Public Contract Law Journal

Public Contract Law Journal Vol. 53, No. 1

Other Transactions Authority: Business Necessity that Needs a Minor Tune-up? Or Too Fast and Furious with Insufficient Compliance and Transparency Requirements?

Roza Sheffield

AI & Emerging Technology Contract Formation & Administration Foreign Military Sales International OT Agreements Procurement Fraud Regulatory & Compliance Space Act Agreements Subcontracts, Supply Chain & Related Agreements

Summary

The Project on Government Oversight (POGO), the U.S. Government Accountability Office (GAO), and the Department of Defense Inspector General (IG) recently issued reports raising red flags about the government’s ability to track, oversee, and be transparent on how Other Transaction Agreements (OTA) funds are allocated and spent.
A review of the U.S. Procurement system and how procurement rules and objectives were developed includes the OT authority and its legislative history.
Recommendations focus on combating oversight and transparency issues and the need for more robust training.

Other Transactions Authority: Business Necessity that Needs a Minor Tune-up? Or Too Fast and Furious with Insufficient Compliance and Transparency Requirements?

Abstract

As the government’s spending and the use of other transactions (OTs) continue to expand, there are constant unresolved issues stemming from a lack of competition, transparency, and borderline negligent expenditure of taxpayers’ money without any sufficient built-in accounting mechanisms lurking in the OTs’ shadows. The OTs advocates tend to dismiss those concerns in favor of the expedited acquisition processes and the desire to acquire more and better cutting-edge technology to stay competitive in the current global near-peer military rivalry. This article will explore the underlying laws that allow the use of OTs, their purpose, and the mechanisms to prevent fraud, waste, and abuse of U.S. taxpayers’ dollars while balancing the need and purpose against current business needs for OTs. Few rules usually mean more temptations for abuse of the system and fraud. This area of the law needs a compliance tune-up to run like a well-oiled machine for the government to maintain public trust.

I. Introduction

Other Transaction Agreements (OTA or OTs) are “legally-binding instruments, other than contracts, grants, or cooperative agreements, that generally are not subject to federal laws and regulations applicable to procurement contracts.” OTs Authority “usage has grown significantly over the past five years, with obligations increasing from $1.7 billion in 2016 to $16.5 billion in Fiscal Year 2020.” For perspective, the federal government spent $682.6 billion on government contracts in 2022. OTs utilization continues to proliferate, showing an increase of 712% since FY 2015. Fifty-seven percent of all OTA dollars between FY2015 and FY2019 went to consortiums. “OT consortiums are business structures put in place by the government to more effectively execute OTs.” Despite the efforts to award more OTs to nontraditional contractors, large defense contractors like Lockheed Martin, Boeing, and Northrup Grumman are still among the top five vendors. Traditionally, the government uses rigid procurement contracts to purchase services and goods, in addition to providing grants or entering into cooperative agreements to assist. However, the Department of Defense (DoD) in particular uses more agile OTs to buy prototypes of cutting-edge technology to sustain the military’s competitive edge in this frequently globally antagonistic environment. Over the last decade, the military branches continued to expand their OTA spending on research and development projects.

However, OTA flexibility comes at a cost. Because the FAR and many other procurement regulations do not generally apply, OTs can be risky, especially since “the acquisition workforce . . . may not always have the requisite skills and training necessary to negotiate and execute OTAs.” Lately, OTA processes have drawn a lot of negative attention for their lack of compliance and transparency. The Project on Government Oversight (POGO), the U.S. Government Accountability Office (GAO), and the Department of Defense Inspector General (IG) recently issued reports raising many red flags about the government’s ability to track, oversee, and thus be transparent on how OTA funds are allocated and spent. OTA compliance is especially important in light of the FY2021 National Defense Authorization Act (NDAA) because it addresses many areas of concern regarding government contracts, including acquisition policy and management, supply chain, and industrial base matters. President Joseph Biden commented that “combating corruption [is] a core national security interest and democratic responsibility.” According to the Biden White House, “the fight against corruption” will be the most essential aspect of the national security strategy because corruption threatens democracy.

Part II provides a review of the U.S. procurement system and how procurement rules and objectives were developed. OT authority will also be discussed in full detail, including OTs’ legislative history. The compliance framework and anti-corruption ecosystem developed by Dean Jessica Tillipman will set the stage for a discussion of the OTs current compliance regime and its shortcomings. Issues with transparency and oversight, particularly with consortiums, show that the government must improve its data tracking and reporting requirements regarding OTs. Judicial oversight of OTs is limited but evolving, and, depending on how a party pleads the case, courts may find they do not have jurisdiction to hear certain cases.

Finally, Part III contains recommendations primarily focused on combating oversight and transparency issues and the need for OTA contract professionals to have more robust training.

II. Background and Overview of the U.S. Procurement System and Other Transactions Authority

A. Federal Acquisition Regulation (FAR) Background and Purpose

1. The United States Procurement System Historical Background

A full understanding of the United States procurement system and why procurement contracts are different from commercial contracts begins with its roots and historical background. Accordingly, to understand the reasons behind many governing laws and regulations, we must look at how the U.S. procurement system and associated processes were developed. Government spending is, and has always been, tied to historical, scientific, social, and economic developments. The federal procurement system and its principles developed through waging wars and implementing lessons learned after those wars. These lessons materialized into regulations that now cover contract formation and administration.

Not surprisingly, the procurement contracts model dates back to its English roots, similar to the entire U.S. legal system. The English procurement system started developing when young educated men from the middle class joined the military. Clerks in the Royal Navy, modern-day equivalents of Contracting Officers, made their fortunes through kickbacks from contractors. Nevertheless, in the absence of a government budget or strict regulations, their conduct was considered acceptable.

England’s common law and procurement system spread through the British colonies in the eighteenth century because the British Army obtained its supplies locally. The Army adopted a decentralized procurement system since the colonies were geographically removed from their governing domain in London. The commissary and quartermaster generals worked together to procure, deliver, and store local items for the Army. When the United States adopted the British procurement system, it also embraced the decentralized aspect.

The United States’ procurement system’s formulaic abnormalities were evident at its inception, as early as the Revolutionary War. The Continental Congress’s lack of centralized power and (mutual) distrust of states made it impossible to centrally regulate commerce and have a comprehensive plan for supplying troops. The American government solved wartime logistical issues through trial and error. Between various committees that tried to manage the procurement system for the military, changing administrative processes every few months, and the inability to keep the personnel in the quartermaster general’s office, the system remained dysfunctional. Despite systematic difficulties, purchasing agent positions were in high demand. Congress appointed business people as purchasing officers instead of military officers to utilize their commercial buying experience. Purchasing agents were paid a percentage of the total purchase value, which disincentivized them from focusing on the value of potential goods and drove up government costs. Without any compliance regulations, the government regularly awarded contracts based on nepotism and favoritism, which created issues with supplying food and weapons.

Congress created the Department of the Treasury in light of failed attempts at a decentralized procurement system whereby suppliers had an option to sell to one of the highest bidders: the thirteen sovereign states, the British Army, or the federal government. The Superintendent of Finance during the Revolutionary War, experienced businessman Robert Morris, immediately established the rules that became the foundation for the current federal procurement system. The Department began exclusively working with those deemed “responsible bidders,” who could offer the best value to the government while still carrying on such duties as logistics, delivery, and storage of the goods. The new system imposed rules for dispute resolution and quality control. Mr. Morris’s new procurement system was not foolproof and still had corruption issues, but it was an improvement from the previous system. Despite all his accomplishments, Superintendent Morris was replaced after the end of the war with a three-person Board of Treasury, which continued to use the rules and regulations created by Mr. Morris. However, accountability issues with purchasing agents persisted.

In 1787, the U.S. Constitution established the centralized government structure and “provide[d] for the common defense and general welfare of the United States . . . to raise and support armies,” and “to provide and maintain a Navy.” Congress initiated its first investigation into the country’s ability to meet the standards articulated in the Constitution at the turn of the century, leading to another procurement system overhaul. The investigation assessed the failing system and a collapsed supply chain that led to the most significant loss during the Native American uprising in 1791. Finally, in 1808, Congress enacted the “Officials Not to Benefit” statute, which prohibited the long practice of profiting from procurement contracts by official government members.

