SBIR has four overarching purposes: to (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 SBIR program has a three-phase structure as follows: In Phase I, agencies award up to $150,000 for a period of about 6 to 9 months to small businesses to determine the scientific and technical merit and feasibility of ideas that appear to have commercial potential. In Phase II, small businesses whose Phase I projects demonstrate scientific and technical merit, 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 objectives resulting from the Phase I and II R&D activities, where appropriate. Phase III is the period in which Phase II innovation moves from the laboratory to the marketplace. SBIR Phase III work completes an effort made under prior SBIR phases, but it is funded by sources other than the SBIR program. To commercialize their products, small businesses are expected to raise additional funds from private investors, the capital markets, or from non-SBIR sources within the agency that made the initial award. According to SBA documents, STTR’s purpose is to stimulate a partnership of ideas and technologies between innovative small businesses and research institutions through federally funded R&D.program provides funding for research proposals that are developed and executed cooperatively between small businesses and research institutions. Like the SBIR program, the STTR program is structured in three phases as follows: Phase I aims to establish the technical merit, feasibility, and commercial potential of the proposed R&D efforts and to determine the quality of performance of the small businesses. STTR Phase I awards generally do not exceed $150,000 for 1 year. Phase II funding is based on the results achieved in Phase I and the scientific and technical merit and commercial potential of the Phase II project proposed. STTR Phase II awards generally do not exceed $1 million total costs for 2 years. Phase III is for small businesses to pursue commercialization of research or technology resulting from the Phase I and II R&D activities, and it completes an effort made under the prior STTR phases but is funded by sources other than the STTR program. According to SBA, Phase III work can involve commercial application of R&D financed by nonfederal capital, including STTR products or services intended for use by the federal government and continuation of R&D that has been competitively selected in Phases I and II, according to the 2012 SBA policy directive. As noted, federal agencies with a budget of more than $100 million for extramural R&D are required to have an SBIR program, while federal agencies with extramural R&D budgets that exceed $1 billion annually are required to have an STTR program. Generally, the extramural R&D budget is defined as the sum of the total obligations for R&D minus amounts to be obligated for intramural R&D, that is, R&D conducted by employees of a federal agency in or through government-owned, government-operated facilities. In determining their extramural R&D budget, agencies have authority to exclude certain R&D programs from the extramural R&D base used for calculating SBIR and STTR spending requirements, such as facilities and equipment used for R&D and certain intelligence activities. For example, under the Small Business Act, DOE must exclude amounts obligated for its naval reactor program from its extramural R&D budget. Likewise, under the act, DOD excludes programs carried out by certain elements of the intelligence community. In addition, DOT must exclude funds obligated for the Federal Highway Administration State Planning and Research program from its extramural R&D budget. In fiscal year 2011, the 11 participating agencies reported spending a total of $2.2 billion for SBIR, and the 5 participating agencies reported spending a total of $251 million for STTR, with DOD spending the most on these programs––$1.1 billion and $121 million, respectively. DOD’s reported spending constituted 48.8 percent of total SBIR spending and 48.2 percent of total STTR spending in fiscal year 2011. According to SBA documents, the agency’s role is to serve as the oversight and coordinating agency for the SBIR and STTR programs and is to direct and assist the agencies’ implementation of the programs, review their progress, collect agency reports, analyze the information in the agencies’ methodology reports, and report annually to Congress on the programs. In this role, SBA issued SBIR and STTR policy directives in September 2002 and December 2005, respectively, and updated them in August 2012; these directives provide agencies with detailed guidance on implementation of the SBIR and STTR programs. Data reported by the participating agencies to SBA for fiscal years 2006 to 2011 indicate that most of the agencies have not consistently complied with the mandated spending requirements for SBIR and STTR. In calculating their spending requirements, some participating agencies made improper exclusions and used differing methodologies. Our analysis of data the participating agencies reported to SBA indicates that, from fiscal years 2006 to 2011, most agencies did not consistently comply with mandated spending requirements. Specifically, 8 of the 11 agencies did not consistently meet annual spending requirements for SBIR. Data from 3 of the agencies—DHS, Education, and HHS—indicate that they met their spending requirements for all 6 years. For STTR, 4 of 5 agencies did not consistently meet annual spending requirements. Data from 1 agency—HHS—indicate that it met its STTR spending requirements for all 6 years. Figure 1 shows the number of years that each agency met its annual SBIR and STTR spending requirements, based on the information submitted to SBA in each agency’s annual reports.spending on these programs. See appendix I for further details on each agency’s reported Evaluation budget of the United States Special Operations Command subunit from its extramural R&D budget because the budget is less than the $1 billion required for participating in the STTR program. HHS reported excluding the extramural R&D budgets of the Centers for Disease Control and Prevention and the Food and Drug Administration because these subunit budgets are less than the $1 billion required for participating in the STTR program. In another example, a third agency, DOT reported excluding the Federal Aviation Administration’s extramural R&D budget, which is well in excess of $100 million annually, from the SBIR program budget calculation. We asked DOT and FAA to provide the legal authority for this exclusion, but they did not supply this information. Improperly excluding subunits reduced calculations of three agencies’ respective extramural R&D and, in turn, the agencies’ spending requirements for SBIR and STTR. Over fiscal years 2006 to 2011, these improper exclusions resulted in a $7.7 million reduction to DOD’s STTR spending requirement, a $34.7 million reduction to DOT’s SBIR requirement, and HHS’ exclusions resulted in a $6.1 million reduction to its STTR spending requirement. Officials at DOD said they changed the agency’s policy on exclusions as of fiscal year 2013 and that the new policy, which will not allow these improper exclusions, is currently being implemented. DOT provided no further information on its exclusion. HHS met its overall agency spending requirement even with the improper exclusions, according to the data in HHS’ annual reports to SBA. In addition to identifying improper exclusions, we found that, when appropriations were received late in the year, agencies used differing methodologies to calculate their spending requirements, making it difficult to determine whether agencies’ calculations were correct. For example, some agency program managers told us that, when appropriations were received late in the year, they used their prior year actual spending to calculate their current year spending requirement, while others calculated their current year spending requirement using some other methodology. Specifically, program managers at the National Institute of Standards and Technology (NIST)—a subunit of Commerce—stated that program managers at NIST used the past year’s actual SBIR spending to calculate the current year’s requirement. In contrast, NASA calculated its SBIR spending requirement by determining what percentage its extramural R&D spending comprised of its total R&D spending in the prior year. NASA then applied this percentage to the current year’s total R&D budget to calculate the current year’s extramural budget, which it then used as the basis for calculating the SBIR and STTR spending requirements. Although SBA provided guidance in policy directives for participating agencies on calculating their spending requirements, neither SBA’s prior nor its current policy directives provide guidance to agencies on how to calculate such spending requirements when agency appropriations are delayed. Without such guidance, agencies will likely continue to calculate spending requirements in differing ways. Agencies participating in the SBIR and STTR programs have not consistently complied with Small Business Act requirements for annually reporting a description of their methodologies for calculating their extramural R&D budgets to SBA. In addition, SBA has not consistently complied with the act’s requirements for annually reporting to Congress, including reporting on SBA’s analysis of the agencies’ methodologies for calculating their extramural R&D budgets. With the exception of NASA in certain years, agencies did not submit their methodology reports to SBA within the time frame required by the Small Business Act for fiscal years 2006 to 2011 for the SBIR and STTR programs. The act requires that agencies report to SBA their methodologies for calculating their extramural budgets within 4 months after the date of enactment of their respective appropriations acts.