The SBIR program is authorized by the Small Business Act to provide funding for innovative research projects by small businesses. The Small Business Administration issues directives to guide participating agencies in conducting their SBIR programs. The directives define a small business as one which (1) does not have more than 500 employees (2) is organized for profit and is independently owned and operated (3) is not dominant in its field of operation (4) has its principle place of business in the U.S. and (5) is at least 50% owned by U.S. citizens or lawfully admitted permanent resident aliens. Each agency with a budget for external research or research and development (R/R&D) exceeding $100 million is required and those with lesser budgets are permitted to establish an SBIR program and to reserve at least 2.5% of that budget for SBIR funding. The 11 agencies currently participating include Departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Transportation, the Environmental Protection Agency, NASA, the National Science Foundation and the Nuclear Regulatory Agency. Each of these agencies publishes, at least annually, a list of research topics of interest to it and a solicitation to submit research proposals for the listed topics. For example, DOD publishes SBIR solicitations twice a year at the Internet website at “http://www.acq.osd.mil/sadbu/sbir”. Evaluation of competing proposals may involve peer review and the decisions are those of the funding agency. Service contracts are the typical mechanism for funding. Contracts are usually awarded in three phases. In Phase I, a contract for exploratory research may be awarded for six months of work, not to exceed
$100,000. If Phase I demonstrates technical feasibility, scientific merit and commercial potential a Phase II award may be awarded at the agency’s discretion for another two years of work not to exceed $750,000. Concerns over loss of momentum between completion of Phase I and decision to pursue Phase II has led to recent efforts to accelerate the review and award process. Agencies have the discretion to continue the R&D or production efforts beyond Phase II with a Phase III contract. The law directs the agency, to the extent practicable, to award the Phase III contract to the same business concern that developed the two earlier efforts. Hence, agencies may and, in fact, are encouraged to award Phase III contracts on a sole source basis where the Competition in Contracting Act requirements are considered to have been satisfied during Phase I and Phase II competitions. 

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