As OTAs grow, traditional contractors are reaping the benefits

The Defense Department spent nearly $21 billion on OTAs in the past three years, but who is bringing home the bacon?

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For the Defense Department, what was once an obscure acquisition approach has now turned into a methodology to fund research, prototyping, and in some cases, the production of systems to the tune of tens of billions of dollars.

It seems like at any conference or discussion about procurement the only words on acquisition officials’ lips these days are Other Transaction Authority (OTA).

Thanks to congressional actions that loosened rules governing other transaction agreements, the Defense Department has significantly increased spending on these contracts.

“It’s really started to ramp up since 2015 and we expect that trend line is likely to continue because the enthusiasm continues to grow,” said Robert Levinson, senior defense analyst at Bloomberg Government

DoD told Federal News Radio it awarded a ceiling of $21 billion through 148 OTAs between 2015 and 2017.

Fiscal year 2018 data was not immediately available, but the Army alone currently has 561 OTA agreements ongoing for $3.5 billion.

“We are making use of them, needless to say, and rightfully so. It is a great tool,” said Lt. Gen. Paul Ostrowski, the director of the Army Acquisition Corps, in May.

When DoD ramped up its use of OTAs, the goal was to be like Silicon Valley: agile, innovative and willing to fail fast. The awards are supposed to go to companies with that mindset and normally would not work with DoD, but Federal News Radio’s special report Danger at High Speed: OTAs in Action finds that despite DoD’s rationale for OTAs, billions of dollars still are funneling into old-line contractors like Lockheed Martin, Boeing and Northrop Grumman.

According to Bloomberg Government, out of the top 10 companies and consortia to receive OTA funding, Boeing came in second, Lockheed Martin in fifth and Northop Grumman in sixth.

OTAs are starting to turn some heads because they lack the transparency associated with traditional contracts. Even the biggest OTA advocates in Congress put some new reporting requirements on the agreements this year.

“We’ve always worried that OTAs were used as exceptions to the award of a government contract, because OTAs have less stringent standards for competition, for providing cost or pricing data to the government and for other contract regulations,” said Scott Amey, general counsel at the Project on Government Oversight. “We worry that the traditional contractors are just using this to circumvent contracting rules and these agreements could result in higher cost, and products and services that are not needed and fail to meet government requirements.”

One congressional staff member told Federal News Radio that some uses of OTAs are more akin to corporate welfare than a way to bring small and nontraditional companies with new ideas into the Pentagon’s fold.

“Basically, they just get money and they don’t have to track how they’re spending it and they don’t have to do anything,” the staff member said.

Over the past three years, Congress has continued to loosen the rules around OTAs, giving the DoD more nerve to flirt with larger OTA agreements and to work with the idea of using OTAs for production.

When Congress granted DoD broader authorities for OTAs, House Armed Services Committee Chairman Mac Thornberry (R-Texas) said the goal was to encourage more experimentation and prototyping while at the same time shifting DoD away from spending a lot of money on programs and getting little or nothing in return.

The Defense Innovation Unit Experimental signed a nearly $1 billion production OTA agreement with REAN for cloud services before senior Pentagon officials and the Government Accountability Office stepped in last month.

Congress also is now demanding more information on the Air Force’s Air Operations Center 10.2 OTA before it gives the service the go-ahead to spend hundreds of millions of dollars.

These two examples are part of the reason why Congress is exhibiting some reservations on how DoD is using OTAs so far. Lawmakers are seeking more details from the Pentagon in the 2019 National Defense Authorization Acts (NDAA).

The House’s 2019 version of the NDAA would add to that reporting requirement, telling DoD to report more details on follow-on production options to prototypes using OTAs worth more than $5 million.

“The committee remains committed to providing the Department of Defense the needed flexibility to acquire advanced capabilities through streamlined and expedited processes. The committee recognizes that other transaction authority has been an effective tool for research and development, particularly for execution of science, technology and prototyping programs. It provides needed flexibility in terms of adherence to select federal acquisition regulations,” the House NDAA report states. “While the benefits of this flexibility are clear, the committee believes that it is still necessary to exercise effective oversight both to understand the ways in which the department is properly leveraging the use of this authority and to prevent its abuse or misuse.”

OTAs give DoD the potential to move some procurements faster, and hopefully open the door to new vendors who can bring innovation to the department. But that speed comes at the cost of relaxed oversight and transparency.

DoD needs to move fast, but are OTAs the right way?

