2019 NDAA Analysis: Changes Affecting Small Businesses and the SBIR Program

This is the first blog post in a series analyzing the 2019 National Defense Authorization Act (NDAA) as signed into law on August 13, 2018. Stay tuned for more blog posts covering additional topics in the near future from Holland & Knight's Government Contracts Team.

The 2019 NDAA contains significant changes that will impact many facets of government contracting. In this post, we discuss the Sections of the 2019 NDAA that affect small businesses. As discussed below, these changes include: (1) the codification and reauthorization of defense research and development rapid innovation program; (2) the establishment a Department of Defense small business strategy; (3) the improvement of prompt payment of small business contractors; (4) the increased participation in the SBA microloan program; (5) the extension and amendment of the Small Business Innovation Research (SBIR)/ Small Business Technology Transfer (STTR) programs; (6) the funding for procurement technical assistance program; (7) the creation of a commercialization assistance pilot program; and (8) the increasing of opportunities for employee-owned business concerns through SBA loan programs.

Codification and Reauthorization of Defense Research and Development Rapid Innovation Program

NDAA Section 224 required the establishment of a competitive, merit-based program to accelerate the fielding of technologies developed pursuant to phase II Small Business Innovation Research Program projects. The requirement is set forth in the new 10 U.S.C. § 2359a. It will apply to technologies developed by the defense laboratories, and other innovative technologies (including dual use technologies).

Congress directed the Secretary of Defense to issue guidelines for the program that must include:

1. The use of competitive processes or broad agency announcements to receive candidate proposals;
2. The review of proposals through a merit-based selection of the most promising cost-effective proposals for funding through contracts, cooperative agreements, and other transactions for the purposes of carrying out the program;
3. A dollar value limitation on total funding, such that any project not exceed $3,000,000, unless the Secretary, or the Secretary's designee, approves a larger amount of funding for the project;
4. A time limitation on funding, such that any project shall be limited to a total of two years, unless the Secretary, or the Secretary's designee, approves funding for any additional year;
5. The possibility for a transition of a follow-on of current projects carried out under the program into defense acquisition programs, as may be appropriate to conduct further testing, low rate production, or full rate production of technologies developed under the program; and
6. A restriction that the merit-based selection procedures shall not be subject to undue influence by Congress or other Federal agencies.

Establish a Department of Defense Small Business Strategy

Section 851 required that the Secretary of Defense implement a small business strategy for the Department of Defense (DoD). Such a strategy must provide for a unified management structure within DoD for functions related to small business programs, manufacturing and industrial base policy, and any procurement technical assistance program.

Congress directed that the Secretary ensure that DoD programs related to small business concerns are carried out so as to further national defense programs and priorities and the statements of purpose for DoD acquisition set forth in section 801 of the 2018 NDAA. These priorities include: (1) that the defense acquisition system exists to manage the investments of the United States in technologies, programs, and product support necessary to achieve the national security and to support the United States Armed Forces; (2) procurements support not only the current United States Armed Forces, but also future Armed Forces of the United States; and (3) the primary objective of DoD acquisition is to acquire quality products that satisfy user needs with measurable improvements to mission capability and operational support, in a timely manner, and at a fair and reasonable price. This demonstrates a limit on when DoD will carry out its small business programs. In other words, if the small business programs conflict with the priorities set forth in the 2018 NDAA, then DoD's strategy will be to not use the small business programs.

The DoD's small business strategy shall ensure that opportunities for small business concerns to contract with the DoD are identified clearly and that small business concerns have access to program managers, contracting officers, and other persons using the products or services of such concern to the extent necessary to inform such persons of emerging and existing capabilities of such concerns. The policy shall also promote coordinated outreach to small business concerns through any procurement technical assistance program.

Congress directed that DoD develop the strategy not later than 180 days after the date of the enactment of the 2019 NDAA (or February 9, 2019). Once completed, the strategy must be transmitted to Congress and publically published on a DoD website.

Prompt Payment of Small Business Contractors

Section 852 amended 10 U.S.C. § 2307(a) to provide that if a prime contractor is a small business, the Secretary of Defense shall, to the fullest extent permitted by law, establish an accelerated payment date with a goal of 15 days after receipt of a proper invoice for the amount due if a specific payment date is not established by contract. Similarly, if a prime contractor subcontracts with a small business concern, a goal of 15 days should also be established, so long as a specific payment date is not established by contract and the prime contractor agrees to make payments to the subcontractor in accordance with the accelerated payment date, to the maximum extent practicable, without any further consideration from or fees charged to the subcontractor.

Increased Participation in the Small Business Administration Microloan Program

Section 853 increased the Microloan Intermediary Lending Limit from $5,000,000 to $6,000,000. Congress also directed SBA to conduct a study and submit it to Congress on microenterprises participation. The General Accountability Office (GAO), similarly, is directed to conduct a study on microloan intermediary practices.

