In this episode of the Acquisition Talk podcast, I speak with Richard Dunn about commercial contracting, and in particular, Other Transactions Authority (OTAs). He is the founder of the Strategic Institute, and has had a long career in government including a role as General Counsel of DARPA.
Rick argues that the traditional Federal Acquisition Regulation (FAR) does not have enough flexibility to allow for commercial contracting. Instead of focusing on value and innovation, the FAR narrows government’s focus on cost. The system is “fundamentally unfair,” he said. If it were fair, we should expect to see greater business participation. One study found that just the top ten cost drivers contribute to an 18 percent cost premium. Why would any firm take on that cost at the expense of being noncompetitive in their commercial markets?
Other Transactions, by contrast, allow the government to legally negotiate terms and conditions without reference to the FAR. In other words, the government can do business like any commercial firm, leading to lower transaction costs. However, the adoption of OTs have been stymied for decades because of proactive resistance. Preexisting learning stops subsequent learning, and contracting officers tend to think in terms of FAR language. Rick suggests how to break out of the mindset.
During the conversation, we discussed:
- The reason Norm Augustine said Lockheed couldn’t do commercial business
- How contract regulations became so burdensome
- Why are most OT consortia are only “so-called” consortia
- The effect of telling contract officers they will go to jail for non-compliance
- How OTs “shop problems” while the FAR “shops requirements”
- How startups can use unfunded OTs to gain access to government capital and users
- Why payable milestones are outside of the FAR
- The history of OTs, including Paul Demling, NASA, and the Telestar satellite
Podcast annotations.
One of the important things about OT contracts is that they can be used with any funding instrument. It depends on the characteristics of the project. If it is science and technology or a prototype, then it can leverage OTs. And if the program starts with an OT, it can transition into production and sustainment using OT contracts as well.
Rick provided an example. Use an unfunded OT in an open process to invite industry to show the current state of the art. That could transition into a prototype contract, which could then transition seamlessly into production. However, the front end of that process wouldn’t budge, at least in one instance:
What we got from the [Navy] lab guys was, “We don’t do acquisition. We’re not going to go out to industry and say, we’re going to start a process that will actually end in acquisition, production, and fielding.” And I’m just sitting there scratching my head saying, “What are you in business for?”
One of the biggest problems of shifting the cultural mindset of government agents. The contracting officer, Rick argues, has the toughest time because they are threatened with jail:
The duty of a contracting officer — this is what the FAR says — is to make sure that all the laws, executive orders, and regulations are complied with before you start to use good sense and business judgment. We have a workforce who is told that your most important job is the regulation. In some of the training materials and even the defense acquisition university system, you’ll see this slide of a person behind jail bars. And the slide says, “follow the FAR or you’ll go to jail.”
Other Transactions, however, are completely legal authorities that contracting officers can take advantage of. Rick recommends using a clean sheet for each contract, writing out the terms and conditions without reference to FAR language. Yet he finds many contracting officers encountering difficulty from habitual thinking.
For example, whenever cost-sharing arrangements are discussed, that automatically brings to their mind FAR Part 16, stating that cost-sharing requires the use of a cost-reimbursement contract. Or that there are no in-scope versus out-of-scope changes in OTs. There are just modifications.
Rick’s provides advise, but all too often it is not taken:
My advise hasn’t been taken. When we started at DARPA, we said we were going to use clean sheet of paper contract. For each project, we would decide the terms and conditions we needed. We were going to start the process by getting all the stakeholders around a table and ask, “why are you here?” When you get together, you create that vision statement which makes things much easier…
Having said that it worked successfully on a number of occasions, government people and industry people said, “Please, give us an outline! Please give us a template!” More than just a clean sheet of paper. So we made a model for that, and all innovation in that area stopped. People just used the model, made very few changes to it.
My mind naturally gravitated toward outlines and templates for OTs as well. Without templates and all the front end bureaucracy that usually goes into a contract, much more thinking will need to be done by the program officials and contract officers. To support the increased load, I suppose bloated staff officials would have to be converted into program officials. But it’s not necessarily to write long requirements documents. Rick gives an example on a Navy unmanned supply system:
The requirement came in from the fleet in great detail. And nowhere in parsing through the requirement could you see what problem they were trying to solve. Virtually all of the requirement document could be done away with. Then the question is, what does industry have out there as potential solutions to the [problem].
Here’s another good part:
Even re-engining the B-52, if you could bring private money into that, and have that occur much more rapidly than waiting for the POM [Program Objectives Memorandum] cycle and the appropriations cycle. The economies of that more optimum production cycle could allow a private investor to recoup his investment. We’re not even thinking that way today.
And finally this:
Norm Augustine was asked the question, ‘why doesn’t Lockheed Martin diversify and become a government contractor with a broad base of commercial business?’ He said, ‘well, because we can’t do commercial accounting.’ That’s a shorthand way of saying we do have to do government accounting and we have all the other overhead that the government imposes on us.
I’d like to thank Richard Dunn for joining me on the Acquisition Talk podcast. I recommend his short articles at the Strategic Institute, including those related to our discussion: “The Virtue of Unlearning,” “Milestone Payments,” and “Consortia, the Lost Vision.” Here is a good video of Rick speaking with Capt. David Rothzeid. I recommend Rick’s book, Exploding Fuel Tanks.
Rick recommends this OT resource: The applicability of certain procurement-related statutes to DOD “Other Transactions.” Also, read the 2018 DoD Other Transactions Guide.
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