Transactions Other Than Contracts, Grants, or Cooperative Agreements for Prototype Projects, 71865-71872 [2024-19457]

Agencies

• DEPARTMENT OF DEFENSE
• Office of the Secretary

[Federal Register Volume 89, Number 171 (Wednesday, September 4, 2024)]
[Proposed Rules]
[Pages 71865-71872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-19457]


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DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 3

[Docket ID: DoD-2021-OS-0071]
RIN 0790-AK98


Transactions Other Than Contracts, Grants, or Cooperative 
Agreements for Prototype Projects

AGENCY: Office of the Under Secretary of Defense for Acquisition and 
Sustainment (OUSD(A&S)), Department of Defense (DoD).

ACTION: Proposed rule.

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SUMMARY: DoD is proposing revisions to its regulations on Other 
Transaction (OT) agreements for prototype projects to implement changes 
in statutory authority enacted by Congress since the last update in 
2004. The Department is proposing changes in: the authority to provide 
for follow-on production OTs and contracts; special circumstances for 
award of OTs to small businesses, nontraditional defense contractors, 
nonprofit research institutions, and consortia; approval requirements 
for large dollar OTs; the authority to supply prototypes and production 
items to another contractor as Government furnished items; and applying 
procurement ethics requirements to covered OT agreements.

DATES: Comments must be received by November 4, 2024.

ADDRESSES: You may submit comments, identified by docket number and/or 
Regulatory Identifier Number (RIN) number and title, by any of the 
following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Department of Defense, Office of the Assistant to 
the Secretary of Defense for Privacy, Civil Liberties, and 
Transparency, Regulatory Directorate, 4800 Mark Center Drive, Attn: 
Mailbox 24, Suite 08D09, Alexandria, VA 22350-1700.
    Instructions: All submissions received must include the Docket ID 
No. Comments received will be posted without change to https://www.regulations.gov, including any personal information provided. Do 
not submit any information you consider to be Confidential Business 
Information (CBI) through https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Mr. Larry McLaury and Mr. Jesse 
Bendahan, 703-697-6710.

SUPPLEMENTARY INFORMATION:

I. Background and Authority

    These proposed changes update 32 CFR 3 under section 4022 of title 
10, United States Code (section 4022). An OT is a legal instrument 
(award) issued by the Federal Government that is not a procurement 
contract, cooperative agreement or grant, and is the defining 
characteristic of OTs. OTs pursuant to section 4022 can take many forms 
and generally are not required to comply with Federal laws and 
regulations that apply to procurement contracts, grants, and/or 
cooperative agreements. To the extent that a particular law or 
regulation is not tied to the type of instrument used (e.g., fiscal and 
property laws), it would generally apply to an OT.
    The purpose of these types of agreements is to provide agility in 
the contracting process by attracting nontraditional defense 
contractors and small businesses with leading edge technologies. They 
are meant to enable acquisition of innovative technologies by allowing 
for flexibility in terms of the award process and the terms and 
conditions of a contract.
    The Department currently has permanent authority to award OT under 
three areas.
     Research--Section 4021 of title 10, United States Code 
(section 4021) provides authority for basic, applied, and advanced 
research projects. These OTs are intended to spur dual-use research and 
development to take advantage of economies of scale without burdening 
companies with Government regulatory overhead, which would make them 
non-competitive in the commercial (non-defense) sector. The update 
proposed here is limited to authority for prototype OTs under section 
4022, but section 4022 states that OTs for prototypes are under the 
authority of section 4021.
     Prototype--This allows for prototype projects under 
section 4022 authority that are directly relevant to enhancing the 
mission effectiveness of personnel of the Department of Defense or 
improving 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.
     Follow-on Production OTs and Contracts--This allows for a 
non-competitive, follow-on OTs to a Prototype OT agreement under 
section 4022 authority that was competitively awarded and successfully 
completed. Although advance consideration of transition from a 
prototype agreement to a follow-on production OT is recommended as best 
practice, explicit notification is not required within the request for 
proposal for the transaction if: competitive procedures were used for 
the selection of parties for participation in the transaction; and the 
participants in the transaction successfully completed the prototype 
project provided for in the transaction.
    This proposed rule covers prototype OTs and follow-on production 
OTs and contracts under section 4022. This part of the CFR was last 
updated on March 30, 2004 (61 FR 16481-16483). The changes proposed 
facilitate statutory alignment and ensure up-to-date information and 
policy are codified in the CFR.
    For the purposes of this proposed rule, prototype projects can 
address:
     a proof of concept, model, or process, including a 
business process;
     reverse engineering to address obsolescence;
     a pilot or novel application of commercial technologies 
for defense purposes;
     agile development activity; and
     the creation, design, development, demonstration of 
operational utility; or any combination of the foregoing.
    The current provisions of Part 3 in Title 32 are based on authority 
in section 845 of the NDAA for Fiscal Year 1994, Public Law 103-160, as 
amended

[[Page 71866]]

(section 845). This authority permitted the use of OT agreements for 
prototype projects directly relevant to weapons or weapon systems 
proposed to be acquired or developed by the DoD. It was permanently 
codified when section 2371b, (which is now 10 U.S.C. 4022) was 
enacted.\1\ Although section 4022 replaced section 845, many of the 
provisions regarding OT agreements for prototype projects are retained 
in section 4022 and are retained in this proposed rule.
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    \1\ Section 845 was codified in section 2371b of title 10, 
U.S.C. by section 815 of the FY16 NDAA, Public Law 114-92. Section 
1841 of the William M. (Mac) Thornberry National Defense 
Authorization Act for Fiscal Year 2021, Public Law 116-283, 
transfers section 2371b to section 4003 of title 10, U.S.C. This 
change was effective January 1, 2022 by section 1801(d)(1). Further, 
section 1701(u)(2)(B) of the National Defense Authorization Act for 
Fiscal Year 2022 transferred section 4003 to section 4022 of title 
10, U.S.C. Further references in the proposed revision are to 
section 4022.
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    However, DoD is proposing to retain some of the current language 
from the now replaced Section 845 with some modifications based on 
changes in the law in the following areas:
     changing the use of OTs for prototype projects so it does 
not require a cost share from a performer \2\ when at least one 
nontraditional defense contractor is participating to a significant 
extent.
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    \2\ For OTs under section 4022, awardees are considered 
``performers'', which is contrasted with traditional FAR procurement 
contract awardees that are considered ``contractors''.
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     Providing authority for the senior procurement executive 
of the agency to make an exceptional circumstances justification to use 
such a prototype OT transaction.
     Including a limitation on cost sharing.
     Comptroller General access and DoD access to records 
policy provisions.
     Adding authority for follow-on production contracts.

