Department of Homeland Security: Status and Accountability Challenges Associated with the Use of Special DHS Acquisition Authority
Published: 2008-02-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Other transaction authority was created to enhance the federal government's ability to acquire cutting-edge science and technology by attracting nontraditional contractors that have not typically pursued government contracts. The Homeland Security Act of 2002 granted the department the temporary authority to enter into other transactions for research and prototype projects for a period of 5 years. The Consolidated Appropriations Act of 2008 extended this authority until September 30, 2008. This testimony discusses (1) the extent to which DHS has used its other transaction authority, (2) the status of DHS's implementation of GAO's previous recommendations, and (3) the accountability challenges associated with the use of these agreements.
section_title: What GAO Found
paragraphs: DHS entered into 37 other transaction agreements between fiscal years 2004 and 2007, most of which were entered into in the first 2 years. Though it has since used this authority less frequently, it continues to obligate funds for its earliest agreements. Furthermore, about 77 percent of the dollars spent on these agreements have been for 7 of DHS's 37 agreements. Contracting representatives also told us that all of the agreements to date were for prototype projects and that each agreement included at least one nontraditional contractor. GAO plans further review of DHS's use of other transaction agreements as required by the Homeland Security Act of 2002. DHS has made efforts to improve its use of other transaction agreements and to prevent conflicts of interest. The department has taken the following steps to address prior GAO recommendations including: (1) creating guidance on when to include audit provisions in other transaction agreements; (2)creating a training program on using these agreements; (3) and improving controls over conflicts of interest. GAO also recommended that DHS capture knowledge gained from the agreements it has entered into. The department has compiled lessons learned from the Department of Defense, but the document is not related to DHS's experience. Furthermore, while DHS created guidance on when to include audit provisions in agreements, its guidance only applies to certain prototype projects and only in certain circumstances. Risks inherent with the use of other transaction agreements create several accountability challenges. These challenges include attracting and ensuring the use of nontraditional contractors, acquiring intellectual property rights, ensuring financial control, and maintaining a skilled acquisition workforce with the expertise to create and maintain these agreements.

section_title: Letter
paragraphs: Thank you for inviting me here today to discuss the Department of  Homeland Security’s (DHS) use of its other transaction authority.  According to DHS officials, this authority, which is set to expire in  September 2008, is a critical tool because it has given the department the  flexibility to attract new contractors to help develop and manage the  mission of an integrated program of science and technology from basic  research to production. However, the flexibility afforded by other  transaction authority also carries the risk of reduced accountability and  transparency. For this reason, it is important to monitor the use of this  authority to help ensure that the benefits outweigh the risks to the  government. We have previously reviewed DHS’s use of this authority and  ethics related management controls and made recommendations for  improvements.
My statement today will focus on (1) the extent to which DHS has used its  other transaction authority, (2) the status of DHS’s implementation of  GAO’s previous recommendations, and (3) the accountability challenges  associated with the use of these agreements. In preparation for this  hearing, we obtained recent data on other transaction agreements from  DHS and looked at several of these agreements, interviewed DHS  representatives from the Science and Technology Directorate, reviewed  related reports and studies, and identified the efforts DHS has made to  address our previous recommendations. We conducted our work from  January to February 2008 and in accordance with the generally accepted  government auditing standards. Those standards require that we plan and  perform the audit to obtain sufficient, appropriate evidence to provide a  reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives. We  plan to conduct additional audit work on DHS’s use of other transaction  authority as required by the Homeland Security Act of 2002.
