[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
      OTHER TRANSACTION AUTHORITY: FLEXIBILITY AT THE EXPENSE OF 
                            ACCOUNTABILITY?

=======================================================================

                                HEARING

                               before the

                        SUBCOMMITTEE ON EMERGING
                        THREATS, CYBERSECURITY,
                       AND SCIENCE AND TECHNOLOGY

                                 of the

                     COMMITTEE ON HOMELAND SECURITY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 7, 2008

                               __________

                           Serial No. 110-92

                               __________

       Printed for the use of the Committee on Homeland Security
                                     

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                                     

  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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                     COMMITTEE ON HOMELAND SECURITY

               Bennie G. Thompson, Mississippi, Chairman

Loretta Sanchez, California          Peter T. King, New York
Edward J. Markey, Massachusetts      Lamar Smith, Texas
Norman D. Dicks, Washington          Christopher Shays, Connecticut
Jane Harman, California              Mark E. Souder, Indiana
Peter A. DeFazio, Oregon             Tom Davis, Virginia
Nita M. Lowey, New York              Daniel E. Lungren, California
Eleanor Holmes Norton, District of   Mike Rogers, Alabama
Columbia                             David G. Reichert, Washington
Zoe Lofgren, California              Michael T. McCaul, Texas
Sheila Jackson Lee, Texas            Charles W. Dent, Pennsylvania
Donna M. Christensen, U.S. Virgin    Ginny Brown-Waite, Florida
Islands                              Gus M. Bilirakis, Florida
Bob Etheridge, North Carolina        David Davis, Tennessee
James R. Langevin, Rhode Island      Paul C. Broun, Georgia
Henry Cuellar, Texas
Christopher P. Carney, Pennsylvania
Yvette D. Clarke, New York
Al Green, Texas
Ed Perlmutter, Colorado
Bill Pascrell, Jr., New Jersey

       Jessica Herrera-Flanigan, Staff Director & General Counsel

                        Todd Gee, Chief Counsel

                     Michael Twinchek, Chief Clerk

                Robert O'Connor, Minority Staff Director

                                 ______

   SUBCOMMITTEE ON EMERGING THREATS, CYBERSECURITY, AND SCIENCE AND 
                               TECHNOLOGY

               James R. Langevin, Rhode Island, Chairman

Zoe Lofgren, California              Michael T. McCaul, Texas
Donna M. Christensen, U.S. Virgin    Daniel E. Lungren, California
Islands                              Ginny Brown-Waite, Florida
Bob Etheridge, North Carolina        Paul C. Broun, Georgia
Al Green, Texas                      Peter T. King, New York (Ex 
Bill Pascrell, Jr., New Jersey       Officio)
Bennie G. Thompson, Mississippi (Ex 
Officio)

                   Jacob Olcott, Director and Counsel

       Dr. Chris Beck, Senior Advisor for Science and Technology

                       Carla Zamudio-Dolan, Clerk

           Kevin Gronberg, Minority Professional Staff Member

                                  (II)


                            C O N T E N T S

                              ----------                              
                                                                   Page

                               Statements

The Honorable James R. Langevin, a Representative in Congress 
  From the State of Rhode Island, and Chairman, Subcommittee on 
  Emerging Threats, Cybersecurity, and Science and Technology....     1
The Honorable Michael T. McCaul, a Representative in Congress 
  From the State of Texas, and Ranking Member, Subcommittee on 
  Emerging Threats, Cybersecurity, and Science and Technology....     2

                               Witnesses

Mr. Thomas W. Essig, Chief Procurement Officer, Department of 
  Homeland Security, Accompanied by Dr. Keith B. Ward, Chief 
  Research and Development Branch, Chemical and Biological 
  Division, Science and Technology, Department of Homeland 
  Security:
  Oral Statement.................................................     4
  Prepared Statement.............................................     6
Dr. L. Elaine Halchin, Analyst, American National Government, 
  Congressional Research Service, Accompanied by Dr. John D. 
  Moteff, Specialist, Science and Technology Policy, 
  Congressional Research Service:
  Oral Statement.................................................    13
  Prepared Statement.............................................    15
Mr. John K. Needham, Acting Director, Acquisition and Sourcing 
  Management, Government Accountability Office:
  Oral Statement.................................................    21
  Prepared Statement.............................................    23


                 OTHER TRANSACTION AUTHORITY: FLEXIBI- 
                 LITY AT THE EXPENSE OF ACCOUNTABILITY?

                              ----------                              


                       Thursday, February 7, 2008

             U.S. House of Representatives,
                    Committee on Homeland Security,
      Subcommittee on Emerging Threats, Cybersecurity, and 
                                    Science and Technology,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 2:11 p.m., in 
Room 311, Cannon House Office Building, Hon. James R. Langevin 
[Chairman of the subcommittee] presiding.
    Present: Representatives Thompson, Langevin, Etheridge, 
Green, Pascrell, McCaul, and Broun.
    Mr. Langevin [presiding]. The subcommittee will come to 
order.
    The subcommittee today is hearing testimony on other 
transaction authority, or OTA, answering the question, 
flexibility at the expense of accountability.
    Good afternoon, and I want to welcome our witnesses to 
today's hearing on other transaction authority at the 
Department of Homeland Security.
    I would like to begin by thanking my Ranking Member, Mr. 
McCaul, for working with me on this issue and the Chairman of 
the full committee, Mr. Thompson, for his leadership and 
continued oversight over procurement matters within the 
Department.
    We are here today to consider the arguments for and against 
extending the Department's use of other transaction authority, 
which is scheduled to sunset in September 2008. Other 
transaction authority, abbreviated as OTA, was originally 
created to attract nontraditional commercial firms to do 
business with the Federal Government. Within that definition 
are those firms that either refuse or could not participate in 
such contractual agreements with the Federal Government.
    This authority is based on the premise that it is in the 
Federal Government's best interest to attract nontraditional 
contractors who are at the cutting edge of technology, which 
can lead to new homeland security or defense products that 
companies might not otherwise have adequate resources to invest 
in on their own.
    The Department of Homeland Security is one of several 
agencies, including NASA, the Department of Defense, the 
Department of Energy and the Department of Health and Human 
Services, that use OTA.
    OTA applies only two types of awards at DHS. One award is 
known as other transactions for research, which are typically 
used for basic, applied or advanced research. This type of 
transaction does not call for a deliverable product but rather 
provides a support to broaden the homeland technology knowledge 
base.
    The other award is known as other transactions for 
prototypes, which are used to help the Department develop or 
acquire a prototype.
    Companies who receive awards under OTA are granted 
exceptional benefits. For instance, an other transaction is not 
subject to the Federal acquisition regulation, or FAR, most 
procurement status or the Government's cost accounting 
standards. Companies are also usually granted greater rights to 
intellectual property that is produced under the agreement.
    The subcommittee seeks answers to two questions today: 
First, is OTA premised on sound policy, and, second, given the 
incredible flexibility granted under OTA, are there adequate 
protections in place to reduce or eliminate any potential 
abuses?
    We are not the first to examine these questions. Reports 
issued earlier this decade suggested other transactions do 
indeed expand Government's access to commercial technology and 
production capacity and because of the cost-sharing provisions, 
do result in lower overall transaction costs.
    However, people closely associated with OTA, including a 
former Department of Defense inspector general, note that the 
potential for abuse exists without the traditional protections 
of the procurement system.
    The DOD IG noted during its review of OTA that contracting 
officers failed, in this case, to sufficiently document 
justification for using other transactions, to document the 
review of cost proposals and to monitor the actual research 
costs itself. This led to the IG's testimony in 2002 where the 
Department concluded that based upon the DOD experience, we 
believe other transactions should be considered only when it is 
clear that the Government is unable to acquire goods, services 
and even technologies through existing vehicles.
    In short, though the freedoms associated with OTA may 
attract more businesses to participate, they also carry 
significant risks for the Federal Government. While we all want 
technology faster and cheaper, we also have to be mindful that 
we are stewards of American tax dollars.
    If we are going to allow this kind of flexibility at the 
Department, the Department must demonstrate to this committee 
that it can be trusted to handle the authority. This means 
showing that adequate protections are in place to reduce or 
eliminate any potential abuses of OTA.
    Then Mr. Essig can provide us with assurances that the 
Department has conducted robust oversight over this process 
before we consider extending OTA beyond 2008. We will have 
several questions on this front when we get to that point.
    With that, I conclude my remarks, and the Chair now 
recognizes the Ranking Member of the subcommittee, the 
gentleman from Texas, Mr. McCaul, for the purpose of an opening 
statement.
    Mr. McCaul.
    Mr. McCaul. I thank the Chairman. I thank you for honoring 
my request for this hearing. You are certainly a man of your 
word and, as usual, conducting yourself in a very bipartisan 
way, which is a good way to conduct ourselves in this very 
important committee.
    I believe this is an important issue. This is a tool that 
the Department uses to protect our country.
    Part of our duty as a committee is to ensure that DHS has 
the best technology and training available. I see the authority 
to engage in the other transactions is a critical tool, which 
allows the Department to partner with nontraditional Government 
contractors to develop state-of-the-art technologies faster and 
more efficiently than would be possible under a traditional 
procurement contract.
    The Department of Defense has used this authority to enter 
into other transactions for many years within DARPA where they 
have had many incredible technological breakthroughs. These 
agreements are not used to purchase office supplies or other 
commodities for which a traditional contract is perfectly 
acceptable.
    Other transactions cover the development of technology to 
fill a particular unmet need, such as automated biowarfare 
agent detectors or a system to knock missiles out of the sky 
before they bring down an airliner.
    The traditional requirements of Government contracting do 
not provide the flexibility necessary, in my judgment, to 
develop such projects and can be cost-prohibitive to smaller 
companies or those that don't regularly do business within the 
Government.
    I understand that my colleagues may have questions 
regarding the accountability of these other transactions, and 
I, too, share their concern. Because they are not subject to 
the traditional Federal acquisition requirements, or the FAR, 
other transactions do not have the same checks and balances 
required by traditional procurement contracts. Considering the 
increased risk inherent in other transactions, they should not 
be entered into for inappropriate goals nor should they be 
entered into lightly.
    It is my understanding that the Department only allows its 
most experienced and highly trained contracting officers to 
enter into other transactions and even competes such contracts 
despite there being no requirement that it do so. I believe 
that this shows that the Department approaches the negotiations 
of other transactions with the appropriate gravity, and I look 
forward to hearing how the Department has put forth this 
authority to use and the technologies that it has developed as 
a result of these agreements.
    I also hope to find out more about the nontraditional 
Government contractors with which the Department has been able 
to work. At the same time, I am looking forward to the 
testimony from GAO and hearing their recommendations to improve 
the success of these types of agreements.
    The Department's authority to use other transactions 
expires at the end of September 2008. Late last year, I 
introduced H.R. 4290, which would extend the authority for 
another 5 years. Without that authority, in my judgment, the 
next administration could be unnecessarily hamstrung in their 
pursuit of the best technology to fit their needs.
    I thank the Chairman, and I yield back.
    Mr. Langevin. I thank the Ranking Member.
    Other Members of the subcommittee are reminded that under 
the committee rules, opening statements may be submitted for 
the record.
    I now want to welcome our witnesses today. Our first 
witness is Tom Essig, chief procurement officer of the 
Department of Homeland Security. Mr. Essig came to his position 
January 10, 2008, so he is definitely new on the job, but he 
has a wealth of experience behind him. Prior to this 
appointment, he was deputy chief procurement officer. Before 
coming to DHS, Mr. Essig worked in the Navy's Office of the 
Assistant Secretary and was the services director of the 
Program Analysis and Business Transformation Division.
    During the questioning period, Mr. Essig will be joined by 
Keith Ward, chief of the Chem-Bio R&D branch within Science and 
Technology Directorate.
    Our second witness is Dr. Elaine Halchin, analyst in 
American National Government at Congressional Research Service. 
Dr. Halchin's principal areas are research responsibility, 
government procurement, sports and the Senior Executive Service 
and the government travel policy.
    During the questioning period, she will be joined by her 
CRS colleague, Jack Moteff.
    Our third witness is John Needham, assistant director, 
Acquisition and Sourcing Management, Government Accountability 
Office. Mr. Needham leaves reviews of acquisition contracting 
practices at the Department of Homeland Security and Defense.
    I want to welcome all of our witnesses. Without objection, 
the witnesses' full statements will be inserted into the 
record, and I now ask each witness to summarize his or her 
statement for 5 minutes, beginning with Mr. Essig.
    Welcome.

