SBIR Phase III: Sole-Source Rights Most Institutions Never Use

Last verified 2026-08-16 against the primary statutory text of 15 U.S.C. § 638 (Cornell LII), FAR Subpart 6.302-5 (Acquisition.gov), and the SBA’s SBIR/STTR Policy Directive. Dollar figures and agency-specific procedures change on a solicitation cycle — the statutory citations below do not.

Phase III sole source, at a glance

Question	Answer
What is a Phase III award?	Any follow-on work — funded by private capital, a non-SBIR federal contract, or a license — that derives from, extends, or completes a Phase I or Phase II SBIR or STTR effort. It is not itself SBIR/STTR-funded.
Statutory sole-source authority	15 U.S.C. § 638(r)(4)(B)
What it lets an agency skip	The FAR Part 6 justification-and-approval (J&A) memo ordinarily required to sole-source a contract — the statute directs agencies to issue Phase III sole-source awards “without further justification.”
Who can invoke it	Any federal agency — not only the one that funded the original Phase I/II award — plus federal prime contractors issuing their own Phase III subcontracts to the SBIR/STTR performer.
Dollar, duration, or contract-type limit	None set by statute.
Deadline after Phase I/II ends	None set by statute — Phase III can follow years later.
Is the award guaranteed?	No. Agencies are directed to use this authority only “to the greatest extent practicable,” and nothing happens automatically — the small business (or its university partner) has to invoke it and make the case to a contracting officer.
Data-rights protection window	20 years from the date of the underlying Phase I, II, or III award (SBA SBIR/STTR Policy Directive, effective May 2, 2019).

Phase III is not a funding phase — it is a contracting right

Phase I and Phase II are the SBIR/STTR-funded stages: a feasibility study, then a full research-and-development effort, both awarded competitively by one of the eleven participating federal agencies. Phase II normally runs up to about two years. Phase III is different in kind, not just in sequence: it is never itself SBIR- or STTR-funded. It describes whatever commercialization or follow-on work happens next — private investment, a licensing deal, or a separate federal contract — that derives from, extends, or completes the technology developed in Phase I or II.

Because Phase III sits outside the SBIR/STTR appropriation entirely, the interesting question for a research office or a small-business awardee is not “how much Phase III funding is available” (there is no dedicated pot) but “what special contracting rights attach to Phase III work.” The most consequential one is the sole-source authority this page covers.

The statute: 15 U.S.C. § 638(r)(4)

The authority comes directly from the SBIR/STTR reauthorization statute itself, not from FAR Part 6. Section 638(r)(4) directs that, to the greatest extent practicable, federal agencies and federal prime contractors:

• Treat the original SBIR/STTR competition as satisfying competition requirements under 10 U.S.C. §§ 3201–3205 and other applicable competition rules – 638(r)(4)(A);
• “Issue, without further justification, Phase III awards relating to technology, including sole source awards, to the SBIR and STTR award recipients that developed the technology” – 638(r)(4)(B), the operative sole-source clause;
• Develop simplified, standardized procedures and model contracts for Phase I, II, and III awards, and report on that effort – 638(r)(4)(C); and
• Issue standard solicitation language spelling out what a small business must submit to establish its eligibility for a Phase III award – 638(r)(4)(D).

Because the competitively awarded Phase I or II effort already satisfies the government’s competition obligations, Congress pre-cleared the sole-source decision for whatever follows: a contracting officer awarding Phase III work to the business that did the underlying Phase I/II research does not need to prepare the formal justification-and-approval memo that FAR Subpart 6.303 requires for most other sole-source categories. FAR Subpart 6.302-5 (“Authorized or required by statute”) is the general competition exception this falls under – its own illustrative list names the 8(a), HUBZone, service-disabled-veteran, and women-owned small business sole-source programs by name but is expressly introduced as non-exhaustive (“statutes, such as the following”); agency SBIR/STTR guidance documents (Army, DOE, and others) describe Phase III sole-source awards as falling under this same “authorized by statute” category, with 15 U.S.C. § 638(r)(4)(B) as the actual statute doing the work. For how this compares to an ordinary sole-source acquisition that does require a J&A memo, see CASRAI’s sole-source justification letter guide – Phase III is the exception to that entire process, not an example of it.

What the authority does not do

• It is not automatic. Nothing about completing Phase II triggers a Phase III award. The statute is a permission for the agency to sole-source, exercised only “to the greatest extent practicable” – the awardee has to identify the follow-on requirement and ask.
• It does not create new funding. Phase III money has to come from somewhere – a program office’s existing budget line, private capital, or another agency’s acquisition – the sole-source authority only removes the competition requirement once that money and requirement exist.
• It does not extend to the university directly in the ordinary case. The sole-source right runs to “the SBIR and STTR award recipients” – the small business. A university most often encounters Phase III as a subcontractor under the small business’s Phase III contract, or as the licensor of the underlying patent the small-business spinout is commercializing. See CASRAI’s Federal Government Contracts vs. Grants for University Research guide for what a university inherits under FAR flow-down once it is a subcontractor on a Phase III contract.

Who can actually invoke it

A detail that surprises most awardees: the sole-source right is not limited to the agency that funded the original Phase I or Phase II work. Because 638(r)(4)(B) refers generally to “Federal agencies,” a different federal agency – one that never funded any part of the underlying SBIR/STTR effort – can sole-source a Phase III award to the same small business for a requirement that derives from, extends, or completes that earlier work. A federal prime contractor can do the same thing on its own subcontracts. In practice this means a small business (or a university spinout it has licensed technology to) should be raising its SBIR/STTR pedigree with any agency or prime whose mission the technology now fits, not only the one on the original award letter.

