[Federal Register Volume 73, Number 159 (Friday, August 15, 2008)]
[Pages 48004-48006]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-18914]



RIN 3245-AF61

Small Business Innovation Research Program Policy Directive

AGENCY: U.S. Small Business Administration.

ACTION: Notice of proposed amendments to Policy Directive.


SUMMARY: The U.S. Small Business Administration (SBA) proposes to 
adjust the Small Business Innovation Research (SBIR) Program award 
threshold amounts to offset the effect of inflation that has occurred 
since the amounts were last set in 1992. Current threshold amounts were 
set by Congress in 1992 at $100,000 for Phase I awards and $750,000 for 
Phase II awards. SBA is authorized by statute to adjust the award 
amounts once every 5 years to reflect economic adjustments and 
programmatic considerations. SBA proposes to increase the award amounts 
to $150,000 and $1,000,000, respectively, to account for increases in 
the costs of performing research and development.

DATES: Comments must be received on or before September 15, 2008. SBA 
intends to make these comments available to the public.

ADDRESSES: You may submit comments, identified by RIN 3245-AF61 by any 
of the following methods: (1) Federal Rulemaking Portal: http://www.regulations.gov, follow the instructions for submitting comments; 
(2) Mail: Office of Technology, 409 Third Street, SW., Washington, DC 
20416; or (3) Hand Delivery/Courier: Edsel Brown, Assistant Director, 
Office of Technology, 409 Third Street, SW., Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: Edsel Brown, Assistant Director, 
Office of Technology, at (202) 205-7343. You may also e-mail questions 
to [email protected].


A. Background

    The statutory purpose of the SBIR program is to stimulate 
innovation in the economy through a stronger role for innovative small 
business concerns in Federally-funded research and research and 
development (R/R&D). The SBIR program is a competitive program wherein 
agencies offer solicitations for proposals and award-phased funding 
agreements for R/R&D to meet stated agency needs or missions. Phase I 
and Phase II agreements are funded through the portion of agency 
budgets reserved by statute for the program. Phase III funding comes 
from other Federal or non-federal sources.
    At the inception of the SBIR program in 1982, award guideline, or 
threshold, amounts were established at $50,000 for Phase I and $500,000 
for Phase II. SBA's first SBIR policy directive required agencies to 
notify SBA within 30 days after award of any funding agreement 
exceeding these amounts, and to justify the award. 48 FR 38794, 38802 
(Aug. 26, 1983). In the program's 1992 reauthorization legislation, 
Congress established award thresholds of up to $100,000 for Phase I and 
up to $750,000 for Phase II. SBA has statutory authority to increase 
these award amounts to adjust for inflation or other economic or 
programmatic considerations once every five years. 15 U.S.C. 
    The regulatory guideline for the SBIR award amounts can be found in 
Sec.  7(h)(1) of the SBIR Policy Directive. 67 FR 60072, 60088 (Sept. 
24, 2002). Participating agencies are to keep the majority of their 
awards close to these amounts; however, they may exceed them 
occasionally, provided they submit to SBA a written justification for 
doing so. SBIR Policy Directive, Sec.  7(h)(2), 67 FR 60088. In 
addition, agencies have the flexibility to make awards at levels below 
these amounts.
    As the costs of conducting R&D have increased over time, along with 
general price level increases and increases in wages and salaries, the 
real value of a typical, guideline amount, SBIR award has declined. 
Since 1992, the general price level has increased by almost 39 percent. 
SBA has determined that to restore the average economic value of the 
SBIR awards, the award threshold amounts should be increased at this 
time. SBA's analysis is explained in further detail below.

B. Proposed Amendments

    SBA proposes to amend Sections 7(h) and 10(b) of the current SBIR 
Policy Directive to raise SBIR Phase I award threshold amounts from 
$100,000 to $150,000, and Phase II award threshold

[[Page 48005]]

