Does Defense have $250M IOU to small businesses?

The SBIR program has been a legislated requirement of the Department of Defense, an agency responsible for roughly 40 percent of all federal extramural R&D spending, for more than three decades. One might expect that over that amount of time, the Department of Defense would have developed a system to become compliant with SBIR’s fundamental provision that a minimum threshold of innovation research spending be directed toward small businesses.  Yet, a new report from the Government Accountability Office concludes DOD couldn’t say if it was meeting the threshold because, DoD did not submit the required obligations data. The report states “DOD officials told [the GAO] that obtaining obligations data would require requesting information from more than 10 individual program offices that, in turn, would have to request the information from various DOD comptrollers, which would be a major effort.” [Emphasis added.]

The report states the DOD has “no procedures to capture total extramural R&D obligations for a particular fiscal year. Moreover, they said they have no plans to establish such procedures, and establishing them would be challenging.”

During SBIR’s first decade or so, there were widespread grumblings that Defense viewed SBIR as a tax on its R&D budget rather than an opportunity to integrate more innovative ideas, high quality R&D and creativity into the earliest stages of the military research agenda at lower cost. Now, with DoD’s spending on SBIR having grown to nearly $1 billion annually, GAO is again asserting that the department find a way to calculate the spending, or that reporting requirements be adjusted.

The GAO used fiscal year 2015 as its study year to assess compliance for all of the SBIR/STTR participating agencies. DOD and EPA, the smallest agency required to participate in the programs, could not say they met the spending threshold. The other nine participating agencies were able to submit the required data and eight of the nine met the SBIR spending requirements. In EPA’s case, the GAO report states multiyear appropriations for several EPA research programs makes assessment of an adequate annual threshold more difficult.

What about DOD? Using considerably fewer resources than are available to the Department of Defense, SSTI was able to calculate quickly the DOD SBIR FY 2015 obligation based on extramural R&D data the agency submits to the National Science Foundation for the annual “Survey of Federal Research and Development Expenditures.”  Based on those figures, the math shows the Department of Defense shortchanged SBIR, but the amount was surprising. DOD missed the required threshold by $223.7 million for the single fiscal year.

How we got there:

• The SBIR set aside requirement for FY 2015 as defined by law is 2.9 percent of an agency’s extramural R&D budget.
• Appendix I of the GAO report indicates DOD spent $956.9 million on SBIR in FY 2015. 
• Table 8 of the NSF Survey of Federal R&D reports DOD extramural R&D obligations totaled $40,711 million that same year.
• The expected 2.9 percent SBIR set aside of $40,711.3 million is $1,180.6 million
• The difference between $1,180.6 million and $956.9 million is $223.7 million.

To put the nearly quarter billion dollars the Department of Defense shorted small innovation businesses in FY 2015 into perspective, the figure is nearly the same as the combined total  in FY 2015 for the seven smallest SBIR participating agencies (in size order): NASA, USDA, DHS, DOT, DOC, DOEd and EPA. 

One explanation that might be advanced to justify some of the defense shortfall is that DOD may not have been using the same definition of extramural R&D that the SBIR enabling legislation requires.  Historically, DOD has used its own definition that excludes a sizable portion of the agency’s R&D budget that are not exempt explicitly in statute.  SBA recognizes the defense anomaly among all reporting agencies, stating in its 2013 annual report to Congress that it was “working with DOD to better understand the unique exemptions it has reported.”

GAO submitted the report to the relevant Congressional committees for their consideration and review on May 31.