The government’s independent procurement law arbiter ruled Thursday that the Defense Department overstepped its legal authorities earlier this year when it struck a nearly $1 billion agreement for cloud computing services without soliciting competitive bids.

In the decision, the Government Accountability Office sided with Oracle Corp., which had filed a bid protest arguing that the department’s other transaction agreement (OTA) with Herndon, Va.-based REAN Cloud violated federal laws on how OTAs can be used.

“GAO recommended that the agency terminate the production OTA,” Ralph White, GAO’s managing associate general counsel for procurement law said in a statement.

The department should “either use competitive procurement procedures in accordance with statutory and regulatory requirements, prepare the appropriate justification required by the Competition in Contracting Act of 1984 to award a contract without competition, or review its other transaction authority to determine whether it is possible to comply with the statutory preconditions for entering into a production OTA,” White said.

GAO has not yet released the full text of its legal decision, saying it needs more time to redact companies’ proprietary information before making the document public.

OTAs are not technically contracts, and as such are not subject to the same regulations that govern most other federal procurements. Congress has been moving to encourage their use, since they’re perceived as allowing the government to conduct acquisitions more quickly.

Historically, they have  mostly been used to draw in non-traditional government vendors to develop prototypes. But two years ago, Congress passed a provision that lets DoD award production work to the same firm that handled the prototype, as long as multiple companies were allowed to compete from the beginning.

The Feb. 7 award to REAN, issued by DoD’s Defense Innovation Unit-Experimental (DIUx) was only the third time the department had used its new authority to award production OTAs. It was a follow-on to a small prototype DIUx coordinated for U.S. Transportation Command (TRANSCOM), and the production agreement would have made REAN’s services available to the entire Defense Department without any further competition.

In its statement, GAO did not specify precisely what aspects of federal law it believed the production agreement violated, and officials declined to elaborate until the full legal decision is published.

But the Pentagon itself has already acknowledged that DIUx’s follow-on award to REAN was overly ambitious.

A few weeks after DIUx issued the award, senior Defense officials intervened, capping the dollar amount of the OTA at $65 million instead of the previous ceiling of $950 million. The Department also said it would restrict REAN’s work under the agreement so that it could only handle TRANSCOM business.

However, the after-the-fact  intervention wasn’t enough to correct the underlying problems Oracle pointed to, and with which GAO concurred.

A senior GAO attorney who is involved in the case, but who asked not to be identified, said DIUx’s award to REAN would have been improper regardless of the dollar amount.

Oracle’s victory before GAO was an early legal test of DoD’s new and expanding use of OTAs, and is notable, since those agreements have previously been considered to be mostly-immune from bid protests.

Since they are not traditional “contracts” — at least as defined by the federal procurement system — their terms are not bound by the voluminous rules that make up the Federal Acquisition Regulation, and the grounds on which companies can lodge legal protests are extremely limited.

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