The Department of Defense August 27 issued a final rule regarding use of “Other Transaction” authority for prototype projects which exclude controversial audit provisions proposed earlier. Use of OTs are authorized for prototype projects directly relevant to weapons or weapons systems acquisitions or development and are considered transactions other than contracts, grants or cooperative agreements which are not subject to the laws and regulations that apply to typical procurement contracts. They usually include cost sharing arrangements by the government and private firms.
DOD believes the flexibility offered by OTs are essential in offering access to cutting edge technology generated by commercial firms who traditionally resist doing business with the government. The new rules are intended to address DOD concerns that a number of OTs have been awarded to traditional defense contractors and accordingly, provides that OTs are not to be used for prototype work unless (1) at least one third of the total project cost is paid by parties other than the government (2) at least one “non-traditional defense contractor” is participating to a “significant extent” in the project or (3) the senior procurement executive of an agency determines “exceptional circumstances” justify use of an OT where other methods are not feasible. A “non-traditional defense contractor” is defined as a business unit that has not for at least one year prior to the OT agreement date entered into or performed on a contract (1) fully CAS covered or (2) any other contract exceeding $500,000 to carry out prototype projects or basic, applied or advanced research projects for a federal agency subject to the FAR.
Responding to concerns that contractors have excessively used prior work as significant portions of their cost sharing contributions, the new rule provides that non-federal amounts provided by businesses may not include costs incurred before the date the OT agreement becomes effective. Costs incurred by a business unit or their subawardee incurred after the beginning of negotiation but prior to the OT agreement date may be counted only if (1) they were incurred in anticipation of entering into the OT agreement and (2) it was “appropriate” to incur the cost at the time to insure successful completion of the OT agreement.
The original proposed rule provided for audits of claims for both awardees and significant subawardees by DCAA for traditional defense contractors and auditors by either DCAA or independent auditors for non-traditional defense contractors. Public comments stressed the proposed rule would deter participation in OT agreement by the very non-traditional companies OTs are intended to attract. DOD decided to withdraw the controversial audit provisions stating it would consider revisions to the proposal.
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