subsections: section_title: Background
paragraphs: Other transaction authority was created to enhance the federal  government’s ability to acquire cutting-edge science and technology by  attracting nontraditional contractors that have not typically pursued  government contracts. Other transactions are agreements other than  government contracts, grants, or cooperative agreements and may take a  number of forms. These agreements are generally not subject to the FAR.  This authority originated in 1958 when Congress gave the National  Aeronautics and Space Administration (NASA) the authority to enter into  contracts, leases, cooperative agreements, or “other transactions.” In 1989,  Congress granted the Defense Advanced Research Projects Agency  (DARPA) temporary authority to use other transactions for advanced  research projects. In 1991, Congress made this authority permanent and  extended it to the military services. In 1993, Congress temporarily  expanded DARPA’s other transaction authority, allowing the agency to use  the agreements for prototype projects. The Homeland Security Act of 2002  created DHS and granted the agency the authority to enter into other  transactions for research and development and prototype projects for a  period of 5 years. Congress granted DHS this authority to attract  nontraditional firms that have not worked with the federal government,  such as high-tech commercial firms that have resisted doing business with  the government because of the requirements mandated by the laws and  regulations that apply to traditional FAR contracts. The Consolidated  Appropriations Act for 2008 extended this authority until September 30,  2008.
DHS began operations in March 2003 incorporating 22 federal agencies to  coordinate and centralize the leadership of many homeland security  activities under a single department. Since then, DHS has become the  third largest agency for procurement spending in the U.S. government.  DHS’s acquisition needs range from basic services to complex  investments, such as sophisticated screening equipment for air passenger  security and upgrading the Coast Guard’s offshore fleet of surface and air  assets. In fiscal year 2006, according to agency data, the department  obligated $15.9 billion for goods and services to support its broad and  complex acquisition portfolio. DHS’s S&T Directorate supports the  department’s mission by serving as its primary research and development  arm. In fiscal year 2006, according to S&T data, S&T obligated over $1.16  billion dollars to fund and develop technology in support of homeland  security missions. The directorate has funded technology research and  development in part through the use of other transaction authority.  According to agency officials, S&T is the only component within DHS that  uses this authority. Because of their flexibility, other transactions give  DHS considerable latitude in negotiating with contractors on issues such  as intellectual property, reporting on cost, and data rights. In addition, it  may relieve the parties from certain contract administration requirements  that nontraditional contractors find burdensome.
section_title: DHS’s Use of Other Transaction Authority Has Declined Since Fiscal Year 2005
paragraphs: The number and value of DHS’s other transaction agreements has  decreased since 2005. Its recent other transaction agreements represent  just a small portion of its total procurement spending. Most of the  department’s use of other transaction authority to date occurred between  fiscal years 2004 and 2005. Though it has since used this authority less  frequently, it continues to obligate funds for its earliest agreements. About  77 percent of the $443 million spent on DHS’s agreements has been on 7 of  the 37 agreements. S&T contracting representatives reported that all of  these agreements were for prototype projects.
In fiscal year 2006, other transactions accounted for almost $153 million of  DHS’s reported $15.9 billion in procurement obligations, approximately 1  percent (see fig. 1). In addition, other transactions represent only a small  portion of S&T spending. For example, the department estimates that from  fiscal years 2004 through 2007, S&T spent 13 percent of its total  obligations on its other transaction agreements.
DHS reported a total of 37 other transaction agreements, 30 of which were  entered into in fiscal years 2004 and 2005. Accordingly, 88 percent of total  spending was for agreements reached in fiscal years 2004 and 2005 (see  fig. 2). While the total number of new agreements has decreased since  2005, the total obligations under these agreements have generally  increased because funds are obligated for agreements made in prior years  (see fig. 3).
About 77 percent of obligations was for the seven largest other transaction  agreements (see appendix I). According to S&T, all of these agreements  included at least one nontraditional contractor, most commonly as a  subcontractor.
