Your SBIR Phase III Work Is Protestable: What Strategi Consulting Means for Small Innovators

A Court of Federal Claims ruling in Strategi Consulting, LLC v. United States gives SBIR Phase II awardees a real path to challenge agencies that quietly move follow-on work to other contractors instead of honoring the Phase III preference. The court held that informal insourcing counts as a procurement, that the FASA task order bar does not shield it, and that injunctive relief is available. Combined with the 20-year data protection period and the 2026 reauthorization, small innovators have more leverage over the transition to Phase III than most of them use.

Category: GovCon News · 10 min read · Published 2026-08-13

Every small business that has completed an SBIR Phase II knows the pattern. You build the thing. The agency accepts every deliverable, tells you it works, and then goes quiet. Months later a program in the same command is running something that looks a great deal like your product, built by somebody else, under a contract vehicle you were never invited onto. You suspect you have been cut out of Phase III, and you also suspect there is nothing you can do about it, because there was never a solicitation to protest.

A recent decision from the U.S. Court of Federal Claims changes that calculation. In Strategi Consulting, LLC v. United States, the court denied the government's motion to dismiss a protest brought by a former Phase II awardee, holding that an agency's decision to continue development through other contractors, after declining to award Phase III to the innovator, is reviewable as a procurement. Practitioner analysis of the ruling began circulating in early August 2026, and it is the most consequential SBIR development since the program was reauthorized in April.

What the Court Actually Decided

The protester held a Phase II SBIR contract with Space Systems Command to build a tactical surveillance, reconnaissance, and tracking platform for the Air Force and Space Force. The contract closed in November 2025 with all deliverables accepted, and the software earned an authorization-to-operate equivalent certification. According to the complaint, rather than award a Phase III contract, the Air Force Research Laboratory routed continuation work to an internal, pooled, multi-contractor organization that used existing task orders with four private contractors to build a second platform the protester alleges replicates its architecture and development backlog. The complaint further alleged that the agency demanded the protester's codebase.

The government moved to dismiss on three grounds: that there was no procurement for the court to review, that the claim was barred by the Federal Acquisition Streamlining Act task order bar, and that the requested relief was not redressable in a bid protest. Judge Carolyn N. Lerner rejected all three.

Procurement is broader than solicitation. The court reaffirmed that procurement under 28 U.S.C. 1491(b)(1) is interpreted expansively, covering the entire process of determining a need for property or services rather than only formal solicitations and awards. An agency decision to develop functionally equivalent software through existing contractors, after declining a live Phase III proposal, is acquisition by another name. The court distinguished earlier precedent involving software developed decades earlier with no active solicitation, noting that here the agency had recently funded the technology, declined a pending Phase III proposal, and continued near-identical development elsewhere.

The task order bar has limits. The Federal Acquisition Streamlining Act bar at 41 U.S.C. 4106(f) generally prohibits protests at the court regarding the issuance or proposed issuance of a task order. The court held the claim survived because it targeted the alleged violation of the SBIR Phase III preference, with the task orders serving as the mechanism rather than the target. The court also observed that the increased-scope exception would independently apply if the disputed work exceeded what the task orders actually covered.

Injunctive relief is available. The government argued the claims were not redressable because courts generally cannot order an agency to buy a particular product. The court rejected the framing. The protester sought a ruling that the agency's conduct was arbitrary and an injunction against assigning the disputed work to other contractors, both expressly authorized under 28 U.S.C. 1491(b)(2).

One caution matters more than any of the above. This was a jurisdictional ruling. The court did not find that the agency violated the SBIR statute, and it did not hold that the protester is entitled to a Phase III award. It held that the allegations deserve to be heard.

The Phase III Preference You Are Actually Enforcing

Most small innovators underuse Phase III because they misunderstand what it is. Phase III is not a funding pool. It is the commercialization stage of the SBIR program, funded with agency mission money rather than SBIR set-aside dollars, and it carries a statutory shortcut that few contracting officers volunteer.