OTAs are agreements that don’t need to comply with DoD’s sometimes cumbersome and slow contracting rules set by the Federal Acquisition Regulation and the Defense Federal Acquisition Regulation Supplement.

The real goal of Congress and DoD in using OTAs is to hack through the layers of red tape, redundant rules and burdensome paperwork that has built up and delayed the federal buying process over the last 50 years. Additionally, DoD officials recognized its culture of demanding exquisite, complex and near-perfect systems was slowing the acquisition process even more, said multiple military acquisition officials.

Likewise, traditional contractors have only been investing 2 percent to 4 percent of their revenue into new research, leaving some DoD officials complaining that the contractors are not pulling their own weight.

Countries like China and Russia can buy faster, play looser and develop quicker than DoD, said David Berteau, CEO of the Professional Services Council, one of the industry groups that lobbied Congress to expand DoD’s authority to use OTAs.

“If you look at the National Defense Strategy issued back in January, it says China is a big problem. Russia is a big problem. We’ve got to be better prepared and better organized and structured in putting our resources in priority ways that prepare us to deal with those challenges,” said Berteau, who is also former assistant secretary of defense for logistics and materiel readiness. “We’ve got to figure out how to go faster like they are.”

Congress, in the 2016 Defense authorization bill, expanded the use of OTAs for prototypes to bring in nontraditional companies and to give DoD a vehicle to move faster, essentially opening the floodgates.

In the 2018 NDAA, Congress increased the reporting limit on the cost of OTA prototypes from $250 million to $500 million, giving DoD even more leeway to award OTAs. Congress must be notified when agreements go over that amount. But prototypes only involve creating a working model of a proposed weapon or product. There’s no guarantee it will go into production for wider use.

A symptom of a larger illness

Analysts told Federal News Radio DoD could waste a colossal amount of money by paying for a $500 million prototype. And corporations may use the lack of regulation in OTAs to make a quick buck with a low quality prototype, leaving DoD with nothing.

As Congress gave more authority to DoD for OTAs, the department has been using those authorities for more than just researching and prototyping, said Angela Styles, former administrator for the Office of Federal Procurement Policy at the Office of Management and Budget and current partner at Bracewell.

OTAs “may be more of a symptom than it is the fix, if you will. The problem is that the procurement system itself is really clunky at this point in time. Particularly for DoD,” Styles said.

She acknowledged that an overabundance of regulations can slow the process, make things more costly and repel some companies DoD is trying to court.

But “there’s a lot of risks to having no rules. There are no rules for competition. There are no protests. None of the things you would consider just a regular day-to-day oversight of them. There’s nothing that really says they have to be reported, other than what may be in the statute for reporting them,” she said. “There’s nobody who knows how to manage them and there’s nobody who knows what the terms and conditions should be. It’s a completely unknown world, but with the benefit of allowing easier access to products and services for the Department of Defense.”

Styles said OTAs don’t require cost accounting rules and it’s unclear if the government gets a fair price and who retains the intellectual property rights.

The nontraditional question

The minimal rules and paperwork are supposed to drive business from companies DoD usually doesn’t deal with and has trouble attracting.

The whole selling point for OTAs is to bring in new companies, since innovation tends to come from the private sector and not as much from inside the government like it did in the 1950s, 1960s and 1970s.

One of the most popular ways DoD does business through an OTA is to work through a consortium of companies that coalesce around one subject, like robotics or artificial intelligence.

The companies that join pay a small fee to the consortium, which acts as a “benevolent prime,” said Stephen P. Rodriguez, founder of One Defense, a network of nontraditional companies interested in working with DoD.

The consortiums are there “to help and work with nontraditional companies,” Rodriguez said.

The law requires the awards go to nontraditional firms or to a partnership where non-traditional companies participate to a “significant” extent. The law does not define what significant means, nor does it define what constitutes a nontraditional company.

“Congress has loosened the rules about non-traditionals so that it’s easier to qualify for an OTA,” said a former congressional staffer who played a key role in drafting many of the congressional directives on the use of OTAs, and who requested anonymity because of current ties to the Pentagon.

Analysts like POGO’s Amey wonder if awards are actually going to non-traditional companies or if they are going to the same old-guard primes, but faster and with less regulation.

Data on that issue is hard to find since reporting requirements are sparse and there are caveats to the funds that actually go to nontraditional companies.

DoD states 98 of the 148 of the awards it made between 2015 and 2017 through OTAs went to nontraditional companies.

But the money tells a different story. Only $7.4 billion of the nearly $21 billion went to those nontraditional companies, according to statistics from DoD.

