The U.S. Department of Defense (DoD) issued a proposed rule on September 4, 2024, designed to bring the regulations for other transaction (OT) agreements (found in 32 CFR part 3) in line with congressional changes to the statutory authority for prototype OTs and follow-on contracts, 10 U.S.C. § 4022. The implementing regulations have not been updated since 2004. 

OTs are awards made by the federal government that are not procurement contracts, cooperative agreements, or grants, and thus are not covered by the Federal Acquisition Regulation (FAR) or the Defense Federal Acquisition Regulation Supplement (DFARS). OTs are designed to streamline the contracting process and provide DoD with flexibility in negotiating contract terms to aid in attracting nontraditional defense contractors and small businesses and facilitate better access to innovative technology. Nontraditional defense contractors are entities who have not performed a contract or subcontract for DoD within the year preceding the relevant solicitation that was subject to the government's cost accounting standards (CAS).

The proposed rule makes the following key changes to the CFR:

• Clarifies what activities fall into the prototype category of OTs. Prototype OTs may be used to address "a proof of concept, model, or process, including a business process; reverse engineering to address obsolescence; a pilot or novel application of commercial technologies for defense purposes; agile development activity; and the creation, design, development, demonstration of operational utility; or any combination of the foregoing."
• Details the circumstances in which DoD may award a prototype OT. Use of an OT is appropriate where either (1) "at least one nontraditional defense contractor or nonprofit research institution is participating to a significant extent in the prototype project"; (2) all significant participants are either small businesses or nontraditional defense contractors; or (3) "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." If none of those three situations apply, an OT 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." 
• Adds authority for DoD to issue follow-on production OTs for prototype projects on a sole source basis. DoD may exercise follow-on authority when (1) competitive procedures were used to choose the participants in the original OT and (2) the participants successfully completed the prototype project. This authority may also be used even if the original request for proposal (RFP) did not explicitly mention the potential for a follow-on contract. The proposed amendment also allows a follow-on production contract or OT to be awarded to a consortium if an individual prototype or prototype subproject is successfully completed, even if all of the consortium's activities are not complete. As they stand before the implementation of these proposed changes, the regulations reflect outdated statutory requirements that follow-on production contracts be awarded subject to the FAR and that initial OT prototype solicitations include express mention of the possibility of follow-on contracts.
• Outlines approval requirements for large-dollar OTs for prototype projects. Those OTs valued between $100 million and $500 million require a written determination by the senior procurement executive for the agency. For the Defense Advanced Research Projects Agency (DARPA), the Defense Innovation Unit (DIU), and the Missile Defense Agency (MDA), the determination must be made by the director of the agency. OTs valued over $500 million require congressional notice in addition to a written determination by the Under Secretary of Defense for Research and Engineering or the Under Secretary of Defense for Acquisition and Sustainment. Follow-on production OTs and contracts over $100 million require a written determination by a "covered official" and congressional notice.
• Expands offices that have been delegated OT authority. The new list includes "the Commanding Officers of the Combatant Commands with contracting authority, the Directors of Field Activities with contracting authority, the Director of the Defense Innovation Unit, and any other official designated by the Secretary of Defense to carry out OTs for prototype projects." The current rule only gives authority to "the Secretary of a Military Department, the Directors of the Defense Agencies, and any other official designated by the Secretary of Defense to enter into [OTs] for prototype projects that are directly relevant to weapons or weapon systems proposed to be acquired or developed by the Department of Defense." 32 CFR § 3.3. The proposed change also expands the authority of all listed offices to include issuing follow-on production OTs and contracts.
• Adds authority to supply prototypes and production items to another contractor as government furnished equipment (GFE).
• Adds the competition requirement ("competition to the maximum extent practicable") set forth in 10 U.S.C. § 4022.
• Extends the procurement ethics requirements and limits on post-government employment of officials involved in contracting decisions to OTs.

The proposed rule will update the CFR to provide potential OT participants with better guidance. It is not expected to result in significant changes since DoD has been operating under the authority of section 4022 to issue OTs and follow-on contracts despite the outdated language in the CFR. Comments to the proposed rule are due by November 4, 2024.

Contact one of the Miller & Chevalier attorneys listed below if you wish to discuss this proposed rule or require assistance.

Scott N. Flesch, Member, sflesch@milchev.com, 202-626-1584

Elissa B. Harwood, Law Clerk, eharwood@milchev.com, 202-626-5890

Jason N. Workmaster, Member, jworkmaster@milchev.com, 202-626-5893

Alex L. Sarria, Member, asarria@milchev.com, 202-626-5822

Ashley Powers, Counsel, apowers@milchev.com, 202-626-5564

Alexandra S. Prime, Senior Associate, aprime@milchev.com, 202-626-5940

Connor W. Farrell, Associate, cfarrell@milchev.com, 202-626-5925

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