II. Major Provisions

    The following is a section-by-section overview of the amendments 
proposed by this rule.
    Section 3.1 Purpose. The proposed amendments reflect the statutory 
implementation as the basis for the authority to award OT agreements 
for prototype projects. The amendment identifies the changes in the law 
since the current rule was published. It also expands the background on 
the intended use of OTs for prototype projects. Specifically, DoD is 
aligning the intended uses consistent with law that are directly 
relevant to enhancing the mission effectiveness of personnel of the DoD 
or improving platforms, systems, components, or materials proposed to 
be acquired or developed by the DoD, or to improvement of platforms, 
systems, components, or materials in use by the armed forces.
    Section 3.2 Background. The proposed amendments clarify that OT 
agreements for prototype projects are legally binding instruments that 
include the elements of: offer; acceptance; consideration; authority; a 
legal purpose; a meeting of the minds; and are approved by an 
Agreements Officer who has authority to bind the Government. The 
proposed amendments to this section also highlight that DoD has an 
internal OT Guide that provides instruction for DoD employees on the 
planning, publicizing, soliciting, evaluating, negotiation, award, and 
administration of OTs for prototype projects. It was most recently 
revised in July 2023, and includes changes codified in 10 U.S.C. 
4022.\3\
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    \3\ The DoD OT Guide is issued by the Office of the Under 
Secretary of Defense for Acquisition and Sustainment. https://www.acq.osd.mil/asda/dpc/cp/policy/other-policy-areas.html. The OT 
Guide provides internal guidance to DoD practitioners and does not 
direct any requirements for OT performers. The contents of this 
document do not have the force and effect of law and are not meant 
to bind the public in any way. This document is intended only to 
provide clarity to the public regarding existing requirements under 
the law or departmental policies.
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    Section 3.3 Applicability. The proposed amendments detail how this 
part applies to OT agreements for prototype projects and follow-on 
production OTs and contracts awarded under this part. This section also 
specifies that authority for OT agreements for prototype projects and 
any follow-on production contract or follow-on production OT under this 
part has been delegated to specified officials. The amendment proposes 
to add offices that have been delegated OT authority to include, the 
Commanding Officers of the Combatant Commands with contracting 
authority, the Directors of Field Activities with contracting 
authority, the Director of the Defense Innovation Unit, or any other 
official designated by the Secretary of Defense to carry out OTs for 
prototype projects. The proposed amendment also recognizes changes in 
applicability to include follow-on production OTs and contracts under 
the authority of this part.
    Section 3.4 Definitions. The definitions are retained from the 
current rule, except that the definition of the term, ``nontraditional 
defense contractor'' has been changed to reflect statutory changes in 
the definition of the term. A definition of the terms ``covered 
official'' and ``prototype project'' are added to the rule consistent 
with the definitions in 10 U.S.C. 4022.
    Section 3.5 Appropriate use. This section is amended to reflect 
changes that align the appropriate use of the authority related to 
nonprofit research institutions and use of small businesses. If a 
performer meets the required category under this section, there is no 
requirement for a cost share for the prototype project. The proposed 
amendment also amends the basis for an exceptional circumstances 
justification (to forego a requirement for a cost share) to include an 
opportunity to expand the defense supply base in a manner that would 
not be practical or feasible under a contract. Per the National Defense 
Authorization Act for Fiscal Year 2024, section 821, Public Law 118-31, 
this section also recognizes that the cost sharing requirements do not 
apply to follow-on production OTs or contracts.
    Section 3.6 Limitations on cost-sharing. This section is proposed 
to be amended to clarify cost sharing limitations related to OT 
transactions for prototype projects. The amendment proposes to change 
the official approving the limits on cost sharing from the agreements 
officer to the official responsible for entering into the transaction, 
recognizing that there may be a few cases where approval for a 
limitation on cost sharing is required above the level of the 
agreements officer.
    Section 3.7 Comptroller General access. This section is proposed to 
be amended to update changes in the authority from section 845 to 10 
U.S.C. 4022, and for organizational changes with the DoD, and for 
flowdown requirements. The cognizant office is changed to the Principal 
Director, Defense Pricing, Contracting, and Acquisition Policy. This 
rule also clarifies the flowdown requirements to any entity that 
participates in the performance of the agreement that provide for total 
government payments in excess of $5,000,000 as discussed in section 
4022(c)(1).
    Section 3.8 DoD access to records policy. This section is proposed 
to be amended to update authority for the Single Audit Act, 31 U.S.C. 
7501-7506, and for organizational changes within DoD for the Principal 
Director, Defense Pricing, Contracting, and Acquisition Policy. The 
amendment also updates the contact address for DoD IG.
    Section 3.9 Follow-on production contracts or transactions. This 
section is revised to add authority for follow-on production OT 
agreements for prototype projects, and revise authority for follow-on 
contracts. This section also proposes to add special conditions 
regarding the

