Report to the Chairman and Ranking

Minority Member, Committee on Armed

Services, U.S. Senate

United States General Accounting Office

GAO

October 2002 DEFENSE

ACQUISITIONS

DOD Has

Implemented Section

845 Recommendations

but Reporting Can Be

Enhanced

GAO-03-150
Page i GAO-03-150 Defense Acquisitions

Letter 1

Results in Brief 1

Background 2

DOD Revised Section 845 Guide as Recommended 5

Number of Nontraditional Contractors Is Captured as a

Performance Metric 7

Section 845 Reports Lack Sufficient Information 8

Conclusion 9

Recommendations for Executive Action 10

Agency Comments 10

Scope and Methodology 11

Appendix I Comments from the Department of Defense 13

Appendix II Report of Other Transactions for Prototype Projects 15

Figure

Figure 1: Section 845 Agreements Awarded in Fiscal Year 2001 4

Abbreviations

DARPA Defense Advanced Research Projects Agency

DOD Department of Defense

NIMA National Imagery and Mapping Agency

Contents
Page 1 GAO-03-150 Defense Acquisitions

October 9, 2002

The Honorable Carl Levin

Chairman

Committee on Armed Services

United States Senate

The Honorable John Warner

Ranking Minority Member

Committee on Armed Services

United States Senate

In April 2000, we reported on the Department of Defense’s (DOD) use of

Section 845 agreements, also referred to as “other transactions” for

prototype projects. 1 These are transactions other than contracts, grants, or

cooperative agreements that generally are not subject to federal laws and

regulations applicable to procurement contracts. 2 In that report, we

recommended that the Secretary of Defense (1) update DOD’s Other

Transactions Guide for Prototype Projects to lay out the conditions and

provide a framework for using Section 845 agreements and (2) establish

and require the use of performance metrics. The Senate report

accompanying the National Defense Authorization Act for Fiscal Year

20013

 directed the Secretary to implement these recommendations by

March 1, 2001. It also directed us to report on DOD’s compliance with our

recommendations. This report responds to that mandate. In addition, we

determined whether DOD is providing Congress with sufficient

information on Section 845 agreements.

In December 2000, DOD revised its Section 845 guide. The guide specifies

when Section 845 agreements may be used and provides criteria for

tailoring terms and conditions appropriate for each agreement. Officials

 1

 U. S. General Accounting Office, Acquisition Reform: DOD’s Guidance on Using Section

845 Agreements Could be Improved, GAO/NSIAD-00-33 (Washington, D.C.: April 7, 2000).

2

 This authority comes from Section 845 of the National Defense Authorization Act for

Fiscal Year 1994, P.L. 103-160, Section 845, hereinafter referred to as “Section 845

agreements.”

3

 Senate Report 106-292.

United States General Accounting Office

Washington, DC 20548

Results in Brief
Page 2 GAO-03-150 Defense Acquisitions

from the military services and defense agencies have found the new guide

useful and a significant improvement over the prior version. For example,

the current guide provides more details on the appropriate use of terms

and conditions such as intellectual property, accounting systems, and costsharing arrangements between the government and the private sector.

DOD’s new guide complies with our April 2000 recommendation.

The Secretary of Defense has required a metric—the number of

participating nontraditional defense contractors—which is measurable

and directly related to each agreement. This metric is tracked and reported

internally. DOD explored additional metrics, but concluded that the

number of nontraditional contractors was the only one that was

quantifiable and tied directly to Section 845 outcomes.

DOD’s annual report to Congress on Section 845 agreements consists of

summaries of each agreement. However, the key metric—the number of

nontraditional contractors—is not clearly presented in these reports,

making it difficult to gauge DOD’s progress in achieving success on this

objective. Further, DOD is not regularly assessing or reporting on the

benefits derived from completed Section 845 projects. In the absence of

such assessments, congressional and DOD decision makers lack a vital

piece of information that would help them determine whether this flexible

procurement authority is achieving expected results.

We are making recommendations to the Secretary of Defense concerning

reporting to Congress on (1) the extent of nontraditional defense

contractor participation in Section 845 agreements and (2) the benefits

derived from completed projects.

In commenting on a draft of this report, DOD agreed to include in the

summary section of the annual report to Congress the number of new

agreements and the reason Section 845 authority was used. However, DOD

did not agree to include in the summary the total number of nontraditional

contractors. DOD agreed to make available to Congress any studies that

assess the use of “other transaction” authority for prototype projects.

DOD’s written comments are in appendix I.