   STATEMENT OF THOMAS W. ESSIG, CHIEF PROCUREMENT OFFICER, 
DEPARTMENT OF HOMELAND SECURITY, ACCOMPANIED BY KEITH B. WARD, 
CHIEF RESEARCH AND DEVELOPMENT BRANCH, CHEMICAL AND BIOLOGICAL 
   DIVISION, SCIENCE AND TECHNOLOGY, DEPARTMENT OF HOMELAND 
                            SECURITY

    Mr. Essig. Mr. Chairman, Ranking Member McCaul and Members 
of the subcommittee, thank you for this opportunity to appear 
before you to discuss the Department of Homeland Security's use 
of its other transaction authority.
    I am the Department's chief procurement officer, or CPO, 
and I am responsible for the management, administration and 
oversight of the Department's acquisition programs. With me 
here today is Dr. Keith Ward from the Department's Science and 
Technology Directorate.
    Before addressing the subject of today's hearing, DHS' 
other transaction authority, I would like to take this 
opportunity to summarize my background. I am a career Federal 
employee with more than 30 years of public service in the 
acquisition career field. I began my career in 1976 as a 
contracting intern with the Navy Department. I was selected as 
a member of the Senior Executive Service in 1995 and held 
several senior acquisition positions with the Navy Department, 
including executive director of the Office of Special Projects 
and director for Program Analysis and Business Transformation.
    I joined DHS in May 2006 as a deputy chief procurement 
officer and was selected as the chief procurement officer last 
month. I am also certified at level three, the highest level, 
in both the contracting and program management career fields at 
both DOD and DHS.
    In my written statement, I identified my top priorities as 
CPO. The first, to make good business deals, is intended to 
ensure that we accomplish our mission while also being good 
stewards of taxpayer dollars. Other transactions, or OTs, are a 
very useful took in helping us achieve that goal.
    OTs differ from traditional contracts in a number of ways. 
Contracts are governed by the Federal acquisition regulation, 
or the FAR, and as a result include a number of terms and 
conditions not seen in commercial transactions. OTs, however, 
are not subject to the FAR, so we are able to tailor terms and 
conditions in order to, No. 1, attract business entities that 
do not normally do business with the Government and, No. 2, 
enhance our ability to share the cost of maturing certain dual-
use technologies with industry, thereby lowering the overall 
cost to the taxpayer.
    OTs have only been used by two of DHS contracting 
activities, the Transportation Security Administration, TSA, 
and the Office of Procurement Operations in support of DHS 
Science and Technology Directorate. Their respective OT 
authority comes from different sources.
    TSA's OT authority is derived from the Aviation and 
Transportation Security Act, and its primary use has been for 
the explosive baggage screening and closed-circuit TV programs 
at the Nation's airports. Because airport operators are public 
entities, TSA's ability to enter into traditional contracts for 
these programs is limited. TSA's OT authority provides the 
necessary flexibilities to meet their mission requirements.
    The focus of my testimony today, however, is on the 
Department's OT authority in support of the S&T Directorate. 
That authority stems from the Homeland Security Act of 2002, 
which allows DHS to enter into other transactions for basic, 
applied and advanced research and development and prototype 
projects. The Department appreciates that the recently passed 
DHS Appropriations Act includes a provision extending our OT 
authority through September 30 of this year, and we are 
grateful for, and fully support, Ranking Member McCaul's 
efforts to further extend that authority through September 
2012.
    In my written statement, I identified four S&T projects 
that were made possible with this OT authority. One of these is 
the lightweight autonomous chemical identification system, or 
LACIS project, which is developing handheld chemical agent 
detectors for our first responders, including fire departments 
and HAZMAT teams. The project resulted from a broad agency 
announcement designed to reach a broad segment of the market 
and attract traditional and nontraditional firms, both 
individually and as teams.
    In a December 2004 report, the Government Accountability 
Office, GAO, reported on DHS' used of its OT authority under 
the Homeland Security Act and recommended that DHS provide 
guidance on including audit provisions in OTs, develop a 
training program on the use of OTs and capture knowledge gained 
during the acquisition process. I am pleased to report that we 
have implemented all three recommendations.
    In summary, OT authority provides a tool that is especially 
useful when bringing nontraditional contractors to the Federal 
research and development environment, gives the Department 
access to more commercially available technologies than would 
otherwise be the case, promotes the development of dual-use 
technologies at a reduced overall cost to the taxpayer and 
allows the Department to obtain proposals from teams that cut 
across organizational boundaries to achieve optimal mixes of 
talent and innovation.
    We also recognize that OTs are not right for every 
situation and have implemented guidance, training, knowledge 
sharing and oversight procedures to ensure that OTs are used 
appropriately.
    Thank you, Mr. Chairman, for your interest in and continued 
support of the DHS acquisition program and for the opportunity 
to testify before the subcommittee about the Department's OT 
authority.
    I would be glad to answer any questions you or other 
Members of the subcommittee may have for me.
    [The statement of Mr. Essig follows:]

