SBIR Program: Agencies Have Broad Discretion Over Phase III Awards, GAO Confirms

A federal agency has broad discretion to make a sole source award under Phase III of the Small Business Innovation Research program.

In a recent bid protest decision, the GAO confirmed that an agency may make a Phase III award when the contract “derives from, extends, or completes efforts made under prior funding agreements under the SBIR program.” What’s more, an agency has “relatively limited requirements to justify a phase III award,” and considerable discretion when it comes to determining whether a new contract fits this definition.

GAO’s decision in ASRC Federal Data Network Technologies, LLC, B-418765 (Aug. 28, 2020) involved a Defense Health Administration task order awarded to American Systems Corporation. Under the task order, American Systems would modernize an existing military healthcare system, known as the Theater Medical Information Program – Joint (TMIP-J). The DHA issued the task order on a sole source basis as a Phase III SBIR award.

The SBIR Program has three distinct phases. In Phase I, firms competitively apply for awards to test the scientific, technical and commercial merit and feasibility of a concept. Phase II allows a Phase I awardee to submit a proposal to further develop the concept it conceived in Phase I.

Most SBIR awardees hope for a Phase III award, because Phase III is where significant money can be made. Like Phase II, Phase III is optional; no Phase I or II awardee is guaranteed a Phase III award. Under Phase III, firms obtain non-SBIR funding to develop concepts from Phase I or II into commercial products or services, or into products or services to be used by the government. Under the Small Business Act (the statute governing the SBIR program), a Phase III award can be made “for work that derives from, extends or completes efforts made under prior funding agreements under the SBIR program.”

In this case, American Systems had acquired a company named DDL Omni Engineering LLC. DDL Omni had been awarded a Phase I SBIR for a “shipboard assessment methodology with prototype software for training-based, combat systems readiness measurement.” The DHA contended that its Phase III award to American Systems (as successor-in-interest to DDL Omni), appropriately built on DDL Omni’s Phase I award, even though the Phase III award was for healthcare modernization, not shipboard assessment.

Another contractor, ASRC Federal Data Network Technologies, LLC, disagreed. It filed a GAO bid protest, arguing that the award was not sufficiently related to the Phase I work performed by DDL Omni–and thus, that a Phase III sole source award to American Systems was improper.

The GAO wrote that “[w]e routinely find that contracting agencies have broad discretion to determine their needs and the best way to meet them.” In the case of an award under SBIR Program, the GAO’s review “is limited to determining whether the agency violated any applicable regulations or solicitation provisions, or acted in bad faith.” With respect to a SBIR phase III award, “it must be evident that the requirements for the second effort incorporated original concepts, findings, ideas, or research results that were generated in the first.”

GAO continued:

Given the relatively limited requirements to justify a phase III award and the discretion otherwise afforded to agencies, at issue here is whether [ASRC] has clearly shown that the modernization planning order does not incorporate any original concepts, findings, ideas, or research generated under prior SBIR phase I or II work. 

In other words, when a protester challenges a Phase III award, the protester has the burden of “clearly” demonstrating that the Phase III work is not sufficiently related to Phase I or II. In this case, that meant that ASRC had a heavy burden to meet.

The two contracts certainly sounded different–the first for a “shipboard assessment methodology” and the second for healthcare modernization. However, the Contracting Officer had prepared a memorandum for the record explaining how the Phase III award was related to the Phase I shipboard assessment contract.

The GAO found the Contracting Officer’s explanation persuasive, writing:

As explained above, the SBIR statute and policy directive set forth relatively limited requirements to justify a phase III award.  Here, the record contains an explanation for how the modernization planning order incorporates at least some of the original concepts, findings, and ideas–such as developing unique software able to operate on Navy vessels, providing for automated data feedback, and collecting and transmitting data between disparate systems–from the prior SBIR phase I contract.  [ASRC] has not clearly shown that the modernization planning order fails to incorporate any of these original concepts, findings, and ideas, and therefore has not shown that the issuance of the phase III order to American Systems violated the applicable statute and regulations.

The GAO denied the protest.

SBIR Phase III awards can be tremendously advantageous, as shown by American Systems’ example. And while another contractor can protest a sole source Phase III award, the ASRC Federal Data case demonstrates that agency has broad discretion, and the protester bears a heavy burden of showing that the Phase III contract is improper.

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