Breakout Session # 605 Andrew C. Obermeyer Director of Contracts, Targets and Countermeasures Missile Defense Agency Apr

2. Other Transactions for Prototype Projects Breakout Session #605 Andrew C. Obermeyer Director of Contracts, Targets and Countermeasures Missile Defense Agency April 24, 2007 1:40 PM

3. Purpose • Provide introductory-level information on Other Transactions (OTs) for Prototype Projects (a.k.a. Section 845 Acquisition OTs) • Discuss the findings of a recent study sponsored by the Office of the Secretary of Defense (OSD) • Provide guidance on how to establish relationships with nontraditional government contractors/commercial firms

4. Introduction • Industry and government are both interested in developing cooperative, nonadversarial relationships • The technologies being developed will have both commercial and government applications • This “co-developed” aspect means that industry can sell to the government a product that can also be marketed commercially • Thus you will have a strong incentive to push the project to a successful conclusion • What instruments can industry and government use to foster this collaborative partnership?

5. Acquisition* Assistance* CooperativeAgreements Procurement Contracts Non-FAR Contracts Acquisition OTs Grants TIAs 10 U.S.C. 2358 10 United StatesCode (U.S.C.) 2304 *Non-appropriated funds contracts 10 U.S.C. 2358 10 U.S.C. 2358 10 U.S.C. 2371 (a) & (d) • 1994 National Defense Authorization Act (NDAA), Section 845 • 2004 NDAA, Section 1441 • Federal Aviation Administration Authority • Homeland Security Act, Section 831 • National Aeronautics and Space Administration (NASA) Space Act • Transportation Equity Act for the Twenty-First Century (TEA-21), Section 502 DoDGARs Part 37 Does not Comply with Bayh-Dole DoDGARs Part 37 Complies with Bayh-Dole Non-profit andfor profit DoDGARs Non-profit andfor profit DoD Grant and Agreement Regulations (DoDGARs) Federal Acquisition Regulation Part 15 Part 12 Commercial Items Cost/Price Based Price Based * Chart does not display all forms of acquisition and assistance instruments or all statutes that allow these forms of award Research Instruments

6. Acquisition versus Assistance • Acquisition instruments involve buying or acquiring goods and services for the government’s direct benefit, such as: • Federal Acquisition Regulation (FAR)-based procurement contracts (traditional method) • Acquisition OTs • Derive authority from 1994 NDAA, Section 845 • Are legally binding contractual instruments • Example: Development and testing of a prototype airplane needed to provide surveillance of a battlefield

7. Acquisition versus Assistance (Continued) • Assistanceinstruments are used to transfer a thing of value from the government to a recipient to carry out a public purpose • Assistance instruments are not used for acquiring goods and services for the direct benefit of the government • TIAs are legally binding assistance instruments • Some TIAs use OT authority (10 U.S.C. 2371) • Some TIAs use cooperative agreement authority (10 U.S.C. 2358) • Some TIAs use both authorities • Example: Development of an innovative brake system for heavy trucks, which the government will purchase as a commercial item in the future

8. Special Research Instruments for Acquisition and Assistance • Acquisition OTs and TIAs are separate “tools” that Agreement and Grants Officers can use when appropriate • Acquisition OTs and TIAs can be effective when used correctly by skilled individuals; e.g., those who have completed the DAU training • Acquisition OTs are not subject to the FAR • TIAs are covered by DoDGARs Part 37 • Acquisition OTs and TIAs can help DoD overcome the main concerns of doing business with nontraditional government contractors/commercial firms: • Cost and pricing data submittals and certifications (acquisition) • Cost Accounting Standards (CAS) (acquisition) • Financial management systems (assistance) • Access of government auditors to the books • Preconceived government position on licensing of intellectual property rights • Socioeconomic provisions

9. Special Research Instruments for Acquisition and Assistance • Acquisition OTs and TIAs are designed to: • Create new relationships with nontraditional government contractors/commercial firms that would not consider doing business with the government under traditional acquisition or assistance methods • Give the government more latitude to tailor provisions • Give DoD access to the broadest possible technology and industrial base • Allow certain use of independent research and development (IR&D) funds to support acquisition OT projects, signifying industry’s commitment to the projects

10. Acquisition OTs

11. Acquisition OTs • Acquisition OTs are different from procurement contracts (culture issue) • Conducted outside the FAR system • But Agreement Officers should use agency acquisition regulations for guidance and the experience they represent • DoD has published the “Other Transactions Guide for Prototype Projects,” dated 21 December 2000 • Require competition to the maximum extent practicable • Can be entered into without cost sharing, except when cost sharing is required by the authority’s limitations • Should be designed for transition into standard, FAR-based contracts for later stages of product life-cycle development or production

12. Acquisition OTs (Continued) • 10 U.S.C. 2371, as modified by Section 845 of the 1994 NDAA, says DoD may acquire “prototype projects directly relevant to weapons or weapons systems proposed to be acquired or developed by DoD” • “Weapons systems” include offensive and defensive weapons • “Proposed to be acquired or developed by DoD” does not, based on past practice, mean that a formal DoD Instruction 5000.1 requirement has been established • The result is something the government could buy if the prototype is a success

