Proposed Rule2024-19457
Transactions Other Than Contracts, Grants, or Cooperative Agreements for Prototype Projects
Primary source
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Published
September 4, 2024
Issuing agencies
Defense Department
Abstract
DoD is proposing revisions to its regulations on Other Transaction (OT) agreements for prototype projects to implement changes in statutory authority enacted by Congress since the last update in 2004. The Department is proposing changes in: the authority to provide for follow-on production OTs and contracts; special circumstances for award of OTs to small businesses, nontraditional defense contractors, nonprofit research institutions, and consortia; approval requirements for large dollar OTs; the authority to supply prototypes and production items to another contractor as Government furnished items; and applying procurement ethics requirements to covered OT agreements.
Full Text
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<title>Federal Register, Volume 89 Issue 171 (Wednesday, September 4, 2024)</title>
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[Federal Register Volume 89, Number 171 (Wednesday, September 4, 2024)]
[Proposed Rules]
[Pages 71865-71872]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-19457]
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DEPARTMENT OF DEFENSE
Office of the Secretary
32 CFR Part 3
[Docket ID: DoD-2021-OS-0071]
RIN 0790-AK98
Transactions Other Than Contracts, Grants, or Cooperative
Agreements for Prototype Projects
AGENCY: Office of the Under Secretary of Defense for Acquisition and
Sustainment (OUSD(A&S)), Department of Defense (DoD).
ACTION: Proposed rule.
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SUMMARY: DoD is proposing revisions to its regulations on Other
Transaction (OT) agreements for prototype projects to implement changes
in statutory authority enacted by Congress since the last update in
2004. The Department is proposing changes in: the authority to provide
for follow-on production OTs and contracts; special circumstances for
award of OTs to small businesses, nontraditional defense contractors,
nonprofit research institutions, and consortia; approval requirements
for large dollar OTs; the authority to supply prototypes and production
items to another contractor as Government furnished items; and applying
procurement ethics requirements to covered OT agreements.
DATES: Comments must be received by November 4, 2024.
ADDRESSES: You may submit comments, identified by docket number and/or
Regulatory Identifier Number (RIN) number and title, by any of the
following methods:
<bullet> Federal eRulemaking Portal: <a href="http://www.regulations.gov">http://www.regulations.gov</a>.
Follow the instructions for submitting comments.
<bullet> Mail: Department of Defense, Office of the Assistant to
the Secretary of Defense for Privacy, Civil Liberties, and
Transparency, Regulatory Directorate, 4800 Mark Center Drive, Attn:
Mailbox 24, Suite 08D09, Alexandria, VA 22350-1700.
Instructions: All submissions received must include the Docket ID
No. Comments received will be posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>, including any personal information provided. Do
not submit any information you consider to be Confidential Business
Information (CBI) through <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
FOR FURTHER INFORMATION CONTACT: Mr. Larry McLaury and Mr. Jesse
Bendahan, 703-697-6710.
SUPPLEMENTARY INFORMATION:
I. Background and Authority
These proposed changes update 32 CFR 3 under section 4022 of title
10, United States Code (section 4022). An OT is a legal instrument
(award) issued by the Federal Government that is not a procurement
contract, cooperative agreement or grant, and is the defining
characteristic of OTs. OTs pursuant to section 4022 can take many forms
and generally are not required to comply with Federal laws and
regulations that apply to procurement contracts, grants, and/or
cooperative agreements. To the extent that a particular law or
regulation is not tied to the type of instrument used (e.g., fiscal and
property laws), it would generally apply to an OT.
The purpose of these types of agreements is to provide agility in
the contracting process by attracting nontraditional defense
contractors and small businesses with leading edge technologies. They
are meant to enable acquisition of innovative technologies by allowing
for flexibility in terms of the award process and the terms and
conditions of a contract.
The Department currently has permanent authority to award OT under
three areas.
<bullet> Research--Section 4021 of title 10, United States Code
(section 4021) provides authority for basic, applied, and advanced
research projects. These OTs are intended to spur dual-use research and
development to take advantage of economies of scale without burdening
companies with Government regulatory overhead, which would make them
non-competitive in the commercial (non-defense) sector. The update
proposed here is limited to authority for prototype OTs under section
4022, but section 4022 states that OTs for prototypes are under the
authority of section 4021.
<bullet> Prototype--This allows for prototype projects under
section 4022 authority that are directly relevant to enhancing the
mission effectiveness of personnel of the Department of Defense or
improving platforms, systems, components, or materials proposed to be
acquired or developed by the Department of Defense, or to improvement
of platforms, systems, components, or materials in use by the armed
forces.
<bullet> Follow-on Production OTs and Contracts--This allows for a
non-competitive, follow-on OTs to a Prototype OT agreement under
section 4022 authority that was competitively awarded and successfully
completed. Although advance consideration of transition from a
prototype agreement to a follow-on production OT is recommended as best
practice, explicit notification is not required within the request for
proposal for the transaction if: competitive procedures were used for
the selection of parties for participation in the transaction; and the
participants in the transaction successfully completed the prototype
project provided for in the transaction.
This proposed rule covers prototype OTs and follow-on production
OTs and contracts under section 4022. This part of the CFR was last
updated on March 30, 2004 (61 FR 16481-16483). The changes proposed
facilitate statutory alignment and ensure up-to-date information and
policy are codified in the CFR.
For the purposes of this proposed rule, prototype projects can
address:
<bullet> a proof of concept, model, or process, including a
business process;
<bullet> reverse engineering to address obsolescence;
<bullet> a pilot or novel application of commercial technologies
for defense purposes;
<bullet> agile development activity; and
<bullet> the creation, design, development, demonstration of
operational utility; or any combination of the foregoing.
The current provisions of Part 3 in Title 32 are based on authority
in section 845 of the NDAA for Fiscal Year 1994, Public Law 103-160, as
amended
[[Page 71866]]
(section 845). This authority permitted the use of OT agreements for
prototype projects directly relevant to weapons or weapon systems
proposed to be acquired or developed by the DoD. It was permanently
codified when section 2371b, (which is now 10 U.S.C. 4022) was
enacted.\1\ Although section 4022 replaced section 845, many of the
provisions regarding OT agreements for prototype projects are retained
in section 4022 and are retained in this proposed rule.
