Department of Homeland Security: Improvements Could Further Enhance Ability to Acquire Innovative Technologies Using Other Transaction Authority
Released: 2008-09-23T00:00:00

Letter

Background

Other transaction authority was created to enhance the government’s ability to acquire cutting-edge science and technology in part through attracting contractors that typically have not pursued government contracts because of the cost and impact of complying with government procurement requirements. Because other transactions are exempt from certain statutes, they permit considerable latitude by agencies and contractors in negotiating agreement terms. For example, other transactions allow the federal government flexibility in negotiating intellectual property and data rights, which generally stipulate each party’s rights to technology developed under the agreement. Because these agreements do not have a standard structure based on regulatory guidelines, they can be challenging to create and administer.

The Homeland Security Act of 2002 authorizes two types of other transactions: (1) prototype and (2) research and development. Other transactions for prototypes are used to carry out projects to develop prototypes used to evaluate the technical or manufacturing feasibility of a particular technology, process, or system. To use other transactions for prototypes, federal statute requires that one of three conditions be met: (1) significant participation by a nontraditional contractor, (2) parties to the transaction other than the federal government will pay at least one- third of the total project cost, or (3) the Chief Procurement Officer determines that exceptional circumstances justify the use of an other transaction agreement. Other transactions for research and development are used to perform basic, applied, or advanced research and do not require the involvement of nontraditional contractors. Almost all of S&T’s other transaction agreements have been for prototype projects and justified based on the involvement of nontraditional contractors.

From fiscal years 2004 through 2008, S&T entered into at least 55 other transaction agreements to support 17 different projects. (For a description of the projects see app. II.) DHS entered into 45 agreements in fiscal years 2004 and 2005, when it first began using other transactions to support prototype development projects, based on the Department of Defense’s (DOD) guidance and, in some cases, with assistance from DOD contracting officers. Currently, DHS’s Office of Procurement Operations provides all contracting support, including that for other transactions, to S&T. S&T contracting officers explained that they have been more selective in choosing to use other transaction agreements in recent years. Since 2006, DHS has entered into fewer new agreements each year, while continuing to fund work under the initial agreements entered into in 2004 and 2005. (See fig. 1.) As of April 2008, according to DHS data, 21 agreements were active—including 1 agreement entered into in fiscal year 2008—and 33 agreements were closed.

In fiscal year 2007, other transactions accounted for about $124 million (about 17 percent) of the S&T’s total acquisition activity of $748 million to fund and develop technology in support of homeland security missions. A small proportion of projects account for the vast majority of the funding for other transactions; in February 2008, we reported that the seven largest agreements accounted for over three-quarters of all obligations.

Most Agreements Involved Nontraditional Contractors to Provide Key Technologies and Services

DHS has used its other transaction authority to leverage the capabilities of nontraditional contractors in prototyping and research and development efforts. Most of S&T’s agreements have involved nontraditional contractors, including small businesses, at the prime or subcontractor level. The majority of the nontraditional contractors provided technologies or services that DHS described as significant to the efforts under S&T projects. S&T program managers stated that without the involvement of nontraditional contractors, some of the research efforts may not have been able to advance.

We identified a total of 50 nontraditional contractors who participated in 44 (83 percent) of the agreements we examined, with multiple nontraditional contractors involved on 8 agreements. Half of these contractors had not recently worked for the government. Sixteen nontraditional contractors were prime contractors on agreements, while the other 34 were subcontractors. Nearly half of the nontraditional contractors were classified as small businesses. According to some S&T program managers, using the agreements reduced the administrative burden of working with the federal government and encouraged small businesses, in particular, to participate. Figure 2 shows the proportion of prime contractors and subcontractors by business size.

Small business, subcontractor (12)

Large business, subcontractor (12)

Large business, prime contractor (5)

Planned obligations for 25 of the 44 agreements involving nontraditional contractors total $117 million, which is 40 percent of the total dollars obligated through these agreements.