[[Page 71867]]

use of consortium. The current provision provides authority for follow-
on production contracts and does not address special circumstances for 
use of consortium. The amendment adds authority for follow-on 
production OTs or contracts and amends the conditions for approval. The 
proposed amendment provides that a follow-on production OT or contract 
may be awarded to the participants in the OT without the use of 
competitive procedures, if: (1) competitive procedures were used for 
the selection of parties for participation in the OT for prototype 
project; (2) the participants in the OT successfully completed the 
prototype project provided for in the OT; and (3) even if explicit 
notification was not listed within the request for proposal for the 
original prototype project transaction. The proposed amendment also 
provides that follow-on production contract or OT may be awarded to a 
consortium when the Department determines that an individual prototype 
or prototype subproject as part of a consortium is successfully 
completed by the participants. The proposed section recognizes that it 
is not a condition for award of a follow-on production contract or OT 
to a consortium to require the successful completion of all activities 
within a consortium for the prototype projects awarded to the 
consortium.
    Section 3.10 Approval requirements. This is a new section 
consistent with section 4022 to reflect internal DoD approval 
requirements for proposed large dollar OT agreements for prototype 
projects and follow-on production OTs and contracts. Per requirements 
in section 4022(a)(2) OTs in excess of $100,000,000 but not in excess 
of $500,000,000 (including all options) require a written determination 
by the senior procurement executive for the agency, or for the Defense 
Advanced Research Projects Agency (DARPA), the Defense Innovation Unit 
(DIU), or the Missile Defense Agency (MDA), the director of the agency. 
OTs in excess of $500,000,000 (including all options) require a written 
determination by either the Under Secretary of Defense for Research and 
Engineering, or the Under Secretary of Defense for Acquisition and 
Sustainment. This latter category also requires congressional notice 
before exercising such authority. Follow-on production OTs and 
contracts in excess of $100,000,000 (including all options) require a 
written determination by a covered official (defined in Sec.  3.4), 
including a congressional notice at the time such authority is 
exercised.
    Section 3.11 Authority to provide prototypes and follow-on 
production items as government-furnished equipment. This is a new 
section consistent with section 4022 to provide prototypes and follow-
on production items as government furnished equipment (GFE). This 
section reflects authority added in 10 U.S.C. 4022 for providing GFE to 
support another contractor. The GFE may be provided to another 
contractor, or to a performer of an OT.
    Section 3.12 Competition requirements. This is a new section 
consistent with section 4022 to reflect competition requirements that 
were included in section 845, but are not reflected in the current 
rule, and such competition requirements are retained in 10 U.S.C. 4022. 
The competition standard under section 4022 is competition to the 
maximum extent practicable.
    Section 3.13 Applicability of procurement ethics requirements. This 
is a new section consistent with section 4022 to reflect the 
applicability of the post-Government employment restrictions to OTs 
under this part covered in the Procurement Integrity Act, in 41 U.S.C. 
chapter 21. The ethics provisions of the Procurement Integrity Act 
include a prohibition that a former Government employee may not accept 
compensation from a contractor (or performer) as an employee, officer, 
director, or consultant of the contractor (or performer) for a period 
of one year after the official either served in a specified role, or 
personally made for the Federal agency a specified decision.

III. Expected Impact of This Rule

    OMB Circular No. A-4, Subject: Regulatory Analysis (Nov. 2023) 
provides guidance to Federal agencies on the development of regulatory 
analysis as required under Section 6(a)(3)(C) of Executive Order 12866. 
Under OMB Circular A-4, a benefit-cost analysis is the primary 
analytical tool used for regulatory analysis. In developing a 
regulatory analysis for a proposed rule, identifying and evaluating the 
need for the regulatory action, and defining the baseline are important 
initial steps. The proposed rule to update 32 CFR 3 for Other 
Transactions is necessary because the current rule has not been updated 
in over 20 years, and there have been several changes to OT authority 
since the current rule.
    The OMB Circular A-4 baseline criteria states, ``The benefits and 
costs of a regulation are generally measured against a no-action 
baseline: an analytically reasonable forecast of the way the world 
would look absent the regulatory action being assessed, including any 
expected changes to current conditions over time.'' (p. 11). In the 
case of the proposed rule to update 32 CFR 3 for OT authority, absent 
the proposed rule, we have the current regulation that is based on the 
statutory authority of section 845. In establishing a baseline, A-4 
states:

    In general, an agency's first regulatory action implementing a 
new statutory authority should be assessed in a manner that accounts 
for the effects of the statute itself--that is, assessed against a 
without-statute baseline.\4\ However, in some cases, substantial 
portions of a regulation may simply restate statutory requirements 
that are self-implementing even in the absence of the regulatory 
action or over which an agency clearly has essentially no regulatory 
discretion. In these rare cases, you may use a with-statute baseline 
in your regulatory analysis, focusing on the discretionary elements 
of the action and potential alternatives.
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    \4\ Footnote from A-4: The terms ``pre-statute baseline'' and 
``post-statute baseline'' were used in OMB Circular No. A-4 as 
originally issued in 2003. However, as noted elsewhere, the baseline 
for a regulatory analysis is (and has been) the predicted future 
state of the world in the absence of the policy being assessed, so 
more precise terms--that avoid the potentially misleading temporal 
element of the prefixes ``pre-'' or ``post-''--without-statute or 
with-statute are now used.

    A ``without-statute baseline'' (or pre-statutory baseline) does not 
fit the proposed rule because the current rule is firmly based on the 
statutory authority of section 845. The proposed rule cites 10 U.S.C. 
4022 (section 4022). However, section 4022 is not a ``new statutory 
authority'' under the OMB Circular A-4 criteria for establishing a 
baseline.\5\ Section 845 is the original OT authority and has been 
permanently codified as section 4022. Section 845 was originally 
temporary authority and included as a note to 10 U.S.C. 2371.\6\ 
Section 815 of the National Defense Authorization Act for Fiscal Year 
2016, Public Law 114-92, amended OT authority by permanently codifying 
OT authority in section 2371b of title 10 U.S.C., and thereby repealed 
section 845. As a result of reorganization of title 10 U.S. Code, 
section 2371b became the current section 4022. However, the OT 
authority of section 845 continued as the current section 4022. 
Therefore, as