Though the acquisition outcomes related to DHS’s use of other transaction  authority have not been formally assessed, the department estimates that  at least some of these agreements have resulted in time and cost savings.  According to an S&T contracting representative, all of its current  agreements are for development of prototypes, but none of the projects  have yet reached production. Therefore, it is too soon to evaluate the  results. However, the department believes that some of these agreements  have reduced the time it takes to develop its current programs, as  compared to a traditional FAR-based contract. In addition, DHS has stated  that its two cost-sharing agreements for development of its Counter- MANPADS technology have resulted in savings of over $27 million and  possibly more. However, the extent to which these savings accrue to the  government or to the contractor is unclear.
subsections: section_title: DHS Has Made Progress in Improving Its Use of Its Other Transaction Authority, but Has Yet to Fully Address Prior GAO Recommendations
paragraphs: Soon after DHS established the S&T Directorate, S&T issued other  transaction solicitations using some commonly accepted acquisition  practices and knowledge-based acquisition principles. For example, DHS  used integrated product teams and contractor payable milestone  evaluations to manage other transaction agreements. To quickly  implement its early projects, S&T relied on experienced staff from DARPA,  other government agencies, and industry to help train S&T program and  contracting staff in using other transactions and help DHS create and  manage the acquisition process. S&T also brought in program managers,  scientists, and experts from other government agencies on a temporary  basis to provide assistance in other areas. Beyond these efforts, GAO  found some areas for improvement and recommended that: DHS provide  guidance on when to include audit provisions in agreements; provide more  training on creating and managing agreements; capture knowledge gained  from current agreements for future use; and take measures to help  rotational staff avoid conflicts of interest. DHS has implemented some  measures to address many of these recommendations; however, it has not  addressed all of them.
Provide guidance:  We recommended that DHS develop guidance on  when it is appropriate to include audit provisions in other transaction  agreements. Subsequently, DHS modified its management directive to  add guidance on including GAO audit provisions in agreements.  However, the guidance only addresses prototype agreements over $5  million. While S&T contracting officials recently told us that they have  only issued other transaction agreements for prototypes, they noted  that the department intends to issue agreements for research projects  in the future. In addition, it is unclear how the $5 million threshold is to  be applied. In at least one agreement, the audit provision did not apply  to subcontractors unless their work also exceeded the $5 million  threshold.
Provide additional training: We recommended that DHS develop a  training program for staff on the use of other transactions. DHS has  developed a training program on other transactions, and S&T  contracting representatives said they have plans to conduct additional  sessions in 2008. The training includes topics such as intellectual  property rights, acquisition of property in other transactions, and  foreign access to technology created under other transaction authority.  An S&T contracting representative told us the Directorate currently has  three staff with other transaction warrants and has additional in-house  expertise to draw on as needed, and they said S&T no longer needs to  rely on other agencies for contracting assistance.
Capture lessons learned: We recommended that DHS capture  knowledge obtained during the acquisition process for use in planning  and implementing future other transaction projects. In 2005, DHS hired  a consultant to develop a “lessons learned” document based on DOD’s  experience using other transactions. This is included in DHS’s other  transaction training. However, it was not evident based on our follow- up work that DHS has developed a system for capturing knowledge  from its own experience regarding other transaction agreements the  directorate has executed since it was created.
Ethics:  We made a number of recommendations regarding conflicts of  interest and ethics within S&T. When the S&T Directorate was  established in 2003, it hired scientists, engineers, and experts from  federal laboratories, universities, and elsewhere in the federal  government for a limited time under the Intergovernmental Personnel  Act (IPA) with the understanding that these staff would eventually  return to their “home” institution. This created potential conflicts of  interest for those staff responsible for managing S&T portfolios as  these staff could be put in a position to make decisions on their  “home” institutions. We recommended that DHS help the portfolio  managers assigned through IPA comply with conflict of interest laws  by improving the S&T Directorate’s management controls related to  ethics. DHS has complied with these recommendations to define and  standardize the role of these portfolio managers in the research and  development process; provide regular ethics training for these  portfolio managers; and determine whether conflict of interest waivers  are necessary. The only outstanding recommendation concerns  establishing a monitoring and oversight program of ethics-related  management controls. Furthermore, an S&T official told us the use of  rotational portfolio managers has largely been eliminated with the  exception of one portfolio manager who is currently serving a two-year  term.
section_title: Inherent to Other Transactions’ Flexibility Are Certain Accountability Challenges
paragraphs: With federal agencies' increased reliance on contractors to perform  mission related functions comes an increased focus on the need to manage  acquisitions in an efficient, effective, and accountable manner. The  acquisition function is one area GAO has identified as vulnerable to fraud,  waste, abuse, and mismanagement. An unintended consequence of the  flexibility provided by other transaction authority is the potential loss of  accountability and transparency. Accordingly, management controls are  needed to ensure intended acquisition outcomes are achieved while  minimizing operational challenges. Operational challenges to successfully  making use of other transaction authority include: attracting and ensuring  the use of non-traditional contractors; acquiring intellectual property  rights; financial control; and maintaining a skilled acquisition workforce.
