Appropriate Contractual Instruments For R&D

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Federal Government agencies enter into a wide variety of contractual relationships for various purposes under different regulatory regimes. In addition to procurement contracts covered by the Federal Acquisition Regulation and assistance instruments (grants and cooperative agreements), these include contracts for real property, non-appropriated fund contracts, sales contracts, cooperative research and development agreements, and various licensing and loan guarantee arrangements, for example.  Some Government agencies have authority to enter into “other transaction” agreements—that is, contracts subject to fiscal laws but with few regulatory constraints, essentially allowing for commercial style contracting.  Despite this array of legal authorities, the either/or dichotomy of procurement versus assistance looms large and tends to overshadow the variety of legal authorities mentioned, and sometimes leads to the use of procurement contracts for purposes for which they are not entirely suited.

There is a profound misunderstanding of the proper use of, and a related misuse of, available contractual instruments in the conduct of R&D within the Department of Defense and some other agencies. Basic policies established in law and regulations are routinely ignored or misinterpreted.  Quoted below are relevant laws and regulations followed by a concise discussion demonstrating that “other transactions” are not merely useful but the legally preferred means for conducting contracted R&D within DOD, and should be its default instrument for doing so.

Law (Armed Services Procurement Act, 10 USCA § 2303)—(a) This chapter [title 10, U.S. Code, chapter 137, the Armed Services Procurement Act] applies to the procurement by any of the following agencies, for its use or otherwise, of all property (other than land) and all services for which payment is to be made from appropriated funds [emphasis supplied]:

(1) The Department of Defense.
(2) The Department of the Army.
(3) The Department of the Navy.
(4) The Department of the Air Force.
(5) The Coast Guard.
(6) The National Aeronautics and Space Administration.

Regulation (Federal Acquisition Regulation 35.002—General)—The primary purpose of contracted R&D programs is to advance scientific and technical knowledge and apply that knowledge to the extent necessary to achieve agency and national goals. Unlike contracts for supplies and services, most R&D contracts are directed toward objectives for which the work or methods cannot be precisely described in advance.  It is difficult to judge the probabilities of success or required effort for technical approaches, some of which offer little or no early assurance of full success.  The contracting process shall be used to encourage the best sources from
the scientific and industrial community to become involved in the program and must provide an environment in which the work can be pursued with reasonable flexibility and minimum administrative burden. [emphasis supplied]

Regulation—(FAR 35.003—Policy)—(a) Use of contracts. Contracts shall be used only when the principal purpose is the acquisition of supplies or services for the direct benefit or use of the Federal Government. Grants or cooperative agreements should be used when the principal purpose of the transaction is to stimulate or support research and development for another public purpose. [emphasis supplied]

Law—Uses of Other Transactions (OTs)— (10 USCA §§ 4021 and 4022)—§ 4021 (a) Additional Forms of Transactions Authorized—The Secretary of Defense and the Secretary of each military department may enter into transactions (other than contracts, cooperative agreements, and grants) under the authority of this subsection in carrying out basic, applied, and advanced research projects.  The authority under this subsection is in addition to the authority provided by section 2358 of this title to use contracts, cooperative agreements, and grants in carrying out such projects. [emphasis supplied]

§4022 (a) Authority—(1) Subject to paragraph (2), the Director of the Defense Advanced Research Projects Agency, the Secretary of a military department, or any other official designated by the Secretary of Defense may, under the authority of section 4021 of this title, carry out prototype projects that are directly relevant to enhancing the mission effectiveness of military personnel and the supporting platforms, systems, components, or materials proposed to be acquired or developed by the Department of Defense, or to improvement of platforms, systems, components, or materials in use by the armed forces. [emphasis supplied]

Discussion—A possible source of confusion apparently stems from ignoring the first sentence of FAR 35.002 which is not merely regulatory fluff but a factual statement of the principle purpose of contracted R&D.  Attempts to apply the either/or paradigm of the Federal Grant and Cooperative Agreement Act, 31 USCA § 6301 et seq., to OTs may rely on the false assumption that the Act applies to all possible Federal contractual relationships. In fact, the original Office of Management and Budget guidance on the Act, 43 Fed. Reg. 36860 (1978), expressly states: “This Act does not cover all possible relationships that may exist between the Federal agencies and others.” (p. 36862).  A relatively recent joint publication of OMB and the White House Office of Science and Technology Policy says regarding OTs: “They may be used to support projects that are not strictly procurement or assistance; in lieu of standard assistance instruments; and depending on specific statutory authority for the acquisition of goods and services.” Innovative Contracting Case Studies (2014), p.15. The same publication cites FAR 35.002, “R&D contracts are unlike contracts for supplies and services.”  FAR 35.003 is the regulatory implementation of the Federal Grant and Cooperative Agreement Act in an R&D context.  OTs under § 4021 may be awarded when standard award instruments are not deemed appropriate. Standard procurement contracts are to be used to acquire property and services, but FAR pt. 35 states that most R&D contracts are unlike contracts for supplies and services.  At the time of enactment of 10 USCA § 4021 in 1989, standard grants and cooperative agreements were only awarded to academic institutions or non-profits. Thus, an assistance instrument awarded to a profit making company is not a standard grant or agreement for purposes of § 4021.  At the time of enactment of §4021, § 2358 of title 10 did not authorize award of cooperative agreements, but OMB guidance for cooperative agreements related only to cooperative agreements with academic institutions or nonprofits.  Thus a cooperative agreement awarded to a for-profit company was not a standard cooperative agreement. Additionally, multi-party instruments such as consortia, whether procurement or assistance were not standard instruments in 1989.

In summary, § 4021 is a viable options for R&D from basic research up to technology demonstrations, including prototype projects. Section 4022 agreements may be awarded whether or not a standard procurement contract or assistance is also deemed appropriate.  Section 4022 is available for prototype projects from their very earliest stage up to residual operational use and follow on production. Despite their differences, there is substantial overlap between the two authorities. Contrary to the recently issued (January 2017) DOD Guide for Other Transaction for Prototypes, § 4022 OTs may be used not only for acquisition but also for other purposes including support and stimulation. The authority of § 4021 (and thus also of § 4022) is in addition to authority to award standard procurement contracts, grants and cooperative agreements.  Thus, in programs where award instruments are specified as contracts, grants or cooperative agreements, DOD may also award OTs consistent with the requirements of the relevant OT statute.  An example is 15 USCA § 638, authorizing the Small Business Innovative Research program.  OTs are especially suited to dual-use science and technology projects and programs where commercial opportunities may develop. It would be appropriate for DOD to adopt the OT as its default award instrument for R&D projects and follow on production programs after a successful 4022 prototype project as provided for in § 4022 (f). Broad Agency Announcements R&D solicitations should at a minimum include OT’s among potential award instruments. Using procurement contracts as the default instrument for R&D is inconsistent with FAR 35.002 and 35.003.

written by Richard L. Dunn
This article originally appeared in the Government Contractor, July 12, 2017 and is republished here by permission of the publisher, Thompson Reuters.  OT statute numbers updated 6/2023.