Using SBIR Funding to Award Other Transactions Agreements (OTA)

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The DoD and federal government are missing out!  So too are large segments of the industrial base.  There is an inability to conceptualize the congruency between the Small Business Innovation Program (SBIR) and Other Transactions (OTs).  Procurement contracts (FAR), though widely used to conduct research and development by the DOD, are not the preferred, or even appropriate, instrument for that purposeOther Transactions (10 U.S. Code 4021 and 4022) provide specific authority to award contracts for R&D, prototyping through follow-on production.  They were made for R&D and prototyping.  Congress has directed DOD to create a preference for using those authorities to conduct contracted R&D (section 864, National Defense Authorization Act, 2018).  Using OTs in the SBIR program makes sense!  Many small businesses lack knowledge, the overhead, time or desire to specialize in arcane government contracting practices. If the DoD wants to work with them, instead of turning them into mini-defense contractors or worse, it makes sense to do a better job meeting businesses where they are. SBIR and OTs offer that opportunity.

The Small Business Innovation Research (SBIR) program was established in the 1980’s.  Authorizing legislation is 15 U.S.C. 638.  The SBIR program taxes Federal agencies with large R&D outlays a small percentage of their extramural R&D budget for funding. The purpose is to promote commercialization of innovative technologies by small businesses. The SBIR statute, policy, and goals point to small businesses as playing key roles in economic development and job creation. The program aims to enhance small businesses innovation through access to federal R&D funding and other assistance. For some agencies, commercialization is taken literally, aimed at enhancing the national economy through development of innovative products. Some mission-oriented agencies, like the military departments and defense agencies, use SBIR programs to support commercialization of items that are of potential interest to the agency which will become the primary market for the developed product.  The statute recognizes this as a legitimate approach.

This article establishes that Other Transactions (OTs) are legally preferred for contracted R&D and congruent with SBIR goals.  Secondly, it is Congressionally preferred.  OTs, if used with the correct intent, should be much less arcane (complex), and open to commercial practices and achieving shared goals, i.e. seeking win/win scenarios.   Win/win scenarios are desirable and the result of intelligence in in action.

In addressing these questions, it is pertinent to review the basic eligibility requirements for a company’s participation.  This also addresses in part the second question.  A company participating in the SBIR program must be:

  • A small business with 500 or fewer employees
  • Independently owned and operated and organized for profit
  • Must have its principal place of business in the United States
  • At least 51% owned by U.S. citizens or lawfully admitted permanent resident aliens
  • Work must be performed in the United States
  • The Principal Investigator must spend more than one-half of the time employed by the proposing firm
  • A minimum of two-thirds of the research work must be performed by the proposing firm in Phase I and one-half in Phase II.

The SBIR program is divided into three phases. The initial award results from an SBIR competitive call for proposals. Phase I awards are for what might be called concept definition to assess scientific and technical merit and feasibility for commercialization. Phase II awards result from a down-select among companies that executed Phase I awards. Scientific and technical merit based on phase I results and feasibility for commercialization are used as the selection criteria. In Phase II the concept is further developed and typically takes on demonstrable form as in a prototype. Phase III involves further development leading to full product development. Phase III is to be conducted with commercial funding or non-SBIR government program funding.

Other Transactions as SBIR Award Instruments 

The SBIR statute defines a “funding agreement” as a contract, grant or cooperative agreement. It does not use the term “procurement contract” (the term used in the Federal Grant and Cooperative Agreement Act, FG&CA, 31 U.S.C. 6301-6306) and in least one instance uses the term contract rather than funding agreement. There is no express prohibition or inclusion of OT’s as a funding instrument.  DARPA has used OT’s selectively in its SBIR program.  Some agencies, including DOD, primarily use procurement contracts.  Others such as National Science Foundation use grants.  Yet others (National Institutes of Health) use a mix of procurement contracts and grants.  I have found no example of a cooperative agreement being used for SBIR, although they are used in the related STTR program. Interestingly, the only expressly authorized instrument with the word “agreement” in it apparently is not used as a “funding agreement.”