amounts from $750,000 to $1,000,000. SBA believes these changes will 
cover general increases in the costs of conducting SBIR-funded projects 
that have occurred since 1992 due to inflation.
    SBIR awards fund cutting-edge research and technology design and 
development. They are used to cover the costs of performing innovative 
R&D activity. Therefore, when assessing the effect of inflation on SBIR 
award amounts over time, the most appropriate index to use is one that 
tracks the prices of R&D inputs (e.g., researcher salaries, cost of 
equipment and materials, etc.). The U.S. Department of Commerce's 
Bureau of Economic Analysis (BEA), an entity charged with producing 
economic accounts statistics that enable the Federal Government and 
others to understand the performance of the Nation's economy, has 
developed an R&D Satellite Account that includes a set of R&D output 
price indexes that are based on input costs, and thus present a good 
proxy for the costs of performing innovative R&D activity. Estimates 
are now available covering the years 1959-2004 (see Survey of Current 
Business: Research and Development Satellite Account Update, Estimates 
for 1959-2004: New Estimates for Industry, Regional, and International 
Accounts, October 2007; http://www.bea.gov/scb/pdf/2007/10%20October/1007_rd_text.pdf).
    BEA's R&D Satellite Account estimates for the Aggregate Input Price 
Index for R&D Investment show costs of Federal Extramural R&D 
investment increasing by 24 percent from 1992 to 2004 (see http://www.bea.gov/scb/pdf/2007/10%20October/1007_rd_tables.pdf; Table 4.1). 
Although this index was estimated only through 2004, it closely tracks 
the implicit Gross Domestic Product (GDP) price index for the economy 
as a whole which is currently estimated through 2006 (see NIPA Table 
1.1.4, at http://www.bea.gov/bea/dn/nipaweb).
    The U.S. GDP implicit price index, which provides an aggregated 
measure of inflation for the national economy, increased by 38.5 
percent from 1992 to 2007 (NIPA Table 1.1.9). Using the GDP price 
index, $100,000 in 1992 is equivalent to about $138,500 in 2007, and 
$750,000 in 1992 is equivalent to about $1,039,000 in 2007.
    When comparing the R&D and GDP price indexes, SBA found that the 
R&D index showed lower rates of price increase in the early 1990s, and 
similar rates thereafter. Over the 1992-2004 period, the R&D index 
shows a 24 percent inflation rate while the GDP index shows a rate of 
27 percent. As a result, SBA considers the GDP estimate of 39 percent 
to be an upper bound aggregate estimate for SBIR-related R&D work, with 
the actual change in SBIR-related R&D input costs likely lying somewhat 
below that.
    SBA recognizes that the costs of R&D and innovative activity vary 
considerably by industry and consequently by Federal agency. R&D costs 
have risen faster in some industries than in others during this period. 
For example, according to the Biomedical Research and Development Price 
Index (BRDPI) developed by BEA and used by National Institutes of 
Health, biomedical research input prices increased by 68 percent from 
1992 to 2007 (available at http://officeofbudget.od.nih.gov). By 
comparison, another available price index for R&D-related activity is 
the index for National Defense Consumption Expenditures for R&D 
services. This price index rose by just under 40 percent over this 
period, closely tracking the overall inflation rate for the period (see 
BEA NIPA Table 3.11.4).
    Taking into account the broad range of industries active in the 
SBIR program, SBA feels that adjusting the award threshold amounts to 
$150,000 for Phase I and $1,000,000 for Phase II adequately offsets the 
general effects of inflation, maintains a degree of stability and 
simplicity to the threshold levels, and continues to provide 
participating agencies with an appropriate degree of flexibility in 
award size.
    SBA welcomes comments on these proposed changes.

Paperwork Reduction Act

    SBA has determined that this rule imposes no additional reporting 
or recordkeeping requirements under the Paperwork Reduction Act, 44 
U.S.C., chapter 35.

Regulatory Impact Analysis

    The Office of Management and Budget (OMB) has determined that this 
rule constitutes a ``significant regulatory action'' under Executive 
Order 12866. Therefore, a general discussion of the need for this 
regulatory action and its potential costs and benefits follows.

I. Need for the Regulatory Action

    SBA has specific statutory authority to increase the award amounts 
to adjust for inflation or other economic or programmatic 
considerations once every five years. 15 U.S.C. 638(j)(2)(D). Based on 
the rise in the general level of prices and the rise in R&D costs, SBA 
believes that an inflation adjustment to the award amounts is needed.

II. The Potential Benefits and Costs of This Regulatory Action

    The SBIR Phase I and II threshold amounts appear to have served 
well during the 1990s. SBIR program managers did not express concern 
over the effects of inflation to SBA during that time period. In recent 
years, however, some of the participating agencies have increasingly 
felt the need to make larger awards to cover the higher nominal value 
of research costs. SBA has received no information indicating that the 
real value of SBIR awards should be intentionally reduced, or allowed 
to diminish, from the levels set in 1992.
    One effect of maintaining the nominal value of the award thresholds 
since 1992 has been that, as total SBIR obligations increased with the 
sizes of agency budgets, the number of awards made increased faster 
than if frequent inflation adjustments had been made. Adjusting the 
threshold levels to restore the real value of the awards may offset to 
some extent this expansion in the number of awards. If the threshold 
levels reflect the average amount per award, the increase in Phase 1 
award amounts from $100,000 to $150,000 could result in one-third fewer 
awards and the increase in Phase 2 award amounts from $750,000 to 
$1,000,000 could result in one-fourth fewer awards.
    However, SBA expects the resulting changes in award numbers to be 
less significant than described above because (1) The size of agency 
SBIR budgets are likely to continue to increase in proportion to their 
extramural R&D budgets; (2) some SBIR agencies will likely continue to 
make awards below the threshold amounts; and (3) for those agencies 
that adjust their average award size proportionally to the new 
threshold amounts, this adjustment is likely to be made over several 
    SBA notes that the SBIR program has experienced considerable growth 
since its inception in 1983. In that first year of awarding activity, 
the program made 686 Phase I awards for $44.5 million to small high 
technology firms. In FY 2006, the program produced 3,835 Phase I awards 
and 2,026 Phase II awards for approximately $2.1 billion dollars. With 
each year, the number of awards and total value of awards has 
increased, primarily as a result of an increase in the agencies' SBIR 
budgets and utilization of the program.
    Because some costs of administering SBIR awards are fixed, any 
decrease in the number of awards resulting from the proposed increase 
in award threshold amounts may tend to reduce the costs to