How to invoke it: a working checklist

1. Confirm the lineage. Document, in plain terms a contracting officer can use, how the proposed Phase III work derives from, extends, or completes the specific Phase I/II effort – cite the award number, agency, and topic.
2. Identify a receptive requirement. Look for an agency (the original funder or any other) or federal prime with an actual need the technology now addresses – the sole-source authority only matters once there is a requirement and funding to attach it to.
3. Approach the program or contracting office directly, citing 15 U.S.C. § 638(r)(4)(B) by name. Many contracting officers have never issued a Phase III sole-source award and will not raise the option on their own – this is precisely the awareness gap Congress tried to close by requiring SBA, in coordination with DoD and GSA, to run mandatory training for the federal contracting workforce on “the execution of Phase III sole source award contracts” (638(r)(5)(B)(iv)).
4. Point to the agency’s own standardized Phase III procedures where they exist – 638(r)(4)(C) directs agencies to publish simplified, standardized Phase III procedures and model contracts, and several (DOE and the Army SBIR/STTR programs among them) have public guidance describing exactly this pathway.
5. Assemble the eligibility package the agency’s own solicitation provisions call for under 638(r)(4)(D) – typically a narrative connecting the new requirement to the funded research, current status of any patent or license, and confirmation of small-business status.
6. Negotiate contract type and terms with no statutory ceiling on value, duration, or contract type to work around – that negotiation is bounded only by ordinary FAR contract-type rules and the agency’s own budget.
7. Preserve the data-rights markings. The 20-year SBIR/STTR data-rights protection period runs from the date of the underlying Phase I, II, or III award and depends on proper legend/marking on technical data and software delivered – see CASRAI’s SBIR/STTR Data Rights entry for the marking mechanics and the FAR 52.227-20 / DFARS 252.227-7018 clause split by agency.

Why most institutions never use it

Three structural reasons show up repeatedly in agency guidance and in the statute’s own text:

• It has to be requested, not received. There is no Phase III application, portal, or solicitation cycle the way there is for Phase I and II – a business that does not proactively raise its SBIR/STTR pedigree with a contracting officer simply competes for the next contract like anyone else.
• Contracting-officer awareness is uneven. Congress found the gap significant enough to mandate government-wide training specifically covering Phase III sole-source execution (638(r)(5)) – a strong signal that, absent that training actually reaching a given contracting officer, the default instinct is to compete the work rather than sole-source it.
• Most SBIR/STTR relationships never reach a formal “Phase III” conversation at all. A large share of Phase I awardees do not receive a Phase II award, and of those that do, commercialization outcomes vary widely by agency and technology area – the sole-source right is only relevant to the subset of awardees with a live follow-on opportunity in hand, and only if someone on that team knows the authority exists.

For a university technology transfer office, the practical implication is to build the citation – “15 U.S.C. § 638(r)(4)(B), without further justification” – into any conversation with a contracting officer about follow-on work for a licensed SBIR/STTR technology, rather than assuming the office already knows the authority is available.

Related CASRAI pages

• SBIR (Small Business Innovation Research) – program basics and eligibility.
• SBIR Phase II – award-size breakdown and the Direct-to-Phase-II pathway.
• SBIR/STTR Data Rights – the 20-year protection period and clause mechanics.
• SBIR Phase I vs. Phase II – duration, award size, and eligibility compared.
• SBIR vs. STTR – the structural differences between the two programs.
• SBIR Contracts – when a Phase I/II award itself is a FAR contract rather than a grant.
• Federal Government Contracts vs. Grants for University Research – what a university inherits under FAR flow-down as a Phase III subcontractor.
• Sole-Source Justification Letter – the ordinary J&A process Phase III sole-source awards are exempt from.
• SBIR/STTR Reauthorization – why the program periodically lapses and what changed in the 2026 reauthorization.
• Grant vs. Contract vs. Cooperative Agreement – the underlying legal test for which instrument type applies.

Frequently asked questions

Does a Phase III sole-source award have to come from the agency that funded Phase I or II?

No. 15 U.S.C. § 638(r)(4)(B) applies to “Federal agencies” generally, and a federal prime contractor can issue its own Phase III subcontract under the same authority. A different agency with no funding history on the original SBIR/STTR effort can still sole-source a Phase III award if the work derives from, extends, or completes that effort.

Is there a dollar cap on SBIR Phase III contracts?

No statutory cap exists on a Phase III award’s value, duration, or contract type. The only constraints are the agency’s own budget and ordinary FAR contract-type rules once a contract type is chosen.

Do we need a justification and approval (J&A) memo to sole-source a Phase III award?

No – that is the specific point of 638(r)(4)(B)’s “without further justification” language. Compare this to CASRAI’s sole-source justification letter guide, which covers the FAR Subpart 6.303 J&A process that applies to most other sole-source categories.

How long do SBIR/STTR data rights last once Phase III starts?

The SBA’s SBIR/STTR Policy Directive sets a uniform 20-year protection period beginning on the date of the underlying Phase I, II, or III award, after which government rights narrow from unlimited rights toward government-purpose rights. See CASRAI’s SBIR/STTR Data Rights entry for the full mechanics.

Can a university itself receive a Phase III sole-source award?

The statutory sole-source right runs to the small business that held the Phase I/II award, not to a university. A university typically participates in Phase III as a subcontractor under the small business’s contract (inheriting FAR flow-down obligations) or as the licensor of the underlying patent – see Federal Government Contracts vs. Grants for University Research.