Department of Defense Use of Other Transaction Authority: Background, Analysis, and Issues for Congress

Summary

The Department of Defense (DOD) obligates more than $300 billion annually to buy goods and services, and to support research and development. Most of these acquisitions are governed by procurement statutes and regulations found in Title 10 (and parts of other select titles) of the United States Code, the Federal Acquisition Regulation (FAR), and the Defense Federal Acquisition Regulation Supplement.

Under certain circumstances, DOD can enter into an other transaction (OT) agreement instead of a traditional contract. OT agreements are generally exempt from federal procurement laws and regulations. These exemptions grant government officials the flexibility to include, amend, or exclude contract clauses and requirements that are mandatory in traditional procurements (e.g., termination clauses, cost accounting standards, payments, audit requirements, intellectual property, and contract disputes). OT authorities also grant more flexibility to structure agreements in numerous ways, including joint ventures; partnerships; consortia; or multiple agencies joining together to fund an agreement encompassing multiple providers.

Other transaction agreements are legally binding contracts; they are referred to as agreements to distinguish them from the traditional procurement contracts governed by the FAR and procurements laws. Other transaction authorities are set forth in two sections of law:

10 U.S.C. 2371—granting authority to use OTs for basic, applied, and advanced research projects.

10 U.S.C. 2371b—granting authority to use OTs for prototype projects and follow-on production. Under this authority, a prototype project can only be conducted if at least one nontraditional defense contractor significantly participates in the project; all significant participants are small businesses or nontraditional defense contractors; at least one-third of the total cost of the prototype project is provided by nongovernment participants; or the senior procurement acquisition official provides a written justification for using an OT. Follow-on production can only be conducted when the underlying prototype OT was competitively awarded, and the prototype project was successfully completed.

OTs have the potential to provide significant benefits to DOD, including

attracting nontraditional contractors with promising technological capabilities to work with DOD,

establishing a mechanism to pool resources with other entities to facilitate development of, and obtain, state-of-the-art dual-use technologies, and

offering a unique mechanism for DOD to invest in, and influence the direction of, technology development.

A number of analysts warn that along with the potential benefits come significant risks, including potentially diminished oversight and exemption from laws and regulations designed to protect government and taxpayer interests.

In FY2017, DOD obligated $2.1 billion on prototype OT agreements, representing less than 1% of contract obligations for the year. However, the use of OTs is expected to grow at a rapid pace, due in part to recent statutory changes expanding other transaction authorities.

A number of analysts and officials have raised concerns that if DOD uses OTs in ways not intended by Congress—or is perceived to abuse the authority—Congress could clamp down on the authority. Generally, DOD lacks authoritative data that can be used to measure and evaluate the use of other transaction authorities.