Congress has incrementally expanded the use and scope of “other

transaction” authority since first authorizing its use more than a decade

ago. In 1989, Congress gave DOD, acting through the Defense Advanced

Research Projects Agency (DARPA), authority to temporarily use “other

transactions” for basic, applied, and advanced research projects. In 1991,

Background
Page 3 GAO-03-150 Defense Acquisitions

Congress made this authority permanent and extended it to the military

services. In 1993, Congress enacted Section 845 of the National Defense

Authorization Act for Fiscal Year 1994, which provided DARPA with

authority to use, for a 3-year period, “other transactions” to carry out

prototype projects directly relevant to weapons or weapon systems

proposed to be acquired or developed by DOD. The National Defense

Authorization Act for Fiscal Year 1997 temporarily extended DARPA’s

Section 845 authority and provided similar authority to the military

services and defense agencies. Congress subsequently extended this

authority’s expiration date until September 30, 2004.

In an era of a shrinking defense industrial base and new threats, DOD

views “other transaction” prototype authority as a key to attracting

nontraditional defense contractors. Section 803 of the Floyd D. Spence

National Defense Authorization Act for Fiscal Year 2001 defined a

nontraditional defense contractor as an entity that has not, for at least a

period of one year prior to the date of entering into or performing an

“other transaction,” entered into or performed (1) any contract subject to

full coverage under the cost accounting standards or (2) any other

contract in excess of $500,000 to carry out prototype projects or to

perform basic, applied, or advanced research projects for federal agencies.

DOD also views Section 845 authority as a way to test creative

procurement strategies—such as the use of teaming and consortia—with

traditional defense contractors and in industry areas not normally

associated with government contracts. Under this authority, new business

relationships, which could involve changes in traditional business

processes or intellectual property rights agreements, are created to

leverage commercial investments and to permit DOD to influence the

design, development, and availability of commercial technologies to

address national security needs.

In fiscal year 2001, the most recent year for which complete data are

available, DOD awarded 61 Section 845 agreements, totaling $392 million

in federal government funds. Contractors contributed another $97 million
Page 4 GAO-03-150 Defense Acquisitions

in cost-sharing funds.4 Figure 1 shows these agreements by awarding

organization.

Figure 1: Section 845 Agreements Awarded in Fiscal Year 2001

Note: The National Imagery and Mapping Agency did not award any Section 845 agreements in fiscal

year 2001.

Source: Office of Defense Procurement.

DOD is required to submit an annual report to Congress addressing both

research and prototype “other transaction” agreements awarded in the

preceding fiscal year.5

 The report, which is prepared and signed by the

Director, Defense Research and Engineering, includes input from the

Director of Defense Procurement on Section 845 agreements. The report is

to address (1) the technology areas in which the work was focused; (2) the

 4

 Section 803 of the National Defense Authorization Act for Fiscal Year 2001 established a

requirement that when a nontraditional contractor does not participate to a significant

extent in a prototype project, the nonfederal parties must pay at least one-third of the

project’s cost. In the absence of this arrangement, the Senior Procurement Executive (as

defined by 41 U.S.C. Sec. 414 [3]) must provide a written justification for the use of an

“other transaction.”

5

 10 U.S.C. Section 2371(h).
Page 5 GAO-03-150 Defense Acquisitions

extent of cost sharing among federal and nonfederal sources; and (3) how

“other transactions” contributed to a broadening of the technology and

industrial base and fostered new relationships and practices that support

U.S. national security interests.

In December 2000, the Under Secretary of Defense for Acquisition and

Technology6

 issued a revised guide that sets out the conditions and

framework for using Section 845 agreements.7

 The guide is effective for all

solicitations issued after January 5, 2001, and provides a useful framework

for tailoring the terms and conditions appropriate for each agreement.

DOD agreements officers view the new guide as a significant improvement

over the prior version.8

 Several key improvements are as follows:

• The previous guide contained very limited information on the terms and

conditions to be tailored when crafting a Section 845 agreement. The

current guide provides additional details on the appropriate use of terms

and conditions such as intellectual property, accounting systems, and cost

sharing. It instructs agreements officers not to view previously issued

agreements as a template or model, but to rely on their skill and

experience and to consider Federal Acquisition Regulation clauses and

commercial business practices, as well as prior “other transactions,” when

formulating agreements. The current guide also requires an acquisition

strategy that identifies and discusses the rationale for using a Section 845

agreement.

