Department of Defense Other Transaction Authority Trends: A New R&D Funding Paradigm?
December 8, 2020
- Other Transaction Authorities (OTAs) have become a core element of the Department of Defense’s (DoD) approach to technology acquisition. DoD OTA obligations increased 75 percent in fiscal year 2019 and have increased 712 percent since FY 2015.
- The Army remains the predominant awarder of OTAs largely due to the efforts of Army Contracting Command New Jersey, which is headquartered out of Picatinny Arsenal, but the other DoD components are starting to catch up.
- A new research and development (R&D) funding paradigm between contracts and OTAs might be consolidating, with OTAs increasingly replacing contracts in the mid-to-late stages of the development pipeline for major weapon systems. In FY 2015, OTAs accounted for just three percent of DoD’s total R&D portfolio. Comparatively, in FY 2019, OTAs totaled 18 percent of DoD’s total R&D portfolio.
- OTA consortia are becoming central players in the technology marketplace. The majority of OTA obligations in recent years were awarded to consortia, accounting for 57 percent of DoD OTA obligations between FY 2015 and FY 2019.
As the DoD and congressional leadership have sought ways to maintain continued U.S. technological superiority against global competitors like China and Russia, OTA agreements have become an increasingly popular tool. Between FY 2015 and FY 2019, DoD OTA obligations increased from $0.7 billion to $7.4 billion, a 712 percent increase. Neither contracts, grants, nor cooperative agreements, OTAs are a more flexible acquisition approach that enables specific federal agencies to access goods and services outside of traditional acquisition processes.1 OTAs are not subject to the Federal Acquisition Regulation (FAR) and other related regulations, meaning that all of the usual government contract requirements are either absent or negotiable. In return, OTAs give these agencies greater flexibility and customization in designing a contract approach that can incentivize and attract nontraditional defense contractors, better manage risk and uncertainties, and increase efficiency. However, OTAs are not without risk as they can be more complicated to design and execute, which is compounded by a lack of familiarity and training amongst the broader acquisition community. Additionally, OTAs are more restrictive in what they can be used for. The specifics depend on the laws and statutes governing the different federal agencies’ OTA authorities, but OTAs are largely limited to activities involving R&D.
DoD has had some form of OTA authority since 1989 (when DARPA was given the authority to enter into OTAs), so what explains its increased popularity in recent years? DoD’s recent interest in OTAs is heavily driven by the FY 2015 and FY 2016 National Defense Authorization Act (NDAA) expanding what DoD can use OTAs to accomplish.2 Section 812 of the FY 2015 NDAA expanded the range of what types of prototypes could be perused under an OTA, while Section 815 of the FY 2015 NDAA “expanded DoD’s OTA authority by making DoD’s OTA authority permanent, modifying the definition of nontraditional defense contractor, and allowing DoD to issue follow-on production contracts for OTA prototypes.”3 In the FY 2016 NDAA conference report, House and Senate conferees noted that the expansion of DoD’s OTA authorities was designed to “support Department of Defense efforts to access new source of technical innovation” by making OTAs “attractive to firms and organizations that do not usually participate in government contracting due to the typical overhead burden and ‘one size fits all’ rules.”4
The following brief examines the notable trends in the DoD OTA authorities since the FY 2015 and FY 2016 NDAA statuary changes expanded DoD’s OTA authorities and seeks to answer the following research questions:
- What are the topline trends in DoD’s OTA usage?
- What is DoD procuring using OTAs?
- Is a new R&D paradigm emerging?
- How are the different DoD components using OTAs?
- What is the extent of competition for DoD OTA awards?
- Whom is DoD procuring from using OTAs?
This brief builds and expands on the methodology used in other CSIS reports that employ data from the Federal Procurement Data System (FPDS). Unlike other Defense-Industrial Initiatives Group reports on federal contracting, which rely on bulk data downloaded from USAspending.gov, this brief relies on the data downloaded directly from FPDS.gov. All dollar figures are reported in constant FY 2019 dollars, using the latest Office of Management and Budget (OMB) deflators.
OTAs have become a core element of the DoD approach to technology acquisition.
The data, as seen in Figure 1, show that the explosion in DoD OTA obligations between FY 2015 and FY 2018 highlighted in previous CSIS research—continued into FY 2019 as DoD OTA obligations—increased 75 percent last year. DoD OTA obligations rose from $4.4 billion in FY 2018 to $7.7 billion to FY 2019. Between FY 2015 and FY 2019, DoD OTA obligations increased 712 percent, rising from just $0.95 billion to $7.7 billion. Interestingly, although DoD OTA obligations continued rising last year, the total potential value of OTAs awarded in FY 2019 declined compared to FY 2018. The total potential value of all DoD OTA obligations totaled $28.2 billion in FY 2018 compared to $17.8 billion in FY 2019, a 37 percent decline. While this does not suggest that OTAs are falling out of favor in DoD, it might suggest that the exponential growth seen in DoD OTA obligations since FY 2015 might start slowing down.