In describing the roles of the nontraditional contractors, the agreements and supporting documentation we reviewed identified the majority of these roles as significant to the project’s successful completion. Program staff, contracting officers, and contractor representatives also highlighted several technologies and services that nontraditional contractors provided to S&T through the use of other transaction authority.

Several agreements that we reviewed identified significant technologies and services provided by nontraditional contractors. For example, one agreement with a nontraditional contractor—the sole participant on the project—noted that the contractor’s sensor technology would be used to develop prototypes designed to detect chemical warfare agents. The agreement stated that the resulting prototype would help first responders assess and monitor the risks in an area after a suspected or known chemical attack. Similarly, one nontraditional subcontractor was involved under an agreement to develop a prototype for delivering robust detection and geographic information about bioterror attacks. The agreement stated this subcontractor would have a significant level of participation and a substantial role in the project, and possessed unique skills and expertise in the area of DNA microarrays, which was identified as a core technology for the system. In addition, the subcontractor was identified as the leader for all bioagent detection laboratory testing for the project, as well as for designing and performing the lab tests for all critical items in the development of the system.

Program managers said some of the projects pursued under the agreements could not have advanced without the contributions of nontraditional contractors. For example, S&T staff told us that one project, the development and testing of a prototype device to counter the threat of shoulder-fired missiles to commercial aircraft, required the participation of nontraditional contractors. They said that the involvement of major commercial airlines and transport companies allowed S&T to test whether a certain military technology was suitable for a commercial application. In another case, the project manager said that the nontraditional contractor was the only company that held patent rights for the unique technology needed to develop a type of foot and mouth disease vaccine. According to the nontraditional contractor’s representative, the company would not have participated in the project under a FAR-based contract due to concerns about retaining intellectual property rights.

The proportion of dollars obligated on each agreement for nontraditional contractors—which ranged from less than 1 percent to 100 percent—did not necessarily indicate the importance of the contractors’ contributions. For example, only 1 percent of one agreement’s obligations was allocated for work by a nontraditional subcontractor to develop chemical tests for a hazardous substance detection system. However, the prime contractor told us that this nontraditional contractor was the leading expert in the field and uniquely qualified to contribute to the project. In a similar example, only 3 percent of an agreement’s obligations were allocated for work by a nontraditional contractor to manufacture devices necessary for a mobile laboratory prototype. However, DHS considered these devices the heart of the project, and thus a significant contribution.

Policies and Practices Are in Place to Manage Agreements, but Assessment and Staffing Needs Have Not Been Fully Addressed

Since we reported in 2004, DHS has continued to develop policies and practices for managing other transactions, issuing an operating procedure and a guidebook in May 2008, but has not fully addressed the need to assess its use of these agreements and maintain a contracting workforce. DHS has developed guidance and practices to minimize financial and program risks. However, DHS does not have information to systematically assess whether it is obtaining the full benefits of its other transaction authority. Finally, contracting officers with business acumen and training are critical to entering into and administering other transactions; however, it is unclear whether the present workforce is sufficient to support S&T’s operation.

DHS Has Adopted Policies and Practices for Managing the Risks of Other Transactions

In 2004, we reviewed DHS policies and procedures and found they provided a foundation for using its other transaction authority, though refinements were needed. We reported that since the beginning of its use of other transactions, DHS has applied commonly accepted acquisition practices, such as using contractor payable milestone evaluations to manage other transaction agreements. Aspects of DHS’s review process for other transaction agreements are similar to those for contracts subject to the FAR. For example, DHS’s proposed sole source agreements must be explained and approved, and program and contracting offices, as well as its office of general counsel, review all proposed agreements.

DHS’s guidance for prototype projects also encourages the use of fixed price agreements with fixed payable milestones to minimize financial and performance risks. We found that DHS has established fixed price agreements with fixed payable milestones in 44 of the 53 agreements we reviewed. Fixed price acquisitions generally transfer most of the financial risk to the contractor. The financial risk for both parties may be further limited in other transaction agreements by a provision that allows either the government or contractor to leave the program without penalty. In addition, the use of fixed price agreements mitigates concerns regarding cost controls, as the costs are fixed at the time the agreements are established. Payable milestones mark observable technical achievements or events that assist program management and focus on the end goal of the agreement. DHS guidance states that it is based on commercial best practices, in which the use of payable milestones gives industry opportunities to provide major input into milestone descriptions as well as the option to leave the program. One S&T program manager told us that a contractor opted to cancel an agreement at a payable milestone after determining it could no longer meet the goals of the program.

