On September 4, DoD published a proposed rule updating the other transaction (OT) regulations set forth in 32 CFR part 3.  These updates are intended to implement various changes to the prototype OT statute (42 U.S.C § 4022) previously enacted by Congress.  Among other things, those changes included:

  • An expansion of the “appropriate circumstances” under which a prototype OT may be issued, to include situations involving participation by nonprofit research institutions, participation by small businesses, or opportunities “to expand the defense supply base”; and
  • Authority for DoD to issue follow-on “production” OTs on a sole source basis, provided that competitive procedures were used for award of the initial prototype OT.

Although these changes were already applicable to DoD as a matter of statute, the proposed rule would ensure that the CFR is aligned with the statute and that the regulations provide accurate guidance. More details are below.

OTs and 32 CFR Part 3

As a general matter, OTs (also referred to as Other Transaction Agreements or OTAs) are defined by what they are not: they are not procurement contracts (subject to the FAR) or grants (subject to 2 CFR part 200).  As a result, OTs are not regulated by numerous federal laws and regulations that otherwise apply to contracts and grants.  This exemption from regulation is intended to grant DoD greater agility and flexibility when acquiring new technology. It is also intended to facilitate DoD’s acquisition of such technology from entities that have traditionally not been defense contractors.

DoD has the authority to award OTs for research (under 10 U.S.C § 4021) and for prototype project and follow-on production OTs (under 10 U.S.C § 4022).  The proposed regulations relate to prototype OTs and production-OTs, and implement multiple statutory changes made since 32 CFR part 3 was last updated in 2004. 

Appropriate Circumstances

The proposed rule would update 32 CFR part 3 to account for each of the appropriate circumstances whereby DoD may award a prototype OT, as follows:

  • At least one “nontraditional defense contractor” (defined as an entity not subject to full CAS coverage) or a “nonprofit research institution” will participate “to a significant extent in the prototype project”; or
  • All of the significant participants in the transaction are either small businesses or nontraditional defense contractors; or
  • The agency determines either that an OT would provide “for innovative business arrangements or structures that would not be feasible or appropriate under a procurement contract” or would otherwise “provide an opportunity to expand the defense supply base in a manner that would not be practical or feasible under a contract”; or
  • If none of the other circumstances apply (e.g., if all of the significant work will be performed by a traditional defense contractor subject to full CAS coverage), an OT may be awarded if at least one-third of the total cost of the prototype project will be paid out of funds provided by sources other than the Federal Government. (Note that there is not a cost share requirement if any of the other circumstances are present). 

Follow-On Production Contracts and OTs

A competitively awarded and successful prototype OT may culminate in the award of follow-on, sole source awards for production of the prototyped technology.

Historically, the OT statute allowed only for the award of follow-on production contracts subject to the FAR.  It also required the OT prototype solicitation to advise potential offerors of the possibility of a follow-on production contract. 

Congress has since amended the statute such that: (1) DoD also has the ability to award a sole source, follow-on “production OT” for the manufacturing of a successful prototype (assuming that competitive procedures were used for the award of the underlying prototype OT), in lieu of awarding a FAR-based production contract; and (2) the prototype OT solicitation and agreement do not need to include express notice of a follow-on production award in order for DoD to issue such a follow-on contract or OT.  DoD’s proposed rule incorporates those two key changes into 32 CFR part 3. 

The proposed rule also includes changes to follow-on production awards made to consortia consisting of multiple vendors.  Under the proposed language, a follow-on production contract or OT may be awarded when the DoD determines that “an individual prototype or prototype subproject” made “as part of a consortium” is successfully completed.  Award of a follow-on production contract or prototype “is not contingent upon the successful completion of all activities” within the consortium.  In other words, if the consortium OT concerns multiple prototypes and one of those prototypes is successful, then a follow-on production award may follow, even if all the other prototype activities undertaken by the consortium have not yet been completed. 

Conclusion

DoD’s proposed rule seeks to implement statutory changes that expand DoD’s ability to make use of OTs, and invest in new research and production opportunities with nontraditional partners.  Although these changes have already been implemented as a matter of statute, the corresponding update to the regulations is a welcome development.  We plan to continue to monitor updates in this area as they occur.

