On September 4, 2024, the Department of Defense (DOD) issued a proposed rule to update regulations related to other transaction (OT) agreements[1] to implement congressional changes in the statutory authority for prototype OTs and follow-on production OTs and contracts.[2] Although Congress made several updates to 10 U.S.C. § 4022 over the years, DOD did not update its OT regulations since 2004. Below, PilieroMazza’s GovCon attorneys highlight some key changes to DOD’s prototype project OT regulations and their potential impacts on government contractors working with DOD.
What are OT Agreements?
OT agreements are awards issued by the federal government that are not procurement contracts, grants, or cooperative agreements. Because OT agreements are different from traditional federal award vehicles, OT agreements are not required to comply with the Federal Acquisition Regulation (FAR) or the Defense Federal Acquisition Regulation Supplement (DFARS).
OTs allow agencies to have agility in the contracting process to attract nontraditional defense contractors and small businesses. OTs also enable agencies to acquire innovative technologies by allowing agencies flexibility when negotiating contract terms and conditions. DOD has statutory authority to award OTs for (i) basic, applied and advanced research projects; (ii) prototype projects; and (iii) follow-on production OTs and contracts.
Updates to DOD’s OT Regulations
DOD’s proposed rule encompasses several updates, including, but not limited to, the following:
- Clarifies that OT agreements for prototype projects are “legally binding instruments that include the elements of: offer; acceptance; consideration; authority; a legal purpose; a meeting of the minds; and are approved by an Agreements Officer who has authority to bind the Government.”
- Adds a definition for “prototype project.” The proposed rule provides that “prototype projects” can address any of the following: (a) a proof of concept, model, or process, including a business process; (b) reverse engineering to address obsolescence; (c) a pilot or novel application of commercial technologies for defense purposes; (d) agile development activity; (e) the creation, design, development, demonstration of operational utility; or (f) any combination of the foregoing.
- Outlines the appropriate circumstances under which a prototype OT agreement may be awarded. OT agreements for prototype projects may be used when one of the following conditions is met: (a) at least one nontraditional defense contractor or non-profit research institution participates to a significant extent in the prototype project; (b) all significant participants in the prototype project are either small businesses or nontraditional defense contractors; or (c) “exceptional circumstances justify the use of a transaction that provides for innovative business arrangements or structures that would not be feasible or appropriate under a contract or would provide an opportunity to expand the defense supply base in a manner that would not be practical or feasible under a contract.” Where none of the three circumstances above are met, an OT agreement may still be awarded if “at least one-third of the total cost of the prototype project is to be paid out of funds provided by sources other than the Federal Government.”
- Revises the definition for “nontraditional defense contractor,” which is now defined 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 Department of Defense for the procurement or transaction, any contract or subcontract for the Department of Defense that is subject to full coverage under the cost accounting standards.”
- Adds authority for DOD to award follow-on production OTs for prototype projects on a sole-source basis without the use of competitive procedures if: (i) competitive procedures were used for the selection of parties for participation in the OT for the prototype project; (ii) the participants in the OT successfully completed the prototype project provided for in the OT; and (iii) even if explicit notification was not listed within the request for proposal for the original prototype project transaction. The proposed rule also provides that follow-on production OTs for prototype projects may be awarded to a consortium when DOD “determines that an individual prototype or prototype subproject as part of a consortium is successfully completed by the participants.” Notably, “[a]ward of a follow-on production contract or OT . . . is not contingent upon the successful completion of all activities within a consortium.”
- Adds a new section to the regulations which provides authority to provide prototypes and follow-on production items “to another contractor or to a performer of an OT as government-furnished equipment (GFE).”
- Adds a new section to the regulations to reflect the competition requirements in 10 U.S.C. § 4022, which is “competition to the maximum extent practicable.”
- Adds a new section to the regulations to reflect that the post-government employment restrictions apply to OTs, consistent with 10 U.S.C. § 4022.
Because the proposed rule only updates DOD’s OT regulations to align with its statutory authority in 10 U.S.C. § 4022, PilieroMazza attorneys do not anticipate any major changes in how DOD awards prototype and follow-on production OTs. Comments on the proposed rule are due by November 4, 2024.
PilieroMazza attorneys are here to assist you. If you need guidance concerning OT agreements, please contact Cy Alba, Joseph Loman, Kelly Kirchgasser, or another member of the Firm’s Government Contracts practice group.
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[1] Codified at 32 C.F.R. Part 3.
[2] Codified at 10 U.S.C. § 4022.
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