15 U.S.C. 638(r)(4) authorizes sole-source Phase III awards to the firm that performed the underlying Phase I or Phase II work. Under SBA's SBIR/STTR Policy Directive, a separate justification and approval is not required from the procuring agency once a contracting officer determines that a technology meeting a current agency requirement derives from, extends, or completes an effort made under a prior SBIR or STTR funding agreement that was issued competitively. If an agency chooses to prepare a justification anyway, the Policy Directive states it is sufficient to say that the project is a Phase III award derived from, extending, or completing prior SBIR work and is authorized under 15 U.S.C. 638(r)(4). Further justification is not needed.

There is no dollar ceiling on Phase III, no limit on the number of Phase III awards, and no requirement that the buying agency be the one that funded Phase I or Phase II. That last point changes business development strategy: a Navy Phase II can become an Army Phase III, and the sole-source authority travels with the technology, not the funding office. Where an agency chooses not to go sole source, 15 U.S.C. 638(y) still offers levers, including naming the SBIR awardee's product as a required deliverable and using evaluation factors that favor primes who subcontract to SBIR firms.

Data Rights Are the Other Half of the Fight

A Phase III preference is worth little if the government can hand your technical data to a competitor. Small businesses working with the Department of Defense have stronger protection here than most of them realize, and the rules changed recently enough that outdated advice is still circulating.

A DoD final rule published December 17, 2024 and effective January 17, 2025 amended DFARS 252.227-7018 to codify a 20-year SBIR and STTR data protection period running from the date of award of the contract under which the data were developed or generated. That replaced the prior 5-year period, which could be extended indefinitely through subsequent derivative SBIR awards. The same rule changed the license the government receives once the protection period expires, from Unlimited Rights to perpetual Government Purpose Rights.

The rule also tightened protections against pressure. DFARS 227.7104-1 provides that an offeror cannot be required, as a condition of being considered responsive or as a condition of award, to relinquish rights in technical data or computer software developed or generated under an SBIR or STTR contract. DFARS 227.7104-2 makes clear that special license rights may be negotiated only after contract award. The rule cuts the other way in one respect that offerors should price into their strategy: the government may use information submitted in response to a solicitation to evaluate, during source selection, the impact of proposed restrictions on its ability to use or disclose the data. That evaluative consideration survived industry objections. Finally, the amended DFARS 227.7104-1 confirms that SBIR and STTR data rights apply to contracts and subcontracts that include Phase III work, not just to Phase I and Phase II.

What the 2026 Reauthorization Adds

The programs lapsed on September 30, 2025, and the six-month gap that followed halted new awards across federal agencies. President Trump signed the Small Business Innovation and Economic Security Act of 2026 on April 13, 2026, extending both programs through September 30, 2031. The Senate had passed the bill on March 3, 2026 and the House on March 17, 2026. Agencies holding unspent SBIR and STTR funds at the end of fiscal year 2026 may carry them into fiscal year 2027.

Three provisions bear directly on the transition problem. First, the Act creates a strategic breakthrough category of Phase II funding for agencies whose annual required SBIR expenditures exceed 100 million dollars, with individual awards up to 30 million dollars, a maximum 48-month performance period, and a requirement that agencies execute awards within 90 days of receiving a proposal. Eligibility requires at least one prior Phase I or Phase II award, matching funds equal to 100 percent of the award, and market research showing the technology answers an identified need. DoD adds further conditions, including a commitment for inclusion in a program objective memorandum.

Second, the Act directs SBA to update its policy directive so that procurement center representatives advocate for the maximum practicable use of and transition to Phase III, and directs agencies to develop simplified, standardized procedures, model contracts, and clauses covering what information a company may be asked to supply to establish Phase III eligibility. Third, the Federal Procurement Data System is to be updated to report SBIR and STTR award classifications and to reference the prior SBIR work underlying follow-on awards. That third item is quietly the most useful to a small business: it makes de facto Phase III work easier to find in the data.

One change cuts against volume-driven strategies. Beginning in fiscal year 2027, agencies will set their own caps on how many proposals a company can submit on a per-company, per-solicitation, or per-topic basis, with caps due no later than 90 days before the fiscal year starts and topic-by-topic waivers limited to 5 percent of an agency's topics in a year.

