DOD May Clarify Sole-Source Production Contracting Rules

Two recent developments are significant for the U.S. Department of Defense's use of sole source follow-on production contracts arising from prototype Other Transactions¹ — (1) a proposed Defense Federal Acquisition Regulation Supplement rule² and (2) the U.S. Government Accountability Office's decision in DRS Sustainment Systems Inc.³

The proposed rule contains interesting insight as to the DOD's view of follow-on production contracts and it emphasizes the importance of the DOD satisfying several specific requirements before transitioning from a prototype Other Transaction to the sole source award of a follow-on production contract.

The GAO's decision in DRS Sustainment, however, seems to hold that the DOD may bypass those statutory requirements by invoking an independent exception to the Competition in Contracting Act.

Industry should carefully review the proposed rule and consider commenting before the Nov. 25 deadline. In light of the ongoing rulemaking, the DOD may take the opportunity to provide clarity on this point and amend the proposed rule to confirm the extent to which it agrees with the GAO's interpretation. Ultimately, the courts and Congress may weigh in.

Context for Sole Source Follow-On Production Contracts

Through the 2016 National Defense Authorization Act, Congress granted the DOD permanent, agency-wide authority to enter into Other Transactions for prototype projects, codified at 10 U.S.C. Section 2371b. While this Other Transactions Authority is not new, it has received significant attention in recent years. Congress and the DOD leadership encourage contracting offices to take advantage of this nontraditional (i.e., nonprocurement) contracting method. The hope is that, by working outside the Federal Acquisition Regulation and DFARS, the DOD may acquire cutting-edge technologies at the speed needed to maintain technological superiority.

One of the most powerful features of the DOD's prototype OTA is that once the DOD uses "competitive procedures" to award an initial Other Transaction for a prototype project, it may (subject to limitations) award a sole source follow-on production contract.⁴

It is one thing for the DOD to avoid the FAR and DFARS when developing and acquiring a single prototype; it is quite another to transition from that prototype project to full scale production on a sole source basis. There are trade-offs to foregoing competition at the production stage. To be sure, competition takes precious time, but it also drives significant benefits. Indeed, competition often provides the DOD its greatest point of leverage to negotiate pricing and terms, particularly with respect to intellectual property rights.

While prototype OTA is broad, Congress did impose limits on the DOD's authority to issue sole source follow-on production contracts.⁵ By sustaining the landmark Oracle America protest, the GAO seemed to confirm that the DOD lacked authority to issue a sole source follow-on production contract where the DOD had not complied with these statutory preconditions.

In that case, the GAO rejected the agency's attempt to award a sole source follow-on production contract where the agency had failed to satisfy the preconditions of (1) providing for a follow-on production contract in the initial prototype Other Transaction instrument, and (2) completing the initial prototype project before issuing the follow-on production award.⁶

Through its recently proposed rulemaking, the DOD intends to amend the DFARS to reflect the requirements that must be met before an agency may issue a sole source follow-on production contract pursuant to Section 2371b.

Proposed DFARS Rule

According to the DOD, the "objective of the proposed rule is to clarify for contracting officers the criteria that must be met to award, without competition, a follow-on production contract associated with a prototype project transaction agreement."⁷

Significantly, in the background section of the public notice, the DOD suggests that follow-on production contracts are subject to the FAR and DFARS. The proposed rule acknowledges that Other Transactions for prototype projects made under Section 2371b are not subject to the FAR and DFARS, but asserts that "the award of a follow-on production contract resulting from such a transaction agreement is subject to these acquisition regulations."

Suffice it to say additional clarification would be useful to the extent the DOD views the FAR and DFARS as applicable to follow-on production contracts.

The proposed rule would amend DFARS 206.001 to recognize follow-on production contracts for products developed under Section 2371b as exempt from full and open competition requirements where the following conditions are met:

(1) The other transaction agreement includes provisions for a follow-on production contract;

(2) The follow-on contract will be awarded to the participants in the other transaction for the prototype project;

(3) Competitive procedures are used for the selection of parties for participation in the transaction;

(4) The participants in the transaction successfully completes the prototype or sub-prototype project provided for in the transaction; and

(5)(i) There is a written determination that —

• (A) The requirements of 10 U.S.C. 2371b(d) are met; and
• (B) The use of the authority of 10 U.S.C. 2371b is essential to promoting the success of the prototype project; and

(ii)(A) For actions in excess of $100 million, but not in excess of $500 million including all options, the determination is executed by the senior procurement executive; and

(B) For actions in excess of $500 million including all options, the determination is —

• 1. Executed by the Under Secretary of Defense for Research and Engineering or the Under Secretary of Defense for Acquisition and Sustainment; and
• 2. Provided to the congressional defense committees at least 30 days prior to contract award. Industry should carefully review the proposed rule and consider commenting before the Nov. 25 deadline

DRS Sustainment Systems

While the DOD's proposed DFARS amendment emphasizes the requirements that must be met before issuing a sole source follow-on production contract under Section 2371b, GAO's decision in DRS Sustainment Systems Inc.⁸ suggests that the DOD can essentially bypass those statutory requirements and enter into a sole source follow-on production contract by issuing a justification and approval, or J&A, that invokes an independent CICA exception.

The DRS Sustainment protest involved ongoing DOD efforts to equip the Bradley Fighting Vehicle with an active protection system, or APS. The agency previously awarded an Other Transaction for development of a prototype APS system for the Bradley. Because the agency awarded that initial Other Transaction on a noncompetitive basis, Section 2371b presumably did not authorize a sole source follow-on production contract.

Instead of conducting a competition, the agency issued a J&A for a sole source follow-on production contract under the authority of 10 U.S.C. Section 2304(c) and FAR 6.302-1(a)(2)(ii)(B). Those authorities generally permit agencies to forgo CICA's requirement for full and open competition to award a "follow on contract for the continued development or production of a major system or highly specialized equipment, including major components thereof, when it is likely that award to any other source would result in ... [u]nacceptable delays in fulfilling the agency's requirements."⁹

The J&A concluded a new competition for the Bradley APS would result in unacceptable delays.

In a footnote, the GAO dismissed the argument that the agency was impermissibly sidestepping the statutory preconditions at Section 2371b(f) for awarding a sole source follow-on production contract:

Given that the J&A specifically states that the agency is relying on the authority of title 10 section 2304, rather than the agency's other transaction authority under section 2371b, we find this argument factually insufficient and dismiss it for failure to state a valid basis of protest.

Conclusion

Assuming the DOD rulemaking is, as stated, intended "to clarify for contracting officers the criteria that must be met to award, without competition, a follow-on production contract associated with a prototype project transaction agreement" — the rulemaking seems a prime opportunity to clarify the DOD's position on the issue raised in DRS Sustainment.

To what extent can an agency issue a sole source Other Transaction that does not meet the express requirements stated at Section 2371b(f), but nevertheless forgo competition at the production stage by issuing a J&A to invoke an independent CICA exception? Regardless whether the DOD uses the ongoing rulemaking to clarify its position, we may learn what the U.S. Court of Federal Claims, district courts, and even Congress have to say on the matter before this issue is resolved.