[[Page 48006]]

the Federal Government associated with the awarding and monitoring of 
SBIR funding agreements.
    As a result, SBA believes there will be negligible costs to the 
Federal Government with respect to the award and monitoring of SBIR 
funding agreements as a result of this rule. In addition, the potential 
decrease in the number of SBIR awards is not enough to significantly 
affect current small businesses.
    SBA expects the increase in award amount guidelines to allow 
participating agencies to more effectively cover the costs of some SBIR 
projects. This could increase the likelihood of success for some SBIR-
funded projects.

III. Alternatives to Regulatory Action

    In determining the appropriate adjustment to the threshold amounts, 
SBA considered the past changes in prices for the economy as a whole 
and for inputs into R&D activity. While different technology sectors 
have increased at different rates, SBA identified the general rise in 
prices of R&D inputs and decided to adjust the program-wide threshold 
amounts accordingly. SBA also determined that there are program 
advantages and efficiencies to maintaining the threshold amounts as 
relatively stable and rounded figures. SBA therefore rounded the 
inflation-adjusted amounts.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires agencies to analyze 
the economic impact of proposed regulations on small entities and 
consider alternatives that would minimize the burden on these entities. 
5 U.S.C. 603. This RFA requirement only applies to regulations that are 
subject to notice and comment under the Administrative Procedure Act 
(APA) or any other law. 5 U.S.C. 533(b). Generally, the notice and 
comment requirement does not apply to interpretive rules, general 
statements of policy, or rules of agency organization, procedure and 
practice. Id at Sec.  553(b)(A). The SBIR Policy Directive is not a 
rule for RFA purposes. The Policy Directive is issued under authority 
of the Small Business Act (Act), which provides that the SBA shall 
``issue policy directives for the general conduct of the SBIR program 
within the Federal Government * * * '' 15 U.S.C. 638(j)(1). Therefore, 
no RFA analysis is required.

Notice of Proposed Amendments to the Policy Directive; Small Business 
Innovation Research Program

To: The Directors, Small Business Innovation Research (SBIR) Program
Subject: Proposed Revisions to the SBIR Program Policy Directive 
concerning Phase I and Phase II Threshold Amounts

    1. Purpose. Section 9(j)(3) of the Small Business Act (Act) (15 
U.S.C. 638(j)(3)) requires the Administrator of the U.S. Small Business 
Administration (SBA) to modify the SBIR Program Policy Directive as 
required for the general conduct of the SBIR Program within the Federal 
Government. Specifically, Sec.  9(j)(2) of the Act requires the SBA to 
increase the award amounts for Phase I and II to adjust for inflation 
or other economic or programmatic considerations once every five years.
    2. Authority. These proposed amendments to the Policy Directive are 
issued under the authority of 15 U.S.C. 638(j).
    3. Procurement Regulations. The Federal Acquisition Regulations may 
need to be modified to conform to the requirements. Regulatory 
provisions that pertain to the areas of SBA responsibility will require 
approval of the SBA Administrator or designee. The SBA's Office of 
Technology is the appropriate office for coordinating such regulatory 
    4. Personnel Concerned. All Federal Government personnel who are 
involved in the administration of the program, including those involved 
with the issuance and management of funding agreements of the SBIR 
Program and the establishment of goals for small business concerns in 
research or research and development procurements or grants.
    5. Distribution. Federal Government agencies and departments 
participating in the SBIR Program and those required to establish small 
business research development goals as directed by Sec.  9 of the Act 
(15 U.S.C. 638(j)).
    6. Originator. Office of Technology, SBA.
    7. Dates. The SBIR Program is authorized through September 30, 
2008. These proposed amendments will be effective when issued as final 
in the Federal Register.

Authorized By: Edsel Brown, Jr., Assistant Director, Office of 
Technology, U.S. Small Business Administration.

For the reasons set forth in the preamble, SBA proposes to amend the 
SBIR Policy Directive as follows:
    1. Amend Sec.  7(h)(1) by removing ``$100,000'' and adding in its 
place ``150,000'' and by removing ``$750,000'' and replacing it with 
    2. Amend Sec.  7(h)(2) by removing ``$100,000'' and adding in its 
place ``150,000'' and by removing ``$750,000'' and adding in its place 
    3. Amend Sec.  10(b)(7) by removing ``$100,000'' and adding in its 
place ``150,000'' and by removing ``$750,000'' and adding in its place 

Jovita Carranza,
Acting Administrator, U.S. Small Business Administration.
[FR Doc. E8-18914 Filed 8-14-08; 8:45 am]