What to Do Right Now

Submit a written Phase III proposal before your Phase II closes out, and submit it to a named contracting officer rather than to your technical point of contact. The protester in Strategi Consulting had a live Phase III proposal on the table, and the court leaned on that fact when it distinguished the case from earlier precedent. A proposal in the record converts a vague grievance into a declined procurement decision.

Mark everything. Confirm that DFARS 252.227-7018 is in your contract, that your deliverables carry correct SBIR and STTR data rights legends, and that your 20-year clock is documented by award date for each contract under which data were generated. If a contracting officer suggests that broader rights are a condition of award, that request is inconsistent with DFARS 227.7104-1 and should be raised in writing before award, not after.

Monitor follow-on procurement activity in the program office that funded your Phase II. Watch for new task orders, modifications, and internal development efforts touching the same capability. Build a dated timeline as you go: proposal submitted, agency response or silence, requests for your codebase or documentation, appearance of substantially similar work elsewhere. That timeline is the protest.

Move quickly if the pattern appears. Bid protest timelines are short and the Court of Federal Claims applies its own rules on standing and timeliness. Consult protest counsel while an injunction can still preserve the status quo, not after the replacement capability is fielded.

Finally, brief your team on the fiscal year 2027 proposal caps. If your capture plan assumes you can submit to a dozen topics per solicitation, that assumption may not survive the next cycle, and agencies must publish their limits at least 90 days before the fiscal year begins.

How ProposalApp Helps

The practical difficulty in enforcing a Phase III preference is not legal, it is administrative. The evidence is scattered across proposals you wrote a year ago, emails with a program office, and award data you never had reason to pull. ProposalApp keeps that material in one place. Company documents, prior proposals, and capability statements live in your workspace, so when you need to show that a later award covers work derived from your Phase II, the technical narrative is already there.

ProposalApp's opportunity search and pipeline tracking let you watch the program offices and contract vehicles that matter to your technology, so a new task order touching your capability area surfaces in your feed rather than in a rumor. Saving those opportunities to your pipeline builds the dated record a protest timeline depends on, and the contract intelligence and recompete tools show where similar scopes are being bought and by whom, often the first signal that follow-on work has moved.

When it is time to write the Phase III proposal, ProposalApp drafts from your existing capability content and prior performance, and the bid and no-bid analysis gives you a structured read on whether to pursue a competitive follow-on or press the sole-source route under 15 U.S.C. 638(r)(4). The point is not to make you litigious. It is to make sure that if you ever need to show what you built, when you offered it, and what happened next, the record exists.

Sources

- [PilieroMazza: Strategi Consulting, A Jurisdictional Win for SBIR Contractors](https://www.pilieromazza.com/strategi-consulting-a-jurisdictional-win-for-sbir-contractors/)
- [National Law Review: SBIR Phase III Bid Protests, What Strategi Consulting v. U.S. Means for Government Contractors](https://natlawreview.com/article/sbir-phase-iii-bid-protests-what-strategi-consulting-v-us-means-government)
- [Crowell & Moring: Final DOD Rule Codifies 20-Year SBIR Data Protection Period and Other SBIR Program Protections](https://www.crowell.com/en/insights/client-alerts/final-dod-rule-codifies-20-year-sbir-data-protection-period-and-other-sbir-program-protections)
- [Crowell & Moring: SBIR/STTR Programs Reauthorized After Six-Month Lapse](https://www.crowell.com/en/insights/client-alerts/sbirsttr-programs-reauthorized-after-six-month-lapse)
- [Acquisition.gov: DFARS 252.227-7018, Rights in Other Than Commercial Technical Data and Computer Software, SBIR and STTR Programs](https://www.acquisition.gov/dfars/252.227-7018-rights-other-commercial-technical-data-and-computer-software%E2%80%94small-business-innovation-research-program-and-small-business-technology-transfer-program.)
- [Acquisition.gov: DFARS 227.7104-2, Rights in SBIR or STTR data](https://www.acquisition.gov/dfars/227.7104-2-rights-sbir-or-sttr-data.)
- [SBA: SBIR and STTR Policy Directive](https://www.sbir.gov/about/policies)
- [PilieroMazza Weekly Update for Government Contractors, August 6, 2026](https://www.pilieromazza.com/weekly-update-for-government-contractors-and-commercial-businesses-august-6-2026/)