SBIR Phase I, II, and III for Defense Startups

The Small Business Innovation Research program can support a company's entry into defense acquisition, but the three phases answer different questions. DARPA's program overview describes the progression from feasibility through development to commercialization. A useful way to manage it is to give each phase both a technical objective and a customer objective.

On This Page

• How the three phases differ
• What changed in 2026
• Choose the right entry point
• Build a proposal that can become a contract
• Use Phase II to prepare the next purchase
• Make the Phase III connection explicit
• Protect the data that support the business
• The next decision for the founder

How the three phases differ

The phase describes the work and funding relationship. It is not a universal maturity rating or a promise that a military customer will buy the finished product.

Phase	What the funded work establishes	Funding basis	Management decision
I	Scientific and technical feasibility	SBIR research funding under the selected topic	Is the central technical uncertainty worth a larger development effort?
II	Further development, often including a prototype and demonstration	SBIR development funding under the applicable award	Can the team deliver something a specific customer can evaluate and use?
III	Follow-on work connected to prior SBIR/STTR efforts, including commercialization	Non-SBIR/STTR government funds or private funding	Is there a buyer, a defined purchase, and money appropriate to that work?

Phase descriptions follow DARPA's overview and the SBA SBIR/STTR Policy Directive, section 4. The management questions are editorial recommendations.

Do not build a cash plan around a generic phase ceiling. The current defense program overview labels its displayed phase figures as FY25 information. For an actual bid, use the active topic's budget, base and option structure, and period of performance. Those instructions determine whether the proposed team and work fit the opportunity.

What changed in 2026

Public Law 119-83, approved April 13, 2026, extended SBIR and STTR authorization through September 30, 2031. It also expanded security review provisions and created a strategic breakthrough funding mechanism within Phase II. That mechanism is conditional, including prior-award and matching-fund requirements; it is not an automatic larger award for every Phase II recipient.

Starting in fiscal year 2027, the law requires each agency's program director to set a submission limit covering Phase I and direct-to-Phase-II proposals. A startup planning several bids should check the agency's implementation before assigning proposal staff.

The defense Office for Small Business Innovation also announced Accelerated Research for Transition, or ART, to help move Phase II efforts toward Phase III. Treat that announcement as program direction. An available topic, its instructions, and an executed award are separate milestones. Reauthorization does not establish a particular company's funding or award date.

Choose the right entry point

Start with eligibility before spending engineering time on a proposal. Under 13 CFR 121.702, Phase I and II eligibility is tested at award. The employee limit is 500, including affiliates, and ownership and control must satisfy the specified rules. A U.S. incorporation alone does not settle eligibility. Majority ownership by investment funds has separate conditions and depends on agency participation in that authority.

Keep the cap table, voting and board-control terms, affiliate analysis, and relevant financing documents together. Before closing an investment or changing control during award negotiations, reassess eligibility using the post-transaction facts. For foreign relationships, also prepare the disclosures required by the current solicitation and security review provisions.

Next, decide whether the unknown is feasibility or development. Phase I fits an idea whose essential technical proposition still needs proof. Direct-to-Phase-II can fit an already-demonstrated concept, but only when the topic permits that route and the submitted evidence meets its requirements. The defense program instructions specify that the supporting feasibility work for that route must not derive from previous federally funded SBIR/STTR work.

SBIR also limits outsourcing: the small business generally performs at least two-thirds of Phase I research and half of Phase II research. STTR, the Small Business Technology Transfer program, requires a research-institution partner and different work shares. Choose the program around the actual research team, not merely the available deadline.

Build a proposal that can become a contract

Use the official funding opportunities guidance to reach the Defense SBIR/STTR Innovation Portal, or DSIP. Read the department-wide Broad Agency Announcement or Commercial Solutions Opening, the component instructions, and the topic together. Defense SBIR does not accept unsolicited proposals outside an open topic.

Create a submission folder containing the applicable instructions and amendments, technical approach, cost support, required forms, and final submitted volumes. Record the deadline and permitted question channel. Direct discussion with topic authors is generally available during pre-release; once the topic opens, use the stated question process. Recheck amendments before submission.

The registration sequence includes DSIP, the SBA company registry, and SAM.gov. Preserve the SBA control ID, Unique Entity ID, and CAGE record with the proposal. Final DSIP submission requires corporate-official certification; a package left ready for certification has not been submitted. Keep the confirmation message.

For Phase I, propose an experiment that can change a decision. Identify the uncertain mechanism, the measurement, the conditions, and what result would justify continuing. A polished demonstration that avoids the hardest technical question leaves the next development plan exposed.

A selection notice also needs careful handling. DARPA's contracting FAQ distinguishes selection for possible award from an executed contract and warns that its selection letter does not commit funding or reimburse pre-award spending. Maintain separate dates for selection, execution, authorized performance, invoicing, and payment in the company's cash forecast.

Use Phase II to prepare the next purchase

Phase II should convert the feasibility result into a development plan with a credible use case. For the business team, that means identifying three roles: the user who needs the capability, the organization responsible for integrating it, and the office that can fund the next step. One enthusiastic contact may not fill all three roles.