That number is even more shrouded by the fact that awards are often given to consortiums. Those consortiums decide how the money is handed out for an award and any company can join a consortium.

For example, the U.S. National Center for Manufacturing Sciences was the fourth largest recipient of OTAs in the past three years. Between 2015 and 2017, DoD awarded the consortium $2 billion. It includes companies DoD usually doesn’t do business with like Crestwood Technology Group, the Digital Manufacturing Group and Design Innovation Institute and Sustainable Water Works.

But there are also some very familiar names on the list like Boeing, Booz Allen Hamilton, Honeywell, General Electric, Siemens and Lockheed Martin. Based on government spending records, it’s impossible to know how the $2 billion was divvied up, and which firms actually conducted work for the military.

The same goes for the Consortium Management Group Inc., which received $4 billion from DoD from 2015 to 2017, and manages two different consortia—C5 and CEED.

Both consortia include plenty of non-traditional companies, but familiar names pop up again: L3 Advanced Programs, Leidos, Lockheed Martin, Booz Allen Hamilton, Rockwell Collins and Boeing.

Federal law established four requirements for how DoD can use OTAs. Two of them require that non-traditional vendors participate in the work to a “significant extent,” but large firms can still be involved in those awards.

Primes have another way of getting involved in contracts under consortia. If OTAs do not go to a non-traditional company, then one-third of the project must be funded from a non-governmental source.

Finally, the law gives DoD procurement executives blanket authority to award OTAs to any firm whatsoever, as long as they determine in writing that “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 expand the Defense supply base.

All of this leads to several questions, including who gets the revenue, the intellectual property or walks away with follow-on contracts. In some cases, those questions are dealt with inside the consortium, based on the previous agreement with the government and the answers are unknown to the rest of the world.

OTAs aren’t being used just for futuristic technologies like robotics, man-machine learning and precision weapons as the agreements were first intended either.

“It’s a rapidly expanding universe,” said Levinson. “There’s a consortia out there for just about anything you might want to do. I don’t think there’s too much work in a prototyping space that you couldn’t find consortia to fit given the broad spectrum.”

There’s a defense ordnance consortium that covers ammunition, demilitarization, weapons systems, rockets, missiles and bombs. There’s a consortium for automotives, space, command and control, energy, electronic warfare, analytics, sensors, training enterprise systems, networks, forensics, and the list goes on.

What’s the government getting for $21 billion?

There are two main ways DoD can obtain technology it wants or new ideas from industry. It can send a broad agency announcement to a consortium with a general requirement and ask for ideas, or it can use one of the organizations the Pentagon set up to go out and find companies to solve specific problems.

The Defense Innovation Unit Experimental (DIUx) is the first organization in this era created by DoD to reach out and make contact with nontraditional companies.

DIUx pioneered the use of new-age OTAs by putting feet on the ground in Silicon Valley and other places like Austin and Boston and cozying up to non-traditional companies.

Former DIUx director “Raj [Shah] and his team are already bringing in game-changing technologies that will benefit America’s warfighters. They’ve closed five deals in the last three months, totaling $3.5 million. It took an average of just over 50 days after they first interacted with a company to award these funds — that’s lightspeed for the Department of Defense, and appropriately so,” former Defense Secretary Ash Carter said in late 2016 as the organization started to take shape. “And they have another 22 more projects in the pipeline, for an additional $65 million — in areas like network defense, autonomous seafaring drones, and virtual war-gaming.”

In 2016, DIUx spent $36 million, but the largest contract went to a more traditional company, Tanium, for nearly $13 million. The second-largest award, at $12.6 million, went to Composite Engineering and Kratos, both intimately familiar with working with DoD.

In 2017, DIUx awarded 48 contracts for prototypes. Only two of them were actually moved into production, states the program’s annual report.

“Everyone talks about how awesomely DIUx has done. They’ve actually produced no fieldable systems. They’re just handing out money,” the congressional staff member said. “That’s the view of a lot of the staff up here and some members [of Congress] who are starting to pay attention to this.”

The congressional aide said DIUx and some uses of OTAs are akin to corporate welfare.

“Hopefully, what we’ll see is DoD doing its job and doing some adult supervision of their own people to make sure something bad doesn’t happen and nobody goes to jail,” the staff member said.

This is part one of a two-part series called Danger at High Speed: OTAs in Action. Read part two, Danger at High Speed: The Fog Around OTAs, to learn about the lack of transparency in OTA agreements and what that means for the way DoD buys its goods.

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