DHS’s recent guidance also calls for considering when to include financial audit provisions in the agreements. Our 2004 report noted that the department lacked guidance on when to include such provisions—other than providing for access to GAO when the agreement is over $5 million. In May 2008, DHS issued a guidebook for the use of other transactions for prototypes, which now includes additional information on when audits should be conducted. Specifically, it states that audit provisions should be included when the payment amounts in the agreement are based on the awardee’s financial or cost records, or when parties other than the government are required to provide at least one-third of the total costs. The guidebook contains sample audit clauses that contracting officers should use or tailor to an individual agreement. The guidance also describes when these requirements apply to key participants other than the prime contractor.

DHS Lacks Information Needed to Assess Whether It Is Obtaining Full Benefits of Other Transaction Authority

Two key benefits of using other transactions are to provide greater latitude in negotiating the allocation of intellectual property and data rights and to leverage the cutting-edge technology developed by nontraditional contractors. Knowledge gained from past projects supported by other transaction agreements could allow DHS to assess the extent to which these benefits are being obtained and inform planning to maximize benefits for future projects. Performance information can help agency managers to ensure that programs meet intended goals, assess the efficiency of processes, and promote continuous improvement. We have previously reported on the benefits of agencies using systematic methods to collect, verify, store, and disseminate information on acquisitions for use by their current and future employees. However, DHS does not have the data it needs to make such assessments and ensure that, in using other transactions, the benefits outweigh the additional risks.

In our 2004 review, we found that S&T lacked the capacity to systematically assess its other transactions, and we recommended that DHS capture knowledge obtained during the acquisition process to facilitate planning and implementing future projects. While the S&T directorate now shares knowledge about the benefits derived from completed projects on an informal basis, DHS does not formally collect or share information about whether other transactions have been successful in supporting projects or what factors led to success or failure. In 2005, DHS hired a consultant to develop a “lessons learned” document based on the DOD’s experience using other transactions, and DHS has incorporated this into its other transactions training. S&T program representatives told us that their programs undergo regular management reviews; however, these reviews are not documented. DHS has not developed a system for capturing knowledge from its own projects, which may limit its ability to learn from experience and adapt approaches going forward.

DHS also lacks the information needed to assess whether it is using other transaction authority to effectively negotiate intellectual property and data rights. While some agreements tailored the language on intellectual property and data rights to the particular needs of the project, we found that the language in most agreements was similar and that some of this language is generally applied to FAR-based contracts. For example, most agreements included standard FAR clauses for allocating intellectual property rights, such as giving all ownership of an invention to the contractor while maintaining a paid-up license that allows the government to use the invention; standard FAR language that gives the government the right to require a contractor to grant a license to responsible applicants or grant the license itself if the contractor refuses to do so; requirements for the contractor to submit a final report on the use of the inventions or on efforts at obtaining such use; and a standard data rights clause with an added provision that extends rights to state and local governments.

Incorporating these clauses enables DHS to protect the government’s interest, however, the extent to which DHS needed these rights is unclear because the rationale for using these provisions and the anticipated benefits were not documented. Concerned that rights may be overestimated—and ultimately result in the government paying for unused rights and discouraging new businesses from entering into other transaction agreements—DOD issued guidance on intellectual property rights negotiations. We reported that DOD’s guidance called for consideration of factors such as the costs associated with the inability to obtain competition for future production, maintenance, upgrade, and modification of prototype technology, or the inability of the government to adapt the developed technology for use outside the initial scope of the prototype project. DHS’s May 2008 guidance for prototype projects includes similar areas of consideration to assist contracting officers in negotiating these rights, which could help to address this concern if implemented as intended. This guidance also provides that contracting officers, in conjunction with program managers, should obtain the assistance of the DHS Intellectual Property Counsel in assessing intellectual property needs.