13. Acquisition OTs (Continued) • In accordance with DoD’s “Other Transactions (OT) Guide for Prototype Projects”: • Prototypes include: • Risk-reduction activities • Technology demonstrations • Development of “pre-production” prototype(s) • “Subsystems,” which are defined broadly to include training, simulation, and support equipment • Agreementmay require delivery of more than one prototype if needed to prove concepts • Prototypes may be “virtual”; e.g., the computer-based prototype design for the Navy’s newest surface combatant ship

14. Acquisition OTs (Continued) • Criteria for use of acquisition OTs • At least one nontraditional government contractor is participating to a significant extent in the prototype project, or one of the following circumstances exists: • At least one-third of the total cost of the prototype project is to be paid by industry if no non-traditional contractor is involved, or • The agency’s senior procurement executive determines that the use of an OT provides for innovative business arrangements or structures that would not be feasible or appropriate under a traditional contract

15. Acquisition OTs (Continued) • Criteria for use of acquisition OTs(Continued) • Nontraditional government contractoris a business unit that has not, for a period of at least one year prior to the date of the OT agreement, entered into or performed on: • Any contract subject to full coverage under CAS prescribed pursuant to Section 26 of the Office of Federal Procurement Policy (OFPP) Act (41 U.S.C. 422) and regulations implementing that section; or • Any other contract in excess of $500,000 to carry out prototype projects or to perform basic, applied, or advanced research projects for a federal agency that is subject to compliance with the FAR • Examples of what significant participation might include: • Supplying new key technology or products • Accomplishing a significant amount of the effort • Causing in some other way a material reduction in cost or schedule, or an improvement in performance

16. Acquisition OTs (Continued) • Some laws and regulations do not apply, including: • Procurement protest system • Extraordinary Contractual Relief (Public Law 85-804) • Cost plus a percentage of cost (is not prohibited) • Buy American Act (in part) • Other laws and regulations do apply, including: • Procurement Integrity Act • Freedom of Information Act (FOIA) exemption • Proposal, proposal abstract, and supporting documents • Business plan submitted on a confidential basis • Technical information submitted on a confidential basis

17. Acquisition OTs (Continued) • Some considerations for creating an effective agreement: • Changes • No government-directed unilateral changes • No claims for equitable adjustment caused by changes • Termination clauses should: • Identify conditions that would permit terminations • Include procedures for deciding termination settlements • Costs • No mandatory cost principles or accounting standards • No certified cost or pricing data

18. Acquisition OTs (Continued) • Some considerations in creating an effective agreement (cont.): • Subcontracting • Government subcontracting system not required • No mandatory flow-down clauses • Intellectual Property • Do all the processes and license rights required by the Bayh-Dole Act apply? • Is treatment of trade secrets fair in the DFARS-based technical data and computer software clauses? • Audits of nontraditional government contractors may be customized or eliminated

19. Acquisition OTs (Continued) • Best practices for relationship-building with Acquisition OTs • The combined use of the Acquisition OT authority and an integrated product team (IPT) process enables a positive, collaborative relationship between government and industry, with open communication and cooperation • The vesting of design responsibility and management authority in the contractor strongly reinforces sense of owning the process and of working in an integrated partnership with government, and also can drive overhead costs down and limit requirements creep • The effectiveness of cost–performance tradeoffs would be improved with better input from the user community on what constitutes military utility for a particular system; user input must be more thorough and formal

20. Acquisition OTs: Relationship between Payment Types and Audits

21. Acquisition OTs: Relationship between Payment Types and Audits (Continued)

22. Acquisition OTs: Summary

23. OSD-Sponsored Study ofAcquisition OTs and TIAs

24. Study Background • In May to August 2006, LMI Government Consulting conducted a study sponsored by OSD • Reviewed and analyzed past and current literature (included 40 articles, reports, annotated briefings, and websites) on acquisition OTs and TIAs • Reviewed and analyzed annual OT reports to Congress • Conducted and analyzed results of 20 interviews with 26 representatives of FY 2001–2005 acquisition OT and TIA programs • Analyzed two databases • Prepared and issued questionnaires • Surveyed 47 Agreement Officers and Program Managers, many of whom were responsible for multiple acquisition OT and TIA programs • The recipients of the questionnaire were derived from DoD’s Cooperative Agreement/OT database, which has limited data on TIAs; as a result, the questionnaire responses were predominately focused on acquisition OTs

25. Study Findings: Acquisition OTs • The following findings are based on questionnaire responses of 30 respondents who addressed acquisition OTs (representing 61% of all OTs issued FY 2001–2005) • Performance savings • 63% of questionnaire respondents said acquisition OTs reduced preaward acquisition cycle time, saving an average of 61 days • 59% of respondents said acquisition OTs reduced program execution cycle time, saving an average of 74 days • 80% of respondents said acquisition OTsyielded moderate to significant time savings overall • Impact: • Saving time means earlier expenditure of research, development, test, and evaluation (RDT&E) funds that are FY sensitive • Earlier research results help direct future efforts