As OTA obligations have increased across DoD, so too has the average size of those OTA awards, as shown in Figure 2. In FY 2015, the average DoD OTA award totaled roughly $1.04 million. Comparatively, in FY 2019, the average DoD OTA award totaled $4.39 million, a 321 percent increase. In the last year alone, the average DoD OTA award increased 30 percent, going from nearly $3.39 million in FY 2018 to $4.39 million last year.
DoD predominantly uses OTAs for R&D activities, but they are not exclusively limited to R&D. On average, 82 percent of total DoD OTA obligations were awarded for R&D, compared to 9 percent each for products and services. Although the most recent growth has been concentrated in R&D, products and services have also seen significant growth in recent years. Since FY 2016, defense products OTA obligations have increased 124 percent while defense services OTA obligations have increased 280 percent compared to the 426 percent growth in defense R&D OTA obligations.
Is a New R&D Paradigm Emerging?
Looking at the recent OTA trends in the context of DoD’s broader R&D portfolio, the data suggests that a new acquisition paradigm might be emerging. Between FY 2015 and FY 2019, DoD’s R&D portfolio of OTAs and contract obligations increased from $24.8 billion to $36.5 billion, a 47 percent increase. While defense R&D contract obligations increased 25 percent over the last five years, this growth was primarily driven by the 785 percent increase in defense R&D OTA obligations. In FY 2015, OTAs accounted for just three percent of DoD’s total R&D portfolio. Comparatively, in FY 2019, OTAs totaled 18 percent of DoD’s total R&D portfolio.
Analyzing the defense R&D trends by R&D activity suggests that OTAs are partially supplanting contracts in the mid-to-late stages of the development pipeline for major weapon systems. Whereas nearly every other R&D stage saw increased contract obligations between FY 2015 and FY 2019, System Development & Demonstration (6.5) and Operational Systems Development (6.7) contract obligations declined 10 percent and 34 percent respectively.
In FY 2019, OTAs totaled 18 percent of DoD’s total R&D portfolio.
The idea that OTAs are taking on a more major role in the mid-to-late stages of the development pipeline for major weapon systems is supported by the trends in defense OTA obligations by stage of R&D shown in figure 5. Between FY 2015 and FY 2019, 63 percent of DoD OTA obligations went toward Advanced Component Development & Prototypes (6.4) activities. Comparatively, Advanced Component Development & Prototypes (6.4) contract obligations increased 21 percent between FY 2015 and FY 2019 compared to a 504 percent growth in OTA obligations over the same time period. System Development & Demonstration (6.5), which experienced the aforementioned 10 percent decline in contract obligations between FY 2015 and FY 2019, saw an emergence of OTA spending, particularly in the last year. Whereas there were only minimal System Development & Demonstration (6.5) OTA obligations in the years prior, DoD SD&D OTA obligations totaled $0.78 billion in FY 2019, compared to $0.73 billion in contracting obligations. As a share of DoD OTA obligations, SD&D went from just 1 percent the previous year to 12 percent in FY 2018.
These trends suggest that a new R&D paradigm is emerging in which R&D activities in the mid-to-late stages of the development pipeline for major weapon systems that had previously been executed using contracts are now being conducted under OTAs. Such a move would be in line with the emphasis on DoD’s OTA to “carry out prototype projects that are directly relevant to enhancing the mission effectiveness of military personnel and the supporting platforms, systems, components, or materials.” The emergence of this new R&D paradigm would bring with it significant benefits, but also significant risks. Unburdened by the FAR and other regulations, greater usage of OTAs in the development pipeline for major weapon systems offers significant potential for driving efficiencies in the defense acquisition system, speeding up delivery of critical technologies, and attracting new vendors to the defense ecosystem. However, OTAs place a greater emphasis on the acquisition workforce which is already less familiar with OTAs and may not always have the requisite skills and training necessary to negotiate and execute OTAs. In addition, the increased flexibility of OTAs also can come with increased uncertainty. An approach to the late stages of system development that emphasizes rapid prototyping may involve more design changes or decisions to defer the production of prototypes that don’t satisfy the military customer. For industry, this translates to greater risk. As this new R&D paradigm emerges, finding the balance between traditional FAR-based acquisition processes and OT-based agreements will be crucial. OTAs cannot and should not be a catch-all replacement to the traditional FAR-based acquisition system, but there is substantial benefit in an alternative acquisition system that works best for certain scenarios.
DoD OTA Awards by Platform Portfolio
A few notable trends emerge in analyzing DoD OTA obligations by platform portfolios as shown in Figure 6 below.