                 Prepared Statement of Thomas W. Essig
                            February 7, 2008

    Chairman Langevin, Ranking Member McCaul and Members of the 
subcommittee, thank you for this opportunity to appear before you to 
discuss the Department of Homeland Security's (DHS) acquisition program 
and in particular, DHS' use of its Other Transaction Authority (OTA). I 
am the Chief Procurement Officer (CPO) for the Department. With me here 
today is Dr. Keith Ward from DHS' Science & Technology (S&T) 
Directorate.
    As DHS' CPO, I am the lead executive responsible for the 
management, administration and oversight of the Department's 
acquisition programs. In that capacity, I oversee and support eight 
procurement offices within DHS--Customs and Border Protection (CBP), 
Federal Emergency Management Agency (FEMA), Immigration and Customs 
Enforcement (ICE), Transportation Security Administration (TSA), United 
States Coast Guard (USCG), United States Secret Service (USSS), Federal 
Law Enforcement Training Center (FLETC), and the Office of Procurement 
Operations (OPO). My office provides the acquisition policies, 
procedures, training and workforce initiatives that will that enable 
our acquisition professionals to support mission accomplishment while 
also being good stewards of taxpayer dollars.
    Before addressing the subject of today's hearing, DHS' Other 
Transaction Authority, I would like to take this opportunity to 
summarize my background and convey my top priorities as the CPO. I am a 
career Federal employee, with more than 30 years of public service in 
the acquisition career field. I began my Federal career in 1976 when I 
entered the Navy's Contracting Intern Development Program. My initial 
assignment was with the Naval Sea Systems Command (NAVSEA), where I 
served as a contract specialist supporting various Naval weapon systems 
and shipbuilding programs. I was selected as a member of the Senior 
Executive Service in 1995 and served as the Director of the Surface 
Systems Contracts Division of NAVSEA. I have also held Senior Executive 
Service positions with the Navy Department as the Executive Director of 
the Office of Special Projects, Director of the Navy Engineering 
Logistics Office, and Director for Program Analysis and Business 
Transformation in the Office of the Assistant Secretary of the Navy for 
Research, Development, and Acquisition. I joined DHS in May 2006 as the 
Deputy Chief Procurement Officer and was selected as the Chief 
Procurement Officer in January 2008. While most of my career has been 
in the area of contracting, my assignments have also given me 
responsibility for leadership of other critical acquisition functions. 
As a result, I am certified at Level III (the highest level) in both 
the contracting and program management career fields at both the 
Department of Defense (DoD) and DHS.
    Earlier this year, I identified my top priorities for fiscal year 
2008. The first three priorities were initially established by my 
predecessor, Ms. Elaine Duke. While we have made significant progress 
on all three priorities, more remains to be done and I have, therefore, 
retained them for fiscal year 2008.
Priority No. 1: To Make Good Business Deals
    We need to make business decisions that enable us to accomplish our 
mission, while also being good stewards of taxpayer dollars. Within the 
Office of the CPO (OCPO), we are developing and implementing a policy 
and oversight framework that will facilitate the Department's ability 
to achieve this objective. We have, for example, recently issued policy 
and guidance on topics that include: goals for contract awards to small 
business and other socio-economic concerns; judicious use of the Alaska 
Native Corporation 8(a) program, including requirements to ensure the 
award is in the best interest of the Government; increasing the use of 
competition; and guidance documents on Source Selection, the use of 
Other Than Full and Open Competition, and acquisition planning.
Priority No. 2: To Build and Sustain the DHS Acquisition Workforce
    A key enabler of our ability to make good business deals is a 
highly skilled and motivated acquisition workforce. In fiscal year 
2008, we are focusing on four acquisition workforce initiatives: 
establishment of an acquisition intern program; identification of 
certification and training requirements for all acquisition functional 
areas; a centralized acquisition training fund; and centralized 
recruitment and hiring of acquisition personnel. I greatly appreciate 
the funding we received in fiscal year 2008 in support of these 
initiatives.
Priority No. 3: To Perform Effective Contract Administration
    In addition to making sure that our contract awards represent good 
business deals, we must perform effective contract administration in 
order to ensure that we get what we bargained for. In this area, we are 
leveraging support from the Defense Contract Management Agency to 
support a number of contract administration areas, including the 
performance of Earned Value Management (EVM) on DHS contracts. We are 
also conducting comprehensive reviews and improving communications with 
our contracting activities to identify and remedy issues that may occur 
over the life cycle of our contracts. Recently, these reviews led to a 
change in our Acquisition Manual to address specific Contracting 
Officer's Technical Representative oversight responsibilities 
associated with the review of contractor invoices (also referred to as 
vouchers) for reasonableness and accuracy, and to ensure that 
deliverables have been provided in accordance with the terms of our 
contracts.
    These first three priorities are largely focused on the contracting 
function. Recognizing, however, that successful acquisition programs 
require more than just good contracting, I have added a fourth priority 
this year:
Priority No. 4: To Improve the Quality of Program Management Throughout 
        DHS
    In order to deliver the capabilities to meet DHS' mission on 
schedule and within budget, we are working to strengthen program 
management, including related functions such as cost analysis, 
logistics, systems engineering, and test and evaluation. During the 
past year, we established a core group within OCPO and partnered with 
the Defense Acquisition University and the Homeland Security Institute 
to ensure we have the skills and experience necessary to assess the 
status of DHS' acquisition programs and put policies and procedures in 
place to improve the management of our acquisition programs. We are 
also working to ensure that our program management teams are 
appropriately staffed and trained. Our goal is to make certain we have 
the policies, processes, and skilled people in place to effectively 
manage our programs and ensure the successful achievement of our 
mission objectives.

                   OTHER TRANSACTION AUTHORITY (OTA)