The Act of March 3, 1809, established formal advertisements and gave Contracting Officers complete control of the procurement process, giving them purchasing and payment authority. The Act also implemented the contracting officers’ formal appointment system and bond requirements. During the early nineteenth century, the U.S. procurement system started functioning on settled principles of more organized solicitations, which made awards based on low prices. Further, the concept that the government should be acting in good faith and subject to a dispute process when contracting with the private industry developed.

A new generation of government contractors emerged in response to the new system. For example, Eli Whitney, who was trying to find business opportunities away from his failing cotton gin, offered to make muskets for the government, even though it took him eleven years to fulfill his obligation. He revolutionized the industry and government procurement system by developing mass production of muskets with interchangeable parts instead of parts being made for an individual musket. The Whitney contract and the War of 1812 were responsible for emerging government procurement principles like termination for default and convenience concepts, inspection requirements, compliance with the stated contract requirements, and payment after the performance. Notwithstanding the above-listed developments in the procurement system, domestic manufacturers still did not have the capacity to meet the needs of the military; in fact, domestic manufacturers preferred to sell overseas because it was easier than dealing with the U.S. government.Consequently, after the Revolutionary War, the U.S. government started enacting policies that promoted domestic industry’s growth. For example, the government started implementing what are now known as “option years” for private arms manufacturers with satisfactory performance and competitive prices. However, this policy created its own issues—the government received goods that were of far lesser quality than more expensive goods, and the sellers were at the benevolence of the government to keep them in business. The make-or-buy debate continued as the federal government and private industry learned to coexist and benefit from each other: the national armory system was cheaper but private companies were believed to be more innovative. Finally, the 1815 Ordinance Department Act allowed the government to obtain patent rights and disperse them among other public or private manufacturers that do business with the government. Manufacturers like Eli Whitney, who created the system of interchangeable gun parts, now faced competition because other manufacturers could produce parts.

New contracting techniques continued to emerge in response to manufacturing and industrial developments. Until the 1850s, sovereign immunity limited contractors’ rights. However, the 1855 Tucker Act established the Court of Claims to “render judgment upon any claim against the United States founded either upon the Constitution, or any act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States . . . .” In 1860, all federal government agencies adopted the Army’s 1857 regulation imposing requirements for record-keeping, accounting procedures, and advertising procedures. The Civil Sundries Appropriation Act of 1861 cemented the new procurement rules, which became Revised Statute 3709 after its amendment in 1870. The Armed Services Procurement Act of 1947 replaced the Revised Statute 3709.

The United States Civil War again tested the federal procurement system. Competition for the same supplies, provisions, and weapons between the South and North drove prices up and quality down while exploiting the public exigency exception of the Civil Sundries Act. Inefficiencies of the procurement system caused by fraud and the lack of procedural enforcement became the new reality of the Civil War, resulting in weapons that did not function, shoes that fell apart, and tools that did not perform. In response to that dire situation, Congress started a year-long investigation in 1861. As a result, Congress passed new compliance regulations in spite of critics’ warnings that increased compliance will slow the procurement process. The newly imposed requirement of filing the entire contract file in the central office with the associated contract, bids, proposals, and advertisements was met with resistance. Quartermasters who preferred a more expedited method of contracting via telegraph did not support the process. Additionally, contracting officers were required to authenticate the file. Unfortunately, most of those regulations were not fully embraced or enforced, except for the False Claims Act enacted in 1863.

During the Civil War and World War I, the U.S. procurement system continued to develop, primarily due to the Navy’s expansion to accommodate its growth in size and sophisticated fleet. World War I showed that the system lacked necessary contract administration and management processes because pilots complained about aircraft quality. In response, in 1916, Congress created an aircraft inspection department responsible only for aircraft contracts, which later paved the way for in-house inspection offices. Because World War I yet again created an increased demand for military-needed goods, the government procurement system expanded too.

Nevertheless, the end of the war showed many more cracks in the system. Many undelivered contracts had to be canceled—totaling $4 billion. The United States mostly procured aircrafts between World War I and World War II. Boeing was awarded its first contracts in 1921, and the newly established Air Corps in 1926 took a leading role in aircraft procurement. Yet, as contractors developed more aircrafts and the federal government increased its procurement of the aircrafts, the government became increasing concerned about unreasonable profit margins. As a result, the Vinson-Trammel Act was passed in 1934. The Act required contractors to allow their books to be audited and plants to be inspected, if necessary, and also limited profit margins.

2. Federal Acquisition Regulation

After the sudden attack on Pearl Harbor and the start of World War II, Congress passed the First War Powers Act on December 18, 1941. The procurement system during World War II was better organized than during World War I, and negotiated procurements emerged, with emphasis on cost and price analysis. Both the Army and the Air Corps (now the Air Force) established procurement district offices with 27,000 procurement personnel employed across the country. Finally, Congress passed the Armed Services Procurement Act of 1947. This Act standardized procurement methods for all military departments and required formal advertising for all solicitations. A unique body of law and distinct set of policies and principles developed over time to regulate special relationships between the government and contractors. Congress has passed the annual NDAA for over fifty years, which continues to provide the U.S. DoD with procurement authority. Finally, in 1984, the Federal Acquisition Regulation (FAR) created standard contract clauses that supported the formation and administration of federal procurement contracts.

The FAR was designed to combat the procurement issues raised by the 1972 Commission on Government Procurement and replace the Federal Procurement Regulations (FPR) and the Defense Acquisition Regulations (DAR). The FAR is a collection of regulations, guidelines, and rules that executive agencies must follow to acquire goods and services through procurement contracts. The term “procurement” is defined in 41 U.S.C. § 111. Interestingly, the terms “acquisition” and “procurement” are frequently used interchangeably, and even FAR 2.101 refers back to the “acquisition” when defining the word “procurement.” However, the term “acquisition” is more expansive as defined in the 2003 Services Acquisition Reform Act (SARA). Procurement contracts are narrower in scope and do not include grants or cooperative agreements. The FAR is codified in Part 1 through 53 of Title 48 of the Code of Federal Regulations (CFR). It applies to executive agencies but does not apply to the legislative or judicial branches. The FAR does not cover grants, cooperative agreements, OT authorities, real property purchases, or employment contracts. At its core, the FAR mandates transparency, fairness, and impartiality. FAR 1.102 identifies the following goals: satisfy customers, maximize the use of commercial products/services, use contractors with successful past performance, promote competition, minimize administrative operating costs, conduct business with integrity, fairness, and openness, and fulfill public policy objectives.

In Fiscal Year (FY) 2020, the United States spent $681 billion on government contracts. To effectively manage taxpayer money, the federal procurement system contains stringent rules in the FAR to guide contract award and management processes. Those rules reflect the historical experience of dealings between the government and contractors. The purpose of the FAR is to ensure that all procurement systems function in a consistent, fair, and impartial manner.

B. Compliance and Procurement Contracts

1. Compliance Rules That Apply to Procurement Contracts in General

The FAR’s guiding principle is to preserve the public’s trust when spending taxpayers’ money. In addition to statutes and regulations that control government personnels’ conduct while participating in the procurement process, FAR clauses and regulations that protect the government are the following: (1) the proposal process is highly formulaic and heavily regulated, with many prescriptive clauses; (2) the law requires contractors to certify their proposal representations, FAR 31.201-3 and 31.201-2 define price reasonableness and cost allowability, while FAR 15.403-4 requires certified cost or pricing data from a prospective contractor to verify that the government is getting a fair and reasonable price; (3) the Cost Accounting Standards (CAS) also ensure consistency in accounting for contracts; and (4) the Christian Doctrine states that contracts must comply with all applicable FAR clauses, whether clauses are actually incorporated into the contract or not.

2. Bid Protest System

The Competition in Contracting Act of 1984 (CICA) states that executive agencies must acquire property and services in the “most timely” and “efficient” manner. CICA created “a bid protest system intended to balance the proprietary interests of industry against the public’s interest in timely and cost-effective procurement.” The bid protest system ensures that government officials create and maintain official records associated with the formation and administration of procurement contracts. In fact, the bid protest system serves as an audit of the government procurement system while verifying and confirming that government officials follow and comply with all the regulations and laws.

