Other Transaction Authority and Its Impact on Industry and Competitive Bidding

March 2, 2020

Other Transaction Authority and Its Impact on Industry and Competitive Bidding

Sometimes the road less traveled makes all the difference. The Department of Defense (DoD) understands that making better decisions sometimes requires technologies and innovations developed by industry and non-traditional defense contractors acquired through less traditional methods. Other Transaction Authorities (OTAs) enable the DoD to modernize without following traditional acquisition rules and regulations that can add weeks, months, or even years to procurement lead times that hinder military readiness. Since 2015, the DoD has seen nearly a four-fold increase in the use of OTAs, which totaled $26.8 billion in 2018. Although OTAs serve as an important tool for the DoD to combat adversaries, what will be the long-term impact of this provision on the competitive bidding process within the United States?

What is an OTA?

The intent of OTAs within the DoD is to accelerate the acquisition process in order to compete against foreign actors and nations that may acquire innovative solutions more quickly. Malicious foreign actors and nations often lack robust rules, such as the Federal Acquisition Regulation (FAR), to protect the integrity of the competitive bidding process. OTAs are not covered by the FAR, which is the primary regulation used by Federal agencies to acquire supplies and services with appropriated funds. Despite its unconventional nature, OTAs still require the DoD to follow an approval process to conform to specific legal requirements; however, the flexibility of OTAs (e.g., bypassing certain acquisition laws and regulations) allows the DoD to quickly adapt prototype, research, and production projects and incorporate business practices that reflect commercial best practices. In order for the DoD to properly execute an OTA, the awardee must be:

A non-traditional defense contractor or small business.

Non-traditional defense contractors are described as an entity that is not currently performing and has not performed, for at least the one-year period preceding the solicitation of sources by the DoD for the OTA, any contract or subcontract for the Department of Defense that is subject to the full coverage under the cost accounting standards prescribed pursuant to Section 1502 of title 41 and the regulations implementing such section.

Small businesses are described as defined under Section 3 of the Small Business Act.

2. A traditional defense contractor, but at least one of the following applies:

At least one non-traditional defense contractor is participating to a “significant” extent.
The awardee provides a financial or in-kind cost share — typically, a 1/3 cost share is required; however, the Government should not generally mandate cost-sharing requirements for defense unique items.
The Service Acquisition Executive makes a written determination that exceptional circumstances justify use of OTA for the purpose of executing innovative business models or structures that would not be feasible or appropriate with a FAR-based contract.

Impact on Industry and Competitive Bidding

There is growing concern among lawmakers and industry officials that the potential overuse and misuse of OTAs will compromise this valuable mechanism to assist the warfighter on the field and combat adversaries of the United States. Some of their concerns include:

Awards to Traditional Defense Contractors Continue — Traditional, large defense contractors continue to receive a significant portion of OTA awards. Despite its intended purpose to draw in more small businesses and non-traditional defense contractors, traditional, large defense contractors are benefitting from OTA awards that bypass the traditional acquisition rules and regulations
Non-Traditional Defense Contractors Have Stayed Away — Although OTAs were intended to identify and bring non-traditional defense contractors into the industry, their numbers have not increased.
Increased Industry Control of Requirements — OTAs may place the DoD at a disadvantage during negotiations. Unlike traditional acquisitions, which often rely on historical data sources and pricing information, the DoD is severely limited in determining whether the prices proposed by an OTA are reasonable. Traditional acquisitions also subject contractors to critical regulations, such as the Truth in Negotiations Act, to ensure the DoD (and taxpayer) receives the best deal in a non-competitive environment.
Industry Retention of Intellectual Property — Traditional acquisitions enable the DoD to maintain intellectual property rights and protect national interests; however, in an OTA environment, contractors often gain the advantage by retaining some, if not all, intellectual property rights at the expense of the taxpayer. This can result in OTA-developed products being sold to foreign (potentially malicious) actors and nations and other commercial businesses.

Mutually Beneficial, Not Exclusive

The use of OTAs bypass many of the responsibilities outlined by traditional rules and regulations, such as the FAR. Nonetheless, both industry and the DoD should understand the importance of employing and preserving each mode of acquisition to ensure the continued integrity of the competitive bidding process while enabling the DoD to quickly incorporate non-traditional, innovative solutions.

To protect the integrity of DoD acquisition, the U.S. government should consider reviewing current rules and regulations to simplify how the DoD traditionally acquires innovative products and services that do not compromise on the integrity of the competitive bidding process. Acquisitions remain overly burdened by bureaucratic requirements that necessitate the inclusion of innumerable clauses and requirements. Yet OTAs should not take their place to skirt competitive requirements. Rather, the use of OTAs should return to its intended purpose — to target and increase the inclusion of non-traditional contractors and small businesses that might provide innovative solutions to allow the DoD to fulfill its mission while protecting national interests.