United States: DOD's New Rules Of The Road For 'Other Transactions'

Last Updated: December 21 2018
Article by Stuart W. Turner, Sonia Tabriz and Nathaniel Castellano

For over 60 years, the U.S. government has entered into agreements called "other transactions." The Other Transaction Authority, or OTA, permits specific agencies, including the U.S. Department of Defense, to enter into agreements "other than standard government contracts or other traditional mechanisms" like procurement contracts, grants and cooperative agreements. While OT activity continues to increase, formal guidance regarding the effective use of such agreements has been sparse. In an effort to articulate some rules of the road, on Dec. 3, 2018, the Office of the Under Secretary of Defense for Acquisition and Sustainment issued its broad "Other Transactions (OT) Guide."1

While the OTA has been available to the DOD since the late eighties, the DOD has ramped up its OT activity in recent years to obtain research, cutting edge technology and even full production of military hardware, awarding "$21 billion through 148 OTAs between 2015 and 2017."2 Congress has stated that the DOD "has authority to use OTAs with the most flexible possible interpretation."3 As observed by the Government Accountability Office, OT agreements "can be useful in attracting ... companies that have traditionally not done business with federal agencies."4

By its own terms, the guide was not intended to – and does not — provide step-by-step, mandatory instructions for the exercise of OTA by the DOD similar to the instructions in the Federal Acquisition Regulation, or FAR, for traditional procurement contracts. The guide cautions readers that it "is not a formal policy statement," and does not purport to offer a final "interpretation of statutory, regulatory and formal policy requirements."5 The guide states that those seeking to enter into an OT agreement "should consult with legal counsel."6

Nevertheless, the guide covers the waterfront of the DOD's OT tools, and provides helpful examples, definition and context. This advisory highlights some key aspects of the guide.

OT Agreements at the DOD

By statute, the DOD can issue three types of OT agreements: "Research, Prototype, and Production."7 The DOD must comply with specific statutory prerequisites to enter into each type of OT agreement. The DOD has long defined an OT "by mainly what the legal instrument is not."8 The guide itself states that "OT agreements are defined in the negative – they are NOT procurement contracts, grants, or cooperative agreements."9

The guide does, however, seek to dispel the myth that OT agreements are not contracts.10 While OT agreements are not "procurement contracts" subject to the FAR, OT agreements "are legally valid contracts" with all of the traditional defining characteristics of a contract, i.e. "offer, acceptance, consideration, authority, legal purpose, and meeting of the minds."11 Thus, a DOD OT agreement must be "signed by someone who has the authority to bind the federal government (i.e. an Agreements Officer (AO))."12

The guide further confirms that OT agreements are subject to many of the compliance and control systems that govern FAR-based procurement. DOD OT agreements are, however, exempt from any statute or regulation that is solely applicable to traditional procurement contracts.13 However, "[l]aws and regulations that are unrelated to the acquisition or assistance process will still apply to OTs," including "appropriations, security, export control, socio-economic, and criminal laws."14

The DOD OT Team

The guide declares that implementing OTs requires "experienced individuals," which implies that OTs may be perceived as a separate track within the DOD procurement community. Consistent with this, the guide defines the "agreements officer" at the center of the team as a "warranted individual with authority to enter into, administer, or terminate OTs."15 Moreover, "AOs need not be Contracting Officers, unless required by the Component's appointment process."16

This is an important change from the DOD's 2017 Other Transactions Guide for Prototype Projects, which advised that AOs "must be warranted DOD contracting officers."17 The prospect that certain DOD components might have different procedures for appointing AOs creates uncertainty for contractors attempting to determine the actual authority of their government counterpart.

While the guide recommends a small team to support the AO, it nonetheless lists many potential stakeholders, such as the eventual project manager, end user representatives, subject matter experts, small business advocates, and personnel from legal, accounting and administrative functions.18 The guide further provides that the OT team need not include the Defense Contract Management Agency and Defense Contract Audit Agency, management and oversight entities within the DOD that often play a critical – and complex – role in FAR-based procurement.19

Pre-Solicitation Phase

Prior to executing an OT, the guide provides that the DOD OT team should gather market intelligence, define the problem, understand the statutory and regulatory requirements, identify available funding and plan for follow-on activities.20 Specifically, the guide encourages the government to "consider and employ a variety of marketing activities," noting that "traditional advertising methods (i.e. FedBizOpps and Grants.gov[]) may not reach the broad breadth of potential performers."21

The guide directs the OT team to advertise opportunities through alternative channels, and to consult "outside subject matter experts as well as industry sources" to determine "where practitioners in their field would look for opportunities."22 The DOD OT team should also consider the possibility of "foreign participation," as "foreign performers [can] broaden the potential technology options."23 Contractors interested in entering the OT market should, in turn, contact government officials at industry days or pursue other opportunities to ensure they are included in these informal distribution plans.