    There are many differences between a FAR-based contract and an 
Other Transaction or ``OT ''. Contracts are procurement instruments 
and, as such, are governed by the FAR. Contracts are to be used when 
the principal purpose of the project is the acquisition of goods and 
services for the direct benefit of the Federal Government. In contrast, 
DHS OTs used by the DHS Science & Technology Directorate for prototype 
projects are used to acquire technologies that provide counter-
terrorism tools and resources for our agents and first responders in 
the field to combat against those threatening our Homeland. Unlike 
traditional contracts, these OTs attract business entities that do not 
normally do business with the Federal Government, exploit the cost-
reduction potential of accessing innovative or commercially developed 
technologies, and tend to increase competition for follow-on efforts. 
The Contract Disputes Act and GAO protest rules do not apply to OTs for 
prototype projects; procedures for resolving disputes and filing 
protests are addressed in the actual OT.
    OTs have only been issued by two of DHS' contracting activities: 
the Transportation Security Administration (TSA) and the Office of 
Procurement Operations (OPO) in support of DHS' Science & Technology 
Directorate. Their respective OT Authority comes from different 
sources.
    The focus of much of my testimony today is on the Department's OT 
Authority stemming from the Homeland Security Act of 2002 as well as 
the subject of the Government Accountability Office's (GAO) 2004 audit. 
However, I would first like to address the TSA's OT Authority which is 
derived from the Aviation and Transportation Security Act (Pub. L. 107-
71).
TSA's OT Authority
    TSA's primary use of its OT Authority has been for its Explosive 
Baggage Screening Program (EBSP) and its Closed Circuit TV (CCTV) 
Program at the Nation's airports. TSA's use of OTs is primarily as a 
mechanism for providing reimbursement funding and outlining the roles 
and responsibilities associated with these shared airport projects.
            1. Explosive Baggage Screening Program (EBSP)
    TSA's EBSP projects involve the modification and/or construction of 
a checked baggage inspection system in the Airport/Air Carrier baggage 
handling system through the installation of Explosive Detection Systems 
(EDS). The scope of each project includes, but is not limited to, 
design, construction of installation of new or renovation of existing 
baggage conveyor systems, modification and upgrade of existing 
mechanical, electrical, telecommunications infrastructure and plumbing 
equipment, and baggage handling screening matrix able to support EDS 
machines, and the installation of hardware and software for use with in 
in-line baggage screening applications.
    Each airport uses established contracting processes and contractors 
to design and perform necessary airport site preparation to support the 
project. The variety of local factors and conditions that affect 
airport funding and design decisions requires a partnership between TSA 
and each airport. Teaming with each airport ensures a mutually 
acceptable baggage screening solution to TSA and each airport and its 
associated air carriers. By providing funding to each airport via an OT 
that allows for the reimbursement of the baggage screening project 
costs, TSA benefits as the burden of the airport design work and the 
responsibility of the construction management, logistics, and work 
performance is shared with each airport. The OT outlines the 
responsibilities of the airport and the TSA as well as provides the 
funding for each airport project.
    TSA uses an integrated and participatory approach to the project 
planning and design process with each airport to appropriately size the 
system for EDS equipment, providing the most cost-effective solution 
and ensuring optimal baggage screening performance standards are met. 
Using industry standards, TSA validates the cost estimate of the 
project based on information provided by each airport. Once the design 
effort is completed, the TSA Technical Representative monitors the 
airport construction effort.
    TSA retains a percentage of the OT funds until the airport has 
successfully passed the TSA administered integrated baggage screening 
test. Reimbursement of costs by TSA is made to the airport on a 
documented cost basis. The use of an OT provides for airport 
performance of site preparation work, but allows TSA to retain 
oversight of the project and control over the reimbursement of costs. 
Additionally, TSA submits an annual spend-plan to congressional 
appropriators detailing planned locations and funding for its in-line 
systems. To date, for the EBSP, TSA has executed 53 OTs valued at 
approximately $320 million. All of these OTs have been with airport 
operators which are public entities.
            2. Closed Circuit Television (CCTV) Other Transaction 
                    Agreements
    Expanding the views of an airport's CCTV camera system to include 
views of the passenger checkpoints and baggage screening areas allows 
TSA to enhance security situation awareness, deter theft, aid in the 
resolution of claims, and assist in the resolution of law enforcement 
issues. Each airport uses established contracting processes to perform 
installation work (electrical, network connectivity, camera mounting, 
media storage capability) necessary to support the TSA camera views of 
passenger screening and baggage screening areas. Given the variety of 
local factors and conditions that affect airport funding and design 
decisions, developing a partnership between TSA and each airport 
ensures a mutually acceptable CCTV screening solution.
    TSA benefits from the business relationships each airport 
establishes with their CCTV vendors as each CCTV system is unique to a 
particular airport. By providing funds to each airport via an OT that 
allows for the reimbursement of the costs of the installation of CCTV 
cameras and media storage capability, TSA benefits by sharing the 
burden of the installation management, logistics, and work performance. 
The OTA outlines the responsibilities of the airport and the TSA as 
well as provides the funding for the project.
    Each airport provides TSA a statement of work with a cost estimate 
for the camera views to be installed. The cost estimate is validated 
and an OT is executed with the airport for the project and monitored 
during the project's performance. Installed CCTV products supplement 
each airport's current CCTV system and are not owned by the TSA. Each 
airport is responsible for maintenance and repairs to ensure the 
uninterrupted operation of the CCTV system. To date, TSA has executed 
32 OTs valued at approximately $32 million for CCTV projects. All of 
these OTs have been with airport operators which are public entities.
S&T's OT Authority
    DHS' OT Authority exercised by OPO in support of S&T is very 
different from that used by TSA. The OPO Authority is derived from the 
Homeland Security Act of 2002 and the subject of GAO's 2004 audit. 
Section 831 of Public Law 10-296, the Homeland Security Act of 2002, 
granted DHS its authority to enter into transactions (other than 
contracts, cooperative agreements, and grants) for basic, applied, and 
advanced research and development (R&D) projects as well as for 
prototype projects. This authority has since been codified in Title 6 
of the United States Code (Subchapter VIII Part D Section 391, as 
amended. DHS' R&D OT Authority is based on DoD's authority (Section 
2371 of Title 10, United States Code and Section 845 of Public Law 103-
160). DHS appreciates that the recently passed DHS Appropriations Act 
(Public Law 110-161) includes a provision extending our OT R&D 
Authority through September 30, 2008, and we very much appreciate and 
fully support Ranking Member McCaul's efforts through H.R. 4290 
Homeland Security Technology Advancement Act to further extend our R&D 
OT Authority through September 30, 2012.
    This DHS R&D OT Authority provides a useful tool that enhances the 
Department's ability to carry out basic, applied and advanced research 
and development; advance the development, test and evaluation, and 
deployment of critical homeland security technologies; and accelerate 
the prototyping and deployment of technologies to address homeland 
security vulnerabilities. This type of R&D OT Authority is especially 
useful in bringing non-traditional Government contractors to the 
Federal Research & Development environment, because the resultant OTs 
permit flexibilities in key areas to include application of cost 
accounting standards, submission of cost and pricing data, specific 
Federal Acquisition Regulation (FAR) provisions, and intellectual 
property rights. They are also useful for dual-use (Government/
commercial) technologies in cases where the estimated cost of advancing 
those technologies is too great for industry to invest on its own or 
the risk is too immense for companies to commit to traditional contract 
terms and conditions. In these cases, OT Authority gives the Department 
access to more companies and commercially available technologies than 
would otherwise be the case and, in certain situations, is the only way 
to affordably advance the maturity level of technologies that will help 
us counter homeland security vulnerabilities.
    I previously mentioned that my first priority as CPO is to ``make 
good business deals.'' R&D OT Authority supports that goal by enhancing 
our ability to share the costs of maturing certain dual-use 
technologies with industry, thereby lowering the overall cost to the 
taxpayer. In a traditional contract, the Government usually pays the 
full cost of maturing that technology. Our OT Authority also gives us 
the ability to reach agreements with a consortium of providers, where 
such arrangements are more advantageous to the Government than 
traditional contracts (through prime and subcontractor agreements or 
establishment of joint ventures).
    I would like to take this opportunity to elaborate on several 
examples of DHS' use of its OT Authority in support of the Under 
Secretary for Science & Technology:
            1. Lightweight Autonomous Chemical Identification System 
                    (LACIS) Project
    Under the LACIS Project, hand-held chemical agent detectors for 
first responders, e.g., fire departments, military HAZMAT teams, and 
industrial HAZMAT teams, are being developed by Sensor Research and 
Development, Corp., Smiths Detection--Edgewood, Inc., and Purdue 
University in collaboration with ICx Griffin Analytical Technologies. 
The current detectors, normally spectrometers, for chemical warfare 
agents and toxic industrial chemicals, tend to have a limited range, 
are expensive and are subject to false alarm from interference. The 
LACIS Project has been on time and is overcoming limitations of the 
current technology at a relatively affordable cost. The use of an OT 
for this requirement has promoted flexibility in forming teaming 
arrangements involving both traditional and non-traditional 
participants.
            2. Autonomous Rapid Facility Chemical Agent Monitor 
                    (ARFCAM)
    Under the ARFCAM Project, autonomous chemical detectors for 
monitoring facilities, e.g., airports and train stations as well as 
other high-asset venues, are being developed by Hamilton Sundstrand 
Space Systems, Inc., Smiths Detection--Watford Inc., and Bruker 
Daltonics. The current commercial detectors, normally spectrometers, 
for chemical warfare agents and toxic industrial chemicals, tend to 
have a limited range, are expensive and are subject to false alarm from 
interference. The ARFCAM Project has been on time and is overcoming 
limitations of the current technology at a relatively affordable cost. 
The use of an OT for this requirement has promoted flexibility in 
forming teaming arrangements involving both traditional and non-
traditional participants.
            3. BioWatch Generation 3 (BioAgent Autonomous Network 
                    Detector (BAND)) Program
    The purpose of the BAND Program is to develop a detect-to-treat 
biological detection sensor system that provides more rapid indications 
of the presence of biological agents compared to current state-of-the-
art technology. This program is developing the next generation of 
BioWatch detectors and is critical to the BioWatch program. Currently, 
the BioWatch system consists of distributed collectors that sample on 
filters that are collected and centrally processed at local 
laboratories. This process has not provided information in as timely a 
response as the Department would have liked.
    With the use of our OT Authority, DHS has been able to prototype 
and test three BAND systems from three firms, IQuum, Inc., Microfluidic 
Systems, Inc., and U.S. Genomics, Inc. While each system is different, 
the systems have performed up to the rigorous objectives set by DHS. 
DHS objectives include having: a very high sensitivity in a cluttered 
background; an extended coverage area, i.e., with a networked system as 
opposed to a manual collection system; a very low false alarm rate, 
range of 1 per 10 to 100 years; and a low cost of ownership. Due to the 
projected reduced costs of these systems, a larger portion of the 
Nation's population will be protected without incurring additional 
costs and with equivalent or better performance.
    Both the LACIS and BAND Programs resulted from Broad Agency 
Announcements (BAAs) designed to obtain proposals from teams that cut 
across organizational boundaries to achieve optimal mixes of talent and 
innovation. The BAAs specified that DHS would use its OT Authority to 
attract traditional and non-traditional firms individually and as 
teams.
            4. Countermeasures for the Man-Portable Air Defense System 
                    (Counter MANPADS) Program
    Under the DHS Counter-MANPADS Program, we have adapted military 
Directed InfraRed Counter Measure (DIRCM) technology to protect 
commercial transports from shoulder-launched surface-to-air missiles, 
called Man-Portable Air Defense Systems (MANPADS). The systems use 
existing military missile warning systems to detect MANPADS and cue an 
infrared laser to jam the missile guidance system. At the completion of 
the program, DHS expects to have two counter-MANPADS systems capable of 
being deployed on commercial transports.
    DHS realized savings in time by the use of OT agreements. After a 
full and open competition, three 6-month OTs were awarded for Phase I, 
which was less than 8 weeks following program initiation. This rapid 
schedule was several months shorter than what would have been 
experienced for comparable programs of similar size and complexity 
using a FAR-based solicitation and contract award. The use of OT 
Authority for prototype projects will allow DHS to complete a three-
phase system development, test, and operational evaluation program in 5 
to 6 years compared to similar DoD programs that have been programmed 
since the mid-1990's. The use of OT Authority also allowed us to select 
teams that included non-traditional mixtures of military and commercial 
contractors that would not have been possible under FAR-based 
contracts.
    In the second phase of the program, accomplished through a 
modification to an existing OT, design solutions were completed through 
prototype development and Federal Aviation Administration (FAA) 
certification for airworthiness. For this phase, the contractors 
fabricated, installed, and tested their prototypes on commercial 
aircraft. In the latest phase, the OT holders delivered and installed 
several complete countermeasure prototypes on commercial cargo and 
passenger aircraft and have continued demonstrating system performance. 
DHS is now evaluating the operational suitability and anticipated costs 
by collecting data during commercial airline operations for each of the 
systems. Performance results achieved to date would not have been 
possible without the OTs because the non-traditional contractors 
(commercial airlines and associated operation and maintenance 
companies) would not have participated under a FAR-based contract.
    The following are Counter-MANPADS Program Highlights and Key 
Points:
   Program on schedule--to be completed early 2009;
   Systems can protect commercial transports;
   Live fire test demonstrations Fall 2007 (October-December);
   Four different FAA-certified installations;
   Phase III reduced risk and cost of ownership;
   DHS results are also improving DoD systems' reliability and 
        performance;
   No deployment decision yet made.
    OTs, however, are not right for every situation, as the rights 
provided to the Government under an OT differ significantly from those 
provided under a traditional contract. While OTs are an extremely 
useful tool, they should only be used in appropriate situations by 
personnel that are knowledgeable of the advantages and disadvantages of 
OTs versus contracts and who are able to make informed decisions 
regarding which method is anticipated to provide better value to the 
Government.
    In that regard, on July 8, 2005, DHS issued Management Directive 
(MD) 0771.1, ``Other Transaction Authority,'' to align OT Authority and 
accountability and provide policy and guidance on the Department's use 
of OT Authority for research as well as for prototype projects. In 
accordance with this MD, I, as the Chief Procurement Officer, am 
responsible for setting policy, conducting oversight, and approving the 
use of OT Authority pursuant to the Homeland Security Act of 2002. I 
have further designated the DHS Director, Strategic Initiatives within 
OCPO as the authority to make Department-level decisions on R&D OTs. As 
indicated earlier, the only Heads of Contracting Activity within the 
Department with approval to use OT Authority are the Head of the 
Contracting Activity (HCA) for the Office of Procurement Operations 
(OPO), who reports directly to me, and the HCA for TSA under the 
authority of the Aviation and Transportation Security Act.
    While Other Transactions are not covered by the Competition in 
Contracting Act, OPO uses competitive procedures to the maximum extent 
practicable for its R&D OTs including soliciting through FedBizOpps and 
utilizing Broad Agency Announcements to reach a broad segment of the 
marketplace. For OTs where competition is determined not to be 
available or not appropriate (e.g., unsolicited proposals), the OT file 
is fully documented and, for OTs exceeding $550,000, documentation 
supporting the use of non-competitive procedures must be approved by 
the OPO Competition Advocate or higher (depending on OT total dollar 
value). Furthermore, OPO utilizes the audit services of the Defense 
Contract Audit Agency (DCAA) during its pre- and post-award phases for 
its R&D OTs, as it normally would for traditional contracts.
gao review of dhs' use of its research & development other transaction 

