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OTHER TRANSACTIONSDo All Industry Partners Benefit Fairly?by STEPHEN SPECIALE and RICHARD DOWNS

Other Transactions (OTs) are hugely popular across the Department of Defense (DoD). They are the bright and shiny contracting vehicle that DoD entities have become more comfortable with using for research and development

(R&D) and science and technology efforts.

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The future competitive advantage of U.S. national defense depends largely on its ability to modernize business practices …

Although OTs are one of many contracting vehicles for most DoD entities to leverage, they are incredibly unique since they offer tremendous flexibility and involve commercial-like business terms to attract industry partners of all sizes. OT success directly depends on the Defense Industrial Base (DIB) and the innovative technology solutions industry partners could bring to the table. Understandably, the DIB must have complete confidence and trust in DoD’s overall procurement system, particularly for OTs. The overarching question is, “Which industry partners are benefiting from OTs?” Specifically, are nontraditional defense contractors (NDCs) and small businesses (SBs) getting plentiful opportunities to participate like traditional defense contractors? This article is the first part of a two-part series and analyzes DoD’s prototype OT usage from recent years. A later article will identify suggestions for steps DoD entities can take to ensure there is a level playing field.

The future competitive advantage of U.S. national defense depends largely on its ability to modernize business practices and maintain a strong DIB. In response, DoD leadership in 2020 completed multiple relevant and

much-needed initiatives to update DoD acquisition policy. The DoD specifically updated policies to help transform and modernize the options by which DoD entities can conduct business to keep pace with technology changes and Warfighter needs. The Adaptive Acquisition Framework (AAF) outlines six acquisition pathways, including Middle Tier of Acquisition and Major Capability Acquisition. OTs are flexible and innovative contracting options that DoD entities can use for most of the pathways to speed a contract solution. Federal law permits DoD entities to use OTs for research, prototyping, and production purposes. Moreover, Congress permanently codified prototype OTs in 10 U.S. Code (USC) 2371b in Fiscal Year (FY) 2016, thereby expanding OT usage for DoD entities in addition to the existing authority for research OTs.

The flexibility and innovation necessary to support the AAF exist because OTs are different from traditional procurement contracts and not subject to all laws and regulations. Examples of laws and regulations not applicable include the Competition in Contracting Act, Cost Accounting Standards (CAS), the Federal Acquisition Regulation,

and the Defense Federal Acquisition Regulation Supplement. OTs are also unique since agreements can be structured with custom terms and conditions necessary for individual project success between the parties involved. DoD entities have the freedom to strategically negotiate project areas like intellectual property, reporting requirements, payment structures, and property deliverables or government-furnished property since there is not a one-size-fits-all methodology or universal pathway. Besides being similar to contract arrangements in the commercial marketplace, OTs are intended to broaden the DIB (both with traditional contractors and NDCs), support dual-use projects, and enable quicker and cost-effective efforts compared to other contracting vehicles.

For prototype OTs, DoD entities must meet at least one of four possible conditions for each award. Two of the four conditions encompass participation by NDCs and small businesses. One condition requires significant participation by at least one NDC or nonprofit research institution, and another condition requires that all significant participants be NDCs or SBs. The remaining two conditions do not pertain to NDCs

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or SBs and require either a cost-sharing arrangement or a senior procurement executive determination for exceptional circumstances.

An NDC, as defined in 10 USC 2302(9), is an industry partner that has not performed, for at least one year preceding the DoD entity’s solicitation of sources for the procurement or transaction, any DoD contract or subcontract subject to full CAS coverage. Based on the definition specifics, it is very likely that a large business, even if recognizable from work on prior DoD projects, could be an NDC when the DoD solicits future OT opportunities. Regardless of past performance or prior support on DoD-specific efforts, industry partners could qualify as NDCs so long as no contract supported by them over the prior 12 calendar months was subject to full CAS. Since CAS are not required for OTs, it is possible and even likely for businesses to remain NDCs if they primarily conduct business with the DoD via OTs. SpaceX, for example, was considered an NDC at the time of this article even though it had revenues exceeding $1 billion in 2020 and previously worked with the DoD on various efforts.

DoD entities have several pathways to award prototype OTs. For example, entities could directly award OTs to industry partners after independently performing solicitation and proposal evaluation efforts. Besides direct awards, entities could leverage a consortium by awarding an OT to a consortium management firm (CMF).

A consortium is a pool of industry partners working together to achieve similar goals focused on a specific technology area, such as space, artificial intelligence, cyber, aviation, or missiles. Most consortia are made up of hundreds of industry partners such as traditional defense contractors, non-profit organizations, academic institutions, research institutions, and SBs (many of which could be categorized as NDCs). Examples of current consortia are the Aviation and Missile Technology Consortium, the Space Enterprise Consortium, and the System of Systems Consortium. Examples of current CMFs are the Advanced Technology International, the Consortium Management Group, and the National Security Technology Accelerator.

Each consortium has a public website including different information on its members and business opportunities. The Space Enterprise Consortium, as of January 2021, identified that 354 of its 459 members were NDCs. While many of these members have historically done business with the DoD, their support on DoD contracts may not have been subject to CAS for the past 12 months. A close evaluation of various consortia reveals that while some consortia identify members as traditional contractors, NDCs, or SBs, many do not provide such individual member details.

Each OT pathway has individual pros and cons that DoD project teams should assess before pathway selection. Regardless of the pathway used for each OT project, entities must ensure that they use competitive procedures to the greatest extent practicable and that their business practices remain fair and transparent. A closer analysis of recent prototype OT data reveal additional information on the industry partners receiving awards, including the opportunities gained by consortia or CMFs and other businesses.