26. Study Findings: Acquisition OTs • Cost savings • 73% of respondents said acquisition OTs reduced current development costs (e.g., by eliminating non-value-added activities or encouraging better use of limited resources) • 80% of respondents said the ability, through acquisition OTs, to leverage industry funds and/or commercial development practices, was a moderate to substantial benefit for their programs • 57% of respondents said their acquisition OT projects reduced or will reduce future DoD expenditures • 70% of respondents said acquisition OTs had a moderate to substantial impact on their programs’ total cost • Impact: Additional funds (from industry investments or reduced indirect costs allocations) allow additional technical effort and material to further the research efforts

27. Study Findings: Acquisition OTs • Improved technical performance • 90% of respondents said acquisition OTs caused moderate to substantial improvements in the technical performance of the systems and/or items developed in their programs • Impact: Better overall systems or items means better support for the warfighter

28. Study Findings: Acquisition OTs • Literature review and interview findings • Acquisition OTs offer DoD access to nontraditional government contractors’ investments and technologies • FY 2001-FY 2005 reports to Congress identified an average of 84% of the awards with significant participation by nontraditional government contractors • The reports state that the percentage of acquisition OT awards with significant participation by nontraditional government contractors is up from 70% (FY 2001) to 95% (FY 2005) • Analysis determined that the percentage of acquisition OT awards with nontraditional government contractors as primes is up from 22% (FY 2001) to 64% (FY 2005)

29. Study Findings: Acquisition OTs • Specialized consortia with a compelling combination of resources represent a new trend for acquisition OTs • Combine nontraditional government contractors (large commercial firms, small businesses and nonprofits) with universities and major defense suppliers • Meet agency mission needs with tailored, leading-edge technology solutions • Example:NGA National Technology Alliance • Led by Rosettex Technology and Ventures group (solutions for intelligence community) and 3M (chemical, biological, and radiological defense) • Consortium has 60 partners from commercial industry with expertise in related technical areas • Awards made as task orders for speed

30. Study Findings: Acquisition OTs • Although feedback from the questionnaire and interviews was predominantly positive, several reasons were cited for why the number of new acquisition OT awards (excluding task orders) has been declining since 2000, including: • The war on terrorism and changing operational priorities • Congressional criticism of the Future Combat Systems (FCS) OT agreement • Negative climate for acquisition OTs at senior levels within DoD and Congress • A general lack of understanding of how to conduct effective acquisition OTs, except for a few agencies that use them frequently

31. Study Findings: Conclusions • Acquisition OTs offer immediate savings—what Program Managers want • Broader access to technology • Management flexibility • Better use of available funds • Better communications • Better ability to change directions • Acquisition OT projects offer “results”—what management/oversight wants • Broader industrial base • Future savings; reduced acquisition costs • Performance increases

32. Study Findings: Conclusions • Questionnaire respondents and interviewees expressed need to increase understanding of acquisition OT authority via instruction, outreach, and guidance • Only 48% of questionnaire respondents felt their training on acquisition OTs was sufficient • Common themes among study interviewees: • DoD needs well-trained, thoughtful, committed workforce to best use acquisition OTs • A compelling need exists for better understanding of appropriate use of acquisition OTs • A culture change is needed among DoD and industry personnel, to maximize acquisition OT benefits and accelerate process • A significant learning curve is associated with using acquisition OT streamlining and flexibility effectively • Outreach about acquisition OT authority to industry (especially commercial firms) would be beneficial • DoD guidance on acquisition OT authority would receive more attention if the authority were permanent Note: The Defense Science Board (DSB) has recommended expansion in the use of OTs.

33. Study Findings: Best Practices • Encourage participation of nontraditional government contractors/commercial firms through: • Special advertising—outside Federal Business Opportunities (FedBizOpps) and/or • Program creation (focus opportunities where nontraditional government contractors/commercial firms can and will want to participate) • Encourage management flexibility in solicitations and project performance, using innovative source selection practices, by evaluation of offers • Improves management of risks and uncertainties • Improves project structure through new and innovative business relationships • Increases value to the government per dollar spent • Encourages voluntary cost sharing

34. Study Findings: Best Practices Programs for which acquisition OTs and TIAs tend to add value are Science & Technology (S&T) programs S&T Tech Base Engr./Manuf. Development Program Defn. & Risk Reduction Adv. Tech. Development Applied Research Basic Research Managed by System Program Offices or industry Managed by S&T RDT&E Funding

35. Study Findings: Summary • These special research instruments: • Have limitations • Work better with programs that have certain characteristics • Are intended to include nontraditional government contractors/commercial firms • Are best executed by experienced agreement/grants officers and technical personnel

36. Conclusion • To industry, acquisition OTs indicate that the government is flexible and willing to establish partnerships • The decision as to whether an acquisition OT is the appropriate instrument is made by the Agreement Officer • The industry should focus on what is needed, when, how special terms and conditions should apply • The goal of acquisition OTs is development of best technologies for present (acquisition) agency mission needs • (Contracts/Grants)/Legal/Program/Financial representatives working together as a team is a must