SBIR Unlikely to Be Reauthorized…Yet

In his SBIR Insider newsletter of January 16, Rick Shindell covers a lot of ground.  The key point is his analysis of current Congressional priorities.  He points out that, since the House is trying to do a number of things (such as repealing the Health Care Act), they are unlikely to put in the time to do a full reauthorization.  The new Chair of the House Small Business Committee is Sam Graves (R-MO), replacing Nydia Velazquez (D-NY).  I was originally hopeful that Graves would be more open to genuine small business concerns, but Rick points out that he generally supported Velazquez when their roles were reversed.  Still, we hope to get a continuing resolution to keep SBIR alive for a few months as Congress tries to reauthorize this incredibly successful program.

If you read the Internet as assiduously as I do, you have no doubt heard lots of stories of “Waste, Fraud, and Abuse (WF&A) in the SBIR program.”  Many of these seem to be minor technicalities, but if the government sues a small business we generally have two choices – settle or go out of business.  (If they tried the same suits on large companies with multimillion dollar legal budgets, the government would lose.)  Among the items targeted in recent WF&A hearings:

• Unallowable costs.  We all have unallowable costs—patents and interest charges leap to mind—but investigations showed that some companies were listing these as allowable.  Of course, a majority of SBIR projects are fixed price, so how costs are listed has no effect in how much the government is charged – but if the byzantine accounting required by the government is done incorrectly, it’s a violation.
• Unallocable costs.  If you can’t allocate the costs, where do you put them?  You can’t charge them to the contract.
• Unsupported costs.  If you charge anything to the contract you have to have evidence, no matter how inexpensive the item is.
• Unallowable travel.  Four companies charged travel to a contract that should have been charged to indirect or internal expenses.  The total travel cost of these four companies combined was $9225, probably less than the cost of filing charges against these companies.

A NASA Inspector General report indicated that, out of the $112 million awarded annually in the NASA SBIR program, there are WF&A allegations totaling $2.7 million.  In other words, despite the screaming headlines we’ve seen over the past year, it is alleged—not proved—that there was 2.4% waste in the NASA SBIR program.  Does anyone believe there is so little waste in any other part of the government?

On the other hand, according to the same report, this WF&A was committed by an estimated 25% of all companies that received SBIR contracts.  However, if you look at the actual WF&A claims, virtually all of them look more like accounting errors than actual fraud.  I can show a specific example of how difficult it can be to meet the government accounting requirements.  I’m about to travel to San Francisco for the Photonics West conference.  (Let’s pretend that I were doing so for a contract; I’m not, but that’s a different problem.)  Last year’s allowable per diem says that I could only spend $166/night for my hotel room.  Wait!  That was only until the end of August; if I went in September (the end of the Fiscal Year) I could spend $192.

But I’m traveling in April, 2011, so I need the new per diem list.  Oops!  It says I can only charge $142 for my room.  (Does that include the room tax?)  If I used last year’s list by mistake, I might try to charge the contract $166, or $192 per night.  (Where can you get a room in San Francisco for only $142/night, including tax – that is, $122.41 before the 16% room tax?  Most hotels I can find start at $159, plus $25 tax, or $184.)  So to fit the government accounting regulations, I can only charge $142 of my room to the contract, and have to allocate the other $42 per night to my internal expenses.

So, to save the company money, I decide to stay in Oakland, where I can get a room for $99/night (plus $16 tax, or $115).  Oops again!  Maximum per diem for Oakland is $94/night.  Plus, if I stay in Oakland but attend the meeting in San Francisco, do I charge the $61 Oakland per diem for meals or the $71 San Francisco meals?

Actually, I’m not surprised that more than one out of every four small businesses makes accounting errors.  I’m just glad the total waste, fraud, and abuse is only 2.4% in the SBIR program, considering that any tiny mistake in the accounting can be considered WF&A!

Now, I am aware that there are genuine cases of waste; in some cases a larger small business may have two groups who bid on the same topic and both win it.  I’ve seen two cases in which this was handled well. In one case, the two technologies were completely independent, the workers didn’t discuss their projects with each other, and they were competitors for the Phase II.  In another case, the proposal writers had coordinated, and offered to do about twice as much if both proposals were funded (one, say, for a laser and another for a beam director on a laser/beam director solicitation).  Unfortunately, any time a single company gets two awards for the same topic, it has the appearance of WF&A.  I’ve heard that some companies with a number of Phase IIs put all their effort into completing one, at the cost of the others, because one has a better chance of going into Phase III.  I don’t know of this for sure, but it is definitely fraud and abuse.  As a small business owner, I hate these cases, because they tilt the playing field against those of us who can’t combine a bunch of Phase IIs into a single (effective) project.  And to make matters worse, every time I can point to where I might suspect this happened, the project is lauded by the customer for the amount accomplished.

So my own (opinionated) conclusion is that the WF&A attacked by government investigators is generally small, probably just accounting errors, while the WF&A that I would like to see them attack is not only ignored but commended.

Have you heard about SBIR 2.0?

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