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What do the data show about the DoD’s prototype OT usage since FY 2016? The DoD’s use of prototype OTs has significantly grown since FY 2016. The growth is directly linked to Congress enacting various laws that expanded OT authority, specifically requiring that the DoD use OTs as the preferred vehicles for prototyping efforts.

Data from the government’s Federal Procurement Data System (FPDS), according to DoD data collection and analysis, show that DoD obligated only $1.4 billion for prototype OTs in FY 2016 (less than 1 percent of DoD’s FY 2016 contract obligations) compared to $7.4 billion for prototype OTs in FY 2019 (about 2 percent of DoD’s FY 2019 contract obligations). Preliminary FY 2020 data project that DoD obligated more than $15 billion for prototype OTs in FY 2020, which represents about 4 percent of DoD’s total FY 2020 contract obligations. While the data show a continuous upward trend, that trend is even greater for prototype OT data when obligations are compared only to DoD’s overall R&D contract obligations. The trends support the projection that prototype OT growth will continue across the DoD. Furthermore, it is almost certain that DoD use of production OTs will increase as entities successfully complete their prototyping effort(s) and leverage the noncompetitive follow-on option.

Are NDCs and SBs obtaining widespread opportunities to participate on DoD OTs?Analysis of prototype OT awards shows that NDCs and SBs received direct OT awards. However, since many details involving awards to consortia or CMFs are not publicly available, it is not easy to ascertain the exact extent that NDCs and SBs are participating. Figure 1 analyzes prototype OT data from FY 2013 to FY 2020 based on a total percentage of the total OT award actions and dollars obligated. For analysis purposes, the data highlight OTs awarded to consortia and the large, recognizable businesses that have traditionally supported the DoD, such as Lockheed Martin, Raytheon Technologies, Northrop Grumman, Boeing, L3Harris, and Aerojet Rocketdyne.

The data show that about 36 percent of prototype OTs between FY 2013 and FY 2020 were awarded to consortia and the DoD’s largest recognizable contractors. There is an overall downward trend as 81 percent of prototype OT awards went to

Figure 1. Prototype OT Analysis Since FY 2013

100%

80%

60%

40%

20%

0%FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Consortia/LB Award #% Consortia/LB $%

Key: LB = Large Business; OT = Other TransactionSource: Author-created with data obtained from the Federal Procurement Data System.

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these groups in FY 2016, compared to 33 percent in FY 2020. Similarly, there is an overall downward trend with 96 percent of the total amount obligated going to these groups in FY 2017, compared to 50 percent in FY 2020. However, the data show about 88 percent of the total amount obligated for prototype OTs between FY 2013 and FY 2020 went to consortia and the DoD’s largest recognizable contractors.

Although NDCs and SBs did receive OT awards, their dollar amounts were not nearly as large as those of the OTs awarded to consortia and large businesses. NDCs and SBs, while not directly receiving the bulk of obligations, may have participated to a significant extent through teaming or subcontractor arrangements. However, it is not possible to determine this through publicly available data for two reasons. First, the determination of an industry partner to meet the NDC definition rests with the Agreements Officer. Limited information on whether a specific industry partner was subject to full CAS within the last 12 months makes it difficult to determine if any industry partner receiving the OT award met the NDC definition when the DoD solicited the opportunity. FPDS data for OT awards do not specifically recognize which of the four conditions were met for each prototype OT award. The data also

do not provide details to support the DoD entity’s interpretation of industry partners participating to a significant extent (when applicable). As a result, the public cannot see if a condition involving NDCs or SBs was met for an OT award.

Secondly, as previously alluded to, most if not all of the inner details on OTs awarded to consortia or CMFs are not publicly available. While information on FPDS identifies OTs awarded to consortia or CMFs, inadequate information is available to the public on the various consortium members that participated and actually worked on each OT. CMFs usually complete various sub-agreements with the various performers selected to support each OT effort. Unfortunately, none of these agreements are required in FPDS or provide details identifying the extent of NDCs or SBs participation. It is possible that many of the OTs awarded to consortia or CMFs were directed to NDCs and SBs. However, the data, as reported, do not provide that level of fidelity. Again, the public cannot distinguish the condition met for OTs awarded to consortia or CMFs since the limited data available to the public do not provide full transparency or assurances that DoD entities are utilizing OTs to attract NDCs and/or SBs. An assessment cannot be made of industry partners equally benefiting until more specific and consistent

OT data are available. Although the DoD’s OT reporting since FY 2016 has significantly improved, the DoD should further enhance the collection of OT data.

The trend for substantial prototype OT usage growth across the DoD undoubtedly will continue in future fiscal years. OTs are crucial to help the United States solidify its competitive advantage both now and in the future. DoD entities must modernize business practices and leverage the flexible vehicles to maintain an exceptional DIB. DoD entities should also continue to closely evaluate OT award data and take appropriate action to ensure that industry partners, regardless of size or prior DoD business relations, have equal opportunities for OT participation. The DoD will assuredly encounter the greatest possible success with OTs in its pursuit of national defense superiority if it maintains fair and transparent business practices that truly maximize opportunities for all industry partners.

SPECIALE is a senior acquisition specialist supporting the DoD. He is a Certified Defense Financial Manager–Acquisition and a Certified Fraud Examiner.

DOWNS is a senior acquisition analyst supporting the DoD. He is a retired Army lieutenant colonel and former contracting officer with the U.S. Army Contracting Command.

The authors can be contacted at stephen.speciale@gmail.com and downs_richard@hotmail.com.

OTs are crucial to help the United States solidify its competitive advantage both now and in the future.