United States: DoD Issues New Other Transactions Guide With More Flexible Terms

On December 3, 2018, the Department of Defense (DoD) issued a revised Other Transactions (OT) Guide to replace the January 2017 Other Transactions Guide for Prototype Projects. The new OT Guide provides expanded guidance and case studies, and debunks "myths" about OTs. In addition, it includes changes in policy from the prior guide, many of which provide enhanced flexibility that could be beneficial to contractors. However, these changes are not explicitly identified as changes in policy, and contractors with OT experience should accordingly study the new OT Guide carefully to identify new policy.

By way of background, OTs are transactional instruments other than procurement contracts, grants and cooperative agreements. They are not subject to the Federal Acquisition Regulation (FAR), Cost Accounting Standards (CAS), the Truth in Negotiations Act (TINA) or many other regulations that can make federal contracting burdensome—both for contractors and the government. In recent years, Congress has called for expanded use of OTs to provide the government, and DoD in particular, with expanded and expedited access to new innovations and to relationships with entities that do not traditionally participate in government contracting.

The new OT Guide, unlike the 2017 Prototype OT Guide, provides policies applicable to all kinds of OTs for which DoD has statutory authority: research, prototypes and follow-on production. DoD's original OT authority appears at 10 U.S.C. § 2371 and permits DoD to enter OTs for basic, applied and advanced research projects. Research OTs require a 50/50 cost share to the extent practicable. The 2016 National Defense Authorization Act (NDAA) added DoD's authority to enter OTs for prototype projects. Codified at 10 U.S.C. § 2371b, it allows DoD to enter prototype OTs when: (1) all participants are small business or non-traditional; (2) at least one non-traditional defense contractor or nonprofit research institution participates to a significant extent in the prototype project; or (3) at least one third of costs are contributed by the nongovernmental parties. Finally, DoD may enter follow-on production OTs if competitive procedures were used to award the prototype OT and the prototype project in the transaction was "successfully completed."

Like the prior guidance, the new OT Guide is a non-binding policy document that includes instructions for agreements officers (the equivalent of contracting officers under FAR contracts) in the areas of planning, awarding and administering OTs. These instructions are useful for contractors seeking to participate in OTs, as they delineate ground rules and considerations the government will evaluate, in addition to the terms of the particular OT documents.

The new OT Guide is more flexible than its predecessor in many respects. This increased flexibility can be helpful to contractors as they negotiate OT agreements with the government, because the new OT Guide supports using terms that differ from traditional government contracts.

The increased flexibility of the new OT Guide is embodied in its general instruction with respect to statutory authority. Under the new OT Guide, agreements officers are instructed that "[i]f a strategy, practice, or procedure is in the best interest of the Government and is not prohibited by law or Executive Order, the Government team should assume it is permitted." (Emphasis added.) This is in contrast to a similar instruction in the prior guide, which stated, "[i]f a policy or procedure, or a particular strategy or practice, is in the best interest of the Government and is not specifically addressed in this guide, nor prohibited by law or Executive Order, the Government team should not assume it is prohibited." (Emphasis added.)

While the change in language may be subtle, the affirmative statement that non-prohibited practices should be assumed permitted is a potentially powerful tool for contractors proposing innovative strategies that simply are not addressed in the law and that are meeting uncertainty or resistance from government officials more accustomed to the FAR environment.

More specific terms of the OT Guide also increase flexibility, both for the government and for contractors. For instance, under the prior Prototype OT Guide, agreements officers were required to be warranted DoD contracting officers. The new OT Guide states that DoD components should create their own agreements officer warrant procedure, and that "AOs need not be Contracting Officers, unless required by the Component's appointment process." To the extent DoD components appoint non–contracting officer agreements officers, the government and contractors may benefit from increased willingness to employ strategies and terms that depart from the typical FAR and Defense Federal Acquisition Regulation Supplement (DFARS) requirements.

The new OT Guide's discussion of intellectual property rights follows a similar pattern. While both the new and old guides confirm that the Bayh-Dole Act, 35 U.S.C. §201-204 for patents and 10 U.S.C. §2320-21 for technical data, do not apply to OTs, the new guide encourages more latitude in negotiating appropriate IP clauses. Specifically, the prior guide stated:

The new OT Guide instructs that "these statutes do not apply to OTs and negotiation of rights of a different scope is permissible and encouraged" (emphasis in original). Where the language of the prior guide appeared to reflect a grudging admission that deviation from standard IP clauses was permitted, the new guide provides, in bold type, that different terms are encouraged.

This change in general policy with respect to IP rights extends to more specific elements. The prior guide included detailed discussion of the types of rights the government should "consider" reserving for itself. This suggested allocation of rights was essentially similar to the rights allocation in the DFARS clauses. The new OT Guide pares back the guidance to general considerations, without suggesting that the agreements officer incorporate DFARS clauses.

As the discussion above illustrates, DoD's new OT Guide makes some substantial changes with the apparent goal of flexibility. Indeed, the OT Guide states that the government can meet one goal of the OT process in this manner: "The OT award process can be faster if the Government team embraces the flexibility of the authority, is prepared, and the process remains as streamlined as possible." Many of these changes can be expected to benefit non-traditional defense contractors and other participants, who can hope to encounter government officials more receptive to alternative arrangements and terms.

However, the new OT Guide may go too far in the direction of flexibility and non-specificity for some purposes. For instance, the new OT Guide states, with respect to the costs that count toward resource-sharing agreements, "Contributions can be in cash or non-cash form, and costs can be either direct or indirect, so long as contributions are allowable, allocable, reasonable, and consistently accounted for by the awardee." Of course, the concepts of allowability, allocability and reasonableness are drawn from the FAR cost principles. The cost principles are generally inapplicable to OTs because the FAR as a whole does not apply. Yet the OT Guide does not separately define the terms, creating the implication that reference to the FAR may be necessary. This problem and similar issues may be addressed by specific agreement terms.

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