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\1\ Section 845 was codified in section 2371b of title 10,
U.S.C. by section 815 of the FY16 NDAA, Public Law 114-92. Section
1841 of the William M. (Mac) Thornberry National Defense
Authorization Act for Fiscal Year 2021, Public Law 116-283,
transfers section 2371b to section 4003 of title 10, U.S.C. This
change was effective January 1, 2022 by section 1801(d)(1). Further,
section 1701(u)(2)(B) of the National Defense Authorization Act for
Fiscal Year 2022 transferred section 4003 to section 4022 of title
10, U.S.C. Further references in the proposed revision are to
section 4022.
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However, DoD is proposing to retain some of the current language
from the now replaced Section 845 with some modifications based on
changes in the law in the following areas:
<bullet> changing the use of OTs for prototype projects so it does
not require a cost share from a performer \2\ when at least one
nontraditional defense contractor is participating to a significant
extent.
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\2\ For OTs under section 4022, awardees are considered
``performers'', which is contrasted with traditional FAR procurement
contract awardees that are considered ``contractors''.
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<bullet> Providing authority for the senior procurement executive
of the agency to make an exceptional circumstances justification to use
such a prototype OT transaction.
<bullet> Including a limitation on cost sharing.
<bullet> Comptroller General access and DoD access to records
policy provisions.
<bullet> Adding authority for follow-on production contracts.
II. Major Provisions
The following is a section-by-section overview of the amendments
proposed by this rule.
Section 3.1 Purpose. The proposed amendments reflect the statutory
implementation as the basis for the authority to award OT agreements
for prototype projects. The amendment identifies the changes in the law
since the current rule was published. It also expands the background on
the intended use of OTs for prototype projects. Specifically, DoD is
aligning the intended uses consistent with law that are directly
relevant to enhancing the mission effectiveness of personnel of the DoD
or improving platforms, systems, components, or materials proposed to
be acquired or developed by the DoD, or to improvement of platforms,
systems, components, or materials in use by the armed forces.
Section 3.2 Background. The proposed amendments clarify that OT
agreements for prototype projects are legally binding instruments that
include the elements of: offer; acceptance; consideration; authority; a
legal purpose; a meeting of the minds; and are approved by an
Agreements Officer who has authority to bind the Government. The
proposed amendments to this section also highlight that DoD has an
internal OT Guide that provides instruction for DoD employees on the
planning, publicizing, soliciting, evaluating, negotiation, award, and
administration of OTs for prototype projects. It was most recently
revised in July 2023, and includes changes codified in 10 U.S.C.
4022.\3\
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\3\ The DoD OT Guide is issued by the Office of the Under
Secretary of Defense for Acquisition and Sustainment. <a href="https://www.acq.osd.mil/asda/dpc/cp/policy/other-policy-areas.html">https://www.acq.osd.mil/asda/dpc/cp/policy/other-policy-areas.html</a>. The OT
Guide provides internal guidance to DoD practitioners and does not
direct any requirements for OT performers. The contents of this
document do not have the force and effect of law and are not meant
to bind the public in any way. This document is intended only to
provide clarity to the public regarding existing requirements under
the law or departmental policies.
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Section 3.3 Applicability. The proposed amendments detail how this
part applies to OT agreements for prototype projects and follow-on
production OTs and contracts awarded under this part. This section also
specifies that authority for OT agreements for prototype projects and
any follow-on production contract or follow-on production OT under this
part has been delegated to specified officials. The amendment proposes
to add offices that have been delegated OT authority to include, the
Commanding Officers of the Combatant Commands with contracting
authority, the Directors of Field Activities with contracting
authority, the Director of the Defense Innovation Unit, or any other
official designated by the Secretary of Defense to carry out OTs for
prototype projects. The proposed amendment also recognizes changes in
applicability to include follow-on production OTs and contracts under
the authority of this part.
Section 3.4 Definitions. The definitions are retained from the
current rule, except that the definition of the term, ``nontraditional
defense contractor'' has been changed to reflect statutory changes in
the definition of the term. A definition of the terms ``covered
official'' and ``prototype project'' are added to the rule consistent
with the definitions in 10 U.S.C. 4022.
Section 3.5 Appropriate use. This section is amended to reflect
changes that align the appropriate use of the authority related to
nonprofit research institutions and use of small businesses. If a
performer meets the required category under this section, there is no
requirement for a cost share for the prototype project. The proposed
amendment also amends the basis for an exceptional circumstances
justification (to forego a requirement for a cost share) to include an
opportunity to expand the defense supply base in a manner that would
not be practical or feasible under a contract. Per the National Defense
Authorization Act for Fiscal Year 2024, section 821, Public Law 118-31,
this section also recognizes that the cost sharing requirements do not
apply to follow-on production OTs or contracts.
Section 3.6 Limitations on cost-sharing. This section is proposed
to be amended to clarify cost sharing limitations related to OT
transactions for prototype projects. The amendment proposes to change
the official approving the limits on cost sharing from the agreements
officer to the official responsible for entering into the transaction,
recognizing that there may be a few cases where approval for a
limitation on cost sharing is required above the level of the
agreements officer.
Section 3.7 Comptroller General access. This section is proposed to
be amended to update changes in the authority from section 845 to 10
U.S.C. 4022, and for organizational changes with the DoD, and for
flowdown requirements. The cognizant office is changed to the Principal
Director, Defense Pricing, Contracting, and Acquisition Policy. This
rule also clarifies the flowdown requirements to any entity that
participates in the performance of the agreement that provide for total
government payments in excess of $5,000,000 as discussed in section
4022(c)(1).
Section 3.8 DoD access to records policy. This section is proposed
to be amended to update authority for the Single Audit Act, 31 U.S.C.
7501-7506, and for organizational changes within DoD for the Principal
Director, Defense Pricing, Contracting, and Acquisition Policy. The
amendment also updates the contact address for DoD IG.
