Pentagon Clarifies Small Business Programs Are Exempt from Grant Funding Suspension

Key Takeaways

The Pentagon’s SBIR and STTR programs are not affected by the White House’s grant funding pause.
Concerns arise over potential abuse of funding by certain companies in these programs.
Reforms to expand accessibility and improve oversight are being discussed among lawmakers.

Two important Pentagon programs aimed at fostering innovation in small businesses, known as the Small Business Innovative Research (SBIR) and the Small Business Technology Transfer (STTR), remain unaffected by a recent order from the White House’s Office of Management and Budget (OMB) to pause federal grant disbursements. This order, issued earlier this week, instructs federal agencies to halt all activities related to the obligation or disbursement of federal financial assistance, but it excludes programs that directly support individuals, such as Social Security and Medicare.

Despite the broader implications of this directive, a Pentagon spokesman clarified that the SBIR and STTR programs are funded through contracts and not classified as grants. Therefore, the OMB memo is not applicable to these initiatives. These programs, established by Congress, mandate all federal agencies—beyond the Department of Defense (DOD)—to allocate funding specifically to encourage small companies to engage in early-stage research and development.

During a recent Senate Armed Services Committee hearing, lawmakers expressed their worries that the funding pause could negatively affect these essential programs for small businesses. Nonetheless, the Defense Department insists that the SBIR and STTR programs are continuing unaffected. The authorization for funding these programs was last renewed in 2022 but is set to expire in September 2023.

While these initiatives have strong support in Congress and are intended to help small businesses leverage DOD interest to attract investors, concerns about potential misuse of the funds have emerged. The Government Accountability Office (GAO) released a report last fall that highlighted 34 instances of fraud within the SBIR and STTR programs. The report suggested that many federal agencies do not perform fraud risk assessments, leading to alarming cases, including one where a business owner received seven awards from multiple agencies after misrepresenting his companies.

Senator Joni Ernst, a Republican from Iowa, voiced her apprehension during the hearing, noting that a small number of firms, referred to as “SBIR mills,” have reaped a disproportionate amount of funding from the DOD. She pointed out that over the past ten years, just 25 companies have captured 18% of all awards, totaling approximately $2.3 billion—averaging $92 million per company—despite the program being designed for smaller entities.

Former director of the Air Force’s AFWERX innovation hub, Nathan Diller, highlighted the need for reform. He suggested broadening the eligibility of the awards to include a larger pool of companies. This could involve issuing smaller initial contracts that reward successful firms with larger awards as they demonstrate promising technologies. Diller emphasized the importance of swift scaling to advance the best companies in the field.

The discussions surrounding these innovative small business programs and potential reforms indicate a growing awareness among lawmakers and officials of the need to ensure integrity and support the program’s original intent. As the funding landscape evolves, balancing oversight with accessibility remains crucial for fostering genuine innovation within the defense sector.

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