Bid protests can be filed in one of the three authorized forums: (1) the agency making award, (2) the Government Accountability Office (GAO), or (3) the U.S. Court of Federal Claims (COFC), the only federal court with jurisdiction over protests. The Act authorizes COFC to review violations of statute or regulation in connection with a procurement or proposed procurement. It is important to note that both the Federal Acquisition Streamlining Act (FASA) and the Tucker Act contain the phrase “in connection with” a proposed or actual procurement. “Procurement” encompasses “all stages of the process of acquiring property or services, beginning with the process for determining a need for property or services and ending with contract completion and closeout.” Procedures at each forum are very different. Bid protest adjudication is a controversial topic because, on the one hand, it can slow the acquisition process, but on the other hand, it makes the system more transparent.

C. Other Transactions Authority Background

The GAO defines OTs as “legally-binding instruments, other than contracts, grants, or cooperative agreements, that generally are not subject to federal laws and regulations applicable to procurement contracts.” The agencies that have the authority for OTs use them for different purposes. OTs became the preferred contracting vehicle for many “nontraditional contractors” because many burdensome FAR or DFARS clauses did not apply to the OTs. Even though OTs’ authority only recently gained popularity and notoriety, its inception dates to the 1958 National Aeronautics and Space Administration (NASA) Space Act. The Space Act created and authorized NASA to “enter into and perform such contracts, leases, cooperative agreements, or other transactions as may be necessary in the conduct of its work and on such terms as it may deem appropriate.” Congress passed the Space Act in response to the Soviet Union’s successful launch of Sputnik on October 4, 1957. OTs provided the ability for NASA to surpass the Soviet Union in the space race.

OTs are popular for their flexibility and pliability to the needs of specific projects, contractors who want to participate in the projects, and the government. Congress’s intent for OTs is to attract more nontraditional contractors to do business with the government and to speed up the process by excluding OTs from traditional procurement laws and regulations. OTs are “not subject to the laws, regulations, and other requirements applicable to contracts, leases, [and] cooperative agreements.” Currently, NASA actively uses OTs to contract with the private industry to develop the technology needed for space exploration. However, NASA is not the only agency that has OTs authority. This paper will discuss mainly the DoD’s OTs authority and its evolution.

1. Legislative History and Congressional Intent

The competition between the United States and the Soviet Union propelled many industrial, technological, and even legislative developments in the United States. In 1958, the same year that Congress enacted the Space Act, it also authorized DoD to engage with universities and not-for-profit organizations for research through grants and cooperative agreements. The same year, Congress also created the Advanced Research Projects Agency (ARPA), now known as the Defense Advanced Research Projects Agency (DARPA), to assist DoD with research and development (R&D) projects. Nevertheless, this effort alone was not enough to solve the preexisting issues with traditional procurement contracts laced with a litany of regulations.

NASA was the only agency with the authority to enter into OTs for over thirty years. Initially, NASA was hesitant to use OTs and continued to use traditional procurement contracts until 1960, when the American Telephone and Telegraph Co. (AT&T) needed assistance. AT&T developed an active communications satellite but needed NASA’s capability to launch it. At that time, the Department of the Air Force had already invested in two active communications satellites, and NASA had one passive communications satellite. After AT&T approached NASA, the government decided to cooperate with the private industry, knowing that it had already invested in similar technology. Two years later, in 1962, NASA used the Space Act OTs’ authority “Launch Service Agreement” to launch Telstar I. Through this process, AT&T developed and paid for the satellite and reimbursed NASA for its launch. This was the first project where a military entity (Air Force), civilian agency, and private company cooperated and created a significant scientific discovery, especially for modern communications.

Even though this business model helped to launch many more commercial satellites on a reimbursable basis, the commercial industry needed more lift capacity as more satellites were developed. The government was concerned with investing more money into this capability, knowing that it mainly served the private industry. A Space Act OT authority was a much-needed solution to this problem.

Under an OTA, the responsibility of developing, technical monitoring, production, and financing was divided among three players—Delta’s manufacturer McDonnell Douglas, NASA, and potential customer RCA. This successful agreement not only created the Delta 3914 that was continuingly used for many years but also became a model transaction for upgrades and the Space Shuttle.

In 1982, Space Services International performed the first private launch from Matagorda, Texas. Again, multiple government and private parties were involved. The private company reimbursed NASA for acquiring a rocket monitor from a former Air Force Minuteman I missile and refurbishing a similar NASA rocket monitor. Two years later, Starstruck, Inc. conducted a completely privately developed vehicle launch. These launches under the Space Act OTs agreement paved the way for Space X’s development of a reusable Falcon 9. Now, NASA uses OTs creatively in many different ways, and some do not involve exchanging money. The most notable OTs are Joint Endeavor Agreements that allow private citizens to use the Space Shuttle for the cargo and crew programs.

NASA was hesitant to use its OTs authority more extensively until DARPA led the way. In the late 1980s, DoD started to recognize deficiencies in its ability to acquire cutting-edge research and development projects while overpaying for basic necessities. The Packard Commission Report on Defense Management uncovered many issues with the procurement system while also pointing out that DARPA’s inability to assist with DoD developmental projects stemmed from too much red tape that consequently stifled innovation. The Packard Report recommended that DAPRA expand its procurement authority beyond traditional procurement contracts. During the same time, in the late 1980s and early 1990s, as the defense budget started shrinking, forty-four defense contractors consolidated into six. The companies could not keep up with the high overheads imposed by traditional government practices, and they could not quickly adapt to commercial practices to survive. The government also realized that most R&D was done commercially and not through government expenditures as it was done in the past.

As a result, “[s]ection 251 of the National Defense Authorization Act for FY 1990 and FY 1991 expanded the OTAs from solely NASA to include [DARPA] on a two-year trial basis.” The authority was only for “basic, applied, and advanced research projects.” DARPA entered into its first OTs agreement with Gazelle Microcircuits in the spring of 1990 to develop high-speed gallium arsenide components, which became the first “dual-use” agreement between the government and a commercial company. The main goal of 10 U.S.C. § 4021 was to facilitate dual use of technology, attract commercial companies to innovate, and access cutting-edge technology without traditional procurement burdens and overhead. Following multiple successful OTs, Section 845 of the FY 19941 NDAA added the OTs authority for prototype projects to the existing DARPA OTs’ authority for research and development authorization. Armed with the OTs’ authority similar to NASA and now free from traditional procurement regulations, DARPA started to “serve as the central research and development organization of the Department of Defense with a primary responsibility to maintain U.S. technological superiority over potential adversaries.” Finally, Section 804 of the FY 1997 NDAA authorized the DoD to use OTs to acquire prototypes of weapons systems.

2. Other Transactions Authority and Its Evolution

Congress’s continual revisions to OTs’ authority and associated statutes almost every few years demonstrates that it is still a work in progress. The OTs’ authority and the definitions of prototype projects evolved within the last few decades after its initial congressional grant. Multiple key features were added: cost-sharing requirements for traditional contractors, non-competitive follow-on production for successful OTs, a new approval system for high-dollar OTs, and education and training requirements.

Section 801 of the FY 2000 NDAA added the requirement that the Comptroller General review OTs for prototype projects in excess of $5,000,000. Section 803 of the FY 2001 NDAA introduced the concept of cost-sharing and the definition of a nontraditional defense contractor. The determination of whether the cost-sharing is appropriate is based on the practicability standard. Most dual-use projects where joint funding contributes to their successful completion are deemed “practicable” under 10 U.S.C. 4021(e)(1)(B). The FY2001 NDAA extended the OTs authority until September 30, 2004. A follow-on production authority was subsequently implemented in 2001. Specifically, 10 U.S.C. 4022(f) allows awarding a follow-on contract without competition as long as “competitive procedures” were used during the initial source selection, and it was “successful.” This issue continues to be highly controversial since the DoD has issued little guidance. Section 823 of the FY 2006 NDAA added dollar-value threshold review level and made the Procurement Integrity Act applicable to OTs.