                               AUTHORITY

    In December 2004, the Government Accountability Office (GAO) 
released its report, HOMELAND SECURITY: Further Action Needed to 
Promote Successful Use of Special DHS Acquisition Authority in 
accordance with The Homeland Security Act of 2002 requirement for GAO 
to report annually to Congress on DHS' use of its OT Authority. To 
fulfill this obligation, GAO: (1) Evaluated whether DHS has developed 
polices and established a workforce to manage other transactions 
effectively; and, (2) evaluated how effectively DHS has used its other 
transactions authority to attract non-traditional Government 
contractors. In its report, GAO made the following recommendations:
    (1) Provide guidance on including audit provisions in other 
        transactions agreements;
    (2) Develop a training program in the use of other transactions; 
        and
    (3) Capture knowledge obtained during the acquisition process for 
        use in planning and implementing future other transactions 
        projects.
    I am pleased to report that DHS has implemented all three GAO 
recommendations, as follows:
Recommendation No. 1: Provide guidance on including audit provision in 
        other transactions agreements.
    The Director of the Office of Procurement Operations (OPO), the 
primary HCA holding the Department's Other Transaction Authority, has 
established procedures for conducting internal reviews and audits of 
all procurement documentation to ensure compliance with applicable 
Federal and departmental regulatory guidelines. The review and approval 
process for OTs has been integrated into OPO standard business 
processes. In accordance with established procedures, all OTs valued at 
$550,000 or greater are reviewed by the Office of General Counsel and 
OPO Division Directors. OTs with an estimated value greater than $10 
million are subject to additional review by the OPO Policy, Oversight 
and Customer Support Division, and OTs with an estimated value of $25 
million or greater are reviewed by the OPO Acquisition Review Board, 
chaired by the OPO HCA and comprised of OPO Division Directors and 
representatives from S&T General Counsel. As the CPO, I approve all OPO 
OTs with a value over $50 million. OPO Contracting Officers assigned to 
support S&T are required to complete OT training. This training 
includes guidance on the appropriate audit provisions that should be 
included in OTs and securing audit services where appropriate. 
Currently, OPO Contracting Officers utilize the services of DCAA 
whenever possible for pre- and post-award support in evaluating 
proposals and auditing of OTs.
Recommendation No. 2: Develop a training program in the use of other 
        transactions.
    Recognizing the specialized nature and inherent complexities 
required to establish and effectively administer OTs for research and 
development and prototype requirements, the DHS OPO established 
specialized, recurring OTA Training for the OPO Contracting Workforce 
supporting S&T and their customers. During fiscal year 2006, two 3-day 
OTA training sessions were conducted, and an additional two 3-day 
sessions were conducted in fiscal year 2007. OPO plans to continue this 
training in fiscal year 2008. This comprehensive OTA training provides 
specific guidance on OTAs for Prototype Projects, Assistance OTs, the 
acquisition of property, and foreign access to technology. Very 
importantly, the class also includes the necessary foundation in FAR-
based research and development contracting, with a particular emphasis 
on the contract types suitable for S&T contracts. This foundational 
knowledge provides the Contracting Officer and members of the program 
office with the understanding of R&D contracting to ensure that the 
appropriate method of acquisition is selected.
Recommendation No. 3: Capture knowledge obtained during the acquisition 
        process for use in planning and implementing future other 
        transactions projects.
    In July 2005, DHS OPO solicited support services from leading 
industry experts on the appropriate use and implementation of OTs. This 
expertise was utilized by DHS to develop policies and procedures for 
implementing the OT Authority within the Department, and to maximize 
lessons-learned from the application of OT Authority by defense 
agencies, military services and other Federal agencies. OPO continues 
to enlist the services of these industry experts to provide specialized 
OT training for the DHS acquisition workforce. OPO personnel refer to 
the OTA lessons-learned and training material when formulating OTs and 
conducting OTA policy reviews.
    In summary, OTs provide an essential tool to assist DHS with 
accomplishment of its mission. The tool is: especially useful in 
bringing non-traditional contractors to the Federal Research & 
Development environment; gives the Department access to more 
commercially available technologies than would otherwise be the case; 
promotes the development of dual-use technologies at a reduced overall 
cost to the taxpayer; and allows the Department to obtain proposals 
from teams that cut across organizational boundaries to achieve optimal 
mixes of talent and innovation. The tool, however, is not appropriate 
for all actions and requires an appropriate level of knowledge and 
experience to determine whether an OT or traditional contract provides 
the better value to the Government. As Chief Procurement Officer, I am 
responsible for setting policy, conducting oversight, and approving the 
use of OT Authority within DHS. We concur with the recommendations of 
the GAO and have implemented guidance, training, and knowledge sharing 
to ensure that our OTs are used appropriately. I have also directed 
that a statistical sample of TSA and OPO OTs be reviewed during regular 
Procurement Reviews and will update Departmental guidance, training and 
lessons-learned as appropriate. Additionally, I have directed a review 
of Management Directive (MD) 0771.1, ``Other Transaction Authority,'' 
and am assessing whether both OT Authorities should be covered by a 
single MD.
    Thank you, Mr. Chairman for your interest in and continued support 
of the DHS Acquisition Program and for the opportunity to testify 
before the subcommittee about the Department's Other Transaction 
Authority. I would be glad to answer any questions you or other Members 
of the subcommittee may have for me.