[[Page 71868]]

indicated above, section 4022 is not ``new statutory authority''. As a 
result, the baseline for the proposed rule is the statutory authority 
of section 845, continued as section 4022. The proposed rule is a 
direct implementation of OT authority in section 4022. It simply 
restates OT authority in section 4022 and does not add any new 
requirements. DoD practitioners are currently using OT authority in 
section 4022 to award OTs for prototype projects without the benefit of 
an updated rule. OMB Circular A-4 states that a statute baseline is 
authorized where a proposed rule simply restate[s] statutory 
requirements that are self-implementing even in the absence of the 
regulatory action or over which an agency clearly has essentially no 
regulatory discretion.'' Section 845 is a predecessor OT statutory 
authority of the current section 4022.\7\ Section 845 and section 4022 
share several OT provisions. Therefore, it does not appear appropriate 
to apply a ``without-statute baseline'' (or pre-statutory baseline) to 
our proposed rule. The proposed rule is intended to make the CFR 
provisions consistent with the current section 4022. The current 
provisions of section 4022 are self-implementing and are currently 
being used by DoD practitioners to award OTs without the benefit of 
updated CFR provisions. The proposed rule does not add any new 
requirements beyond section 4022. The impact of the proposed rule 
should be measured by comparing the current rule with section 4022 as 
authority (a with-statute baseline).
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    \5\ OT statutory authority in the context of this proposed rule 
is intended to cover OTs for prototype projects under the original 
section 845 and now section 4022. It is recognized that basic OT 
authority, including research OTs, is under the original section 
2371, and now section 4021 of title 10, U.S.C. titled, ``Research 
projects: transactions other than contracts and grants.'' It is 
further recognized that OT for prototype project authority is under 
the authority of section 4021.
    \6\ Section 845 of the NDAA for Fiscal Year 1994, Public Law 
103-160, as amended.
    \7\ Section 1841 of the William M. (Mac) Thornberry National 
Defense Authorization Act for Fiscal Year 2021, Public Law 116-283, 
transfers section 2371b to section 4003 of title 10, U.S.C. This 
change was effective January 1, 2022 by section 1801(d)(1). Further, 
section 1701(u)(2)(B) of the National Defense Authorization Act for 
Fiscal Year 2022 transferred section 4003 to section 4022 of title 
10, U.S.C.
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    The current rule provides authority for OTs for prototypes as a 
significant asset in the DoD toolbox for acquisition of items to 
support the DoD mission. The current rule and the underlying statutory 
authority provide a valuable alternative to traditional Federal 
Acquisition Regulation (FAR) procurement contracts \8\ because they 
encourage participation by small businesses and nontraditional defense 
contractors \9\ and allow flexibility in negotiation of terms of the 
agreement. OTs for prototype agreements are generally not subject to 
procurement laws and regulations.\10\ The proposed rule provides 
qualitative benefits and cost savings by encouraging small business and 
nontraditional defense contractors to meet DoD warfighter requirements. 
The proposed rule and the underlying statutory authority provide 
incentives to small business and nontraditional defense contractors by 
waiving cost share requirements if conditions (discussed below) are 
met. The current rule is out of date with the statutory authority for 
OTs for prototypes. The proposed rule supports innovation because it 
authorizes flexibility in negotiation of terms, which require less 
Government oversight, for prototype projects as an alternative 
acquisition method if available in certain circumstances specified in 
statute instead of regulatory contracts governed by the FAR.\11\ The 
proposed rule may promote additional competition and spur innovation by 
attracting nontraditional and small businesses with leading-edge 
technologies to enable acquisition of innovative technologies.\12\ OTs 
support additional competition because of statutory incentives to small 
businesses and nontraditional defense contractors that potentially may 
not participate absent these incentives. OT authority encourages 
participation by small businesses by waiving cost share requirements if 
certain statutory conditions are met. Section 4022(d) provides that if 
all significant participants in the transaction other than the Federal 
Government are small businesses, or nontraditional defense contractors, 
the cost share requirements are waived. Further, if a nontraditional 
defense contractor or a nonprofit research institution participates to 
a significant extent in the transaction, cost share requirements are 
met. Small businesses qualify as nontraditional defense contractors in 
most cases.\13\
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    \8\ See IBM Center for the Business of Government, ``Other 
Transaction Authorities: After 60 Years, Hitting their Stride, or 
Hitting the Wall'' (2021). https://www.businessofgovernment.org/sites/default/files/Other%20Transactions%20Authorities.pdf.
    \9\ See 10 U.S.C. 3014 for the definition of the term 
``nontraditional defense contractor'' (NDC). The definition of an 
NDC (paraphrased from 10 U.S.C. 3014) is a company that has not done 
business with DoD within the last year, or does not meet the full 
coverage requirements for cost accounting standards. This definition 
permits a large number of entities, including nearly all small 
business concerns, to be considered NDCs to help drive innovation.
    \10\ See IBM report above.
    \11\ See IBM report above.
    \12\ Congressional Research Service (CRS) Report, ``Department 
of Defense Use of Other Transaction Authority: Background, Analysis, 
and Issues for Congress'' updated February 22, 2019. https://crsreports.congress.gov/product/pdf/R/R45521.
    \13\ See 10 U.S.C. 3014.
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    It is believed that if the proposed rule is implemented, it will 
result in only a small number of new OTs. DoD practitioners are 
presently awarding OTs for prototype projects based on the direct 
authority of section 4022. Based on anecdotal evidence, few DoD 
practitioners of OT authority are even aware of the current rule in 32 
CFR 3. We do not expect that implementation of the proposed rule will 
change the practice of using section 4022 as authority without 
consideration of the 32 CFR 3. Therefore, we estimate that 
implementation of the proposed rule will result in less than a 10% 
increase new OT awards.\14\ Further, we do not believe the proper 
measurement of the impact of the proposed rule is to count the 
obligation amounts for OTs. If DoD warfighters have a requirement for 
an item, they obtain funding for the program and decide as part of 
acquisition planning what is the appropriate acquisition vehicle to 
fulfill the requirement. If DoD determines an OT is appropriate for the 
requirement, it will award an OT, or if not, use a FAR procurement 
contract as the appropriate vehicle in the acquisition toolbox. 
However, if an OT is used, it is not a unique impact to the economy 
because if an OT was not selected, the requirement with the same 
funding would be fulfilled by a FAR procurement contract. Section 4022 
and the proposed rule do not promote OTs over FAR procurement 
contracts. DoD must meet specific requirements to use OT authority. DoD 
does not get a separate appropriation for OTs that may independently 
impact the economy. Therefore, we do not expect that implementation of 
the proposed rule will significantly impact the economy.
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    \14\ We believe that practitioners will continue to perform 
acquisition planning of whether a FAR contract or OT is the 
appropriate way to fill a requirement. As indicated above, use of an 
OT under section 4022 requires meeting statutory requirements (see 
section 4022(a) and (d)).
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    Further, when OTs for prototype projects requirements are met and 
are available as an alternative to traditional FAR procurement 
contracts, it can potentially reduce the costs of doing business for 
both OT performers and the Government because the compliance costs for 
traditional FAR procurement contracts are reduced by the use of OTs for 
prototype projects.
    Section 4022 provides flexibility in negotiation of terms compared 
to a traditional FAR procurement contract. Examples of flexibility of 
negotiation of terms that may not apply to OTs under section 4022 are 
obtaining certified cost and pricing data; intellectual property 
reporting provisions; \15\ payment