Section 3.9 Follow-on production contracts or transactions. This
section is revised to add authority for follow-on production OT
agreements for prototype projects, and revise authority for follow-on
contracts. This section also proposes to add special conditions
regarding the
[[Page 71867]]
use of consortium. The current provision provides authority for follow-
on production contracts and does not address special circumstances for
use of consortium. The amendment adds authority for follow-on
production OTs or contracts and amends the conditions for approval. The
proposed amendment provides that a follow-on production OT or contract
may be awarded to the participants in the OT without the use of
competitive procedures, if: (1) competitive procedures were used for
the selection of parties for participation in the OT for prototype
project; (2) the participants in the OT successfully completed the
prototype project provided for in the OT; and (3) even if explicit
notification was not listed within the request for proposal for the
original prototype project transaction. The proposed amendment also
provides that follow-on production contract or OT may be awarded to a
consortium when the Department determines that an individual prototype
or prototype subproject as part of a consortium is successfully
completed by the participants. The proposed section recognizes that it
is not a condition for award of a follow-on production contract or OT
to a consortium to require the successful completion of all activities
within a consortium for the prototype projects awarded to the
consortium.
Section 3.10 Approval requirements. This is a new section
consistent with section 4022 to reflect internal DoD approval
requirements for proposed large dollar OT agreements for prototype
projects and follow-on production OTs and contracts. Per requirements
in section 4022(a)(2) OTs in excess of $100,000,000 but not in excess
of $500,000,000 (including all options) require a written determination
by the senior procurement executive for the agency, or for the Defense
Advanced Research Projects Agency (DARPA), the Defense Innovation Unit
(DIU), or the Missile Defense Agency (MDA), the director of the agency.
OTs in excess of $500,000,000 (including all options) require a written
determination by either the Under Secretary of Defense for Research and
Engineering, or the Under Secretary of Defense for Acquisition and
Sustainment. This latter category also requires congressional notice
before exercising such authority. Follow-on production OTs and
contracts in excess of $100,000,000 (including all options) require a
written determination by a covered official (defined in Sec. 3.4),
including a congressional notice at the time such authority is
exercised.
Section 3.11 Authority to provide prototypes and follow-on
production items as government-furnished equipment. This is a new
section consistent with section 4022 to provide prototypes and follow-
on production items as government furnished equipment (GFE). This
section reflects authority added in 10 U.S.C. 4022 for providing GFE to
support another contractor. The GFE may be provided to another
contractor, or to a performer of an OT.
Section 3.12 Competition requirements. This is a new section
consistent with section 4022 to reflect competition requirements that
were included in section 845, but are not reflected in the current
rule, and such competition requirements are retained in 10 U.S.C. 4022.
The competition standard under section 4022 is competition to the
maximum extent practicable.
Section 3.13 Applicability of procurement ethics requirements. This
is a new section consistent with section 4022 to reflect the
applicability of the post-Government employment restrictions to OTs
under this part covered in the Procurement Integrity Act, in 41 U.S.C.
chapter 21. The ethics provisions of the Procurement Integrity Act
include a prohibition that a former Government employee may not accept
compensation from a contractor (or performer) as an employee, officer,
director, or consultant of the contractor (or performer) for a period
of one year after the official either served in a specified role, or
personally made for the Federal agency a specified decision.
III. Expected Impact of This Rule
OMB Circular No. A-4, Subject: Regulatory Analysis (Nov. 2023)
provides guidance to Federal agencies on the development of regulatory
analysis as required under Section 6(a)(3)(C) of Executive Order 12866.
Under OMB Circular A-4, a benefit-cost analysis is the primary
analytical tool used for regulatory analysis. In developing a
regulatory analysis for a proposed rule, identifying and evaluating the
need for the regulatory action, and defining the baseline are important
initial steps. The proposed rule to update 32 CFR 3 for Other
Transactions is necessary because the current rule has not been updated
in over 20 years, and there have been several changes to OT authority
since the current rule.
The OMB Circular A-4 baseline criteria states, ``The benefits and
costs of a regulation are generally measured against a no-action
baseline: an analytically reasonable forecast of the way the world
would look absent the regulatory action being assessed, including any
expected changes to current conditions over time.'' (p. 11). In the
case of the proposed rule to update 32 CFR 3 for OT authority, absent
the proposed rule, we have the current regulation that is based on the
statutory authority of section 845. In establishing a baseline, A-4
states:
In general, an agency's first regulatory action implementing a
new statutory authority should be assessed in a manner that accounts
for the effects of the statute itself--that is, assessed against a
without-statute baseline.\4\ However, in some cases, substantial
portions of a regulation may simply restate statutory requirements
that are self-implementing even in the absence of the regulatory
action or over which an agency clearly has essentially no regulatory
discretion. In these rare cases, you may use a with-statute baseline
in your regulatory analysis, focusing on the discretionary elements
of the action and potential alternatives.
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\4\ Footnote from A-4: The terms ``pre-statute baseline'' and
``post-statute baseline'' were used in OMB Circular No. A-4 as
originally issued in 2003. However, as noted elsewhere, the baseline
for a regulatory analysis is (and has been) the predicted future
state of the world in the absence of the policy being assessed, so
more precise terms--that avoid the potentially misleading temporal
element of the prefixes ``pre-'' or ``post-''--without-statute or
with-statute are now used.
A ``without-statute baseline'' (or pre-statutory baseline) does not
fit the proposed rule because the current rule is firmly based on the
statutory authority of section 845. The proposed rule cites 10 U.S.C.
4022 (section 4022). However, section 4022 is not a ``new statutory
authority'' under the OMB Circular A-4 criteria for establishing a
baseline.\5\ Section 845 is the original OT authority and has been
permanently codified as section 4022. Section 845 was originally
temporary authority and included as a note to 10 U.S.C. 2371.\6\
Section 815 of the National Defense Authorization Act for Fiscal Year
2016, Public Law 114-92, amended OT authority by permanently codifying
OT authority in section 2371b of title 10 U.S.C., and thereby repealed
section 845. As a result of reorganization of title 10 U.S. Code,
section 2371b became the current section 4022. However, the OT
authority of section 845 continued as the current section 4022.