• The previous guide did not define “nontraditional” contractors. The

current guide defines the term, based in part on the definition in Section

803 of the National Defense Authorization Act for Fiscal Year 2001. It also

requires that information on these entities be collected. DOD considers

nontraditional defense contractors to be “business units,” which can be

 6

 This position is now the Under Secretary of Defense for Acquisition, Technology, and

Logistics.

7

 The Office of Defense Procurement prepared the guide, Other Transactions (OT) Guide

for Prototype Projects. This office is responsible for policy, guidance, and oversight of

“other transactions” for prototype projects, while the Director, Defense Research and

Engineering performs similar functions for “other transactions” for research.

8

 An agreements officer has authority to enter into, administer, or terminate “other

transactions.”

DOD Revised Section

845 Guide as

Recommended
Page 6 GAO-03-150 Defense Acquisitions

any segment of an organization or an entire business organization that is

not divided into segments.

• The previous guide listed eight examples of benefits to be considered

under Section 845 agreements, including attracting business entities that

normally do not do business with the government. However, it did not

identify a specific metric that should be used on all Section 845

agreements. The current guide clearly states that DOD will track, as a

metric, the participation of nontraditional defense contractors.

DOD also included a draft audit policy in the revised guide. According to

DOD officials, the impetus for including a draft audit policy came from

two DOD Inspector General reports. The first, a 1997 report, questioned

the adequacy of audit coverage on DARPA’s “other transactions” for

research.9

 Although “other transactions” agreements for research included

an audit clause, the report noted that agency officials intended to require

audits only if they suspected fraud. The Inspector General argued that

without final cost audits, agency officials could not ensure compliance

with the statutory requirement pertaining to cost-sharing provisions. In a

1999 follow-up study on cost-sharing, the Inspector General raised similar

concerns about prototype projects and included recommendations

regarding audit policy for “other transactions” for prototype projects.10

On August 27, 2002, DOD issued a final rule codifying the definition of a

nontraditional defense contractor and setting forth the conditions for

using Section 845 agreements consistent with Section 803 of the National

Defense Authorization Act for Fiscal Year 2001. The notice accompanying

the final rule stated that the audit policy is being discussed and will be

addressed by a separate rule.

 9

 Office of the Inspector General, Department of Defense, Award and Administration of

Contracts, Grants, and Other Transactions Issued by the Defense Advanced Research

Projects Agency, Report No. 97-114 (Washington, D.C: Mar. 28, 1997).

10 Office of the Inspector General, Department of Defense, Cost Charged to Other

Transactions, Report No. D-2000-065 (Washington, D.C.: Dec. 27, 1999).
Page 7 GAO-03-150 Defense Acquisitions

After exploring a number of performance indicators for Section 845

agreements, DOD selected one quantitative performance metric—the

extent of nontraditional contractor participation—which is tracked by the

Office of Defense Procurement. Officials believe that this metric is key

because involving firms that do not traditionally do business with DOD

increases DOD’s opportunity to leverage commercial technology

investments and to take advantage of commercial business processes,

such as using an integrated team approach rather than a traditional primesubcontractor structure. Congress also has encouraged the participation

of commercial firms in the development of defense systems and has

recognized the critical contributions of nontraditional participants in areas

such as biotechnology and pharmaceuticals in today’s national security

environment.

DOD contracted with RAND, a nonprofit institution, for a study to assess

the overall effectiveness of the Section 845 acquisition approach and to

explore the possibility of using additional metrics.11 In addition to this

effort, a DOD working group, composed of officials from across DOD,

considered the types of metrics that could be used to assess the

effectiveness of Section 845 agreements. These two efforts identified

several difficulties, as follows:

• Traditional metrics—such as cost growth, schedule slips, and performance

shortfalls—are inappropriate for Section 845 projects that are inherently

risky.

• A “path not taken” cannot be measured; that is, when a Section 845

agreement is used rather than a procurement contract, a statistical

comparison between the two acquisition approaches cannot be made.

• Too many variables and too few Section 845 agreements would limit the

results of a quantitative analysis.

• Few Section 845 projects have been completed, limiting the results to date.

RAND concluded that important new technological capabilities—a

desirable benefit of “other transaction” agreements—mostly come from

segments of major firms that formerly focused on commercial projects but

 11 RAND’s National Defense Research Institute, Assessing the Use of “Other Transaction”

Authority for Prototype Projects (Documented Briefing), (Santa Monica, CA: 2002).

Number of

Nontraditional

Contractors Is

Captured as a

Performance Metric
Page 8 GAO-03-150 Defense Acquisitions

are now willing to apply their skills to the development of military

prototypes. RAND also pointed out that there are other benefits associated

with the flexibility inherent in this authority. For example, the flexibility to

change project plans based on mutual agreement between DOD and

industry managers, with minimal documentation or administrative burden,

provides more powerful opportunities to cope with the problems and

opportunities that occur when developing new systems and components.