[[Page 71869]]

procedures; and more extensive audit requirements. Procurement contract 
laws and regulations generally do not apply to OTs for prototype 
projects and follow-on production OTs. Therefore, the time and 
paperwork burden for an offeror and performer of an OT for prototype 
project agreement is less than that for a traditional contract under 
the FAR. Section 4022 promotes and encourages award of OTs for 
prototype projects and follow-on production OTs and contracts to small 
businesses, including those that are nontraditional defense 
contractors.\16\ It is recognized that with increased flexibility in 
negotiation of OT terms, that it raises the potential of risks on 
oversight of such agreements. The oversight risks for OTs are 
significantly reduced by a statutory requirement in section 4022(c) for 
Comptroller General access to performer records for OT agreements over 
$5M. Further, Sec.  3.8 in the current rule in 32 CFR 3 authorizes DoD 
access to performer records for cost-type OT agreements. These 
protections make the risk of flexibility manageable for OT agreements.
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    \15\ For example on flexibility, intellectual property (IP) 
provisions in DoD FAR procurement contracts are subject to the Baye-
Dole Act (Pub. L. 96-517 (1980)) specifying IP rights and duties and 
several proscriptive clauses in the DoD FAR Supplement. IP 
provisions in OTs are not subject to these provisions and allow for 
more flexibility in negotiation.
    \16\ See IBM Report on OTs.
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Benefits
    It has been stated many companies do not pursue Federal Government 
contracts because they are unwilling to forfeit intellectual property 
rights or adhere to some of the procurement regulations.\17\ One of the 
goals of OTs is to expand the defense marketplace by creating a 
mechanism for access to technologies and services of companies that 
would not otherwise work with DoD, particularly startups and companies 
developing innovative technology. Section 4022(d) provides that if a 
nontraditional defense contractor or nonprofit research institution 
participates to a significant extent in the prototype project, or if 
all significant participants in the prototype project are either small 
businesses, or nontraditional defense contractors, there is no 
requirement for the participants to provide a one-third cost share of 
the project. This is a significant benefit for small businesses. The 
proposed rule in implementing 10 U.S.C. 4022 repeats this policy, and 
assists small businesses, and should make it easier for them to compete 
in a particular sector of the economy than large businesses.
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    \17\ Id.
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    In FY 2022, it is estimated that over 90 percent of dollars 
obligated under OT agreements for prototype projects went to performers 
that included nontraditional defense contractors performing a 
significant part of the project,\18\ and in FY 2022 it is estimated 
that the majority of dollars obligated went to nontraditional defense 
contractors.\19\ Many nontraditional defense contractors are small 
businesses. Based on the present data available, it is also estimated 
that 30-40 percent of OT actions for prototype projects were awarded to 
small businesses.
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    \18\ Where an OT transaction includes a nontraditional defense 
contractor performing to a significant extent, DoD does not 
presently have access to data to determine the percentage of 
obligations that went to the prime performer versus the 
nontraditional defense contractor. DoD is working to improve the 
transparency of data to determine the amount of obligations for a 
nontraditional defense contractor.
    \19\ This data is included in the DoD Report to Congress on the 
Use of Other Transactions (OT) Authority for Prototype Projects in 
Fiscal Year 2022 (April 20223). Annual Reports to Congress may be 
viewed at https://www.acq.osd.mil/asda/dpc/cp/policy/other-policy-areas.html.
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    The proposed rule will promote the growth and well-being of such 
small entities. The economic impact to small businesses will be 
beneficial. The effect of the proposed rule will be to encourage more 
competition and awards to small business of OTs for prototype 
agreements, and it is expected there will be a reduction in the 
paperwork burden for small businesses compared to traditional FAR 
procurement contracts.
    The proposed rule would provide an opportunity for public comments 
and provide updated external guidance on OT for prototype policy in 
accordance with the statutory provisions of 10 U.S.C. 4022. Public 
comments are solicited on the aspects of the costs and benefits of the 
proposed rule. The proposed rule supports the use of small businesses 
and will enable DoD to gain access to innovative technologies by 
performers that will not accept doing business through a traditional 
FAR procurement contract. There are no significant costs related to the 
adoption of the proposed rule.
    A potential alternative to the proposed rule is to delete the 
present rule in 32 CFR 3. This potential alternative has the benefit of 
removing an out-of-date regulation. However, the potential benefit is 
outweighed by the costs of such an alternative. OT for prototype 
authority is an important tool in the DoD acquisition toolbox, and 
deletion of such regulatory coverage would be inconsistent with DoD's 
policy to support innovation through acquisition policy. Further, the 
current rule includes Sec.  3.8 DoD access to records policy. The 
current rule provision on audit access is the only section that is not 
directly from the statutory authority in section 845.\20\ Removal of 
this audit access section would deprive DoD of important oversight 
authority for OTs. Another potential alternative is to expand the 
proposed rule to include best practices for DoD practitioners. This 
alternative is not recommended since such best practices are included 
in the DoD internal OT Guide. The proposed rule is the best 
alternative.
---------------------------------------------------------------------------

    \20\ The proposed rule only makes administrative changes to 
section 3.8 on audit policy.
---------------------------------------------------------------------------

III. Regulatory Compliance Analysis

A. Executive Order 12866, ``Regulatory Planning and Review,'' as 
Amended by Executive Order 14094, ``Modernizing Regulatory Review'' and 
Executive Order 13563, ``Improving Regulation and Regulatory Review''

    This rulemaking has been determined to be a significant action 
under Executive Order 12866, as amended by Executive Order 14094. It 
does not have economic, environmental, public health, safety effects, 
or distributive impacts. It raised policy issues for which centralized 
review was meaningful for resolution. Accordingly, the rule was 
reviewed by the Office of Management and Budget.