Therefore, as
[[Page 71868]]
indicated above, section 4022 is not ``new statutory authority''. As a
result, the baseline for the proposed rule is the statutory authority
of section 845, continued as section 4022. The proposed rule is a
direct implementation of OT authority in section 4022. It simply
restates OT authority in section 4022 and does not add any new
requirements. DoD practitioners are currently using OT authority in
section 4022 to award OTs for prototype projects without the benefit of
an updated rule. OMB Circular A-4 states that a statute baseline is
authorized where a proposed rule simply restate[s] statutory
requirements that are self-implementing even in the absence of the
regulatory action or over which an agency clearly has essentially no
regulatory discretion.'' Section 845 is a predecessor OT statutory
authority of the current section 4022.\7\ Section 845 and section 4022
share several OT provisions. Therefore, it does not appear appropriate
to apply a ``without-statute baseline'' (or pre-statutory baseline) to
our proposed rule. The proposed rule is intended to make the CFR
provisions consistent with the current section 4022. The current
provisions of section 4022 are self-implementing and are currently
being used by DoD practitioners to award OTs without the benefit of
updated CFR provisions. The proposed rule does not add any new
requirements beyond section 4022. The impact of the proposed rule
should be measured by comparing the current rule with section 4022 as
authority (a with-statute baseline).
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\5\ OT statutory authority in the context of this proposed rule
is intended to cover OTs for prototype projects under the original
section 845 and now section 4022. It is recognized that basic OT
authority, including research OTs, is under the original section
2371, and now section 4021 of title 10, U.S.C. titled, ``Research
projects: transactions other than contracts and grants.'' It is
further recognized that OT for prototype project authority is under
the authority of section 4021.
\6\ Section 845 of the NDAA for Fiscal Year 1994, Public Law
103-160, as amended.
\7\ Section 1841 of the William M. (Mac) Thornberry National
Defense Authorization Act for Fiscal Year 2021, Public Law 116-283,
transfers section 2371b to section 4003 of title 10, U.S.C. This
change was effective January 1, 2022 by section 1801(d)(1). Further,
section 1701(u)(2)(B) of the National Defense Authorization Act for
Fiscal Year 2022 transferred section 4003 to section 4022 of title
10, U.S.C.
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The current rule provides authority for OTs for prototypes as a
significant asset in the DoD toolbox for acquisition of items to
support the DoD mission. The current rule and the underlying statutory
authority provide a valuable alternative to traditional Federal
Acquisition Regulation (FAR) procurement contracts \8\ because they
encourage participation by small businesses and nontraditional defense
contractors \9\ and allow flexibility in negotiation of terms of the
agreement. OTs for prototype agreements are generally not subject to
procurement laws and regulations.\10\ The proposed rule provides
qualitative benefits and cost savings by encouraging small business and
nontraditional defense contractors to meet DoD warfighter requirements.
The proposed rule and the underlying statutory authority provide
incentives to small business and nontraditional defense contractors by
waiving cost share requirements if conditions (discussed below) are
met. The current rule is out of date with the statutory authority for
OTs for prototypes. The proposed rule supports innovation because it
authorizes flexibility in negotiation of terms, which require less
Government oversight, for prototype projects as an alternative
acquisition method if available in certain circumstances specified in
statute instead of regulatory contracts governed by the FAR.\11\ The
proposed rule may promote additional competition and spur innovation by
attracting nontraditional and small businesses with leading-edge
technologies to enable acquisition of innovative technologies.\12\ OTs
support additional competition because of statutory incentives to small
businesses and nontraditional defense contractors that potentially may
not participate absent these incentives. OT authority encourages
participation by small businesses by waiving cost share requirements if
certain statutory conditions are met. Section 4022(d) provides that if
all significant participants in the transaction other than the Federal
Government are small businesses, or nontraditional defense contractors,
the cost share requirements are waived. Further, if a nontraditional
defense contractor or a nonprofit research institution participates to
a significant extent in the transaction, cost share requirements are
met. Small businesses qualify as nontraditional defense contractors in
most cases.\13\
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\8\ See IBM Center for the Business of Government, ``Other
Transaction Authorities: After 60 Years, Hitting their Stride, or
Hitting the Wall'' (2021). <a href="https://www.businessofgovernment.org/sites/default/files/Other%20Transactions%20Authorities.pdf">https://www.businessofgovernment.org/sites/default/files/Other%20Transactions%20Authorities.pdf</a>.
\9\ See 10 U.S.C. 3014 for the definition of the term
``nontraditional defense contractor'' (NDC). The definition of an
NDC (paraphrased from 10 U.S.C. 3014) is a company that has not done
business with DoD within the last year, or does not meet the full
coverage requirements for cost accounting standards. This definition
permits a large number of entities, including nearly all small
business concerns, to be considered NDCs to help drive innovation.
\10\ See IBM report above.
\11\ See IBM report above.
\12\ Congressional Research Service (CRS) Report, ``Department
of Defense Use of Other Transaction Authority: Background, Analysis,
and Issues for Congress'' updated February 22, 2019. <a href="https://crsreports.congress.gov/product/pdf/R/R45521">https://crsreports.congress.gov/product/pdf/R/R45521</a>.
\13\ See 10 U.S.C. 3014.
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It is believed that if the proposed rule is implemented, it will
result in only a small number of new OTs. DoD practitioners are
presently awarding OTs for prototype projects based on the direct
authority of section 4022. Based on anecdotal evidence, few DoD
practitioners of OT authority are even aware of the current rule in 32
CFR 3. We do not expect that implementation of the proposed rule will
change the practice of using section 4022 as authority without
consideration of the 32 CFR 3. Therefore, we estimate that
implementation of the proposed rule will result in less than a 10%
increase new OT awards.\14\ Further, we do not believe the proper
measurement of the impact of the proposed rule is to count the
obligation amounts for OTs. If DoD warfighters have a requirement for
an item, they obtain funding for the program and decide as part of
acquisition planning what is the appropriate acquisition vehicle to
fulfill the requirement. If DoD determines an OT is appropriate for the
requirement, it will award an OT, or if not, use a FAR procurement
contract as the appropriate vehicle in the acquisition toolbox.