Prior to the recent statutory changes, Weapons and Ammunition accounted for the predominant share of DoD’s OTA portfolio, totaling 72 percent of total DoD OTA obligations in FY 2015. This is not too surprising given the Army’s Center of Excellence at Army Contracting Command (ACC) New Jersey, which is headquartered out of Picatinny Arsenal. Since FY 2015, Weapons and Ammunition has seen its share of DoD OTA obligations fall to 38 percent in FY 2019, but this is the result of larger growth in other platform portfolios and not a deemphasis of this platform. Between FY 2015 and FY 2019, DoD Weapons and Ammunition OTA obligations rose from $0.53 billion to $2.8 billion, a 424 percent increase.5
Other R&D and Knowledge Based is the second-largest platform portfolio as measured by total DoD OTA obligations. As a share of total defense OTA obligations, Other R&D and Knowledge Based rose from 27.6 percent in FY 2015 to 32.9 percent in FY 2019. Other R&D and Knowledge Based OTA obligations increased 1,081 percent over the last five years, going from $0.2 billion in FY 2015 to $2.4 billion in FY 2019. Of note, Other R&D and Knowledge Based serves as a catch-all category that doesn’t fit into platform portfolios but includes a wide range of activities that include but are not limited to, biomedical, technical services, and other R&D activities. Within the Other R&D and Knowledge Based platform portfolio, these were the top six Product or Service Code accounts ordered by total OTA obligations over the last five years:
- AD94: Other Defense (Engineering)
- AD93: Other Defense (Advanced)
- AZ12: R&D- Other Research and Development (Applied Research/Exploratory Development)
- AD92: Other Defense (Applied/Exploratory)
- AZ14: R&D- Other Research and Development (Engineering Development)
- AZ13: R&D- Other Research and Development (Advanced Development)
Other notable platform portfolio trends included significant increases in FY 2019 in two of the platform portfolios corresponding with priorities in the 2018 National Defense Strategy: (1) Missile and Space Systems and (2) Electronics and Communications. Missile and Space Systems OTA obligations increased from $0.08 billion in FY 2018 to $1.1 billion in FY 2019, a 1,366 percent increase. Electronics and Communications OTA obligations increased 144 percent in FY 2019, rising from $0.29 billion in FY 2018 to $0.7 billion in FY 2019.
How Are the Different DoD Components Using OTAs?
The Army remains the leader in OTA usage across DoD components, but the other components saw significant upticks in OTA usage in FY 2019. In FY 2019, Army OTA obligations increased from $3.07 billion to $4.95 billion, a 61 percent increase. Army OTA obligations have increased 416 percent since FY 2016. The Air Force increased OTA obligations by 190 percent in FY 2019, going from $0.54 billion in OTA obligations in FY 2018 to $1.56 billion in FY 2019. Between FY 2016 and FY 2019, Air Force OTA obligations increased 486 percent. The Navy, which had reported marginal OTA obligations in previous years, saw a surge in OTA obligations last year but still lags behind the other services. Navy OTA obligations rose from $0.03 billion in FY 2018 to $0.17 billion in FY 2019, a 431 percent increase.
Between FY 2015 and FY 2018, the Army accounted for 73.6 percent of total defense OTA obligations, compared to the Air Force and DARPA, which both accounted for 12 percent, and the Navy, which accounted for less than 1 percent. In FY 2019, the Army accounted for 67 percent of defense OTA obligations, the Air Force accounted for 21 percent, DARPA fell to 6 percent, and the Navy rose slightly to 2 percent.
As highlighted in previous CSIS reports on DoD OTA usage, Army Contracting Command New Jersey (ACC-NJ) headquartered out of Picatinny Arsenal, the Army’s Center of Excellence for OTAs, remains the largest awarder of OTAs across all of DoD, but other contracting offices are beginning to catch up. 6 Whereas ACC-NJ accounted for 89 percent of DoD OTA obligations in FY 2015, it accounted for 45 percent of DoD OTA obligations in FY 2019. Although ACC-NJ may be the leading contracting office within the Army and DoD, the Army has several other contracting officers executing OTAs, accounting for 5 of the top 10 DoD OTA contracting offices. Outside of the Army, we are starting to see the emergence of the Launch Enterprise Systems Directorate and Space Development & Test Wing contracting offices in the Air Force. Unlike the Army, which has formally designated one of its contracting offices (ACC-NJ) as its OT center of excellence, the Air Force has elected to designate its OT center of excellence in its Office of Transformational Innovation, which is located within the Assistant Secretary of the Air Force for Acquisition, Technology and Logistics (SAF/AQ) office.7
Competition for DoD OTA Awards
The data show a positive trend in the competition for OTA obligations as they have become an increasingly popular acquisition tool. In FY 2015, just 10 percent of DoD OTA obligations were awarded after competition. The share of DoD OTA obligations awarded after competition has risen every year since, and 76 percent of DoD OTA awards were awarded after competition in FY 2019.