A broader view of marketing is critical, as one of the principal circumstances under which the DOD may use prototype OTs is when "at least one non-traditional defense contractor or non-profit research institution" participates to a "significant extent" in the prototype project.24 The statute does not define what "significant extent" means, which has created some confusion over the permissible composition of teams consisting of both traditional and non-traditional contractors. The guide emphasizes the AO's discretion to make this judgment:

[i]n evaluating the significance of expected NDC/nonprofit research institution participation, the Agreements Officer is expected to consider input from relevant technical advisors in assessing the totality of the circumstances for each proposed prototype project before making an independent judgement as to the significance of expected NDC or nonprofit research institution participation.25

The guide is more explicit regarding planning for follow-on activities and affords AOs far less discretion in this context, stating: "potential follow-on activities, to include follow-on production shall be identified in the solicitation and any resulting OT Agreements."26 That said, "the level of detail required as to follow-on activities need only be sufficient for prospective technology providers within the technology sector to make an informed decision whether to bid on the prototyping effort, with the understanding that size, scope and value of potential follow-on activities may vary."[[N:Id. This explicit provision is likely a legacy of the GAO decision in Oracle America, Inc., B–416061, May 31, 2018, 2018 CPD ¶ 327, which found that the DOD "only has the authority to award a follow-on [OT agreement for production] if it was provided for in the prototype OTA."]]

Public information released with the initial notice of an OT opportunity may prove important when assessing the timeliness and viability of a potential bid protest.

Formation of OT Agreements

The guide additionally provides insights on OT formation principles including evaluating solutions, selecting contractors and negotiating terms.27 Rather than directing the use of traditional procurement methods, the guide provides that an OT team may create any "process to solicit and assess potential solutions provided it is a fair and transparent process, provides for competitive procedures to be used to the maximum extent practicable ... and documents the rationale for making the Government investment decision."28

Once the OT team receives proposals, the guide directs that evaluations "must be fair and transparent, and should be conducted in accordance with industry norms for the technology being solicited."29 The DOD is instructed to select "offerors with the most advantageous solution(s)" using OT "competitive procedures."30 Yet, neither the guide nor the OT authorizing statutes apply a specific definition or set of minimum requirements to define what "competitive procedures" means.31 While the legal interpretation of "competitive procedures" for OTs may be unsettled, the guide confidently recommends DOD OT teams pursue non-traditional procedures such as "Tech Demonstrations, Design Sprints, Hackathons, Innovation Workshops, Rodeos, Shark-Tank like presentations, Prize Contests and other similar events" to select its awardees.32

Negotiating Terms

To protect the DOD's interests when negotiating an OT agreement, the guide discusses thirteen topics relevant to OT terms and conditions. Only three of these topics are mandatory: (1) the government must assess price reasonableness – though it should only seek data directly from the contractor as a last resort, (2) the government must identify any anticipated follow-on work, as discussed above and (3) if a prototype OT agreement exceeds $5 million, the comptroller general must have access to the records.

The remainder of the list, including disputes, payment terms, changes, intellectual property and termination rights, are all stated as topics the government "should consider," but is not required to. This creates a stark contrast to FAR-based procurement, where these topics are the subject of mandatory clauses. For example, the guide recommends that AOs consider "whether or not the Government will have the right to make unilateral changes," and whether the awardee should have the right to terminate the contract.33 For most contracts under the FAR, the answer is clearly yes to the former and no to the latter.

In practice, it is likely that most or all of these topics will be covered in a proposed OT agreement, and the guide stresses the importance of these issues, mandatory or not. For example, the guide encourages the DOD OT team to have "a baseline understanding" of the statutes governing rights in patents and technical data, even though "neither of these statutes apply to OTs."34 Contractors should use this listing of issues as a checklist to carefully assess what the government has and has not specifically addressed.