To better track procurement data from other transaction agreements, DHS has modified its procurement database to capture additional information. For example, DHS recently made changes to its database to allow the user, in part, to identify a prime contractor’s nontraditional status. However, the capacity of the database is limited as it is not designed to capture data to assess DHS’s use of other transactions—particularly on the extent of nontraditional contractors’ contributions. The procurement database is also limited to including information on new and active agreements, so DHS may have missed an opportunity to gather data on experiences from any inactive agreements not included in the database. As of April 2008, at least 10 agreements—almost 20 percent of all the agreements we reviewed—were not in the database. In addition, the database does not contain information on the nature of the work performed by nontraditional contractors—either prime or subcontractors—or the funding allocated to nontraditional contractors. DHS’s guidance only recommends reporting expenditures of government funds if a cost reimbursement agreement is involved or the agreement involves cost- sharing. Most available data on the contributions of nontraditional contractors are maintained in hard copy files, but documentation on 19 of 44 agreements did not contain sufficient information for us to determine the planned obligations for nontraditional contractors.

DHS Has Taken Steps to Develop Staff Skills but Has Been Challenged to Maintain Its Contracting Workforce

The unique nature of other transaction agreements requires staff with 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. DHS requires its other transaction contracting officers to hold a certification for the most sophisticated and complex contracting activities and to take training on the use of this authority.

DHS has created training courses that provide instruction in the use of both FAR-based research and development contracting and other transaction agreements. The topics covered include intellectual property, foreign access to technology created under other transactions, and program solicitations. According to DHS representatives, between January 2005 and March 2008, approximately 80 contracting staff, including contracting officers, had been trained. DHS representatives also said they are developing a refresher course for staff who have already completed the initial training. DHS’s recently issued guidance also requires program staff to take training on other transactions.

When DHS first began entering into other transaction agreements in fiscal year 2004, it relied upon contracting services from other agencies, such as the U.S. Army Medical Research Acquisition Activity, including staff who were experienced in executing other transaction agreements. Since fiscal year 2005, DHS has been granting warrants to permit its own contracting officers to enter into other transaction agreements and has issued these warrants to 17 contracting officers. Nine of these contracting officers have been assigned to support S&T; however, DHS has experienced turnover and 4 of these S&T contracting officers have left DHS since February 2008. The Office of Procurement Operations does not have a staffing model to estimate how many contracting officers are needed to support S&T’s workload on an ongoing basis. Two S&T program managers, who each manage one agreement, told us that they had difficultly obtaining assistance from the procurement office for other transactions, and attributed this to inadequate staffing levels and turnover. Our prior work has noted ongoing concerns with regard to the sufficiency of DHS’s acquisition workforce to ensure successful outcomes. In 2003, we recommended that DHS develop a data-driven assessment of the department’s acquisition personnel resulting in a workforce plan that would identify the number, skills, location, and competencies of the workforce. In 2005, we reported on disparities in the staffing levels and workload imbalances among component procurement offices and recommended that DHS conduct a departmentwide assessment of the number of contracting staff. This recommendation has not been implemented. As of February 2008, DHS reported that approximately 61 percent of the minimum required level and 38 percent of the optimal level of contract specialists were in place, departmentwide. We have ongoing work on acquisition workforce issues and initiatives at DHS and plan to report on the results of these efforts in the final product for that engagement.

Conclusion

While other transaction agreements can carry the benefit of tapping into innovative homeland security technologies through nontraditional contractors, as they are exempt from federal procurement regulations, they also carry the risk of reduced accountability and transparency if not properly managed. DHS has successfully used its other transaction authority to attract nontraditional contractors to develop innovative technologies to address homeland security needs, and it continues to implement the policies and procedures needed to manage the inherent risks of these agreements. However, DHS continues to lack the resources—in terms of knowledge and workforce capacity—to ensure that its agreements are transparent and maximize their potential benefits. If other transaction authority is made permanent, it will be important for DHS to take a systematic approach to assessing its experience with other transaction authority and identifying and addressing contracting workforce needs. These steps would not only enable DHS to more strategically manage its agreements in the future, they also would provide Congress with useful information on the benefits of the authority.