However, RAND emphasized the difficulties in developing quantifiable

metrics that would be accepted as credible.

In its effort to focus on collecting information on nontraditional

contractors, DOD uses the Report of Other Transactions for Prototype

Projects (DD Form 2759), which is completed by the agreements officer.

(App. II contains a sample form.) According to the DOD guide, when

funding actions are taken, the agreements officer must record information

on whether the prime or subcontractor awardees are traditional

contractors, nontraditional defense contractors, or non-profit

organizations. The agreements officer also must record the names and

addresses of significant nontraditional defense contractors. The summary

information is sent to DOD’s Office of Defense Procurement, where it is

aggregated.12

According to the DD 2759 reports for Section 845 agreements awarded in

fiscal year 2001, 16 nontraditional prime contractors and 29 significant

nontraditional subcontractors participated in a total of 61 agreements.

Nontraditional participants included commercial business units of U.S.

traditional firms as well as foreign corporations.

Congress requires DOD to report annually on all “other transaction”

projects—for research as well as prototypes—awarded in the preceding

fiscal year. While the Section 845 portion of the report addresses the

issues set forth in the congressional reporting requirement, it does not

present the number of nontraditional contractors in a clear,

straightforward format, such as a summary table. Because information on

 12 DOD eventually will record this type of information electronically. The Washington

Headquarters Services’ Directorate for Information Operations and Reports has primary

responsibility for developing an operational database for Section 845 projects and is the

focal point for data collection. Problems have arisen because some agencies have

computer firewall systems that interfere with their ability to input data and access reports

from this database.

Section 845 Reports

Lack Sufficient

Information
Page 9 GAO-03-150 Defense Acquisitions

nontraditional participants—DOD’s key performance metric—is not

summarized, it is difficult for Congress to assess how successful DOD has

been in achieving this metric. The annual report includes a 1- or 2-page

summary of each project that discusses (1) government and contractor

cost contributions, (2) the reason for using the Section 845 authority, and

(3) how the agreement contributed to a broadening of the technology base

or fostered relationships and practices that support U.S. national security

interests. In the fiscal year 2001 report, these individual summaries totaled

152 pages. In a fiscal year 2000 supplemental report to Congress, DOD did

present a narrative summary of the number of nontraditional contractors;

however, this was the only occasion when the information was clearly

imparted.13 DOD officials stated that they are reluctant to add another

reporting element and that the current report format meets congressional

requirements. They added that they view the number of nontraditional

contractors as secondary to the agreement-level information presented in

the report.

DOD also is not regularly reporting on or assessing the benefits derived

from completed Section 845 agreements. In 1996, the Under Secretary of

Defense for Acquisition and Technology requested a comparison of the

benefits and drawbacks of completed agreements with the expected

benefits at the time of award. However, this attempt to compile “lessons

learned” was abandoned because many DOD officials believed that the

results were parochial and not useful across the department. A draft

version of the current Section 845 guide included a requirement for an

assessment of completed agreements, but the requirement was not

incorporated in the final version because DOD officials believe that

another reporting requirement was not likely to produce a meaningful

assessment of Section 845 results. DOD officials commented that the law

only requires them to report on projects awarded in the previous fiscal

year. They acknowledged, however, that periodic assessments of the

benefits derived from completed agreements could be useful.

By updating the Section 845 guide and requiring the number of

nontraditional contractors to be measured as a performance metric, DOD

has implemented our April 2000 recommendations. However, the reporting

on the benefits derived from this alternative acquisition approach could be

 13 This supplemental report was requested in Senate Report 106-50 on the National Defense

Authorization Act for Fiscal Year 2000.

Conclusion
Page 10 GAO-03-150 Defense Acquisitions

improved. A summary table in the annual report to Congress, setting forth

the number of nontraditional contractors brought in under Section 845

agreements during the preceding year, would provide a clear picture of the

extent to which DOD’s performance metric is being achieved. The current

report format, consisting of summaries of each agreement, requires the

reader to review each summary sheet in order to determine how the

Section 845 authority was used—including the number of nontraditional

contractors participating in the agreement. Thus, its usefulness to

Congress is limited.

Further, in the absence of regular assessments of the benefits derived from

completed projects, DOD and the Congress lack vital information on the

results the government is deriving from this flexible procurement strategy.