Administration of OT Agreements

The guide further provides the DOD OT team with advice on administration principles including reporting, close-out, allowable costs, audit, resource sharing and payment. While the guide suggests that the OT agreement dictate reporting requirements, "close-out should occur in accordance with agency procedures, considering special areas such as audit requirements, cost sharing, payments, property, patents and OT awardee reports."35

Regarding allowable costs, the guide provides that where payment is based on contractor costs, or when the awardee is contributing to the cost of performance, the OT agreement should require that costs be those that "a reasonable and prudent person would incur in carrying out the project."36 Such a broad, flexible standard for cost-reimbursement OTs provides another stark contrast between OTs and those procurement contracts that are subject to FAR Part 31 and the cost accounting standards.

As to audits, the guide states that "fixed amount agreements should not require any type of audit provisions," but that "audits and access to financial records are subject to negotiation" except as provided in 10 U.S.C. § 2371b.37

Legal Considerations

The guide cautions agencies to "be mindful of the possibility" of a protest. "Agency-level protests are possible if the agency chooses to include language in its solicitation describing the procedures."38 The guide also warns of the potential for protests at the GAO and the U.S. Court of Federal Claims.39 Contractors should familiarize themselves with the protest procedures in their OT agreements, as well as any such procedures set forth in advertised opportunities, and pay careful attention to the growing body of case law relevant to OT protests.

Contractors considering OTs should also be aware of certain Freedom of Information Act concerns. Potential contractors should always mark business plans and technical information "with a legend identifying the documents as being submitted on a confidential basis" to ensure that they are exempt from the disclosure requirements of 5 U.S.C. § 552.

Conclusion

The existing regulations regarding the DOD's OTA are not comprehensive, and afford a great deal of discretion to the responsible agency personnel. The guide does not change this, nor was it intended to. The guide, consistent with its subject and the existing authorities, does not provide the kind of granular, step-by-step guidance provided by the FAR governing traditional procurement contracts. The guide does, however, provide valuable insight into the areas where rigid performance, reporting and compliance obligations may be lessened or lifted.

Footnotes

1 Off. of the Under Secretary of Defense for Acquisition and Sustainment, Other Transactions (OT) Guide, Defense Acquisition Univ. (Dec. 3, 2018), referred to herein as "OT guide" or simply "guide."

2 Scott Maucione, As OTAs Grow, Traditional Contractors are Reaping the Benefits, Federal News Network (Jul. 17, 2018).

3 S. Rep. No. 115-125. Congress has reserved its right to oversee OTA activity. In 2019, Congress required the DOD to begin collecting data on OT use and report its findings back to Congress. See FY2019 NDAA § 873(b).

4 U.S. Gov't Accountability Off., GAO-16-209, Federal Acquisitions: Use of 'Other Transaction' Agreements Limited and Mostly for Research and Development Activities at 1 (2016).

5 OT guide.

6 Id.

7 Id. See 10 U.S.C. § 2371 (authorizes the DOD to enter Research OTs "for basic, applied, and advanced research projects"); 10 U.S.C. § 2371b (authorizes the DOD to enter Prototype OTs that the DOD can transition into Production OTs.); and 10 U.S.C. § 2371b(f) (authorizes noncompetitive, follow-on Production OTs to a competitively awarded and successfully completed Prototype OT).

8 Dep't of Defense, Other Transactions Guide for Prototype Projects (Jan. 2017).

9 OT guide.

10 Id.

11 Id.

12 Id.

13 OT guide.

14 OT guide.

15 Id.

16 Id.

17 Dep't of Defense, Other Transactions Guide for Prototype Projects 3 (Jan. 2017).

18 OT guide.

19 Id.

20 Id.

21 Id.

22 Id.

23 Id.

24 10 U.S.C. § 2371b.

25 OT guide.

26 Id. (emphasis in original).

27 OT guide.

28 Id.

29 Id.

30 Id.

31 Some procurement statutes define "competitive procedures" largely as compliance with the FAR, which does not apply to OT agreements. See 41 U.S. Code § 3301(a)(1); 10 U.S. Code § 2304(a)(1)(A).

32 OT guide.

33 Id.

34 Id.

35 OT guide.

36 Id.

37 Id. (emphasis added).

38 OT guide.

39 Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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