Recommendations for Executive Action

To promote the efficient and effective use by DHS of its other transactions authority to meet its mission needs, we recommend that the Secretary of Homeland Security direct the Under Secretary for Management and the Under Secretary for Science and Technology to take the following two actions: Collect relevant data on other transaction agreements, including the roles of and funding to nontraditional contractors and intellectual property rights, and systematically assess and report to Congress on the use of these agreements to ensure that the intended benefits of the authority are achieved.

Direct the Office of Procurement Operations to work with the Science and Technology directorate to determine the number of contracting officers needed to help ensure a sufficient contracting workforce to execute other transaction authority.

Agency Comments and Our Evaluation

We provided a draft of this report to DHS for review and comment. In written comments, DHS concurred with our recommendations and provided some information on efforts under way to improve information on its use of other transaction authority. DHS’s comments are reprinted in their entirety in appendix III. DHS also provided technical comments that were incorporated where appropriate.

In response to our first recommendation, that DHS collect relevant data on other transactions agreements, including the roles of and funding to nontraditional contractors and intellectual property rights, and systematically assess and report to Congress on the use of these agreements to ensure that the intended benefits of the authority are achieved, DHS stated that the Chief Procurement Officer is taking steps to improve the information DHS has on its other transactions. DHS reiterated changes it has made to its procurement data system which are described in our report. DHS also noted the information included in its annual report to Congress on S&T’s other transactions. For example, the report details the technical objectives of each other transaction including the technology areas in which the project is conducted. DHS also stated that it plans to revise its guidance to specify that the Office of Procurement Operations and S&T program management should formally collaborate in preparing its annual report to Congress, noting that this process can serve as a means of sharing “lessons learned” on the benefits of other transaction authority. While DHS stated that its report to Congress includes overarching assessment information, DHS does not systematically evaluate whether it is obtaining the full benefits of other transaction authority. For example, DHS did not specify how it will improve the availability of and systematically assess information related to the nature of the work being performed by nontraditional contractors, the funding allocated to nontraditional contractors, or areas considered in the negotiation of intellectual property rights. We continue to believe that these are key areas in which DHS should collect and evaluate data to determine whether the intended benefits of the authority are achieved.

In response to our second recommendation, that the Office of Procurement Operations work with S&T to determine the number of contracting officers needed to help ensure a sufficient contracting workforce to execute other transaction authority, DHS stated that this issue can only be addressed as part of broader departmentwide acquisition workforce initiatives. DHS recognized the need to have contracting personnel, certified in the use of other transactions, in sufficient numbers to handle S&T’s workload as it arises, but noted that the workload does not lend itself to a static number of personnel. While we recognize that the workload for other transactions fluctuates, the Office of Procurement Operations does not have a staffing model that incorporates workload to estimate what level of contracting support is needed for other transactions on an ongoing basis. We continue to believe that this would help DHS managers ensure a sufficient contracting workforce to execute S&T’s other transaction authority.

We are sending copies of this report to interested congressional committees and the Secretary of Homeland Security. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s web site at http://www.gao.gov.

If you or your staff have questions regarding this report or need additional information, please contact me 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 report. Principal contributors to this report were Amelia Shachoy, Assistant Director; Alexandra Dew; Russ Reiter; Matthew Voit; Tracey Graham; John Krump; and Karen Sloan.

Appendix I: Scope and Methodology

To determine the extent to which nontraditional contractors have been involved in other transactions with the Department of Homeland Security (DHS) to fulfill technology and mission needs, we obtained an initial list of agreements from DHS’s Office of Procurement Operations, the contracting office responsible for entering into these agreements; conducted a file review; and interviewed DHS’s Science and Technology (S&T) directorate’s program managers. As shown in table 1, we identified 53 of 55 agreements that we could review.