Congress continued to revisit OTs nearly every other year in the last decade. In 2008, Section 824 of NDAA for FY2009 “expanded the scope of the pilot program,” and the “temporary authority was extended with a five-year sunset provision.” In 2010, FY2011 NDAA introduced “including all options” in dollar-value threshold review levels. Section 863 of FY2013 NDAA, temporarily extended again the OT Authority that it initially granted in Section 845(i) of FY1994 NDAA. In 2014, Congress yet again augmented and expanded the OTs’ originally created authority by adding the “enhancing the mission effectiveness of military personnel” language while deleting the definition of “weapons or weapons systems used by the Armed Forces.” Also, it allowed small businesses to participate in OTs without cost-sharing requirements. Congress finally made OTs’ authority permanent for DoD in 2016. A follow-on production was also added to the OTs’ authority when “all significant participants in the transaction other than the federal government are small businesses or nontraditional contractors,” in addition to the definition of nontraditional defense contractors being changed.

D. Compliance and Anti-Corruption Framework and Ecosystem

Compliance is frequently characterized as an expensive and burdensome part of doing business with the government, but, nevertheless, even most commercial companies have compliance programs. Many compliance regulations are imposed to ensure public trust and accountability of taxpayers’ money. Moreover, compliance rules compel conduct that leads to “minimisation of costs or damages to either party whether these are associated with potentially inadvertent behavior or deliberate violations while seeking more opportunistic engagements.” Compliance with processes and regulations facilitates the “targeted” behavior in organizations. Consequently, extensive regulatory principles eventually focused on “preventing bribery, corruption, and conflict of interest . . . .”

Dean Jessica Tillipman, Dean for Government Procurement Law Studies at the George Washington University Law School, developed a government procurement anti-corruption and compliance framework, known as the U.S. Government Procurement Anti-Corruption Ecosystem. These tools—such as transparency, oversight, bid challenges, ethics, civil and criminal enforcement, debarment, contractor compliance, whistleblower protections and rewards, and encouraging disclosure—help mitigate corruption and compliance issues. Transparency ensures that the public is aware of how their money is being spent. That is why such organizations as GAO, the Office of Inspector General, and the Department of Justice not only conduct investigations but also publish their reports. They are part of the oversight process to confirm that all the necessary and applicable rules are being followed.

Bid protest tools safeguard the competition process. This compliance tool helps ensure that government officials obey all the applicable rules and regulations through competition challenges. Domestic corruption and ethics laws govern the conduct and behavior of government officials. These laws apply to all civil servants and are not just limited to procurement officials. Ethics laws regulate government employees’ behavior by imposing strict guidelines regarding gifts and hospitality, financial disclosures, and conflicts of interests, just to name a few. Many acts of actual impropriety are strictly prohibited, and civil and criminal liability enforcement tools are used to combat egregiously unethical behavior.

Contractor compliance is one of the newest additions to Tillipman’s ecosystem. There are many emerging global standards and expectations of companies that do business with governments, which include internal controls, ethics, and compliance programs. The internal programs are focused on self-reporting. Taxpayers rely on contractors to correctly and accurately self-certify a lot of information and data submitted to the government without violating the False Claims Act. The purpose of shifting compliance requirements to contractors and making them play a more integral role in the process is to maximize the government’s limited resources for policing every single contract. However, it can still enforce various laws and regulations through the False Claims Act. The government also enforces antitrust laws to block collusion and other anti-competitive behaviors. The government frequently facilitates many prosecutions through self-reporting and whistleblowing procedures.

III. Analysis

Both the government and private industry often favor OTs because they are more flexible than conventional FAR-based contracts. Increased flexibility allows the government to attract companies that have never done business with the government and, thus, acquire innovative and contemporary technology faster. OTs enable contracting parties to start from scratch without any prescribed clauses and design their contractual relationships as they see it fit. OTs are tailored to specific projects and companies that intend to be a part of separate agreements. The risk and obligations are negotiable, and liabilities are divided among parties through mutually created clauses in the contract, making OTs attractive, especially for non-traditional government contractors. However, flexibility and speed often may come at the expense of compliance, transparency, and oversight.

Nevertheless, even traditional FAR-based procurement contracts are not immune to fraud, waste, and abuse. Despite constant vigilance and built-in FAR required oversight and compliance provisions, fraud remains a persistent issue, even for traditional procurement contracts. The DOE OIG’s report to Congress in 2020 included many investigations related to contract fraud. According to the DoD’s 2019 Report to Congress, over $6.6 billion was recovered from defense-contracting fraud cases during FY2013–2017. DOJ recovered over $2.2 billion in settlements and judgments under the False Claims Act in the FY 22. Compliance and oversight remain essential measures to ensure that taxpayers get what they paid for.

Continued issues of oversight and transparency are documented in the GAO’s DoD Financial Management Report released on October 20, 2020. Almost a year later, on September 20, 2021, the GAO published its report DOD Fraud Risk Management: Actions Needed to Enhance Department-Wide Approach, Focusing on Procurement Fraud Risks (GAO-21-309), where it “concluded that DOD needed to take additional actions to enhance its approach to procurement fraud risks.” In response, legislators proposed the Audit the Pentagon Act of 2021, which, if passed, would have required DoD components that fail to pass an audit to forfeit one percent of its budget. Various DoD components are already cognizant of the fraud issues and have implemented different strategies to combat those shortcomings.

With a more heightened focus on government contracts, contractors, and government agencies making use of these contracts may be one scandal away from Congress trimming back OTs’ authority. “The head of the Section 809 panel says Congress will peel back the Defense Department’s ability to use OTAs if it doesn’t reign in the ‘abuse’ of such agreements.” Using Tillipman’s anti-corruption and compliance framework, OTs will be analyzed based on three pillars: (1) the government’s responsibility to ensure transparency and oversight, (2) bid challenge/judicial oversight, and (3) contractor compliance.

A. Government’s Responsibility

1. Transparency

Congress’s expansion of OTs’ authority shows tolerance for risk in light of the current near-peer competitive environment when demand for cutting-edge and next-generation technology is high, but Congress expressed certain reservations. Congress ties DoD’s overall warfighting mission success to acquiring the technology needed through OTs. However, Congress began expressing concerns with the OT’s “lack of transparency,” especially with follow-on projects in the DoD Appropriations Act of 2019. The Act imposes more reporting requirements on the DoD to provide Congress with a yearly listing of each active OT’s agreement with its budget implications and funding.

The Oracle JEDI protest highlighted transparency issues when the protestor challenged an improper award outside a competitive process. However, “[t]he problem was not with the OTA mechanism, which remains an essential element of reforming Pentagon procurement. Rather the problem was a lack of transparency with how the mechanism was employed.” Additionally, collecting and tracking OT awards data continue to be a significant problem. Transparency is vital because not measuring the efficiency and effectiveness of the DoD’s use of OTs prevents assessing it thoroughly.

i. Accounting System

Federal government contracts “represent a substantial component of the U.S. economy.” To ensure that the government chooses its business partners wisely, Contracting Officers (COs) routinely make responsibility determinations. COs are entrusted with investigating whether a company has the financial, technical, and organizational ability to fulfill the contract. The quality of external and internal reporting is essential for both parties. One of the most important ways to ensure transparency between parties is the Cost and Accounting Standards (CAS) system. CAS allows the government to assess whether the government receives what it needs at a fair price. CAS requirements widely used for traditional procurement contracts do not apply to OTs. It is especially concerning because many OTAs are similar to cost-reimbursement contracts without typical cost principles applied to account for taxpayers’ dollars. However, many contractors do not wish to enter into traditional government contracts because of the stringent CAS requirements for procurement contracts under FAR Part 31.

The 2018 DOD OTA Guidebook highlights the evaluation process for price reasonableness:

The Government team shall determine price reasonableness. The Government team may need data to establish price reasonableness, including commercial pricing data, market data, parametric data, or cost information. However, the AO should exhaust other means to establish price reasonableness before resorting to requesting cost information.