However, if an OT is used, it is not a unique impact to the economy
because if an OT was not selected, the requirement with the same
funding would be fulfilled by a FAR procurement contract. Section 4022
and the proposed rule do not promote OTs over FAR procurement
contracts. DoD must meet specific requirements to use OT authority. DoD
does not get a separate appropriation for OTs that may independently
impact the economy. Therefore, we do not expect that implementation of
the proposed rule will significantly impact the economy.
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\14\ We believe that practitioners will continue to perform
acquisition planning of whether a FAR contract or OT is the
appropriate way to fill a requirement. As indicated above, use of an
OT under section 4022 requires meeting statutory requirements (see
section 4022(a) and (d)).
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Further, when OTs for prototype projects requirements are met and
are available as an alternative to traditional FAR procurement
contracts, it can potentially reduce the costs of doing business for
both OT performers and the Government because the compliance costs for
traditional FAR procurement contracts are reduced by the use of OTs for
prototype projects.
Section 4022 provides flexibility in negotiation of terms compared
to a traditional FAR procurement contract. Examples of flexibility of
negotiation of terms that may not apply to OTs under section 4022 are
obtaining certified cost and pricing data; intellectual property
reporting provisions; \15\ payment
[[Page 71869]]
procedures; and more extensive audit requirements. Procurement contract
laws and regulations generally do not apply to OTs for prototype
projects and follow-on production OTs. Therefore, the time and
paperwork burden for an offeror and performer of an OT for prototype
project agreement is less than that for a traditional contract under
the FAR. Section 4022 promotes and encourages award of OTs for
prototype projects and follow-on production OTs and contracts to small
businesses, including those that are nontraditional defense
contractors.\16\ It is recognized that with increased flexibility in
negotiation of OT terms, that it raises the potential of risks on
oversight of such agreements. The oversight risks for OTs are
significantly reduced by a statutory requirement in section 4022(c) for
Comptroller General access to performer records for OT agreements over
$5M. Further, Sec. 3.8 in the current rule in 32 CFR 3 authorizes DoD
access to performer records for cost-type OT agreements. These
protections make the risk of flexibility manageable for OT agreements.
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\15\ For example on flexibility, intellectual property (IP)
provisions in DoD FAR procurement contracts are subject to the Baye-
Dole Act (Pub. L. 96-517 (1980)) specifying IP rights and duties and
several proscriptive clauses in the DoD FAR Supplement. IP
provisions in OTs are not subject to these provisions and allow for
more flexibility in negotiation.
\16\ See IBM Report on OTs.
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Benefits
It has been stated many companies do not pursue Federal Government
contracts because they are unwilling to forfeit intellectual property
rights or adhere to some of the procurement regulations.\17\ One of the
goals of OTs is to expand the defense marketplace by creating a
mechanism for access to technologies and services of companies that
would not otherwise work with DoD, particularly startups and companies
developing innovative technology. Section 4022(d) provides that if a
nontraditional defense contractor or nonprofit research institution
participates to a significant extent in the prototype project, or if
all significant participants in the prototype project are either small
businesses, or nontraditional defense contractors, there is no
requirement for the participants to provide a one-third cost share of
the project. This is a significant benefit for small businesses. The
proposed rule in implementing 10 U.S.C. 4022 repeats this policy, and
assists small businesses, and should make it easier for them to compete
in a particular sector of the economy than large businesses.
---------------------------------------------------------------------------
\17\ Id.
---------------------------------------------------------------------------
In FY 2022, it is estimated that over 90 percent of dollars
obligated under OT agreements for prototype projects went to performers
that included nontraditional defense contractors performing a
significant part of the project,\18\ and in FY 2022 it is estimated
that the majority of dollars obligated went to nontraditional defense
contractors.\19\ Many nontraditional defense contractors are small
businesses. Based on the present data available, it is also estimated
that 30-40 percent of OT actions for prototype projects were awarded to
small businesses.
---------------------------------------------------------------------------
\18\ Where an OT transaction includes a nontraditional defense
contractor performing to a significant extent, DoD does not
presently have access to data to determine the percentage of
obligations that went to the prime performer versus the
nontraditional defense contractor. DoD is working to improve the
transparency of data to determine the amount of obligations for a
nontraditional defense contractor.
\19\ This data is included in the DoD Report to Congress on the
Use of Other Transactions (OT) Authority for Prototype Projects in
Fiscal Year 2022 (April 20223). Annual Reports to Congress may be
viewed at <a href="https://www.acq.osd.mil/asda/dpc/cp/policy/other-policy-areas.html">https://www.acq.osd.mil/asda/dpc/cp/policy/other-policy-areas.html</a>.
---------------------------------------------------------------------------
The proposed rule will promote the growth and well-being of such
small entities. The economic impact to small businesses will be
beneficial. The effect of the proposed rule will be to encourage more
competition and awards to small business of OTs for prototype
agreements, and it is expected there will be a reduction in the
paperwork burden for small businesses compared to traditional FAR
procurement contracts.
The proposed rule would provide an opportunity for public comments
and provide updated external guidance on OT for prototype policy in
accordance with the statutory provisions of 10 U.S.C. 4022. Public
comments are solicited on the aspects of the costs and benefits of the
proposed rule. The proposed rule supports the use of small businesses
and will enable DoD to gain access to innovative technologies by
performers that will not accept doing business through a traditional
FAR procurement contract. There are no significant costs related to the
adoption of the proposed rule.
A potential alternative to the proposed rule is to delete the
present rule in 32 CFR 3. This potential alternative has the benefit of
removing an out-of-date regulation. However, the potential benefit is
outweighed by the costs of such an alternative. OT for prototype
authority is an important tool in the DoD acquisition toolbox, and
deletion of such regulatory coverage would be inconsistent with DoD's
policy to support innovation through acquisition policy. Further, the
current rule includes Sec. 3.8 DoD access to records policy. The
current rule provision on audit access is the only section that is not
directly from the statutory authority in section 845.\20\ Removal of
this audit access section would deprive DoD of important oversight
authority for OTs. Another potential alternative is to expand the
proposed rule to include best practices for DoD practitioners. This
alternative is not recommended since such best practices are included
in the DoD internal OT Guide. The proposed rule is the best
alternative.
