Correction: A previous version of this article misstated some of the penalties for companies for missing benchmarks under the new legislation. The story has been edited to clarify the penalties.
This story was updated on Sept. 21, 2022 at 10:14 AM after the Senate passed the bill.
WASHINGTON — Congress could pass legislation as soon as this week to reauthorize a small business innovation grant program favored by the Pentagon after reforms addressing concerns over the abuse of the rewards process persuaded Sen. Rand Paul, R-Ky., to drop his opposition to the program.
Paul told Defense News on Tuesday that he will not block a unanimous consent request for the Senate to pass the bill reauthorizing the Small Business Administration’s Small Business Innovation Research and Small Business Technology Transfer awards for three years.
Those programs are set to expire by the end of the month.
“We were happy to get some reforms in it,” the Kentucky Republican said.
Paul had used his clout as the top Republican on the Small Business Committee to block reauthorization of the program. The 43-page compromise legislation, first seen by Defense News, is the product of months of negotiations meant to assuage Paul’s concerns.
The reauthorization bill includes new provisions to address ties between some program awardees and China, while adding additional performance benchmarks aimed at commercializing projects to attract more private capital investment.
Senate Small Business Committee Chairman Ben Cardin, D-Md., told Defense News that he filed the reauthorization bill Tuesday, and the Senate passed it by unanimous consent shortly thereafter. The House is expected to easily pass the bill as soon as this week under expedited procedures.
The Defense Department accounts for the majority of the SBIR and STTR awards, which ballooned to nearly $3.3 billion in 2011. The program is awarded jointly by 11 federal agencies, and individual awards range from tens of thousands of dollars to more than $1 million for a two-year grant.
The programs incentivize small businesses to engage in early-stage research and development for technologies and products that companies might otherwise shy away from given uncertain returns on investments.
SBIR grants that were awarded by the Air Force to AeroVironment led to the development of the small, kamikaze Switchblade drones, which the United States has sent to Ukraine as it fends off Russia’s invasion. The Pentagon also relies on SBIR and STTR grants to spur technologies in fields such as artificial intelligence, data processing and munitions development.
Still, Paul had argued that the two programs lacked protections against China gaining access to U.S. technology and that some companies rely entirely on the grants to sustain themselves without spinning off new businesses or products.
Chinese state-sponsored companies have targeted U.S. firms that receive the grants, hoping to benefit from the investments. A 2021 Pentagon report on a small sample of SBIR awardees found China was the ultimate beneficiary of the grants, not the United States.
Under the reauthorization bill’s new guidelines, SBIR or STTR applicants must now disclose whether the company has ties to “any foreign country of concern, including the People’s Republic of China.” The Defense Department and other agencies must deny awards to applicants that have ties to Chinese companies or have high-level employees that are part of “a malign foreign talent recruitment program.”
The bill requires each federal agency that awards the grants to coordinate with the Small Business Administration in the creation of “a due diligence program to assess security risks presented by small business concerns seeking a federally funded award.”
The Small Business Administration and the White House’s Office of Science and Technology must also consult with the Committee on Foreign Investment in the United States to establish best practices to guide these due diligence programs.
Additionally, the enhanced performance benchmarks differentiate between Phase I and Phase II SBIR and STRR grants. Under the program, Phase I awards range from $50,000 to $250,000 for six to 12 months. Phase II awards range from $750,000 to nearly $2 million for two years. There are also direct to Phase II awards, which allow companies to receive Phase II grants without first competing Phase I research.
The new legislation doubles the minimum performance standards for each small business that receives more than 50 Phase I grants within five years.
Additionally, a small business that has received more than 50 Phase II awards within the past 12 years must garner “an average of $250,000 of aggregate sales and investments” for each of those awards. And a company with more than 100 Phase II awards within the past 12 years must earn an average of $450,000 in aggregate sales and investments.
If a company does not meet these standards, then it may not receive more than 20 total SBIR and STTR Phase I and direct to Phase II awards for one year per agency. They may still receive unlimited Phase II awards.
Bryant Harris is the Congress reporter for Defense News. He has covered U.S. foreign policy, national security, international affairs and politics in Washington since 2014. He has also written for Foreign Policy, Al-Monitor, Al Jazeera English and IPS News.