FAR vs OTs: Regulation vs Freedom | What is more conducive for innovation?

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Most procurement lawyers, contracting officers and other acquisition professionals do not understand the relationship between highly regulated Federal Acquisition Regulation (FAR) contracts and Other Transaction (OT) contracts. This misunderstanding primarily stems from a false notion or premise, namely that FAR procurement contracts are the baseline or starting point for a discussion of all things regarding government contracts. I have personally observed this presumption in effect among working level government lawyers and contracting officers, senior level acquisition officials and even academics who specialize in government procurement.

OT authority available to the military departments and other elements of the Department of Defense (DOD) is focused on research (10 USC 4021), prototyping and follow on production (10 USC 4022), and procurement for experimental purposes (10 USC 4023). OT authority in many other agencies including, for example the Department of Energy (DOE) and the National Aeronautics and Space Administration (NASA) is much broader. However, research, development, prototyping and follow on production using OTs could bring increased efficiency and effectiveness to a substantial part of DOD’s acquisition spending, much more than currently.

If FAR is not the baseline, what is? The baseline is freedom of contract. Contracts include those for the purchase of supplies and services, like government procurement contracts, but are not limited to them. Freedom of contract means parties (two or more) may agree to goals, terms and conditions subject to a few basic legal requirements and structure a relationship that the law recognizes and enforces. This meeting of the minds creates a legally enforceable regime. This goes back to English common law and more ancient traditions. Government procurement contracts under a highly regulated purchasing system are just one example of contracts. The contracting system centered on FAR is laden with numerous non-value added rules and process.

If freedom of contract applies (or baseline) to the Federal Government, then regulations such as the FAR are a regulatory restriction upon, not an enabler of contracting. Freedom of contract goes back a long way. That fact has been obscured by procurement regulations going back almost as far. Before getting to the fine point, it is important to consider the irrationality of the current regulatory system. James Nagle addressing the FAR-based system wrote in his A History of Government Contracting these words as the lead sentence to his epilogue: “If someone were asked to devise a contracting system for the federal government, it is inconceivable that one reasonable person or a committee of reasonable people could come up with our current system.” The system is a mix mosh of inputs, some rational and many irrational, some timely and many outmoded contributing to “costs too much, takes too long” contracting.

To the fine point. Freedom of contract absolutely applies to federal government contracting. According to the U.S. Supreme court “The United States [has in its] political capacity a right  to enter into a contract or, take a bond in cases not previously provided by law. It is an incident to the general right of sovereignty, and the United States, being a body politic may. . . through the instrumentality of the proper department to which those powers are confided, enter into contracts not prohibited by law. . . .”  United States v. Tingey, 30 U.S. (5 Pet.) 115, 125 (1831). However, procurement statutes and regulations over the years have so encumbered federal contracting that this basic concept has been obscured. Current and former very senior acquisition executives in DOD and other agencies have no idea that freedom of contract is the underlying principle of federal contracting. Rather than seeing OTs as a doorway to this basic principle, they see OTs as a work around, a niche authority, merely an exception to the FAR system. They are experts in individual trees or shrubs and miss the forest entirely.

But this can’t be true, can it? Yes.  Even in FAR there is hidden evidence that it is true. The evidence is expressly there, not hidden, just not known or ignored. FAR Part I is a section of FAR typically ignored because the other 50+ parts and their agency supplements seem more operable. Consider FAR 1.102-5: “If a policy or procedure, or a particular strategy or practice, is in the best interest of the Government and is not specifically addressed in the FAR, nor prohibited by law (statute or case law), Executive order or other regulation, Government members of the Team should not assume it is prohibited. Rather, absence of direction should be interpreted as permitting the Team to innovate and use sound business judgment that is otherwise consistent with law and within the limits of their authority.” Where does such authority come from? Not prohibited means okay. There is no statute that says this. It comes only from inherent freedom of contract authority, as memorialized in the words of the Supreme Court quoted above. Within the confines of the highly regulated FAR system there is very little room to exercise the discretion 1.102-5 implies. Moreover, many practitioners have not read this provision and, if they have, dismiss it as pie-in-the-sky, not even contemplating its implications. But…OTs, unlike FAR procurement contracts, have very few regulatory restrictions and a broad field in which to operate. They can operate under freedom of contract. In DOD the domain of OTs where freedom of contract can be honored is prescribed by a few statutes. For other agencies with broader OT authority it is even wider than DOD authority. It is authority that can include purchasing supplies and services but transcends that narrow application of contracting.

Finally, most elements of DOD ignore key provisions of FAR Part 35 specifically 35.002 and 35.003 when it comes to appropriate contractual instruments with which to pursue R&D, prototyping and purchases for experiment purposes. The “primary purpose of contracted R&D” is to advance and apply “knowledge”; procurement contracts “shall be used only” for the principle purpose of acquiring supplies and services. These FAR provisions also apply to other government agencies where they are also largely ignored. For DOD Congress has enacted laws that say DOD should create a preference for using innovative contracting methods for research, development, prototyping and procurement for experimental purposes (sec. 867, NDAA 2018). DOD has failed to implement the Congressional mandate for a preference and another mandate to effectively educate the workforce on these authorities. Leaders, workforce: remove the shackles of an overly regulated system. Senior officials do not let the career bureaucrats perpetuate the “cost too much, takes too long system” when you have been provided the authority to do things better.  I hope you will consider pursuing freedom and creativity, over rules and conformity.


For more detail on some of these issues see other articles on this website such as: Appropriate Contractual Instruments for R&D, Uses of Other Transactions, Fundamentals of OTs.


written by Richard L. Dunn





  1. Thomas Bruneau

    Rick, I think that the challenge of thinking, which is required in the use of OTAs, is precisely why contracting officers and others stick with the FAR. The FAR is a safety blanket, and you wrote me stating “contracting officers stick with the FAR as it keeps them out of jail.
    I despair of any “innovation” which is the buzz word these days, if contracting officers do not have incentives to use alternative acquisition authorities aside from the FAR. I have told many people this, and have written it in my recent book, but nobody seems to believe me.