Tags: Consortia, Consortium, Defense Advanced Research Projects Agency, Nontraditional defense contractors, OT, OTA, Other Transaction, Procurement Reform, R&D, research and development, Small Business
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Photo of Peter Terenzio Peter Terenzio

Peter Terenzio routinely advises clients regarding the multiple regulatory regimes that apply to federal contractors. His practice also extends outside of traditional government procurement contracts to include federal grants and Other Transaction Authority (OTA) research, prototype, and production agreements.

Among other things, Peter…

Peter Terenzio routinely advises clients regarding the multiple regulatory regimes that apply to federal contractors. His practice also extends outside of traditional government procurement contracts to include federal grants and Other Transaction Authority (OTA) research, prototype, and production agreements.

Among other things, Peter regularly helps clients with the constantly evolving domestic-preference requirements promulgated pursuant to various federal laws, including, for example, the Buy American Act (BAA) and Trade Agreements Act (TAA), but also including more recently the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA). He also has particular experience with helping clients navigate the complicated prevailing wage rules imposed by the Davis Bacon Act (DBA) and Service Contact Act (SCA). Peter has used this regulatory knowledge to help clients negotiate the specifics of their contracts, grants, and OTA agreements.

Peter also has significant experience with the disputes that may arise during the execution of government prime contracts. He knows how to work closely with the client’s subject matter experts to prepare and submit detailed requests for equitable adjustment (REAs) in order to secure much-needed price or schedule relief. Where necessary, he has assisted clients with converting their REAs into certified claims, and when disputes cannot be resolved at the Contracting Officer level, he has helped clients vindicate their contractual rights in litigation before the Boards of Contract Appeals.

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Photo of Jennifer Plitsch Jennifer Plitsch

Jennifer Plitsch leads the firm’s Government Contracts Practice Group, where she works with clients on a broad range of issues arising from both defense and civilian contracts including contract proposal, performance, and compliance questions as well as litigation, transactional, and legislative issues.

She…

Jennifer Plitsch leads the firm’s Government Contracts Practice Group, where she works with clients on a broad range of issues arising from both defense and civilian contracts including contract proposal, performance, and compliance questions as well as litigation, transactional, and legislative issues.

She has particular expertise in advising clients on intellectual property and data rights issues under the Federal Acquisition Regulations (FAR) and obligations imposed by the Bayh-Dole Act, including march-in and substantial domestic manufacturing. Jen also has significant experience in negotiation and compliance under non-traditional government agreements including Other Transaction Authority agreements (OTAs), Cooperative Research and Development Agreements (CRADAs), Cooperative Agreements, Grants, and Small Business Innovation Research agreements.

For over 20 years, Jen’s practice has focused on advising clients in the pharmaceutical, biologics and medical device industry on all aspects of both commercial and non-commercial agreements with various government agencies including:

  • the Department of Veterans Affairs (VA);
  • the Department of Health and Human Services (HHS), including the Biomedical Advanced Research and Development Authority (BARDA), the National Institutes of Health (NIH), and the Centers for Disease Control (CDC);
  • the Department of Defense (DoD), including the Defense Threat Reduction Agency (DTRA), the Defense Advanced Research Projects Agency (DARPA), and the Joint Program Executive Office for Chemical Biological Defense (JPEO-CBRN); and
  • the U.S. Agency for International Development (USAID).

She regularly advises on the development, production, and supply to the government of vaccines and other medical countermeasures addressing threats such as COVID-19, Ebola, Zika, MERS-CoV, Smallpox, seasonal and pandemic influenza, tropical diseases, botulinum toxin, nerve agents, and radiation events. In addition, for commercial drugs, biologics, and medical devices, Jen advises on Federal Supply Schedule contracts, including the complex pricing requirements imposed on products under the Veterans Health Care Act, as well as on the obligations imposed by participation in the 340B Drug Pricing program.

Jen also has significant experience in domestic sourcing compliance under the Buy American Act (BAA) and the Trade Agreements Act (TAA), including regulatory analysis and comments, certifications, investigations, and disclosures (including under the Acetris decision and Biden Administration Executive Orders). She also advises on prevailing wage requirements, including those imposed through the Davis-Bacon Act and the Service Contract Labor Standards.

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