    Mr. Langevin. Thank you, Mr. Essig, and I thank you for 
your testimony.
    I now recognize Ms. Halchin to summarize your statement for 
5 minutes.

  STATEMENT OF L. ELAINE HALCHIN, ANALYST, AMERICAN NATIONAL 
GOVERNMENT, CONGRESSIONAL RESEARCH SERVICE, ACCOMPANIED BY JOHN 
     D. MOTEFF, SPECIALIST, SCIENCE AND TECHNOLOGY POLICY, 
                 CONGRESSIONAL RESEARCH SERVICE

    Ms. Halchin. Mr. Chairman and Members of the subcommittee, 
thank you for inviting me here today to offer testimony 
regarding the subject matter of this hearing, other transaction 
authority.
    I am Elaine Halchin, an analyst in American National 
Government with the Congressional Research Service of the 
Library of Congress.
    Other transaction authority originated 50 years ago. The 
Space Act of 1958, as amended, authorized the National 
Aeronautics and Space Administration to enter into and perform 
such contracts, leases, cooperative agreements or other 
transactions as may be necessary in the context of its work. 
However, other transaction authority, as it exists today, began 
in 1989.
    The Department of Defense received statutory authority to 
engage in other transactions through the Defense Advanced 
Research Projects Agency for research projects. Other executive 
departments that have been authorized by statute to engage in 
other transactions are the Department of Transportation, the 
Department of Energy and of course the Department of Homeland 
Security.
    Other Federal agencies that engage in research also may use 
OT authority for projects designed to facilitate defending 
against or recovering from acts of terrorism or nuclear, 
biological, chemical or radiological attacks. Other transaction 
authority may be used for research and for prototypes.
    Providing OT authority to DARPA and later expanding the 
authority for use within DOD was part of an effort by the 
Defense Department and Congress to seek ways to better leverage 
the commercial technology and industrial base. This effort was 
based on the argument that the technical capabilities of the 
commercial technology industrial base exceeded those of the 
traditional defense sector in some areas and that such 
transactions would cost the Government less money due to 
greater economies of scale and preexisting investments.
    However, the regulations and statutes governing traditional 
procurement methods were a barrier to some businesses. 
Companies that were unable or unwilling to comply with the 
Federal acquisition regulation did not enter into contracts 
with the Federal Government OT authority is a wholesale way of 
waiving these and other procurement requirements.
    In addition, it was anticipated that other transactions 
would encourage cost sharing, which would result in savings for 
the Government.
    Since an other transaction is not a contract, the FAR, a 
number of procurement statutes and the Government's cost 
accounting standards do not apply to such transactions. In 
2000, an ad hoc working group affiliated with the public 
contract law section of the American Bar Association published 
a monograph on the applicability of relevant statutes to DOD's 
OT authority. Although the monograph includes some statutes and 
provisions that apply only to DOD, the analysis of other 
statutes is applicable to non-DOD agencies.
    Upon analyzing 30 statutes or statutory provisions, the 
working group determined that 20 of them do not apply to other 
transactions. Two others that do not apply to research OTs may 
apply to prototype OTs. The list of statutes, which may be 
found in table one of my testimony, includes, for example, the 
Competition and Contracting Act, the Procurement Protest System 
and the Procurement Integrity Act.
    Freedom from Federal procurement requirements is an 
overarching advantage of the use of OT authority, but, at the 
same time, problems associated with other transactions may 
follow from this exemption. Agencies and companies that engage 
in OTs might face uncertainties and increased risk regarding, 
for example, funding limitations, dispute resolution and data 
rights.
    Also, the protection and tools that contracting officers 
have to negotiate fair and reasonable prices and to ensure that 
costs are allowable and consistent with Federal procurement 
policies do not apply to other transactions.
    Additionally, the DOD inspector general has reported that 
some contracting officers fail to sufficiently document the 
justification for using research OTs, to document the review of 
cost proposals and to monitor actual research costs. Thus, the 
flexibility inherent in OT authority, which is a significant 
advantage of using this method, might also result in fewer 
protections and decreased transparency and accountability when 
compared to conventional procurement methods.
    A DOD IG summary of several audits that it had conducted 
found that other transactions had not attracted a significant 
number of nontraditional defense contractors. Data for the 
period, fiscal year 1994 through fiscal year 2001, showed that 
traditional defense contractors received nearly 95 percent of 
the $5.7 billion in funds for 209 prototype other transactions.
    In 2002, the RAND Corporation evaluated the effectiveness 
of using OT authority for prototypes within DOD. The study 
examined 21 of the 72 prototype projects that at the time of 
the study had been awarded using other transaction authority. 
Due to a number of challenges that involved devising metrics 
for determining whether OT projects achieved policy objectives 
and comparing other transactions with traditional procurements, 
the study relied largely on the judgments and opinions provided 
by DOD and private sector program managers.
    The RAND study concluded that, first, DOD had gained access 
to important, new industrial resources; second, the flexibility 
permitted by other transaction authority meant that more of the 
project cost was spent on the product, then on the acquisition 
process; and, third, the Government did incur some risks but 
RAND considered the risks to be low.
    On the one hand, it is not possible to determine 
conclusively whether the use of OT authority accomplishes what 
is intended, including higher performance and less expensive 
Government end products; however, the RAND study and the 
judgments of many people involved in OTs suggests that the use 
of this authority does expand Government access to commercial 
technology and production capacity and involves lower 
transaction costs and reduced risks for the projects.
    Evaluating how DHS has used other transaction authority and 
whether the use has been successful would be a complex 
undertaking for several reasons, including some of the 
challenges encountered by RAND in the course of conducting its 
study.
    Adding to the complexity of such an undertaking would be 
the need to do field research to obtain information that is 
sufficiently detailed and comprehensive.
    This concludes my statement. Thank you for your attention. 
I am accompanied by a colleague, Dr. Jack Moteff, who is a 
specialist in science and technology policy with CRS. We 
welcome your questions.
    [The statement of Dr. Halchin follows:]

                Prepared Statement of L. Elaine Halchin
                            February 7, 2008