The experience that DOD has gained from the use of Section 845 authority

can be useful to Congress as it makes decisions about subsequent

extensions of this authority to DOD and in future congressional

deliberations.

We recommend that the Secretary of Defense

• incorporate in the annual report to Congress summary information on the

extent of nontraditional contractor participation and

• periodically report to Congress the results of studies on the benefits

derived from completed Section 845 projects, including how key private

sector participants contributed to the results.

In written comments on a draft of this report, DOD agreed to incorporate

in the summary of the annual report to Congress information on the

number of new agreements and to break out the reasons for using the

authority. However, DOD did not agree with our recommendation to

include the number of nontraditional contractors in the annual report,

stating that a raw count does not necessarily indicate the extent of

nontraditional contractor participation and that it is secondary

information derived from a separate reporting system. We agree that a raw

number alone can be misleading. However, we do not understand why

DOD is reluctant to publish the total number of nontraditional

contractors—along with the other information to be reported—when

those numbers are being internally collected and when this is the key

performance metric DOD has established. Including the number of

nontraditional contractors, along with the other information DOD has

Recommendations for

Executive Action

Agency Comments
Page 11 GAO-03-150 Defense Acquisitions

agreed to provide, would give Congress a more complete basis on which to

assess the achievements gained through the use of Section 845 authority.

DOD concurred with our second recommendation but stated that it would

oppose the establishment of a regular reporting requirement. We are not

advocating a new reporting requirement; however, we believe that

periodic assessments of completed Section 845 projects would provide

Congress useful information on the benefits the department is deriving

from use of this authority.

To assess the comprehensiveness of DOD’s new Section 845 guide, we

compared it to the November 1998 guide that was in effect during our

prior review. To determine the adequacy and usefulness of the revised

guide and the performance metrics used, we interviewed officials in the

Office of Defense Procurement and in the Office of Acquisition

Initiatives—Office of the Under Secretary of Defense for Acquisition,

Technology and Logistics; Washington Headquarters Services’ Directorate

for Information Operations and Reports; the headquarters offices of the

Army, Navy, and Air Force; DARPA; and NIMA. We also reviewed reports

prepared by DOD’s Office of the Inspector General, RAND, and GAO. In

addition, we reviewed various directives, memorandums, publications,

correspondence, and legislation concerning Section 845 authority.

To determine the number and value of fiscal year 2001 Section 845

agreements and the number of agreements having nontraditional defense

contractors, we analyzed data compiled by the Office of Defense

Procurement. In addition, at each military service and DARPA, we

reviewed the Reports of Other Transactions for Prototype Projects (DD

Form 2759) for all agreements awarded in fiscal year 2001. We did not

validate or verify the information reported on these forms, including

whether the cited nontraditional defense contractors met the definition in

Section 803 of the National Defense Authorization Act for Fiscal Year 2001.

To determine whether Congress is receiving adequate information on the

number of nontraditional defense contractors participating in Section 845

agreements and whether DOD is assessing the benefits derived from

completed projects, we reviewed the Section 845 portion of the annual

reports for fiscal years 1999 through 2001 and the supplemental reports

provided to Congress in fiscal years 1999 and 2000. We also reviewed

DOD’s guidance and memorandums and held discussions with officials

from the Office of Defense Procurement.

Scope and

Methodology
Page 12 GAO-03-150 Defense Acquisitions

We conducted our review between April and August 2002 in accordance

with generally accepted government auditing standards.

We are sending copies of this report to interested congressional

committees; the Secretaries of Defense, the Army, the Navy, and the Air

Force; the Director, DARPA; the Director, NIMA; and the Director, Office

of Management and Budget. We will also make copies available to others

upon request. In addition, the report will be available at no charge on the

GAO Web site at http://www.gao.gov.

Please contact me at (202) 512-4841 or Michele Mackin at (202) 512-4309 if

you have any questions regarding this report. Other major contributors to

this report were William M. McPhail, Rosa M. Johnson, and Kenneth E.

Patton.

David E. Cooper

Director, Acquisition and Sourcing Management
Appendix I: Comments from the Department

of Defense

Page 13 GAO-03-150 Defense Acquisitions

Appendix I: Comments from the Department

of Defense

Report is now numbered

GAO-03-150.
Appendix I: Comments from the Department

of Defense

Page 14 GAO-03-150 Defense Acquisitions

Report is now numbered

GAO-03-150.
Appendix II: Report of Other Transactions for

Prototype Projects

Page 15 GAO-03-150 Defense Acquisitions

Appendix II: Report of Other Transactions for

Prototype Projects

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