Without access to the pricing data, the price reasonableness determination depends entirely on the Agreements Officer’s (AO) business judgment, market research, and understanding of the project. OTA allows the AO to determine what is needed to satisfy the transparency issue in place of the typical CAS requirements. Cost-sharing is another significant difference and, thus, a potential issue. In the traditional FAR-based procurement contracts, there are no specific cost-sharing options requirements regarding how much precisely, at a minimum, a contractor has to contribute. However, 10 U.S.C. § 4022 requires conventional contractors to provide one-third of the cost of the OT system. At the same time, OTA auditing barriers prohibit verifying vendors’ claimed costs and, thus, their actual contribution to the project. Pricing information minimizes speculation, guessing, and mistrust. Arguably, any method of accounting can be acceptable as long as it meets the purpose of the contract. The purpose of any accurate accounting system, including the Generally Accepted Accounting Principles (GAAP), is to show “an accounting of all assets, liabilities, revenue, and expenses as well as extensive disclosures concerning the company’s operations and financial condition.” Nevertheless, there appears to be no mechanism for evaluating contractor prices when the focus is on acquiring new technology or capability, as the government does with OTs and cost-reimbursement contracts. Conventional market research is not always valuable for deriving information on emerging technologies that do not exist on the market.

ii. Data Collection

Correctly reported OTA awards data does not exist, yet it is needed to analyze OTs’ authority. In 2019, the Congressional Research Service (CRS) identified persistent issues with the lack of “authoritative data that can be used to assess OT effectiveness and better understand broader trends associated with these agreements,” which were also detailed by the GAO in a 2021 report. Some of the problems with OTs’ transparency can be traced back to OTA regulations because the guidance is unclear and confusing. The government’s workforce is insufficiently trained to use OTs and adequately document their use. Without an appropriate and precise record management system that tracks OTs, the government cannot be a transparent and reliable business partner.

Despite the Federal Procurement Data System-Next Generation (FPDS-NG) being used as the “primary source for tracking data on contract obligations, including other transactions for prototypes and follow-on production,” the system does not provide accurate information for OTs. The government collectively, including the DoD, has been attempting to remedy this issue by requiring Agreements Officers to report “organizations involved; number of transactions; amounts of payments; and purpose, description, and status of projects.” One of the reasons the OTs’ data is not reported correctly is because the FPDS-NG is better suited for FAR-based contract reporting than OTs. Neither FPDS-NG, nor any other system, provides taxpayers with the “data about how OTAs are used, any analysis of their costs, or how effective they have been in producing cutting-edge technologies.” Having a system that is easy to use and agile enough to accommodate the OTs’ reporting requirements will decrease transparency issues and increase public trust.

Because transparency, accountability, and the ability to measure the effectiveness of the OTs are challenging to achieve, it is also challenging to explain why, “in the top five [of OT awards recipients], are three of the world’s largest defense contractors: Lockheed Martin Corp. ($350.5 million), Northrop Grumman Corp. ($271.8 million), and Boeing Co. ($259.1 million),” instead of non-traditional contractors. Without accurate reporting, it is hard to observe trends and analyze patterns; therefore, a certain level of speculation is required. One of the possible explanations for this less-than-desired nontraditional contracts participation is the definition of the nontraditional vendor is ambiguous. Conversely, the involvement of the large traditional government contractors could be a result of the broad definition of an “entity” in 10 U.S.C. § 3014, the ability “to partner with firms who do not qualify for NDC status,” and 10 U.S.C. § 4022(d)(1)(A) authority to award the OTs if “[t]here is at least one nontraditional defense contractor or nonprofit research institution participating to a significant extent in the prototype project,” but “significant extent” is left for a broad interpretation. That could be rational for many traditional contractors operating within consortium agreements. Without a proper reporting system and transparency, it is too challenging to achieve oversight.

2. Oversight

The 2018 National Defense Strategy (NDS) pointed out that current near-peer competition demands the speedy development of new weapons and technologies. However, flexibility does not mean the absence of any responsibility or oversight. The Project on Government Oversight (POGO), an independent organization that investigates when the government commits fraud, waste, and abuse, found that this need for speed, no proper oversight, and misreporting created fruitful soil for the OTs’ misuse “for questionable services-management support, custodial/janitorial services, guard services, video surveillance, background investigations, training (including ironically enough, ‘other transaction training for the office of procurement operations’), and canine teams.” To increase congressional oversight, section 819 of the FY2020 NDAA required the Secretary of Defense to submit reports regarding “the use of other [OTA] to carry out prototype projects during the preceding fiscal year,” including a detailed description of the projects’ purpose, status, quantity. However, this reporting requirement has not been thoroughly followed because OTs are not diligently tracked. Additionally, DoD was able to escape this notification requirement of thirty days before the award by using the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s more liberal reporting standards during the Coronavirus disease (COVID-19) global pandemic.

i. Consortiums

Section 864 broadened the authority to award OTs to small businesses and research institutions while expanding more opportunities for follow-on production by including subawards under consortiums. Consortiums are business units set up around a specific area of interest or objective, such as space or cyber. A consortium usually comprises multiple companies or educational institutions, and its makeup may change every year. FY2018 NDAA also raised the approval threshold by fifty percent for a prototype project in then 10 U.S.C. § 4022(a) and clarified OTs’ approval levels. DoD now fully uses its OTs’ authority for research and prototype projects that were expressly awarded under section 864.

OTs are frequently awarded to a consortium, which is supposed to allow all participants to have privity of contract with the government. Even though OTs were supposed to facilitate the privity of contracting among all members, consortiums are set up like Indefinite Delivery-Indefinite Quantity (ID/IQ) contracts or the FSS Schedule, but the government is not a manager. The Consortium Management Organization (CMO) conducts half of the procurement process generally performed by a CO, which creates an issue of shifting the inherent government function to the private sector without any oversight. Conversely, traditional FAR-based contracts only allow prime contractors, not subcontractors, to have direct relationships with the government and therefore privity of contract. Even though some acquisition practitioners are uncomfortable with OTs, OTs are associated with better team building during projects and less “red tape.” With the growing popularity of using consortiums for OT awards, Congress developed new requirements. Section 833 of the FY2021 NDAA directs the DoD to disclose a list of the consortia used when OTs’ opportunities are announced. This initiative was intended to increase transparency and create a more efficient oversight process. However, it is unclear if this directive has been implemented or followed in practice.

Consortium OTs account for about fifty percent of all OTAs in FY2021, with about twenty percent of OTs directly going to major traditional government contractors. It has been noted that “$7.2 billion—more than half of the $12.5 billion [received through the CARES Act in 2020]—was awarded through a single consortium management organization, Advanced Technology International, the contracts for which could only be seen and bid on by consortium members.” Since a significant amount of money travel through consortium agreements, it prompted both the GAO and DoD Inspector General (IG) to look into this specific avenue of OT contracting. According to the GAO report, neither DoD nor HHS has an oversight system for consortia OTs awards. Furthermore, three executive agencies collectively misreported $1.6 billion. Despite the GAO’s emphasis on proper reporting and transparency, “[the] DOD stated it does not believe expending resources on system changes to FPDS-NG is warranted.”

The government has a dangerously lack of oversight on consortiums. The government does not have access to consortium internal teaming agreements. For example, the CMO collects solicitation responses, assists members with solicitations, selects members to perform the project after the base OTs agreements is awarded, and oversees projects. However, the government does not oversee how the CMO functions are conducted. Significantly, “[t]he cost of each project includes the CMO management fee, which the Government pays the CMO based on an agreed-upon percentage of the total project amount.” Therefore, the CMO manager has an incentive to select the member with the highest price. This way of contracting would be akin to a cost-plus percentage of cost contract, which is contrary to the spirit of the federal procurement system and expressly forbidden by the FAR.