Ask the prospective customer what must be demonstrated before a purchase is possible. For a hypothetical maintenance-analysis tool, a laboratory algorithm result might justify development, while the next buyer needs evidence that the tool can ingest its data, fit its maintenance process, and produce usable outputs. The Phase II plan should address those differences explicitly. This example illustrates planning logic, not a claimed SBIR award or tested product.

Keep the following working record through development. These are recommended management records; the signed award determines mandatory deliverables and reporting dates.

Record	Responsible team	Why it matters at the next decision
Test results, conditions, failures, and configuration history	Engineering	Shows what the prototype actually demonstrated and what remains unresolved
Named user, integration owner, and funding office	Business development	Exposes a missing buyer or integration responsibility before development ends
Statement of work, milestones, cost support, invoices, and acceptance records	Contracts and finance	Connects spending and payment to authorized work
Proposed follow-on scope and budget timing	Program lead with the prospective customer	Makes the next purchase concrete enough to discuss with a contracting officer
Award numbers, development funding history, and data-rights assertions	Contracts and engineering	Preserves the connection between earlier research and later deliverables

This checklist combines editorial planning recommendations with the contract records discussed in DARPA's contracting FAQ and the Navy Phase III guidebook. DARPA identifies cost substantiation, milestone pricing, and an editable statement of work among negotiation inputs. Its guidance also identifies accounting-system review where required. Determine the actual contract type and accounting requirements before assuming that prototype development will be funded on a fixed-price basis.

Make the Phase III connection explicit

For federal Phase III work, two questions control the initial discussion: does the proposed effort build on prior SBIR/STTR work, and will it use money outside those programs? Phase III can follow Phase I directly, include additional research, or take the form of a qualifying subcontract. It does not require a completed Phase II or mean only full-rate production.

Under the SBA directive, the earlier SBIR competitions can satisfy the competition requirement for related Phase III work. The directive also provides an awardee preference, including noncompetitive awards when its conditions are met. That is a substantial acquisition advantage, but it does not supply a customer's requirement or budget. Have the contracting officer establish the acquisition treatment for the actual scope.

Prepare a short follow-on package:

1. Identify the original topic and Phase I or II award numbers.
2. Describe the technology developed under those awards.
3. Map each proposed follow-on task to that earlier work.
4. Identify the proposed customer, deliverables, and non-SBIR/STTR funding source.
5. Include the relevant data-rights assertions and development records.

The Navy's Phase III guidebook explains the need to trace the technology to earlier awards and verify the asserted rights. It also distinguishes Phase III work added to an existing agreement from undifferentiated matching funds: separately described work, line items or orders, and deliverables matter. Use that guide for the acquisition questions, with current law and contract clauses controlling where older guidance differs.

If a prime contractor is the route to market, bring this package into subcontract negotiations. Do not assume the prime will recognize the SBIR history from a product brochure. Equally, owning an SBIR-developed technology does not make every unrelated service the company sells Phase III work.

Protect the data that support the business

Data rights concern the government's permitted use and disclosure of delivered information. They should be addressed when developing and delivering the information, not first discussed when a production customer appears.

The current DFARS 252.227-7018 clause generally measures the SBIR/STTR data protection period as 20 years from the award that generated the data, unless the parties negotiate another period after award. It includes exceptions for categories carrying unlimited government rights. The version incorporated into the originating contract governs, and delivering old data under a later award does not automatically restart its protection period.

Maintain a deliverable register showing what was developed, under which funding agreement, the applicable clause version, asserted restrictions, markings, and protection dates. Review subcontract flow-downs as well as the prime award. A blanket proprietary footer is not a substitute for the clause's required legends and accurate treatment of each deliverable.

The next decision for the founder

Before pursuing another phase, hold a joint engineering, finance, and customer review. Put the technical result, unresolved integration work, prospective buyer, acquisition route, and funding timing on one page. If the customer relationship stops at a demonstration sponsor, assign someone to find the purchasing organization before extending the development plan.

The strongest reason to pursue SBIR is a research task that advances a viable product and a real customer's need. Manage Phase I around the uncertainty it resolves, Phase II around the capability it develops, and Phase III around a purchase that can actually be funded and performed.

Source notes

• DARPA SBIR/STTR program overview: agency guidance on phase purposes and research-team work shares.
• SBA SBIR/STTR Policy Directive: government-wide phase definitions and federal Phase III acquisition treatment; read with subsequent statutory amendments.
• Public Law 119-83, April 13, 2026: enacted reauthorization, security review changes, strategic breakthrough provisions, and submission limits.
• Defense SBIR/STTR reauthorization announcement: official introduction of ART; not a company award notice.
• 13 CFR 121.702: ownership, control, size, and affiliation requirements for Phase I and II awards.
• Defense SBIR/STTR program instructions: eligibility, registrations, direct-to-Phase-II evidence, and submission certification. Its displayed funding table is labeled FY25.
• Defense funding opportunities guidance: active solicitation documents, submission route, and communication procedures.
• DARPA contracting FAQ: selection versus award, negotiation records, and contract administration. Current registration identifiers are taken from the defense program instructions.
• Navy Phase III Guidebook, version 2.0, 2020: tracing follow-on scope and documenting Phase III work; historical guidance, not the current data-rights clause.
• DFARS 252.227-7018: current SBIR/STTR data-rights terms, protection periods, markings, and subcontract requirements.

Last checked: September 8, 2026.