Whom Is DoD Buying From?
The majority of OTA obligations in recent years were awarded to consortia.
As shown in Figure 10 below, the vast majority of DoD OTA obligations are awarded to vendors categorized as having “nontraditional significant participation,” but there has been a rise in “cost sharing” as OTAs have become more popular.8 In FY 2015, 96 percent of DoD OTA obligations were awarded to nontraditional significant participation and just 4 percent awarded with cost sharing. By FY 2019, the share of DoD OTA obligations awarded following cost sharing rose to 14 percent, while the share going to nontraditional significant participation fell to 86 percent.
Top OTA Vendors
Although the data show that nearly 96 percent of DoD OTA obligations were awarded to nontraditional significant participation, looking at the data by top vendors shows that most DoD OTA obligations are awarded to consortia. Between FY 2015 and FY 2019, the top DoD OTA vendors were Analytic Services Incorporated, Advanced Technology International, Consortium Management Group Incorporated, the National Center for Manufacturing Services, and the System of Systems Consortium (SOSSEC). These five vendors, all consortia, accounted for 57 percent of total DoD OTA obligations between FY 2015 and FY 2019.
Beyond the top 5, the top 20 overall defense OTA vendors included a wide range of vendors ranging from Big Six defense vendors (Raytheon) to multinational tech giants (Microsoft) to consortia and smaller vendors. These top 20 vendors accounted for 80 percent of DoD OTA obligations between FY 2015 and FY 2020.
Given that a vast majority of DoD OTA obligations are awarded with nontraditional significant participation, it’s not surprising that the same 20 vendors make up the top ranks of both the overall DoD OTA obligations and the top 20 vendors for nontraditional significant participation. Of note, the top five vendors accounted for 70 percent of DoD nontraditional significant participation OTA obligations between FY 2015 and FY 2019.
Although a considerably smaller portion of DoD OTA obligations, there is a considerable difference among the top vendors with cost sharing. Within the top 20 cost sharing vendors, you have both three of the Big Five defense vendors (Lockheed Martin, Boeing, and Northrop Grumman), large defense firms like Honeywell, and several local municipalities.
This data presents a preliminary analysis of the topline trends in DoD’s OTA usage. The evidence suggests that there is a paradigm shift ongoing in DoD as OTAs have become a core element in DoD’s approach to technology acquisition over the last five years. This is clearly seen in the mid-to-late stages of the development pipeline for major weapon systems where OTAs are increasingly replacing contracts. Between FY 2015 and FY 2019, OTAs rose from just 3 percent of DoD’s total R&D portfolio to 18 percent of DoD’s R&D portfolio. However, while there has been a significant shift toward OTAs in the mid-to-late stages of the development pipeline for major weapon systems at a macro level, the data also suggests this is not true across all areas of the defense industrial base. Some sectors such as Weapons and Ammunition and Other R&D and Knowledge Based have seen significant usage of OTAs while other sectors like Space Systems have seen less usage. In conversations with defense industry and government officials, anecdotal evidence suggests that we might start to see a shift in these trends in other sectors of the defense industrial base like aircraft, but whether this presents in future years data remains to be seen. Furthermore, we have seen a rise of the OSA consortia in recent years as OTAs have become more prevalent, raising questions about oversight and competition since there are fewer mechanisms for understanding what happens within consortia.
There has been a significant shift toward OTAs in the mid-to-late stages of the development pipeline for major weapon systems in certain sectors of the defense industrial base.
The data show that DoD envisions OTAs as a critical component of its weapon systems development strategy going forward, but this approach also brings with it significant risks that must be considered. The later stages of the development system for major weapon systems are the most critical stages where you get into testing and find out whether the technologies you have invested in actually do what you expect them to in an operational setting. Additionally, during these stages, you start to develop executable plans for how the military plans to sustain this new equipment. However, this added flexibility can make planning more difficult for both the industry and the military as there is less certainty as to what to plan for. For these reasons, this is the most important oversight period for the weapon systems pipeline. While OTAs are not inherently free from oversight compared to contracts, their greater flexibility is part of a broader signal pushing for less oversight in pursuit of accelerated technology acquisition. While accelerated weapon systems development is an admirable goal, less oversight risks blowback on OTAs and potential reductions of DoD’s OTA authorities, as is what happened after the collapse of the Future Combat System. Although OTAs were not to blame for FCS’s failure, the blowback led to a reluctance to use OTAs in subsequent years. Finding the proper balance will be critical for DoD’s technology acquisition strategy going forward.
DoD envisions OTAs as a critical component of its weapon systems development strategy going forward.
Rhys McCormick is a fellow with the Defense-Industrial Initiatives Group.
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