B. Public Law 96-354, ``Regulatory Flexibility Act'' (5 U.S.C. 601)

    The Under Secretary of Defense for Acquisition and Sustainment 
certified that this proposed rule is not subject to the Regulatory 
Flexibility Act (5 U.S.C. 601) because it would not, if promulgated, 
have a significant economic impact on a substantial number of small 
entities.
    Although the proposed rule will be beneficial to a substantial 
number of small entities as discussed in the expected impact section, 
it will not have a significant economic impact on small businesses. 
Therefore, the Regulatory Flexibility Act, as amended, does not require 
us to prepare a regulatory flexibility analysis.

C. Sec. 202, Public Law 104-4, ``Unfunded Mandates Reform Act''

    Section 202 of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1532) requires agencies to assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. This rule will 
not

[[Page 71870]]

mandate any requirements for State, local, or Tribal governments, and 
will not affect private sector costs.

D. Public Law 96-511, ``Paperwork Reduction Act'' (44 U.S.C. Chapter 
35)

    It has been determined that this rule does not impose reporting or 
recordkeeping requirements under the Paperwork Reduction Act of 1995.

E. Executive Order 13132, ``Federalism''

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on state 
and local governments, preempts state law, or otherwise has federalism 
implications. This rule will not have a substantial effect on State and 
local governments.

F. Executive Order 13175, ``Consultation and Coordination With Indian 
Tribal Governments''

    Executive Order 13175 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct compliance costs on one or 
more Indian Tribes, preempts Tribal law, or effects the distribution of 
power and responsibilities between the Federal Government and Indian 
Tribes. This rule will not have a substantial effect on Indian Tribal 
Governments.

List of Subjects in 32 CFR Part 3

    Government procurement.

    Accordingly, the Department of Defense proposes to amend 32 CFR 
part 3 as follows:

PART 3--TRANSACTIONS OTHER THAN CONTRACTS, GRANTS, OR COOPERATIVE 
AGREEMENTS FOR PROTOTYPE PROJECTS

0
1. The authority citation is revised to read as follows:

    Authority: 10 U.S.C. 4022.


Sec.  3.1  Purpose.

    This part implements the authority for Other Transaction (OT) 
agreements for prototype projects established under section 4022 of 
title 10, United States Code (U.S.C.). Section 4022 of title 10, United 
States Code (U.S.C.) authorizes the Department of Defense (DoD) to 
carry out prototype projects that are directly relevant to enhancing 
the mission effectiveness of personnel of the Department of Defense or 
improving platforms, systems, components, or materials proposed to be 
acquired or developed by the DoD, or to the improvement of platforms, 
systems, components, or materials in use by the armed forces.
0
2. Revise Sec.  3.2 to read as follows:


Sec.  3.2  Background.

    OT agreements for prototype projects are legally binding 
instruments that include the elements of: offer; acceptance; 
consideration; authority; a legal purpose; a meeting of the minds; and 
are approved by an Agreements Officer who has authority to bind the 
Government. OTs for prototype projects are not procurement contracts 
under the Federal Acquisition Regulation (FAR), and generally are not 
subject to the Federal laws and regulations limited in applicability to 
procurement contracts, grants, and cooperative agreements. As such, 
they are generally not required to comply with the FAR and its DoD 
supplement. OTs for prototype projects spur innovation and attract 
nontraditional and small businesses with leading-edge technologies to 
enable acquisition of innovative technologies more rapidly. The DoD has 
broad flexibility in terms of the award process and the terms and 
conditions of an OT for prototype project are negotiable between the 
parties, subject to the provisions specified in 10 U.S.C. 4022 and its 
implementation. The DoD has issued the Other Transactions Guide for the 
promulgation of internal policy on the planning, publicizing, 
soliciting, evaluating, negotiation, award, and administration of OTs 
for prototype projects.
0
3. Revise Sec.  3.3 to read as follows:


Sec.  3.3  Applicability.

    This part applies to:
    (a) OT performers, companies, non-profit research institutions, and 
consortiums of organizations that are awarded OT agreements for 
prototype projects and follow-on OTs and contracts awarded under the 
authority of 10 U.S.C. 4022 implemented in this part. The applicability 
of this part is distinguished from awardees of procurement contracts 
under the Federal Acquisition Regulation.
    (b) The authority for OT agreements for prototype projects under 
this part has been delegated to the following officials: the 
Secretaries of the Military Departments, the Commanding Officers of the 
Combatant Commands with contracting authority, the Directors of the 
Defense Agencies, the Directors of Field Activities with contracting 
authority, the Director of the Defense Innovation Unit, or any other 
official designated by the Secretary of Defense to carry out OTs for 
prototype projects, and follow-on production OTs and contracts under 
the authority of this part.
0
4. Amend Sec.  3.4 by:
0
a. adding in alphabetical order a definition for ``covered official'';
0
b. revising the definition of ``Nontraditional Defense contractor''; 
and
0
c. adding in alphabetical order a definition for ``prototype project''
    The additions and revision read as follows:


Sec.  3.4  Definitions.

* * * * *
    Covered official. An official of the DoD to include:
    (1) A service acquisition executive;
    (2) The Director of the Defense Advanced Research Projects Agency;
    (3) The Director of the Missile Defense Agency;
    (4) The Undersecretary of Defense for Acquisition and Sustainment;
    (5) The Undersecretary of Defense for Research and Engineering; or
    (6) The Director of the Defense Innovation Unit (DIU).
* * * * *
    Nontraditional Defense contractor. An entity that is not currently 
performing and has not performed, for at least the one-year period 
preceding the solicitation of sources by the Department of Defense for 
the procurement or transaction, any contract or subcontract for the 
Department of Defense that is subject to full coverage under the cost 
accounting standards.
* * * * *
    Prototype Project. Includes a project that addresses any 
combination of the following:
    (1) A proof of concept, model, or process, including a business 
process;
    (2) Reverse engineering to address obsolescence;
    (3) A pilot or novel application of commercial technologies for 
defense purposes;
    (4) Agile development activity;
    (5) The creation, design, development, or demonstration of 
operational utility; or
* * * * *
0
5. Revise Sec.  3.5 to read as follows:


Sec.  3.5  Appropriate use.