SBIR/STTR Amendments

Section 854 extended the SBIR and STTR programs until 2022. Congress also directed that the U.S. Small Business Administration (SBA) submit a report by March 30, 2019 on the programs.

In addition to extending the programs, the 2019 NDAA required the establishment of a pilot program to reduce the time for awards under the SBIR and STTR programs. The program must be terminated by September 30, 2022. Congress also directed GAO, within one year of the 2019 NDAA and every three years thereafter, to issue a report addressing the average and median times for awards.

Finally, the 2019 NDAA amended what technical and business assistance the Federal agency may provide to small business concerns engaged in SBIR or STTR projects, including adding "assistance with product sales, intellectual property protections, market research, market validation, and development of regulatory plans and manufacturing plans." The limits on these technical and business assistance are increased from $5,000 per year to $6,500 per year for Phase I and from $5,000 per year to $50,000 per project for Phase II. Congress, however, included a limit on the amount of technical and business assistance services that may be received or purchased by a small business concern, if the concern has received multiple Phase II SBIR or STTR awards for a fiscal year.

Funding for Procurement Technical Assistance Program

Section 858 increased the funding for procurement technical assistance programs. First, it increased the allowable costs that DoD can contribute for such cooperative agreements from 65 percent to 75 percent, (or 85 percent for services provided in a distressed area). It also increased the dollar value funding limit for each type of cooperative agreement.

Commercialization Assistance Pilot Programs

Section 860 directed that not later than one year after the date of the enactment of the 2019 NDAA, SBIR-covered agencies shall implement a commercialization assistance pilot program, under which a contractor may receive a subsequent Phase II SBIR award. However, if SBA determines that a covered agency has a program that is sufficiently similar to the commercialization assistance pilot program established under this subsection, such covered agency shall not be required to implement a commercialization assistance pilot program under this subsection. The head of each covered agency may allocate not more than five percent of the funds allocated to the SBIR program of the covered agency for the purpose of making a subsequent Phase II SBIR award under the commercialization assistance pilot program. Any program so established shall terminate on Sept. 30, 2022.

A contractor submitting an application under the pilot program must submit an updated Phase II commercialization plan. It also must demonstrate, as a condition of any subsequent Phase II SBIR award, that it has received a matching amount (excluding any fees collected by the eligible entity receiving such award) equal to the amount of such award to be provided from an eligible third-party investor. These matching funds cannot come from: (i) the eligible entity's internal research and development funds; (ii) funding in forms other than cash, such as in-kind or other intangible assets; (iii) funding from the owners of the eligible entity, or the family members or affiliates of such owners; or (iv) funding attained through loans or other forms of debt obligations.

The funds awarded to the contractor may only be used for research and development activities that build on the contractor's Phase II program and ensure the research funded under such Phase II is rapidly progressing towards commercialization. Not later than six years after the date of the enactment of the 2019 NDAA, Congress directed GAO to provide a detailed report on the commercialization assistance pilot programs.

Opportunities for Employee-Owned Business Concerns Through SBA Loan Programs

Section 862 amended SBA's lending practices (primarily 7(a) loans) to better cover employee-owned businesses. First, it allows a loan to be made to the sponsor of the Employee Stock Ownership Plan (ESOP), rather than requiring the loan be made directly to the ESOP. Under such a situation, the sponsor then makes an internal loan to the ESOP through a "back-to-back" loan arrangement. Congress clarified that preferred lenders may make 7(a) loans to ESOPs.

The 2019 NDAA also now allows ESOP transaction costs to be paid through SBA. The amendments further allow flexibility for the former owner (seller) to maintain involvement, instead of having to transfer 100 percent ownership interests and resign as an officer or key employee. Specifically, the 2019 NDAA allows the seller to continue as an owner, officer, director, or key employee of the company, so long as the ESOP or workers cooperative acquires a controlling interest. If the seller remains an officer, though, the seller shall be required to provide a personal guarantee to SBA.

Finally, the 2019 NDAA directed that SBA is required to engage in outreach and establish a Small Business Employee Ownership and Cooperatives Promotion Program to offer technical assistance and training on the transition to employee ownership through cooperatives and qualified employee trusts.

Conclusion

As discussed above, the 2019 NDAA made significant changes that affect small business contractors. Stay tuned for additional posts on our Government Contracts Blog in the near future addressing other significant changes relevant to government contractors under the 2019 NDAA, including changes affecting supply chains, service contracts, other transaction agreements/Emerging Technology, cost contracts, security clearances, bid protests, intellectual property data rights, major defense acquisitions, commercial item contracting, and general contracting.

Stay tuned for additional posts on our Government Contracts Blog in the near future addressing other significant changes relevant to government contractors under the 2019 NDAA, including changes affecting supply chains, service contracts, other transaction agreements/Emerging Technology, cost contracts, security clearances, bid protests, intellectual property data rights, major defense acquisitions, commercial item contracting, and general contracting.