DHS and HHS, which we incorporated as appropriate. Seven of the agencies—Commerce, DOE, DOT, Education, EPA, NASA, and NSF had no technical or written comments. The remaining agencies—DOD and USDA—provided written comments, which were reproduced in appendixes III and IV, respectively.

In its written comments, the DOD Acting Director for the Office of Small Business programs raised two issues. First, DOD recommended that we remove the assertion that the extramural budget is defined as actual obligations over the course of the year. DOD stated that the spending requirement is calculated within 4 months following the enactment of annual appropriations; therefore the spending requirement must be based on the planned extramural R&D budget, which has an obligation period of 2 years, and not over the course of the year as defined in this report. DOD is not required to calculate its spending requirement in the first four months after it receives its appropriation, but only required to submit its methodology for calculating its spending requirement. In addition, we acknowledge that DOD generally has two years to obligate its R&D funds, but agencies are specifically required to spend it in each fiscal year. Moreover, the Small Business Act defines extramural R&D budget in terms of obligations. Nothing in the act indicates that “obligations” should be construed as “planned obligations.” Therefore, we continue to believe that the extramural R&D budget is defined as actual obligations over the course of the year. In their second point, DOD recommends submitting the extramural budget calculated in the methodology report, rather than actual extramural obligations, to SBA in the annual report. We recognize that using extramural R&D obligations makes it difficult for agencies to comply with spending requirements and we recommend in this report that SBA notify Congress if it cannot determine compliance with spending requirements when agencies do not report extramural R&D obligations data, or develop a proposal to Congress that would change the requirement.

In its written comments, USDA’s Director of the National Institute of Food and Agriculture stated that USDA generally agrees with our report. The official stated that because total obligations for extramural R&D are not known until the end of the fiscal year, it makes it difficult for the agency to ensure that funding targets for SBIR are met every year. USDA agreed with our recommendation that SBA should submit a proposal to Congress to change the requirement.

We are sending copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Commerce, Defense, Education, Energy, Homeland Security, Health and Human Services, 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 V.

Appendix I: Agencies’ Compliance with Spending Requirements for the Small Business Innovation Research Program for Fiscal Year 2013, 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 2013 spending requirements, while spending for the remaining 2 agencies did not meet the requirements. (See table 4.)

Appendix II: Agencies’ Compliance with Spending Requirements for the Small Business Technology Transfer Program for Fiscal Year 2013, 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 2013 spending requirements, while one agency did not. (See table 5.)

Appendix III: Comments from the Department of Defense

Appendix IV: Comments from the Department of Agriculture

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Hilary Benedict, Assistant Director; Jeffrey Barron; Andrew Burton; Antoinette Capaccio; Cindy Gilbert; Marya Link; Perry Lusk; Cynthia Norris; and Dan Royer made key contributions to this report.