---------------------------------------------------------------------------
\20\ The proposed rule only makes administrative changes to
section 3.8 on audit policy.
---------------------------------------------------------------------------
III. Regulatory Compliance Analysis
A. Executive Order 12866, ``Regulatory Planning and Review,'' as
Amended by Executive Order 14094, ``Modernizing Regulatory Review'' and
Executive Order 13563, ``Improving Regulation and Regulatory Review''
This rulemaking has been determined to be a significant action
under Executive Order 12866, as amended by Executive Order 14094. It
does not have economic, environmental, public health, safety effects,
or distributive impacts. It raised policy issues for which centralized
review was meaningful for resolution. Accordingly, the rule was
reviewed by the Office of Management and Budget.
B. Public Law 96-354, ``Regulatory Flexibility Act'' (5 U.S.C. 601)
The Under Secretary of Defense for Acquisition and Sustainment
certified that this proposed rule is not subject to the Regulatory
Flexibility Act (5 U.S.C. 601) because it would not, if promulgated,
have a significant economic impact on a substantial number of small
entities.
Although the proposed rule will be beneficial to a substantial
number of small entities as discussed in the expected impact section,
it will not have a significant economic impact on small businesses.
Therefore, the Regulatory Flexibility Act, as amended, does not require
us to prepare a regulatory flexibility analysis.
C. Sec. 202, Public Law 104-4, ``Unfunded Mandates Reform Act''
Section 202 of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1532) requires agencies to assess anticipated costs and benefits before
issuing any rule whose mandates require spending in any 1 year of $100
million in 1995 dollars, updated annually for inflation. This rule will
not
[[Page 71870]]
mandate any requirements for State, local, or Tribal governments, and
will not affect private sector costs.
D. Public Law 96-511, ``Paperwork Reduction Act'' (44 U.S.C. Chapter
35)
It has been determined that this rule does not impose reporting or
recordkeeping requirements under the Paperwork Reduction Act of 1995.
E. Executive Order 13132, ``Federalism''
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on state
and local governments, preempts state law, or otherwise has federalism
implications. This rule will not have a substantial effect on State and
local governments.
F. Executive Order 13175, ``Consultation and Coordination With Indian
Tribal Governments''
Executive Order 13175 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct compliance costs on one or
more Indian Tribes, preempts Tribal law, or effects the distribution of
power and responsibilities between the Federal Government and Indian
Tribes. This rule will not have a substantial effect on Indian Tribal
Governments.
List of Subjects in 32 CFR Part 3
Government procurement.
Accordingly, the Department of Defense proposes to amend 32 CFR
part 3 as follows:
PART 3--TRANSACTIONS OTHER THAN CONTRACTS, GRANTS, OR COOPERATIVE
AGREEMENTS FOR PROTOTYPE PROJECTS
0
1. The authority citation is revised to read as follows:
Authority: 10 U.S.C. 4022.
Sec. 3.1 Purpose.
This part implements the authority for Other Transaction (OT)
agreements for prototype projects established under section 4022 of
title 10, United States Code (U.S.C.). Section 4022 of title 10, United
States Code (U.S.C.) authorizes the Department of Defense (DoD) to
carry out prototype projects that are directly relevant to enhancing
the mission effectiveness of personnel of the Department of Defense or
improving platforms, systems, components, or materials proposed to be
acquired or developed by the DoD, or to the improvement of platforms,
systems, components, or materials in use by the armed forces.
0
2. Revise Sec. 3.2 to read as follows:
Sec. 3.2 Background.
OT agreements for prototype projects are legally binding
instruments that include the elements of: offer; acceptance;
consideration; authority; a legal purpose; a meeting of the minds; and
are approved by an Agreements Officer who has authority to bind the
Government. OTs for prototype projects are not procurement contracts
under the Federal Acquisition Regulation (FAR), and generally are not
subject to the Federal laws and regulations limited in applicability to
procurement contracts, grants, and cooperative agreements. As such,
they are generally not required to comply with the FAR and its DoD
supplement. OTs for prototype projects spur innovation and attract
nontraditional and small businesses with leading-edge technologies to
enable acquisition of innovative technologies more rapidly. The DoD has
broad flexibility in terms of the award process and the terms and
conditions of an OT for prototype project are negotiable between the
parties, subject to the provisions specified in 10 U.S.C. 4022 and its
implementation. The DoD has issued the Other Transactions Guide for the
promulgation of internal policy on the planning, publicizing,
soliciting, evaluating, negotiation, award, and administration of OTs
for prototype projects.
0
3. Revise Sec. 3.3 to read as follows:
Sec. 3.3 Applicability.
This part applies to:
(a) OT performers, companies, non-profit research institutions, and
consortiums of organizations that are awarded OT agreements for
prototype projects and follow-on OTs and contracts awarded under the
authority of 10 U.S.C. 4022 implemented in this part. The applicability
of this part is distinguished from awardees of procurement contracts
under the Federal Acquisition Regulation.
(b) The authority for OT agreements for prototype projects under
this part has been delegated to the following officials: the
Secretaries of the Military Departments, the Commanding Officers of the
Combatant Commands with contracting authority, the Directors of the
Defense Agencies, the Directors of Field Activities with contracting
authority, the Director of the Defense Innovation Unit, or any other
official designated by the Secretary of Defense to carry out OTs for
prototype projects, and follow-on production OTs and contracts under
the authority of this part.
0
4. Amend Sec. 3.4 by:
0
a. adding in alphabetical order a definition for ``covered official'';
0
b. revising the definition of ``Nontraditional Defense contractor'';
and
0
c. adding in alphabetical order a definition for ``prototype project''
The additions and revision read as follows:
Sec. 3.4 Definitions.
* * * * *
Covered official. An official of the DoD to include:
(1) A service acquisition executive;
(2) The Director of the Defense Advanced Research Projects Agency;
(3) The Director of the Missile Defense Agency;
(4) The Undersecretary of Defense for Acquisition and Sustainment;
(5) The Undersecretary of Defense for Research and Engineering; or
(6) The Director of the Defense Innovation Unit (DIU).