    Mr. Chairman and Members of the subcommittee, thank you for 
inviting me here today to offer testimony regarding the subject matter 
of this hearing, other transaction authority. I am Elaine Halchin, an 
Analyst in American National Government with the Congressional Research 
Service of the Library of Congress.
        origin and expansion of other transaction (ot) authority
    Other transaction (OT) authority originated 50 years ago.\1\ The 
Space Act of 1958, as amended, authorized the National Aeronautics and 
Space Administration (NASA) to ``enter into and perform such contracts, 
leases, cooperative agreements, or other transactions as may be 
necessary in the conduct of its work . . . ''. However, other 
transaction authority, as it exists today, began in 1989.\2\ With the 
enactment of Public Law 101-189, the Department of Defense (DOD) was 
authorized to use cooperative agreements and ``other transactions,'' 
through the Defense Advanced Research Projects Agency (DARPA), for 
advanced research projects.\3\ Subsequent legislation broadened this 
authority so that, first, it could be used for prototype projects and, 
second, it could be used throughout DOD, including the military 
departments.\4\
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    \1\ American Bar Association, Section of Public Contract Law, Ad 
Hoc Working Group on Other Transactions, Department of Defense ``Other 
Transactions'': An Analysis of Applicable Laws, American Bar 
Association (Chicago: 2000), p. 3. The statutory authority for NASA to 
engage in ``other transactions'' may be found at 42 U.S.C.  2473 (Pub. 
L. 85-569; 72 Stat. 426, at 430).
    \2\ Nancy O. Dix, Fernand A. Lavallee, and Kimberly C. Welch, 
``Fear and Loathing of Federal Contracting: Are Commercial Companies 
Really Afraid to Do Business with the Federal Government? Should They 
Be?'' Public Contract Law Journal, vol. 33, fall 2003, p. 25. The 
statutory authority for DOD to engage in ``other transactions'' may be 
found at 10 U.S.C.  2371 (Pub. L. 101-189, as amended; 103 Stat. 1352, 
at 1403).
    \3\ Sec. 251(a) of Pub. L. 101-189.
    \4\ Sec. 845 of Pub. L. 103-160; 107 Stat. 1547, at 1721. The 
authority for DOD to use other transaction authority for advanced 
research and prototype projects is codified in 10 U.S.C.  2371 and 10 
U.S.C.  2371 note, respectively.
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    Other executive departments that have been authorized, by statute, 
to engage in ``other transactions'' are the Department of 
Transportation (DOT), the Department of Energy (DOE), and the 
Department of Homeland Security (DHS).\5\ Additionally, executive 
agencies that engage in research as well as research and development 
projects that have the potential to facilitate defense against, or 
recovery from, acts of terrorism or nuclear, biological, chemical, or 
radiological attacks are authorized to engage in ``other 
transactions.''\6\
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    \5\ The statutory authority for each department is as follows: 
Department of Transportation, 23 U.S.C.  502; Pub. L. 105-178; 112 
Stat. 107, at 422; the Department of Homeland Security, Pub. L. 107-
296; 116 Stat. 2135, at 2224; and the Department of Energy, 42 U.S.C.  
7256; Pub. L. 109-58; 119 Stat. 594, at 932.
    \6\ 41 U.S.C.  428a note; Sec. 1441(a)(B) of Pub. L. 108-136; 117 
Stat. 1392, at 1673.
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               rationale for other transaction authority
    Providing OT authority to DARPA and, later, expanding the authority 
for use within DOD, was part of an effort by the Defense Department and 
Congress to seek ways to better capitalize on the commercial technology 
and industrial base. This effort was based on the argument that the 
technical capabilities of the commercial technology and industrial base 
exceeded those of the traditional defense sector in some areas, and 
cost less due to greater economies of scale and pre-existing 
investments.\7\ One element of this effort was to encourage greater 
cooperation between DOD and companies (or vendors) in developing new 
technologies of mutual interest. Specifically, the purpose of OT 
authority for DOD, in particular, was, and ``is to enhance the state-
of-the-art, demonstrate technology, transfer technology, establish 
industrial capabilities, and otherwise advance national capabilities so 
that the United States' technological base will be capable of 
supporting the most advanced defense systems in the future.''\8\
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    \7\ One of the many influential recommendations of the President's 
Blue Ribbon Commission on Defense Management (known as the Packard 
Commission), in its report A Quest for Excellence (June 1986), was that 
the Department of Defense should expand the use of commercial products. 
See also Defense Science Board, Use of Commercial Components in 
Military Equipment, 1986 and 1989; The Center for Strategic and 
International Studies, Integrating Commercial and Military Technologies 
for National Strength: An Agenda for Change (Washington: 1991); and 
U.S. Office of Technology Assessment, Assessing the Potential for 
Civil-Military Integration, OTA-ISS-611, 1994.
    \8\ Nancy O. Dix, Fernand A. Lavallee, and Kimberly C. Welch, 
``Fear and Loathing of Federal Contracting: Are Commercial Companies 
Really Afraid to Do Business with the Federal Government? Should They 
Be?'' p. 26.
---------------------------------------------------------------------------
    However, the regulations and statutes governing traditional 
procurement methods were a barrier to some businesses. Companies that 
were unable, or unwilling, to comply with the Federal Acquisition 
Regulation (FAR) and procurement statutes did not enter into contracts 
with the Federal Government. For example, prior to the enactment of OT 
authority, DARPA missed ``numerous opportunities to contract with 
companies that were developing some of the most promising new 
technologies'' reportedly because they had ``neither the capability nor 
the desire to do business with the Government through the procurement 
process.''\9\ Two particular areas of concern for some companies were 
data rights and the Federal Government's cost accounting standards. As 
the value of intellectual property, or data, has grown, companies are 
said to be less willing ``to accept the standard clauses [on data 
rights] required by . . . Federal procurement laws and 
regulations.''\10\ As for cost accounting standards, the often-heard 
complaint was that commercially oriented firms would have to establish 
separate divisions or contracting functions to accommodate the 
relatively unique Federal cost accounting standards.\11\ Other 
transaction authority was a wholesale way of waiving these and other 
procurement requirements that served as barriers to some companies. In 
addition, it was anticipated that ``other transactions'' would 
encourage cost sharing, which would result in savings. Commercial firms 
agree to cost sharing because the technology under development benefits 
the company commercially, and, typically, commercial markets are much 
larger than the Government market.
---------------------------------------------------------------------------
    \9\ Richard N. Kuyath, ``The Untapped Potential of the Department 
of Defense's `Other Transaction' Authority,'' Public Contract Law 
Journal, vol. 24, summer 1995, pp. 526-527.
    \10\ Diane M. Sidebottom, ``Intellectual Property in Federal 
Government Contracts: The Past, the Present, and One Possible Future,'' 
Public Contract Law Journal, vol. 33, fall 2003, p. 65.
    \11\ See Center for Strategic and International Studies, 
Integrating Commercial and Military Technologies for National Strength: 
An Agenda for Change. Another barrier was the use of military 
specifications (MilSpecs).
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  APPLICABILITY OF THE FEDERAL ACQUISITION REGULATION AND PROCUREMENT 
                     STATUTES TO OTHER TRANSACTIONS

    Since an ``other transaction'' is not a contract, the Federal 
Acquisition Regulation, a number of procurement statutes, and the 
Government's Cost Accounting Standards do not apply to such 
transactions.\12\ Determining which procurement statutes do not apply 
to ``other transactions'' is a lengthy, involved process. In 2000, an 
ad hoc working group affiliated with the Public Contract Law Section of 
the American Bar Association (ABA) published a monograph on the 
applicability of relevant statutes to DOD's other transaction 
authority. Although the monograph includes some statutes and provisions 
that apply only to DOD procurement, the analysis of other statutes is 
applicable to non-DOD agencies.
---------------------------------------------------------------------------
    \12\ Executive agencies, contractors, and subcontractors are 
required to use the cost accounting standards developed by the Cost 
Accounting Standards Board (CASB) ``in estimating, accumulating, and 
reporting costs in connection with pricing and administration of, and 
settlement of disputes concerning, all negotiated prime contract and 
subcontract procurement within the United States in excess of 
$500,000.'' (U.S. Office of Management and Budget, ``Cost Accounting 
Standards Board,'' available at http://www.whitehouse.gov/omb/
procurement/casb.html.) The CASB is located within the Office of 
Management and Budget, Office of Federal Procurement Policy.
---------------------------------------------------------------------------
    Upon analyzing 30 statutes or statutory provisions, the working 
group determined that 20 of them do not apply to ``other 
transactions,'' and two others that do not apply to research OTs may 
apply to prototype OTs.\13\ The list of statutes, shown in Table 1, 
includes, for example, the Competition in Contracting Act, the 
Procurement Protest System, and the Procurement Integrity Act.
---------------------------------------------------------------------------
    \13\ American Bar Association, Section of Public Contract Law, Ad 
Hoc Working Group on Other Transactions, Department of Defense ``Other 
Transactions'': An Analysis of Applicable Laws, pp. 27-31.
---------------------------------------------------------------------------
    Finally, it should be noted that, in describing the challenges of 
analyzing each statute, the Ad Hoc Working Group pointed out that its 
analysis of statutes may not be conclusive in some cases.\14\
---------------------------------------------------------------------------
    \14\ Ibid., p. 26.

