After proving the efficacy and competitive strength of the technology procured via a SBIR award, federal agencies are required by law to work in good faith with the SBIR awardee to transition novel SBIR technology to production “to the maximum extent practicable” through sole source Phase III contract awards.
… Sadly, however, successes in scaling SBIR capabilities remain the exception, not the rule. In the more typical case, we have found that agencies are happy to issue small Phase I/II grants without taking the final step of scaling the developed capabilities into production contracts and programs of record with the SBIR awardees who developed the technology. Even worse, in some cases, agencies have taken the technology developed in the SBIR program and handed it to their preferred traditional prime contractor, in clear contravention of the program’s requirements and the law.
That was from an Anduril blog post, “How the Government Can Use the SBIR Program to Scale Innovation.” The Small Business Administration agrees with the problems companies have had getting to a SBIT Phase III sole source follow on. The FY 2021 NDAA includes a provision for each service to report transformative technology that completed SBIR Phase II, perhaps putting a spotlight on them to transition.
Here are some additional considerations why defense officials do not award more sole-source SBIR Phase III follow on contracts:
Program of Record.
I often talk on this blog about the difficulty of lining up requirements and funding to go after a new program of record. Even with institutional support across the Department, it can takes a minimum of three years, and more like five or more to get money. Even the concept of a program of record — this perfectly self-contained system built from the ground up — doesn’t make much sense in an economy defined by combinatorial innovation.
One of the biggest hurdles is that companies completing SBIR Phase II are not often building full-up systems like an aircraft, ship, ground vehicle, missile, etc. They are building enabling technologies, subsystems, software, etc., that may have multiple purposes across defense programs.
The DoD itself outsources most effort to a single prime contractor who does the integration effort. In the current construct, many SBIR companies would not be dealing directly with the government itself, but would have to force their way into the supply chain of primes across any number of programs that are currently on autopilot.
No one gets fired buying from the primes.
Another aspect of this is that government official rarely if ever get in trouble for buying from a prime like Lockheed, Northrop, Boeing, etc. Even if the program fails to deliver value, officials didn’t take a personal risk because those companies handle so much of defense contracting. On the other hand, buying from a relatively unknown SBIR firm and the product turns out to be vaporware could be catastrophic. They should have done their market research!
Something that is often found in common between primes and SBIR firms is that they repackage the existing state-of-the-art found in the commercial sector and call it something new or proprietary. Government officials often don’t have the expertise to do a prior art search and call them out on it. Which gets us to…
Intellectual Property.
Companies that went through the competitive SBIR process also get to keep most of their intellectual property. However, the recent trend in government is to get a minimum of Government Purpose Rights on everything. Their fear is getting locked into a sole-source environment where costs skyrocket and the government cannot manage competition. The F-35 has been the poster child of these issues, and Congress is considering language as a result requiring DoD to own more intellectual property.
Though it’s not clear what DoD could do with the data rights should they get them, or how they will compensate firms for it, these demands for IP are growing. For venture backed companies whose products were mostly developed with private capital, and received maybe a million dollars from government, giving up their “secret sauce” for free is a non-starter.
Conclusion.
I think the ultimate problem is that the budget is already packed with existing programs, and they only want more money to cover their risks. No one is incentivized to look for new technologies. Program offices already have their standing orders and are putting out fires left and right trying to execute.
These SBIR companies often will not have a major hundred-million or billion dollar program fully formed out of Phase II. But the hurdles to starting anything are so high that the program needs to be in that range. DoD needs more avenues to get money to these firms to do small programs, and scale up from there in an optional way where these new firms are the primes. You cannot build to a complex system by starting with complexity. Venture funding rounds understand this, but in the SBIR world its like getting an angle round, seed round, and then expecting the company to IPO next year.
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