Although OT’s are generically “contracts” they are not procurement contracts which is what contract probably means in the SBIR definition of funding instrument.  Prototype OTs can be used in circumstances in which a procurement contract could also be used.  The SBIR statute does not prohibit their use.  As indicated in the article linked above the primary purpose for using a procurement contract is to acquire goods and services for the direct benefit and use of the government.  That is not the primary purpose of the SBIR program. The SBIR program statute’s second section is titled Assistance to Small-Business Concerns. The program’s purpose is to assist in the commercialization of federally funded R&D. The government may end up benefiting by being able to purchase a successfully commercialized product. That purchase takes place once an SBIR project is successful typically during or after phase III in which there is no SBIR funding.

OTs under 10 U.S.C. 4021 (4022 OTs are carried out under the authority of 4021) are “additional forms of transactions authorized” and may be used “in addition to contracts, grants or cooperative agreements…” Thus, for DOD, at least, OTs may be used in addition to expressly authorized SBIR “funding agreements” – contracts, grants or cooperative agreements. This point was reinforced in the National Defense Authorization Act of 2018 when Congress amended 10 U.S.C. 4022 to add the proviso “(including small businesses participating in a program described under section 9 of the Small Business Act (15 U.S.C. 638)” in subsection (d)(1)(B).

OT’s are suited to benefit a program such as the SBIR, especially as implemented by DOD where the program emphasizes commercialization but also desires a potential payoff.  Use of a procurement contract seems inconsistent with the primary purpose definition in the Federal Grant and Agreement Act (31 U.S. Code 6303) and Federal Acquisition Regulation Part 35 (FAR 35.002/003) as well as the characterization of the program as assistance rather than acquisition.

Why Aren’t OTs Being Used?

Given that OTs are (1) preferred contractual instruments for conducting R&D, and are (2) flexible, not requiring arcane contracting knowledge on the part of small business awardees, why are they not widely, even exclusively used, as SBIR award instruments in DOD?  The simple answer based on experience of recent years is probably a combination of ignorance, arrogance, and apathy.  Knowledge about OTs in DOD’s acquisition and R&D community remains abysmal.  This problem is compounded by, perhaps the result of, a persistent business-as-usual attitude within the bureaucracy. Poor leadership has failed to clear-the-way and incentivize innovative approaches to contracting and acquisition for R&D and fielding new advanced capabilities.

DOD’s efforts to educate its workforce have been inadequate.  Moreover, misinformation is more common than fact. This is true despite being addressed directly in NDAA 2018, section 867, Congress mandated adequate education for “management, technical and contracting personnel” involved in the award and administration of prototype projects (reiterated in 2023).  DOD is years behind the curve educating its workforce.  In the case of Other Transactions, policy outpaces practice by a considerable measure.

In addition to a lack of education, contracting officials and SBIR program offices appear to prefer to stick in-bounds of the traditional system, instead of learning and trying something new that would likely improve program execution and outcomes.  Senior acquisition officials have been content with business-as-usual on many fronts, including the SBIR program.  It will be interesting to see if new challenges to national security and DOD’s innovation deficit will lead to efforts to redress the growing acquisition capability gap.


written by Richard L. Dunn


*The statue identification numbers have between updated top reflect recent changes: 10 USC 2371 is now 4021, 10 USC 2371(b) is now 4022

2 Responses

  1. Masco Settles

    Mr. Dunn,
    Great article and thanks for researching.
    What are your thoughts as it relates to using Title 10 US CODE 2373 as a vehicle with in the SBIR program?

    • admin

      Within the specified domains, section 2373 could be used in phase 1 and 2 of SBIR for projects involving “experimentation, technical evaluation, assessment of operational capability, or safety…” (presumably this would apply to most if not all SBIR projects). However, phase 3 would typically involve production or product sales in quantity and would thus exceed the scope of section 2373 in most cases. You would not have a seamless transition to production as available with section 2371b. Using section 2371b or a combination of sections 2371 and 2371b in the same award instrument you can layout a multi-phase program. At each successful down-select you would simply fund the applicable phase of the agreement. Phases of the agreement could replicate phases of the SBIR program and be definitized in advance or upon successful down-select. A section 2373 instrument (“contract or otherwise”) could be similarly structured with two phases but as indicated phase 3 would require a separate award instrument.