    OT agreements for prototype project authority under this part may 
be used only when one of the following conditions is met:
    (a) At least one nontraditional defense contractor or nonprofit 
research institution is participating to a significant extent in the 
prototype project;

[[Page 71871]]

    (b) All significant participants in the transaction other than the 
Federal Government are small businesses or nontraditional defense 
contractors;
    (c) At least one third of the total cost of the prototype project 
is to be paid out of funds provided by sources other than the Federal 
Government. If any of the conditions of paragraphs (a), (b), or (d) of 
this section are met, there is no requirement that at least one third 
of the total cost of the prototype project is to be paid out of funds 
provided by sources other than the Federal Government.
    (d) The Senior Procurement Executive for the agency determines 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 provide 
an opportunity to expand the defense supply base in a manner that would 
not be practical or feasible under a contract.
0
6. Amend Sec.  3.6 by:
0
a. Revising paragraph (a) introductory text.
0
b. In paragraph (a)(1), removing the words ``OT agreement'' and adding 
in its place the word ``transaction''.
0
c. In paragraph (a)(2), removing the words ``OT agreement'' and adding 
in its place the word ``transaction''.
0
d. In paragraph (b), removing the words ``may be recognized when 
using'' and adding in its place the words ``is utilized for''.
    The revision reads as follows:


Sec.  3.6  Limitations on cost-sharing.

    (a) If cost-sharing is provided by a non-Federal party under Sec.  
3.5 of this part, the non-Federal amounts counted as provided, or to be 
provided, by the business units of an awardee or subawardee 
participating in the performance of the transaction for a prototype 
project shall not include costs that were incurred before the date on 
which the transaction becomes effective. Costs that were incurred for a 
prototype project by the business units of an awardee or subawardee 
after the beginning of negotiations, but prior to the date the 
transaction becomes effective, may be counted as non-Federal amounts 
provided if and to the extent that the official responsible for 
entering into the transaction determines in writing that:
* * * * *
0
7. Amend Sec.  3.7 by:
0
a. Removing the word ``subparagraph'' wherever it appears and adding in 
its place the word ``paragraph.''
0
b. Revising paragraph (a).
0
c. In paragraph (c)(1), removing the words ``845 of the National 
Defense Authorization Act for Fiscal Year 1994 (Pub. L. 103-160; 10 
U.S.C. 2371'' and adding in their place the words ``10 U.S.C. 4022.''
0
d. In paragraph (d), removing the words ``Director, Defense 
Procurement'' and adding in their place the words ``Principal Director, 
Defense Pricing, Contracting, and Acquisition Policy (D, DPCAP)''.
0
e. Revising paragraph (e).
0
f. Redesignating paragraph (g)(3)(A) and (g)(3)(B) as (g)(3)(i) and 
(g)(3)(ii), respectively.
0
g. In newly-redesignated paragraph (g)(3)(i), removing the words ``845 
of the National Defense Authorization Act for Fiscal Year 1994 (Pub. L. 
103-160; 10 U.S.C. 2371'' and adding in their place the words ``10 
U.S.C. 4022.''
0
h. Revising paragraph (g)(6).
    The revisions read as follows:


Sec.  3.7  Comptroller General access.

    (a) A clause must be included in solicitations and agreements for 
Other Transaction (OT) agreements for prototype projects awarded under 
authority of this part that provide for total government payments in 
excess of $5,000,000 to allow Comptroller General access to records 
that directly pertain to such agreements.
* * * * *
    (e) The HCA must notify the PD, DPCAP prior to any finalization of 
a waiver under paragraph (d) of this section, and also of situations 
where there is evidence that the Comptroller General Access requirement 
caused companies to refuse to participate or otherwise restricted the 
Department's access to companies that typically do not do business with 
the Department.
* * * * *
    (g) * * *
    (6) The recipient of the agreement shall flow down this provision 
to any entity that participates in the performance of the agreement 
that provide for total government payments in excess of $5,000,000.
0
8. Amend Sec.  3.8 by:
0
a. Revising paragraph (a) introductory text.
0
b. In paragraph (a)(2), removing the words ``Public Law 98-502, as 
amended by Public Law 104-156, 110 STAT. 1396-1404'' and adding in its 
place the words ``31 U.S.C. 7501-7506 (Single Audit Act, or in this 
section the Act)''.
0
c. In paragraph (a)(2)(v)(A), removing the word ``statute'' and adding 
in its place the words ``this part.''
0
d. In paragraph (b)(1)(iv), removing the words ``Director, Defense 
Procurement'' and adding in its place the words ``Principal Director, 
Defense Pricing, Contracting, and Acquisition Policy (PD, DPCAP)''.
0
e. In paragraph (b)(2)(iii), removing the words ``Director, Defense 
Procurement'' and adding in its place the acronym ``PD, DPCAP''.
0
f. In paragraph (b)(3), adding a sentence at the end of the paragraph.
0
g. In paragraph (c)(2):
0
i. Removing the words ``(Public Law 98-502, as amended by Public Law 
104-156, 110 STAT. 1396-1404)''.
0
ii. Removing the words ``that Act'' and adding in its place the words 
``the Act''.
0
h. In paragraph (c)(2)(ii), removing the acronym ``DCAA'' and adding in 
its place the words ``the Defense Contract Audit Agency (DCAA)''.
0
i. In paragraph (c)(2)(iii), removing the words ``Director, Defense 
Procurement'' and adding in its place the acronym ``PD, DPCAP''.
0
j. In paragraph (c)(2)(iii)(B), removing the words ``3 years'' and 
adding in its place the words ``three years''.
0
k. In paragraph (c)(2)(iii)(C), removing the address ``400 Army Navy 
Drive, Suite 737, Arlington VA 22202''; and adding in its place the 
address ``4800 Mark Center Drive, Alexandria, Virginia 22350-1500.''
0
l. In paragraph (d), removing the words ``the DoDIG or GAO'' and adding 
in its place the words ``the DoDIG and the Comptroller General''.
    The additions and revisions read as follows:


Sec.  3.8  DoD access to records policy.