Nontraditional contractors were identified in 44 agreement files, although not all had complete information. For example, 19 of these files did not include sufficient information to determine how much of the contract value was proposed to go to nontraditional contractors. We analyzed all available agreements and the contractors’ proposals to identify the nontraditional contractors, the contribution they plan to bring to the project, and the nontraditional contractors’ shares as identified in contractors’ proposals. However, DHS relies on contractors to self-certify their status as a nontraditional government contractor during agreement negotiation. In analyzing DHS’s agreements, we did not independently verify a contractor’s reported status as a nontraditional contractor other than to conduct a search of the Federal Procurement Data System-Next Generation (FPDS-NG) to determine whether these contractors had prior government work. Our limited review of FPDS-NG identified 25 contractors who had worked with the government in the previous year but found no contract actions that appeared to be subject to the cost accounting standards or that were for prototype or research projects in excess of $500,000. We also did not independently verify the share of costs allocated to nontraditional contractors or their contributions under the agreements. We determined nontraditional contractors’ business size by reviewing data from the Central Contractor Registration. With these data, we identified the business size of 39 of 50 nontraditional contractors. Of the remaining 11 firms, 1 firm did not have a business size identified and 10 were not listed in the database. In addition, we interviewed DHS contracting officers and S&T program managers to obtain their views on the contributions that the nontraditional contractors provided to the project. In addition, we also interviewed two prime contractors, one traditional and one nontraditional, to understand their experiences with entering into other transactions with DHS.

To assess DHS’s management of the acquisition process when using other transactions, we reviewed and analyzed each available agreement file to assess the process and procedures used to negotiate and enter into the agreement. We reviewed DHS’s Management Directive 0771.1, Other Transaction Authority, dated July 8, 2005, and Procurement Operating Procedure 311, Other Transactions for Prototypes and the attached Other Transaction for Prototype Guidebook, dated May 22, 2008. We also interviewed contracting officers and program managers as well as a representative from DHS’s legal counsel to obtain an understanding of the review process. We reviewed each available agreement analysis to determine how the intellectual property and data rights were negotiated. We discussed with contracting and program representatives whether information is collected to assess the effectiveness and benefits of the use of other transaction authority or what lessons are learned from its use. We also reviewed DHS’s June 30, 2008, report to Congress on its use of other transaction authority, which includes information on 38 agreements. During the course of our audit work, we reviewed 15 additional agreements, including 1 agreement entered into after DHS’s reporting period. We reviewed DHS’s training material provided to contracting officers on the use of the other transaction authority. We also obtained information on the number of contracting representatives that have received this training and the number of those that have left DHS since 2005. We also reviewed our prior reports on the use of other transaction authority at the Departments of Defense and Homeland Security.

We conducted this performance audit from April through September 2008, in accordance with 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.

Appendix II: Description of DHS Projects Supported by Other Transaction Agreements

Agriculture Biosecurity Thrust Area Veterinary Countermeasures Development of a Foot and Mouth Disease vaccine that allows for

Autonomous Rapid Facility Chemical Agent Monitor (ARFCAM)

BioAgent Autonomous Network Detector (BAND)

Food Biological Agent Detection Sensor (FBADS)

Instantaneous Bio-Aerosol Detection Systems (IBADS)

Lightweight Autonomous Chemical Identification System (LACIS) Hand-held chemical agent detectors Low-Cost Bio-Aerosol Detection System (LBADS)

Portable High-through-put Integrated Laboratory Identification System (PHILIS)

Rapid Automated Biological Identification System (RABIS)

Counter Man-Portable Air Defense Systems (CMANPADS)

S&T Infrastructure Protection & Geophysical Science Division Kentucky Critical Infrastructure Protection Institute (KCI)

S&T Homeland Security Advanced Research Projects Agency Prototypes and Technology for Improvised Explosives Device Detection (PTIEDD)

Appendix III: Comments from the Department of Homeland Security