Despite DoD Instruction 5010.40 requiring a “comprehensive system of internal controls,” the DoD IG “identified internal control weaknesses related to tracing OTs awarded through a consortium, awarding OTs by applicable requirements, negotiating CMO fees and the security of the information provided to consortium members.” Currently, there is a lack of guidance on how the government or CMO managers should vet consortium members. More importantly, the internal selection process that each consortium uses is unknown, which puts many agencies at risk for security breaches. In the GAO’s audit of OTs, it found that many of the misreported funds are due to personnel training issues. Additionally, “the DoD and the Services did not issue any guidance on how contracting personnel should award or report the individual projects awarded through consortiums.” Even though Congress directed the Secretary of Defense to submit a detailed report about OTs each year starting on December 31, 2018, and Defense Pricing and Contracting (DPC) was tasked to do so, the reports are consistently about a year late.

The DoD IG also found that contracting personnel did not follow all the applicable rules and regulations and frequently did not “compete base OT awards to the maximum extent practicable or maintain documentation.” These issues make the OTA process even more cryptic and secretive. The main issue is that “[w]ithout competition or appropriate documentation, the Government may not have received the best value or justified the use of the OT authority.” Given the lack of oversight over consortiums, it is unclear where taxpayers’ money goes.

ii. Agreement Officer Training and Ethics

Integrity and ethics are the cornerstones of the U.S. procurement system focused on protecting public values and taxpayers’ money. Both traditional COs for FAR-based contracts and AO for OTs must have contracting warrants and follow extensive ethics regulations and requirements. Even though FAR and DFARS clauses do not apply, AOs tend to rely on FAR and DFARS provisions when it is not clear how to structure OTs agreements. The FAR removes much flexibility from contracting officers, but OTs bring it back. Nevertheless, ethics rules still apply to all contracting professionals.

However, because some of the inherently governmental functions of contract administration and formation are being shifted to consortium managers, ethical rules that typically apply to federal employees do not apply to them. Consortium managers do not have to comply with conflicts of interest requirements because 18 U.S.C. § 208, Acts Affecting a Personal Financial Interest, only applies to government employees. “The U.S. Federal Government has strict rules prohibiting government officials from accepting gifts, hospitality, and other business courtesies common in the private sector.” Because consortium managers are not government employees, hospitality and gift-giving rules do not apply and they do not have to be aware of accepting improper gifts, sharing confidential information, or abiding by any other ethics rules that AOs have to follow. Additionally, given a significant lack of guidance and training, contracting personnel are left guessing or implementing rules using “their interpretation of the guidance.”

AOs generally need more business acumen and expertise in “complex acquisition instruments” than what is typically required from COs. Nevertheless, the DoD IG found that each agency and service selects and trains AOs differently; “[w]ithout overall DoD training and guidance specific to consortiums and AO requirements, AOs will continue to award OTs that are not by applicable laws and regulations through consortiums.” Also, contracting personnel may inadvertently create security and ethics issues by disclosing too much information during the prototype OT process. For example, the IG investigation disclosed in its report “Audit of Other Transactions Awarded through Consortiums,” that one of the consortiums publicly posted the information that the Navy contracting personnel only allowed for a limited release.

POGO explicitly raised issues “about contractors’ experience and knowledge levels, government methods to detect fraud, waste, and abuse, and the level of requisite skills and training needed to develop and administer OTAs by the acquisition workforce.” Subsequently, section 835 of the FY2020 NDAA called for improving the acquisition workforce and training. Further, section 861 attempted to change the management structure. However, there is no evidence of that improvement to date.

B. Judicial Oversight

Judicial oversight safeguards full and open competition processes for federal contracts. However, the OTs’ jurisdiction and forum choice are still developing. FAR 1.102 sets out policies for fair competition, past performance, and compliance with procurement contracts. Since 1984, CICA has ensured fair and open competition for procurement contracts through the GAO bid protest system. Traditional FAR-based contracts may also be protested at COFC; however, OTs’ jurisdiction is unclear. COFC received 120 bid protest cases, while GAO received 2,052 bid protests during FY2020.

Unlike traditional FAR-based contracts, the Contracts Disputes Act (CDA) does not apply to OTs, and 10 U.S.C. § 4021 does not provide any statutory-based dispute resolution avenues. The Tucker Act, the Little Tucker Act, the CDA, and CICA do not apply to OTs. Because OTs are not traditional contracts, “sovereign immunity is the first jurisdictional barrier,” so the COFC and GAO generally do not review OTs disputes. Federal courts may have jurisdiction over OTs via the Administrative Procedure Act (APA) to review agency actions when OTs’ contract disputes arise. A few cases below demonstrate the jurisdictional development.

The level of competition and supporting documentation is very different between the FAR-based contracts and OTs. CICA guides the competition requirements and documentation needed during the source-selection process: “a contracting agency has the affirmative obligation to use reasonable methods to publicize its procurement needs and to timely disseminate solicitation documents to those entitled to receive them.” Nevertheless, CICA does not apply to OTs, and “a significant number of OTAs are awarded on a sole-source basis.” “In the case of DoD research on OTAs, competition is not an essential requirement pursuant to 10 U.S.C. § 2371, and DoD prototype OTAs only require competition to the ‘maximum extent practicable’ pursuant to 10 U.S.C. § 4022(b)(2).”

In 2018, the GAO issued its decision in Oracle America, Inc., where a protestor challenged the agency’s decision to use OTs as a contracting vehicle instead of a traditional procurement contract. The GAO decided that U.S. Transportation Command (TRANSCOM) “did not properly use its authority under 10 U.S.C. § 4022 in awarding the production OTA.” Importantly, the GAO will only review whether the agency correctly chose to employ an OT instead of a traditional procurement vehicle, but no other issues concerning OTs. Because TRANSCOM’s OTs did not mention a possibility of a “follow-on production,” the GAO decided that the agency did not have sufficient statutory authority to award a follow-on production OTs’ agreement in this instance. The GAO’s final recommendation was to terminate the contract and recompete it by the CICA principles.

A year later, the GAO decided that it did not have jurisdiction to hear an OT’s solicitation protest because OTs are not procurement contracts. MD Helicopters, Inc. (MDHI), a company located in Mesa, Arizona, submitted its offer in response to the Army’s solicitation “for the development of a future attack reconnaissance aircraft competitive prototype.” Later, the company brought an action for alleged APA violations against the Army in federal district court in Arizona instead of COFC. The district court determined the Administrative Dispute Resolution Act (ADRA) did not provide it with “jurisdiction to hear the kind of ‘bid protest’ cases that they formerly could under their ‘Scanwell jurisdiction.’” The court distinguished MDHI from SpaceX (discussed below), stating that MDHI did not involve two separate solicitations and was, in fact, “related to” future procurement, which was why the ADRA barred the court from adjudicating it.

However, the SpaceX case was decided differently by another federal district court. After the Air Force awarded an OTs agreement to Blue Origin LLC and Northrop Grumman Innovation Systems, SpaceX filed its protest at COFC. COFC dismissed the case for lack of jurisdiction, despite SpaceX’s argument that the project’s second phase was “in connection with” procurement because the Air Force was planning to procure launch services and thus fell under the Tucker Act. After the case was dismissed, the venue was transferred to the U.S. District Court for the Central District of California, where SpaceX protested the Air Force’s actions under the APA. Finally, the U.S. district court judge reviewed the Air Force’s actions and ruled that the Air Force’s actions were not arbitrary, capricious, or in violation of the law and that SpaceX was not entitled to any requested relief. Thus, by the end of 2019, the OTs’ jurisdictional situation remained confusing:

The Court of Federal Claims has found that it does not have jurisdiction over OTAs unless they are considered “in connection with” a procurement, and the Arizona judge had found that although not procurement contracts, OTAs are contracts of a type and therefore the court could not hear the dispute under the APA.

However, in September 2021, the COFC chiseled out a narrow jurisdictional exception for the Commercial Solutions Opening (CSO) contracts “in connection with” a procurement. Kinemetrics, Inc. protested the Air Force’s contract award to Nanometrics, Inc. for seismic equipment for use in monitoring nuclear treaty compliance. The court determined that the Air Force followed its procedures and dismissed the protest because “the agency’s sophisticated evaluation for this technologically advanced project is subject to a high degree of judicial deference . . . [and] the court has found no indication that the deference accorded the Air Force was abused.” The procurement involved the application of then section 2371b(f)(1), which allows an award of follow-on production contracts under OTs authorization. A production contract “may be awarded . . . without the use of competitive procedures.” In this case, compared to another famous OTs case, Space Exploration, a follow-on delivery order was contemplated by the initial solicitation, “this solicitation had a direct effect on the award of a contract.” SpaceX was different because the procurement contract was not considered an option. Kinemetrics was not dismissed or disqualified for the follow-on portion.