* * * * *
Nontraditional Defense contractor. An entity that is not currently
performing and has not performed, for at least the one-year period
preceding the solicitation of sources by the Department of Defense for
the procurement or transaction, any contract or subcontract for the
Department of Defense that is subject to full coverage under the cost
accounting standards.
* * * * *
Prototype Project. Includes a project that addresses any
combination of the following:
(1) A proof of concept, model, or process, including a business
process;
(2) Reverse engineering to address obsolescence;
(3) A pilot or novel application of commercial technologies for
defense purposes;
(4) Agile development activity;
(5) The creation, design, development, or demonstration of
operational utility; or
* * * * *
0
5. Revise Sec. 3.5 to read as follows:
Sec. 3.5 Appropriate use.
OT agreements for prototype project authority under this part may
be used only when one of the following conditions is met:
(a) At least one nontraditional defense contractor or nonprofit
research institution is participating to a significant extent in the
prototype project;
[[Page 71871]]
(b) All significant participants in the transaction other than the
Federal Government are small businesses or nontraditional defense
contractors;
(c) At least one third of the total cost of the prototype project
is to be paid out of funds provided by sources other than the Federal
Government. If any of the conditions of paragraphs (a), (b), or (d) of
this section are met, there is no requirement that at least one third
of the total cost of the prototype project is to be paid out of funds
provided by sources other than the Federal Government.
(d) The Senior Procurement Executive for the agency determines in
writing that exceptional circumstances justify the use of a transaction
that provides for innovative business arrangements or structures that
would not be feasible or appropriate under a contract, or would provide
an opportunity to expand the defense supply base in a manner that would
not be practical or feasible under a contract.
0
6. Amend Sec. 3.6 by:
0
a. Revising paragraph (a) introductory text.
0
b. In paragraph (a)(1), removing the words ``OT agreement'' and adding
in its place the word ``transaction''.
0
c. In paragraph (a)(2), removing the words ``OT agreement'' and adding
in its place the word ``transaction''.
0
d. In paragraph (b), removing the words ``may be recognized when
using'' and adding in its place the words ``is utilized for''.
The revision reads as follows:
Sec. 3.6 Limitations on cost-sharing.
(a) If cost-sharing is provided by a non-Federal party under Sec.
3.5 of this part, the non-Federal amounts counted as provided, or to be
provided, by the business units of an awardee or subawardee
participating in the performance of the transaction for a prototype
project shall not include costs that were incurred before the date on
which the transaction becomes effective. Costs that were incurred for a
prototype project by the business units of an awardee or subawardee
after the beginning of negotiations, but prior to the date the
transaction becomes effective, may be counted as non-Federal amounts
provided if and to the extent that the official responsible for
entering into the transaction determines in writing that:
* * * * *
0
7. Amend Sec. 3.7 by:
0
a. Removing the word ``subparagraph'' wherever it appears and adding in
its place the word ``paragraph.''
0
b. Revising paragraph (a).
0
c. In paragraph (c)(1), removing the words ``845 of the National
Defense Authorization Act for Fiscal Year 1994 (Pub. L. 103-160; 10
U.S.C. 2371'' and adding in their place the words ``10 U.S.C. 4022.''
0
d. In paragraph (d), removing the words ``Director, Defense
Procurement'' and adding in their place the words ``Principal Director,
Defense Pricing, Contracting, and Acquisition Policy (D, DPCAP)''.
0
e. Revising paragraph (e).
0
f. Redesignating paragraph (g)(3)(A) and (g)(3)(B) as (g)(3)(i) and
(g)(3)(ii), respectively.
0
g. In newly-redesignated paragraph (g)(3)(i), removing the words ``845
of the National Defense Authorization Act for Fiscal Year 1994 (Pub. L.
103-160; 10 U.S.C. 2371'' and adding in their place the words ``10
U.S.C. 4022.''
0
h. Revising paragraph (g)(6).
The revisions read as follows:
Sec. 3.7 Comptroller General access.
(a) A clause must be included in solicitations and agreements for
Other Transaction (OT) agreements for prototype projects awarded under
authority of this part that provide for total government payments in
excess of $5,000,000 to allow Comptroller General access to records
that directly pertain to such agreements.
* * * * *
(e) The HCA must notify the PD, DPCAP prior to any finalization of
a waiver under paragraph (d) of this section, and also of situations
where there is evidence that the Comptroller General Access requirement
caused companies to refuse to participate or otherwise restricted the
Department's access to companies that typically do not do business with
the Department.
* * * * *
(g) * * *
(6) The recipient of the agreement shall flow down this provision
to any entity that participates in the performance of the agreement
that provide for total government payments in excess of $5,000,000.
0
8. Amend Sec. 3.8 by:
0
a. Revising paragraph (a) introductory text.
0
b. In paragraph (a)(2), removing the words ``Public Law 98-502, as
amended by Public Law 104-156, 110 STAT. 1396-1404'' and adding in its
place the words ``31 U.S.C. 7501-7506 (Single Audit Act, or in this
section the Act)''.
0
c. In paragraph (a)(2)(v)(A), removing the word ``statute'' and adding
in its place the words ``this part.''
0
d. In paragraph (b)(1)(iv), removing the words ``Director, Defense
Procurement'' and adding in its place the words ``Principal Director,
Defense Pricing, Contracting, and Acquisition Policy (PD, DPCAP)''.
0
e. In paragraph (b)(2)(iii), removing the words ``Director, Defense
Procurement'' and adding in its place the acronym ``PD, DPCAP''.
0
f. In paragraph (b)(3), adding a sentence at the end of the paragraph.
0
g. In paragraph (c)(2):
0
i. Removing the words ``(Public Law 98-502, as amended by Public Law
104-156, 110 STAT. 1396-1404)''.
0
ii. Removing the words ``that Act'' and adding in its place the words
``the Act''.
0
h. In paragraph (c)(2)(ii), removing the acronym ``DCAA'' and adding in
its place the words ``the Defense Contract Audit Agency (DCAA)''.
0
i. In paragraph (c)(2)(iii), removing the words ``Director, Defense
Procurement'' and adding in its place the acronym ``PD, DPCAP''.
