The case for innovation: Let’s broaden Other Transaction Authority

The recent Pentagon announcement of a $950 million (ceiling) production contract to nontraditional defense contractor REAN Cloud has sent reverberations through the acquisition community. This “Production OT” agreement follows a similar, although smaller production award by the Defense Innovation Unit Experimental (DiUX) to the cybersecurity firm Tanium (Full disclosure, Tanium is a client of mine).

These “Production OTA” agreements (they are not technically “contracts”) have created quite a buzz in the acquisition community. The awards flowed out of the prototype development work of REAN Cloud and Tanium with the DiUX office in Silicon Valley. Both agreements reflected successful proof-of-concept work that the companies had undertaken with DoD under specific prototyping procurement authorities that have been largely under the radar for many years but were recently expanded in the annual defense policy bill, the NDAA.

Other Transaction agreements are an interesting procurement approach, not so much for what they, as what they are not. The key attribute of Other Transaction Authority is that they are not a Federal Acquisition Regulation (FAR)-based procurement.

Legally, an OTA based agreement is not a contract, grant, or cooperative agreement as those terms are usually understood, and there is no statutory or regulatory definition of “other transaction.” OTA agreements fall outside of the cumbersome and lengthy procurement processes associated with the Federal Acquisition Regulation.

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Folks who claim this is “new thing” are mistaken. OT agreements have been around for a while, having been originated at NASA as so-called “Space Act” agreements. They are limited in terms of who can use them — only those agencies that have been provided OT authority may engage in other transactions. Their core purpose is to accelerate access to, and adoption by, certain select agencies within government (currently mostly DoD and NASA, although DHS has had OT authority on an intermittent basis for some time). This authority grants access to innovative technologies from companies that otherwise would have no interest in dealing with the red tape and compliance burden created by a standard procurement relationship.

Because they are “outside” the FAR, OT agreements do not require such cumbersome oversight and audit requirements such as those imposed by the Truth in Negotiations Act, cost and pricing data or an expensive Cost Accounting System (CAS) qualified financial system. CAS compliant financial systems can cost company millions of dollars to implement and maintain — and are therefore a significant, if not potentially fatal, barrier to government market entry for startups and small, innovative companies. These requirements tend to reinforce the “legacy advantage” of large traditional contractors, who can afford to hire and staff these requirements with large staffs of accountants and lawyers.

OT agreements are also not protestable, at least at the GAO. The lack of the ability to protest an award to GAO is an undoubtable factor that plays into the appeal of OTAs to agency procurement officials.

Freed from adhering to the FAR, OTA agreements also allow an agency to tailor the engagement terms to the needs and circumstances of specific requirements. For example, if DOD wants to spur the development of new jetpacks, an OT agreement would allow a customized set of deal terms and intellectual property allocations that the FAR might otherwise prohibit. And those FAR terms that are irrelevant or even obstacles to developing jetpacks need not apply.

But perhaps most importantly, my Silicon Valley clients inform me that unlike the FAR, OTA agreements do not require them to surrender control of their intellectual property rights that is common practice under standard FAR-based procurements.

All these attributes make OTA agreements an ideal “toe in the water” for government market engagement for cloud and startup companies from Silicon Valley (or elsewhere). It’s simply a fact that many innovative start-ups will not remotely consider contracting with the government given the compliance risk, oversight burdens and loss of control over key assets, especially their intellectual property.

Traditional government contractors often complain that OT agreements are an “end run” around the FAR. And it is true that OT agreements have been abused in the past — to the point where the Government Accountability Office has expressed concerns regarding their use.

I am not one who believes that the FAR should be lightly disregarded. Recent work by such luminaries as the Section 809 Panel hold great promise for streamlining FAR-based procurements, with, for example, a reinforcement of the use and value of commercial item procurements and recommendations to open the internet for certain types of commodity purchasing by the government. We will wait with enthusiasm how these reforms will play out.

But until these halcyon days of a streamlined FAR arrive, it is simply a fact that the FAR creates a voluminous tangle of mandates and requirements that require entire staffs of experts to navigate. Regardless of where you stand on the value and necessity of the FAR, there is no question that it hinders access and implementation to innovation and technologies from those small companies that are the source of much of the creativity and innovation for which America is famous.

For OT agreements, it is their flexibility that is the key. The best way to prevent abuse of OTs is through skilled oversight and management by DiUX and the government customer. Use of iterative, agile procurement approaches that curtail a program that goes off the rails — before millions are wasted — might be one way to address this concern.

Perhaps OT agreements should be restricted to short-term deliverables of minimally viable product in structured milestone segments? In that event, OT program abuse could be quickly curtailed before money is wasted.

OT production agreements may require a new, different form of program oversight and management. Let’s talk about that. But in the final analysis, we believe that OTA agreements should be acknowledged and recognized — not as an “end run” around normal procurement methods — but as an important  supplement to regular acquisition procedures.

If new oversight standards are developed, we would go so far as to recommend expanding OT production authorities to the rest of government, and specifically the 24 CFO Act agencies. Sure, there is potential for abuse. But it is not as if the FAR has eliminated waste and fraud in government contracting.

Richard Beutel is the founder of Cyrrus Analytics. Rich is a nationally recognized expert in IT acquisition management and cloud policy with 25 years of private sector experience and more than a decade on Capitol Hill working on procurement issues.