Finally, the COFC again exercised its jurisdiction over a bid protest challenging the award of an OTs agreement in 2022. The Army decided to upgrade to military helicopter Aviation Ground Power Units (APGUs) using its OTs’ authority with a subsequent production contract. The court found jurisdiction by relying on the definition of procurement in 41 U.S.C. § 111, which states that “[t]he term ‘procurement’ includes all stages of the process of acquiring property or services, beginning with the process for determining a need for property or services and ending with contract completion and closeout.” The COFC noted that “if the AGPU OTAs are part of the Army’s ‘process for determining a need for acquisition,’ then they are in connection with a proposed procurement and this Court has jurisdiction over plaintiff’s complaint.”

The jurisdiction debate is far from settled. Perhaps federal district courts should have more oversight because many practitioners see OTs not as procurement contracts, but more as legally binding commercial agreements. Crucially, OTs are not without any court oversight, albeit this area of oversight is still developing.

C. Contractor Compliance

Approximately twenty out of the thirty statutes that apply to traditional procurement contracts do not apply to OTs, for example: the Truthful Cost or Pricing Data Act, which guides disclosures of the basis for pricing for procurement contracts; the Competition in Contracting Act, which compels full and open competition for procurement contracts; the Contract Disputes Act, which governs disputes and claims. Even though the 2002 DoD OT Guide for Prototype Projects had a list of laws and regulations that apply or do not apply to OTs, the most recent 2023 Guide does not have this list. The 2017 Guide vaguely explains that utilizing OT authority does not necessarily mean that no regulations apply to the action, but the guide does not provide a tangible list of oversight regulations. One of the reasons the list no longer exists is because it has a propensity to change frequently. At the same time, without a clear list of applicable regulations, both the government and contractors cannot be sure what to expect.

1. What Regulations Do Not Apply?

The particular rules, laws, or regulations that apply to OTs are not necessarily readily apparent. However, it is helpful to analogize OTs to commercial contracts rather than traditional government contracts to determine what regulations may apply. Thus, OTs’ operational zone is contracts law. Richard Dunn, former General Counsel of DARPA and Other Transactions expert, lists specific procurement statutes that do not apply to OTs:

Competition in Contracting Act
Contract Disputes Act
Procurement Protest System
Kinds of Contracts
Examination of records of contractors
Rights in Technical Data
Truthfulness in Negotiations
Prohibition against doing business with certain officers
Major Weapons Systems: Contractor Guarantees, Prohibition on persons convicted of defense contract related felonies
Service Contract Act
Drug-Free Workplace
Buy American Act
The Bayh-Dole Act
Contracts: indemnifications provisions
Cost Accounting Standards and Cost Principles
The anti-Kickback statutes do not apply to research and development OTs but “may apply to prototype OTs.”
The Procurement Integrity Act generally does not apply, it applies to prototype OTs.

Even though statutes that allow the government to ensure fair pricing do not apply, 10 U.S.C. § 4022(h) provides access to the contractor’s records by the Comptroller General if a transaction is over $5 million. Additional statutes apply to OTs, but their application is not always obvious or evident. The general concern is that, because many statutes that tend to prevent “waste, fraud, abuse, and corruption [while] ensuring fair and reasonable pricing” do not apply, the OTs’ authority operates in the black hole of virtually no oversight. “Research revealed that the biggest concern with respect to OT authority is a perceived lack of safeguards to protect government interests.” Fewer rules for OTs frequently manifest in less transparency, accountability, and oversight.

2. Which Rules Apply?

Even though many federal statutes and regulations do not apply to OTs, the False Claims Act (FCA) and the Federal Anti-Bribery Statute apply to OTs. The FCA precludes false or fraudulent claims against the federal government. The FCA defines “claim” as a request for money or property from the government. The FCA prohibits using false records, false statements, or acts of concealment “to avoid[] or decreas[e] an obligation to pay or transmit money or property to the Government.” A contractor that violates the FCA is liable for civil penalties of between $5,000 and $10,000 for each false claim submitted, plaintiff’s costs, and treble damages.

The Federal Anti-Bribery Statute is equally important to combat public corruption and preserve public trust. This criminal statute outlaws giving anything of value to public officials, directly or indirectly, to affect a public act (bribery) or because of the public act (gratuity). The purpose of the statute is to prevent the misuse of official positions and duties. Under this statute, it is a violation to provide, solicit, and accept bribes. A wrongdoer can be convicted, even if the bribe is not harmful to the government. It is only required to prove that the thing of value is offered or given “for or because of any official act” for a gratuities conviction.

It is astonishing that the Anti-Kickback statute does not apply to research and development OTs but “may apply to prototype OTs.” 41 U.S.C. § 51 defines “kickback”:

The term “kickback” means any money, fee, commission, credit, gift, gratuity, a thing of value, or compensation of any kind which is provided, directly or indirectly, to a prime contractor, prime contractor employee, subcontractor, or subcontractor employee for the purpose of improperly obtaining or rewarding favorable treatment in connection with a prime contractor in connection with a subcontract relating to a prime contract.

This definition and the application of this statute are critical because the government heavily relies on consortiums during the OTA process. The law prohibits giving and receiving kickbacks or even attempting to do so. The Anti-Kickback statute carries a heavy penalty of potentially a $250,000 fine per person or $500,000 per business entity fine if the statute is violated. Additionally, “every prime contract must include a clause stating that the prime contractor will implement reasonable procedures to prevent kickbacks.” Conversely, it is unclear if AOs insert the same provisions into consortium agreements and how OTA obligations and liabilities are delineated.

Even if definitive lists of regulations applicable to OTs existed, the government would have to amend them regularly as new updates and regulations are promulgated. For example, Section 889 of the John S. McCain National Defense Authorization Act (NDAA) for the Fiscal Year 2019 shook the government contracting community. It prohibits the use of the following technology:

[T]elecommunications equipment and services produced or provided by Huawei Technologies Company or ZTE Corporation (or any subsidiary or affiliate of those entities) and certain video surveillance products or telecommunications equipment and services produced or provided by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company (or any subsidiary or affiliate of those entities).

Even though this law predominantly affects procurement contracts, this rule is broad enough to arguably apply to all contractors doing business with the government, including through OTs. This is just another example of why more guidance is needed.

IV. Recommendations

Having OTs authority is essential for the government, specifically DoD, to conduct certain business. Current global events and heightened near-peer competition with Russia and China demand a better system conducive to acquiring cutting-edge and modern technology faster, but this must be done without sacrificing public trust. Based on the issues identified in the three pillars of the previous section, the following recommendations will improve compliance issues with transparency, oversight, and vague guidance.

A. Transparency and Documentation

Transparency and documentation are at the heart of competition showing that the government is trustworthy. Yet, one of the biggest issues with OTs is an inadequate avenue of reporting the OTs’ data itself, which creates oversight issues. The only way for the government to demonstrate that it made responsible and equitable decisions is through the contemporaneous documentation and data collection processes. Agencies enjoy significant judicial deference, but the government’s findings are not defensible without the records. That is why it is vital to have a better reporting system than the FPDS. Either the system should be fundamentally changed since it is primarily focused on FAR-based contracts, or more guidance should be issued regarding what needs to be reported. OTA reporting should include a comprehensive narrative about a project that details its justification and the quality and quantity of each unit or equipment being acquired by a contract. It should also include a summary of competitive procedures used to select an awardee, how price reasonableness was assessed, what factors were considered, why a specific consortium was selected (if used), and its participants, and finally how successful completion will be determined.

