Using SBIR Funding to Award Other Transactions Agreements (OTA)

posted in: Other Transactions | 2
Share this:

The DoD and federal government are missing out!  So too are large segments of the industrial base.  A result of an inability to conceptualize the obvious synergy between the Small Business Innovation Program (SBIR) and Other Transactions (OTs) and related authorities to improve the efficacy of both.  Procurement contracts, 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 2371 and 2371b) provide specific authority to award contracts for R&D, prototyping and follow-on production.  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 those instruments in the SBIR Program makes sense!  Many small businesses lack knowledge in arcane government contracting practices. Why else are there hundreds of procurement technical assistance centers throughout the country?  Partnership Intermediaries to aid DOD in assisting small businesses are also a growth industry.

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 and well-being 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, if more appropriate, it is Congressionally preferred.  Also, less arcane and open to commercial principles, practices, and goals.  Yet, they have only been used episodically by a few DOD organizations.

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. 2371 (2371b OTs are carried out under the authority of 2371) 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. 2371b 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 well suited to 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 and apathy.  Knowledge about OTs in DOD’s acquisition and R&D community is abysmal.  This problem is compounded by, perhaps the result of, a persistent business-as-usual attitude within the acquisition bureaucracy.

DOD’s efforts to educate its workforce have been grossly inadequate.  Moreover, as just suggested misinformation abounds. This although in NDAA 2018, section 867, Congress mandated adequate education for “management, technical and contracting personnel” involved in the award and administration of prototype projects.  DOD is years behind the power curve educating its workforce.  In the case of Other Transactions and related authorities, policy far exceeds practice.

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


written by Richard L. Dunn


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.