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

Letter

Background

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.

DHS’s Use of Other Transaction Authority Has Declined Since Fiscal Year 2005

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.

DHS Has Made Progress in Improving Its Use of Its Other Transaction Authority, but Has Yet to Fully Address Prior GAO Recommendations

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.

Inherent to Other Transactions’ Flexibility Are Certain Accountability Challenges

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.

Contacts and Acknowledgements

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.

Appendix I: Selected DHS Other Transaction Agreements

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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