B. OTs Guidance

Additionally, the OTs Guide (guide) should be revised from its current version and heavily updated when new regulations or significant changes occur, at the very least annually. Congress amended OTs’ authority almost annually; however, the guide was not updated to keep pace with the changing OT landscape. Recognizing that the OTs’ Guide is not binding, it is still missing much-needed clarity. The purpose of it should be to educate government contracts professionals and industry members contemplating doing business with the government. The current version is extremely vague. Understandably, it may be intentionally crafted to ensure that it is not a set of requirements and still allow professionals enough room to operate with flexibility, but, at the same time, the guide should be at least instructive in some respects. Many agencies routinely issue directions. For example, the DOJ and Securities and Exchange Commission (SEC) published A Resource Guide to the U.S. Foreign Corrupt Practices Act, and the Federal Trade Commission (FTC) issued its Guide to Antitrust Law. If the rules are clear, they can help dispel the myths about OTs, make the authority user-friendly to attract more participants, and promote competition.

At the very least, the OTs’ Guide should spell out the rules and regulations that apply to OTs. That would serve two purposes: (1) if something is not clear, despite the intent of pushing contracts professionals to be more creative, they default to using FAR clauses; and (2) if commercial industry members are unclear about which obligations and rules apply to them, they may enter into an agreement, mistakenly thinking that no compliance rules should apply because it is not a FAR agreement and traditional rules do not apply. They may discover this during negotiations when both parties have already invested too much time and resources and decide not to go through, leaving both sides frustrated and without a deal.

Additionally, more traditional procurement statutes should apply to OTs to ensure an ethical procurement process. Anti-kickback and conflict of interest statutes should apply. The statutes that deal with fair and ethical conduct of acquisition professionals do not add unreasonable compliance measures that would deter companies from doing business with the government, but instead ensure a fair and reasonable process.

Currently, the government invites the commercial industry to participate, but the game rules are hidden or undefined. Both the government and the commercial industry would benefit from a system where the business partners know clear regulations and laws. For example, one of the most confusing issues is how to go from a successful prototype to production and what level of competition and documentation is needed. As discussed in the analysis section, “successful” completion is not defined judicially or statutorily. The guide can explain what can be considered “successful” by listing a non-exhaustive list of factors and considerations.

More guidance is also needed on the required documentation during any OTA source selection process and what information should be covered in an award or rejection letter. “Nearly 50 percent of obligations went to contracts awarded without competition, the highest share in the past two decades.” OTs’ authority is uncharted territory; if the judicial review is limited, then the agencies must fill the void. OT protest opportunities are much more restrained. However, if the procuring agency provides a detailed explanation in its letter, for example, just like in Kinemetrics, the unsuccessful offeror may not be inclined to protest. In Kinemtrics, the court opined that the rejection letter lacked detail, even though the agency had all the necessary paperwork to support its decision. Ultimately, the government may cure some of the issues associated with transparency by creating a much more comprehensive guide. The guide can create uniformity, which will ensure transparency, integrity, and competition.

C. Consortia Management

If the government shifts some of its inherent functions to consortia, it relinquishes control of the process. The concern is that, by giving up the power to the vendors and consortia, “[f]ederal procurement spending priorities” are no longer set or driven by the government. Instead of the government fully controlling the appropriate “price, deliverables, and intellectual property rights,” contractors and consortia have the upper hand.

More rules on how to manage consortiums are needed. Since fifty percent of OTs’ dollars are channeled through consortiums, Congress should pass regulations allowing the government to review internal documents and inter-consortiums contracts between the CMOs and their members, examine how the source selection process is conducted, what criteria are relied upon, and how information flows including classified or limited released information.

D. Training

A more robust training program for both government and commercial contracting professionals would improve the system’s integrity. Training is particularly important because some of the statutes’ terms like “successful completion” are neither congressionally defined nor judicially explained; therefore, contracts professionals need guidance. Having a better educated and more competent workforce would serve not only the government, but also the industry because this workforce will be well prepared when awarding and negotiating contract.

Agencies should establish a cadre responsible for educating professionals within each agency. Designated individual(s) can serve as a reach back for other agencies who need advice and recommendations. For example, the DoD should have an OTs authority cadre at their level but also responsible individuals for each military branch. They all should be collaborating and exchanging best practices and resources. Frequently, each service uses OTs differently—some resort to inserting FAR clauses. If all services collaborate, it will increase uniformity, efficiency, and effectiveness for each agreement because best practices would be readily available and exchanged. It will also help non-traditional commercial contractors to develop better business relationships with the government when working with an educated and transparent cadre.

The training for OTs professionals should cover how commercial contracts are negotiated, what laws generally apply, what commercial industry values, and what standard clauses and master agreements the commercial industry tends to employ. Government practitioners will always lag when negotiating OTs without understanding how contracts are negotiated and drafted by commercial enterprises and the laws that apply. Merely understanding the FAR rules and requirements and using them as a framework is not conducive to the OTs’ environment.

E. Intellectual Property Training

Given that the Bayh-Dole Act, which deals with intellectual property rights arising from federal government-funded research, does not apply to OTs, specialized training should be implemented. Traditional FAR-based contracts incorporate many prescribed FAR and DFARS clauses required by federal statutes and regulations. OTs have no stringent guidelines and no required or prescribed clauses. Many companies are concerned with the government receiving “unlimited rights” in data developed during the procurement contract. OTs “allow the federal government flexibility in negotiating intellectual property and data rights, which stipulate whether the Government or the contractor will own the rights to technology developed under the [OTs].” Additionally, the new OTs’ Guide significantly differs from the 2017 guide, which instructs that parts of the Bayh-Dole Act, 35 U.S.C. §§ 201–204 for patents and 10 U.S.C. §§ 2320–2321 for technical data “do not apply to OTs and negotiation of rights of a different scope is permissible and encouraged.” If OTs’ practitioners do not fully understand intellectual property law, they cannot ensure that the government acquires enough intellectual property and data rights for follow-on production.

F. Workforce Restructuring

Attorneys, AOs, and experts for specific requirements should work together to collectively determine the government’s needs and define them adequately. More importantly, they can collaborate on negotiating contracts that would satisfy the government’s demands and attract commercial industry members by accommodating their wishes. Attorneys should be contemporaneously involved in the negotiation process to assist in spotting issues, explaining what requirements must be included and which ones can be forgone to secure the product that the government needs. The FAR-based contracts are more conducive to contracting officers creating and negotiating contracts. Attorneys generally review the contracts after issues arise or review for legal sufficiency when needed on the back end. The FAR outlines many prescriptive clauses required in contracts based on the situations at issue. The FAR provides a robust framework for procurement contracts.

Additionally, if some clauses are omitted intentionally or unintentionally, the Christian Doctrine will save the day and add clauses by operation of law. OTs do not have a built-in framework that government contract professionals can rely upon. Therefore, a team of contract professionals working together every step, like in the commercial industry, would benefit everyone involved and further OTs’ authority’s purpose.

G. Master Agreements

Even though the FAR does not apply to OTs and, thus, does not supply a slew of canned clauses, it does not mean that the government and each organization should not be developing master agreements. Contract templates are disfavored among OTs supporters. However, if the government wants to structure OTs’ practice closely resembling how the commercial industry does business, master agreements should be a part of it. Understanding that master agreements and templates are not complete solutions to all issues will help exchange best practices and level the playing field. The concern that templates will be voluminous and become the new FAR is unwarranted. The commercial industry does not start each contract and agreement with a blank piece of paper. Instead, they start their negotiations with master agreements clauses. It is a tool for risk management widely used by the commercial industry. If contract professionals understand the purpose and application of clauses and contracts framework, they can negotiate them up or down depending on the particular contract’s needs.

V. Conclusion

Largely, OTs’ authority is misunderstood. Supporters may see OTs’ flexibility as paramount, which is sometimes to the detriment of full transparency and oversight. At the same time, OTs non-believers, who are so accustomed to working in the highly regulated and prescriptive FAR territory, may fail to see OTs’ authority’s rewards and only focus on the idea that traditional oversight and compliance requirements are missing. Because this authority is meant to be flexible, no additional draconian compliance changes should be implemented, like the CICA stay or full CAS compliance. Nevertheless, the government should focus more on training its personnel, properly documenting and collecting data, improving its consortium management, and creating a more comprehensive OTA guide to maximize the balance between compliance and flexibility for OTs.

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