    (a) Applicability. This section provides policy concerning DoD 
access to awardee and subawardee records on OT agreements for prototype 
projects awarded under the authority of this part. This policy includes 
access to follow-on production transactions awarded under Sec.  3.9 of 
this part. This access is separate and distinct from Comptroller 
General access provided in Sec.  3.7 of this part.
* * * * *
    (b) * * *
    (3) * * * Such deviation shall be consistent with the requirements 
of the Single Audit Act, and paragraph (c)(2)(ii) of this section.
* * * * *
0
9. Revise Sec.  3.9 to read as follows:


Sec.  3.9  Follow-on production contracts or transactions.

    (a) An OT agreement for a prototype project entered into under the 
authority of this part may provide for the award of a follow-on 
production contract or OT to the participants in the OT for prototype 
project. If such a strategy is

[[Page 71872]]

considered, the acquisition plan for the OT for prototype project, and 
the solicitation, and the OT agreement for the prototype project at the 
time of award should all specify that a follow-on production contract 
or OT is authorized subject to the below requirements. A follow-on 
production contract or OT provided for in an OT for prototype project 
may be awarded to the participants in the OT without the use of 
competitive procedures, notwithstanding the requirements of the 
Competition in Contracting Act, 10 U.S.C. 3201 (CICA) if:
    (1) competitive procedures were used for the selection of parties 
for participation in the OT for prototype project;
    (2) the participants in the OT successfully completed the prototype 
project provided for in the OT; and
    (3) even if explicit notification was not listed within the request 
for proposal for the original prototype project transaction.
    (b) The OT agreement shall specify at the time of award of the 
prototype project how a project is determined to be successfully 
completed by the participants. Follow-on contracts and OTs entered into 
pursuant to this part may be awarded using the authority in this part, 
under the authority of 10 U.S.C. chapter 221, or under such procedures, 
terms, and conditions as the Secretary of Defense may establish by 
regulation.
    (c) There are additional circumstances for follow-on OT agreements 
or contracts with consortium. An OT includes all individual prototype 
subprojects awarded under the OT to a consortium of United States 
industry and academic institutions. A follow-on production contract or 
OT may be awarded, pursuant to this section, when the Department 
determines that an individual prototype or prototype subproject as part 
of a consortium is successfully completed by the participants. Award of 
a follow-on production contract or OT pursuant to the terms under this 
section is not contingent upon the successful completion of all 
activities within a consortium as a condition for an award for follow-
on production of a successfully completed prototype or prototype 
subproject within that consortium.
    (d) The cost sharing requirements for prototype projects under 
Sec.  3.5 of this part do not apply to follow-on production OTs and 
contracts.
0
10. Add Sec.  3.10 to read as follows:


Sec.  3.10  Approval requirements.

    (a) An OT agreement entered into under the authority of this part 
may be exercised for a transaction for a prototype project that is 
expected to cost the Department of Defense in excess of:
    (1) $100,000,000 but not in excess of $500,000,000 (including all 
options) only upon a written determination by the senior procurement 
executive for the agency as designated for the purpose of 41 U.S.C. 
1702(c) or, for the Defense Advanced Research Projects Agency (DARPA), 
the Defense Innovation Unit (DIU), or the Missile Defense Agency (MDA), 
the director of the agency that:
    (i) the requirements of Sec.  3.5 of this part will be met for the 
prototype project; and
    (ii) the use of the authority of this section is essential to 
promoting the success of the prototype project; and
    (2) $500,000,000 (including all options) only if:
    (i) the Under Secretary of Defense for Research and Engineering or 
the Under Secretary of Defense for Acquisition and Sustainment 
determines in writing that:
    (A) the requirements of Sec.  3.5 of this part will be met for the 
prototype project; and
    (B) the use of the authority of this section is essential to meet 
critical national security objectives; and
    (C) the congressional defense committees are notified in writing at 
least 30 days before such authority is exercised.
    (ii) Reserved.
    (b) The authority of a senior procurement executive or director of 
DARPA, DIU or MDA under paragraph (a)(1) of this section, and the 
authority of the Under Secretaries of Defense under paragraph (a)(2) of 
this section may not be delegated.
    (c) A follow-on production OT or contract may be entered into under 
the authority of this part that is expected to cost the Department of 
Defense in excess of: $100,000,000 (including all options) only upon a 
written determination by a covered official (as defined in Sec.  3.4 of 
this part) that:
    (1) the requirements of Sec.  3.5 of this part will be met for the 
prototype project;
    (2) the use of the authority of this section is essential to meet 
critical national security objectives; and
    (3) the congressional defense committees are notified in writing of 
the determinations at the time such authority is exercised.
0
11. Add Sec.  3.11 to read as follows:


Sec.  3.11  Authority to provide prototypes and follow-on production 
items as government-furnished equipment.

    An OT agreement for a prototype project, or a follow-on contract or 
OT entered into under the authority of this part may provide for 
prototypes or follow-on production items to be provided to another 
contractor, or to a performer of an OT, as Government-furnished 
equipment.
0
12. Add Sec.  3.12 to read as follows:


Sec.  3.12  Competition requirements.

    An OT for a prototype project entered into under the authority of 
this part shall use competitive procedures when entering into 
agreements to carry out prototype projects, to the maximum extent 
practicable.
0
13. Add Sec.  3.13 to read as follows:


Sec.  3.13  Applicability of procurement ethics requirements.

    An OT entered into under the authority of this part shall be 
treated as a Federal agency procurement for the purposes of the 
Procurement Integrity Act, in 41 U.S.C. chapter 21.

    Dated: August 26, 2024.
Patricia L. Toppings,
OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. 2024-19457 Filed 9-3-24; 8:45 am]
BILLING CODE 6001-FR-P