0
j. In paragraph (c)(2)(iii)(B), removing the words ``3 years'' and
adding in its place the words ``three years''.
0
k. In paragraph (c)(2)(iii)(C), removing the address ``400 Army Navy
Drive, Suite 737, Arlington VA 22202''; and adding in its place the
address ``4800 Mark Center Drive, Alexandria, Virginia 22350-1500.''
0
l. In paragraph (d), removing the words ``the DoDIG or GAO'' and adding
in its place the words ``the DoDIG and the Comptroller General''.
The additions and revisions read as follows:
Sec. 3.8 DoD access to records policy.
(a) Applicability. This section provides policy concerning DoD
access to awardee and subawardee records on OT agreements for prototype
projects awarded under the authority of this part. This policy includes
access to follow-on production transactions awarded under Sec. 3.9 of
this part. This access is separate and distinct from Comptroller
General access provided in Sec. 3.7 of this part.
* * * * *
(b) * * *
(3) * * * Such deviation shall be consistent with the requirements
of the Single Audit Act, and paragraph (c)(2)(ii) of this section.
* * * * *
0
9. Revise Sec. 3.9 to read as follows:
Sec. 3.9 Follow-on production contracts or transactions.
(a) An OT agreement for a prototype project entered into under the
authority of this part may provide for the award of a follow-on
production contract or OT to the participants in the OT for prototype
project. If such a strategy is
[[Page 71872]]
considered, the acquisition plan for the OT for prototype project, and
the solicitation, and the OT agreement for the prototype project at the
time of award should all specify that a follow-on production contract
or OT is authorized subject to the below requirements. A follow-on
production contract or OT provided for in an OT for prototype project
may be awarded to the participants in the OT without the use of
competitive procedures, notwithstanding the requirements of the
Competition in Contracting Act, 10 U.S.C. 3201 (CICA) if:
(1) competitive procedures were used for the selection of parties
for participation in the OT for prototype project;
(2) the participants in the OT successfully completed the prototype
project provided for in the OT; and
(3) even if explicit notification was not listed within the request
for proposal for the original prototype project transaction.
(b) The OT agreement shall specify at the time of award of the
prototype project how a project is determined to be successfully
completed by the participants. Follow-on contracts and OTs entered into
pursuant to this part may be awarded using the authority in this part,
under the authority of 10 U.S.C. chapter 221, or under such procedures,
terms, and conditions as the Secretary of Defense may establish by
regulation.
(c) There are additional circumstances for follow-on OT agreements
or contracts with consortium. An OT includes all individual prototype
subprojects awarded under the OT to a consortium of United States
industry and academic institutions. A follow-on production contract or
OT may be awarded, pursuant to this section, when the Department
determines that an individual prototype or prototype subproject as part
of a consortium is successfully completed by the participants. Award of
a follow-on production contract or OT pursuant to the terms under this
section is not contingent upon the successful completion of all
activities within a consortium as a condition for an award for follow-
on production of a successfully completed prototype or prototype
subproject within that consortium.
(d) The cost sharing requirements for prototype projects under
Sec. 3.5 of this part do not apply to follow-on production OTs and
contracts.
0
10. Add Sec. 3.10 to read as follows:
Sec. 3.10 Approval requirements.
(a) An OT agreement entered into under the authority of this part
may be exercised for a transaction for a prototype project that is
expected to cost the Department of Defense in excess of:
(1) $100,000,000 but not in excess of $500,000,000 (including all
options) only upon a written determination by the senior procurement
executive for the agency as designated for the purpose of 41 U.S.C.
1702(c) or, for the Defense Advanced Research Projects Agency (DARPA),
the Defense Innovation Unit (DIU), or the Missile Defense Agency (MDA),
the director of the agency that:
(i) the requirements of Sec. 3.5 of this part will be met for the
prototype project; and
(ii) the use of the authority of this section is essential to
promoting the success of the prototype project; and
(2) $500,000,000 (including all options) only if:
(i) the Under Secretary of Defense for Research and Engineering or
the Under Secretary of Defense for Acquisition and Sustainment
determines in writing that:
(A) the requirements of Sec. 3.5 of this part will be met for the
prototype project; and
(B) the use of the authority of this section is essential to meet
critical national security objectives; and
(C) the congressional defense committees are notified in writing at
least 30 days before such authority is exercised.
(ii) Reserved.
(b) The authority of a senior procurement executive or director of
DARPA, DIU or MDA under paragraph (a)(1) of this section, and the
authority of the Under Secretaries of Defense under paragraph (a)(2) of
this section may not be delegated.
(c) A follow-on production OT or contract may be entered into under
the authority of this part that is expected to cost the Department of
Defense in excess of: $100,000,000 (including all options) only upon a
written determination by a covered official (as defined in Sec. 3.4 of
this part) that:
(1) the requirements of Sec. 3.5 of this part will be met for the
prototype project;
(2) the use of the authority of this section is essential to meet
critical national security objectives; and
(3) the congressional defense committees are notified in writing of
the determinations at the time such authority is exercised.
0
11. Add Sec. 3.11 to read as follows:
Sec. 3.11 Authority to provide prototypes and follow-on production
items as government-furnished equipment.
An OT agreement for a prototype project, or a follow-on contract or
OT entered into under the authority of this part may provide for
prototypes or follow-on production items to be provided to another
contractor, or to a performer of an OT, as Government-furnished
equipment.
0
12. Add Sec. 3.12 to read as follows:
Sec. 3.12 Competition requirements.
An OT for a prototype project entered into under the authority of
this part shall use competitive procedures when entering into
agreements to carry out prototype projects, to the maximum extent
practicable.
0
13. Add Sec. 3.13 to read as follows:
Sec. 3.13 Applicability of procurement ethics requirements.
An OT entered into under the authority of this part shall be
treated as a Federal agency procurement for the purposes of the
Procurement Integrity Act, in 41 U.S.C. chapter 21.
Dated: August 26, 2024.
Patricia L. Toppings,
OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. 2024-19457 Filed 9-3-24; 8:45 am]
BILLING CODE 6001-FR-P
</pre></body>
</html>Indexed from Federal Register on September 4, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.