Nontraditional Contractors:  One of the goals of using other transactions  is to attract firms that traditionally have not worked with the federal  government. S&T contracting officials confirmed that at least one  nontraditional contractor participated in each other transaction  agreement, generally as a partner to a traditional contractor. We have not  assessed the extent of the involvement of nontraditional contractors or  what portion of the funding they receive. However, we have reported in  the past that DOD had a mixed record in attracting nontraditional  contractors.
Intellectual Property Rights:  One reason companies have reportedly  declined to contract with the government is to protect their intellectual  property rights. Alternatively, insufficient intellectual property rights could  hinder the government’s ability to adapt developed technology for use  outside of the initial scope of the project. Limiting the government’s  intellectual property rights may require a trade-off. On the one hand, this  may encourage companies to work with the government and apply their  own resources to efforts that advance the government’s interests.  However, it also could limit the government’s production options for items  that incorporate technology created under an other transaction agreement.  For example, we previously reported that DARPA received an unsolicited  proposal from a small commercial firm to develop and demonstrate an  unmanned aerial vehicle capable of vertical take-off and landing based on  the company’s existing proprietary technology. DARPA agreed not to  accept any technical data in the $16.7 million agreement. To obtain  government purpose rights, DOD would have to purchase 300 vehicles or  pay an additional $20 million to $45 million. Therefore, using an other  transaction agreement could potentially limit competition and lead to  additional costs for follow-on work.
Financial Controls and Cost Accounting: Other transactions are exempt  from CAS. While other transaction recipients have flexibility in tracking  costs, they still need to provide cost information and demonstrate that  government funds are used responsibly. This is particularly true for  traditional contractors that are performing work under both FAR-based  contracts as well as other transaction agreements. For example,  contractors may use in-kind donations to satisfy cost-sharing  requirements; therefore, it is important that DHS has a means to ensure  that companies do not satisfy their other transaction cost-sharing  requirements with work funded under a FAR-based contract.
Maintaining a Skilled Acquisition Workforce: Other transactions do not  have a standard structure based on regulatory guidelines and therefore  can be challenging to create and administer. Prior GAO work has noted  the importance of maintaining institutional knowledge sufficient to  maintain government control. The unique nature of other transaction  agreements means that federal government acquisition staff working with  these agreements should have experience in planning and conducting  research and development acquisitions, strong business acumen, and  sound judgment to enable them to operate in a relatively unstructured  business environment. Retaining a skilled acquisition workforce has been  a continual challenge at DHS, and we have ongoing work in this area for  this Committee.
Mr. Chairman, this concludes my prepared statement. I would be happy to  respond to any questions you or other Members of the Committee may  have at this time.
section_title: Contacts and Acknowledgements
paragraphs: For further information regarding this testimony, please contact John  Needham at (202) 512-4841 or (needhamjk1@gao.gov). Contact points for  our Offices of Congressional Relations and Public Affairs may be found on  the last page of this product. Staff making key contributions to this  statement were Amelia Shachoy, Assistant Director; Brandon Booth;  Justin Jaynes; Tony Wysocki; Karen Sloan; Laura Holliday; and John  Krump.
section_title: Appendix I: Selected DHS Other Transaction Agreements
paragraphs: American Airlines and  ABX Air Inc.
U.S. Genomics, Inc.
National Institute for  Hometown Security,  Inc.
Science Applications  International Corp  (SAIC)
Genomic HealthCare  (GHC)
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