 TABLE 1.--STATUTES AND STATUTORY PROVISIONS THAT DO NOT APPLY TO OTHER
                              TRANSACTIONS
------------------------------------------------------------------------
                                                Purpose of Statute or
     Statute or Statutory Provision *          Statutory Provision **
------------------------------------------------------------------------
Competition in Contracting Act (CICA).....  ``To promote the use of
    10 U.S.C.  2301 et seq.;               competitive procedures and
    41 U.S.C.  253 et seq.                 prescribe uniform
                                             Government-wide policies
                                             and procedures regarding
                                             contract formation, award,
                                             publication, and submission
                                             of cost or pricing data.''
Contract Disputes Act.....................  ``To create a comprehensive,
    41 U.S.C.  601 et seq.                 fair, and balanced
                                             statutory scheme of
                                             administrative and legal
                                             remedies for claims under
                                             Government contracts.''
Procurement Protest System (Subtitle D of   ``To provide a statutory
 CICA).                                      basis for procurement
                                             protests by interested
                                             parties to the Comptroller
                                             General.''
Kinds of Contracts........................  ``To establish various
    10 U.S.C.  2306                         restrictions on the terms
                                             and conditions of
                                             contracts.''
Examination of records of contractor......  ``To provide authority to
    10 U.S.C.  2313                         the contracting agency to
                                             access a contractor's
                                             records or plants in order
                                             to perform audits of the
                                             contractor.''
Contracts: acquisition, construction, or    ``To provide authority for
 furnishing of test facilities and           acquisition, construction,
 equipment [to R&D contractors].             or furnishing of test
    10 U.S.C.  2353                         facilities or equipment in
                                             connection with R&D
                                             contracts.''
Contracts: indemnification provision......  ``To authorize the Military
    10 U.S.C.  2354                         Departments to include
                                             provisions in DOD R&D
                                             contracts indemnifying the
                                             contractor for certain
                                             claims and losses.''
Prohibition against doing business with     ``To prohibit the award by
 certain offerors.                           the Department of Defense
    10 U.S.C.  2393                         of contracts, or in some
                                             cases subcontracts, to
                                             firms that have been
                                             debarred or suspended by
                                             another agency.''
Major weapon systems: contractor            ``To provide warranty
 guarantees.                                 protection to the
    10 U.S.C.  2403                         Government for major
                                             weapons systems it
                                             acquires.''
Prohibition on persons convicted of         ``To prevent persons
 defense contract related felonies and       convicted of fraud or any
 related criminal penalties as defense       other felony arising out of
 contractors.                                a defense contract from
    10 U.S.C.  2408                         further participating in
                                             contracts with the
                                             Department of Defense for a
                                             specified statutory
                                             period.''
Contractor employees: protection from       ``To prohibit contractors
 reprisal for disclosure of certain          from discharging, demoting,
 information.                                or discriminating against
    10 U.S.C.  2409                         employees who disclose
                                             substantial violations of
                                             law related to contracts.''
Limitation on the use of appropriated       ``To prohibit recipients and
 funds to influence certain Federal          requesters of Federal
 contracting and financial transactions.     contracts, grants, or
    31 U.S.C.  1352                         cooperative agreements from
                                             using appropriated funds to
                                             pay any person to influence
                                             or to attempt to influence
                                             executive or legislative
                                             decisionmaking in
                                             connection with the
                                             awarding of any Federal
                                             contract or grant, the
                                             making of any Federal loan,
                                             or the entering into of any
                                             cooperative agreement.''
Anti-Kickback Act.........................  ``To eliminate the practice
    41 U.S.C.  51-58c                      of subcontractors paying
                                             kickbacks in the form of
                                             fees, gifts, gratuities, or
                                             credits to higher tier
                                             subcontractors or prime
                                             contractors for the purpose
                                             of securing the award of
                                             subcontracts or orders.''
Procurement Integrity Act.................  ``To ensure the ethical
    41 U.S.C.  423                          conduct of Federal agency
                                             procurements by prohibiting
                                             certain Government
                                             officials from accepting
                                             compensation from or
                                             discussing future
                                             employment with bidders or
                                             offerors, and prohibiting
                                             the unauthorized receipt or
                                             disclosure of contractor
                                             bid and proposal
                                             information or source
                                             selection information
                                             before the award of a
                                             Federal agency procurement
                                             contract.''
Walsh-Healey Act..........................  ``To require all covered
    41 U.S.C.  35-45***                    contracts to contain
                                             stipulations regarding
                                             minimum wages, maximum
                                             hours, safe and sanitary
                                             working conditions, child
                                             labor, and convict labor
                                             requirements.''
Drug-Free Workplace Act...................  ``To eliminate any
    41 U.S.C.  701-707                     connection between drug use
                                             or distribution and Federal
                                             contracts, cooperative
                                             agreements, or grants.''
Buy American Act..........................  ``To provide a preference
    41 U.S.C.  10a-10d                      for domestic products in
                                             Government acquisition for
                                             public use.''
Bayh-Dole Act.............................  ``To set forth Government's
    35 U.S.C.  200-212                     policy regarding allocation
                                             of patent rights to
                                             inventions conceived or
                                             first actually reduced to
                                             practice under contracts,
                                             grants, and cooperative
                                             agreements with small
                                             business firms and
                                             educational and other
                                             nonprofit
                                             organizations.''****
Technical data provisions applicable to     ``To provide for regulations
 DOD.                                        to define the legitimate
    10 U.S.C.  2320 and 2321               interest of the United
                                             States and of a contractor
                                             or subcontractor in
                                             technical data pertaining
                                             to an item or process.''
Truth in Negotiations Act.................  ``To require the submission
    10 U.S.C.  2306a                        of cost or pricing data on
                                             negotiated contracts in
                                             excess of $500,000, as well
                                             as for certain subcontracts
                                             and contract
                                             modifications.''
Cost Accounting Standards.................  ``To provide for the
    41 U.S.C.  422                          promulgation of uniform
                                             standards for allocating
                                             costs to Government
                                             contracts.''
Cost Principles...........................  ``To provide for the
    10 U.S.C.  2324                         disallowance of certain
                                             costs under flexibly priced
                                             contracts and prescribe
                                             penalties for the
                                             submission of claims for
                                             unallowable costs.''
------------------------------------------------------------------------
Source: American Bar Association, Section of Public Contract Law, Ad Hoc
  Working Group on Other Transactions, Department of Defense ``Other
  Transactions'': An Analysis of Applicable Laws, American Bar
  Association, (Chicago: 2000), pp. 27-31.
* The source of the name or descriptive information in this column is
  American Bar Association, Section of Public Contract Law, Ad Hoc
  Working Group on Other Transactions, Department of Defense ``Other
  Transactions'': An Analysis of Applicable Laws, pp. 27-29.
** Ibid., pp. A-1--A-57.
*** This provision or statute does not apply to ``other transactions''
  involving research and development, but it may apply to ``other
  transactions'' involving prototypes. (Ibid., pp. 30-31.)
**** The phrase ``first actually reduced to practice'' refers to a
  working model of the idea or invention.

       concerns regarding the use of other transaction authority
    Freedom from Federal procurement requirements is an overarching 
advantage of the use of OT authority, but, at the same time, problems 
associated with ``other transactions'' may follow from this exemption. 
In the absence of certain statutes and regulations that apply to 
traditional procurements, agencies and companies that engage in OTs 
might face uncertainties, and increased risk, with regard to some 
issues or procedures, such as funding limitations, dispute resolution, 
and data rights.\15\ Additionally, the protections and tools that 
contracting officers have ``to negotiate fair and reasonable prices, 
and to ensure that taxpayer dollars are expended for costs which are 
allowable and consistent with Federal procurement policies''--such as 
the Truth in Negotiations Act, cost accounting standards, and various 
audit provisions--do not apply to ``other transactions.''\16\ These are 
some of the tools ``that have provided contracting officers' visibility 
into contractor costs and help the government ensure that prices 
negotiated and eventually paid are reasonable.''\17\ As the DOD 
Inspector General (IG) found, even within the contracting office, 
problems may arise. The IG reported that ``some contracting officers 
[failed:] (a) to sufficiently document the justification for using 
[research and development] OTs, (b) to document the review of cost 
proposals, and (c) to monitor actual research costs.''\18\ Thus, the 
flexibility inherent in OT authority, which is a significant advantage 
of using this method, might also result in fewer protections and 
decreased transparency and accountability when compared to conventional 
procurements.
---------------------------------------------------------------------------
    \15\ Ibid., p. 2; U.S. Department of Defense, Office of the 
Inspector General, ``Statement for the Record, Robert J. Lieberman, 
Deputy Inspector General, Department of Defense, to the Subcommittee on 
Technology and Procurement Policy, House Committee on Government 
Reform, on The Services Acquisition Reform Act (SARA) of 2002,'' Mar. 
12, 2002, Report No. D-2002-064, p. 14.
    \16\ Ibid., p. 11.
    \17\ Ibid.
    \18\ Ibid., p. 12.
---------------------------------------------------------------------------
                    how well does ot authority work?
    A DOD IG summary of several audits that it had conducted found that 
``other transactions'' had not attracted a significant number of 
nontraditional defense contractors.\19\ Data for the period fiscal year 
1994 through fiscal year 2001 showed that traditional defense 
contractors received nearly 95 percent of the $5.7 billion in funds for 
209 prototype ``other transactions.''\20\
---------------------------------------------------------------------------
    \19\ A ``nontraditional defense contractor'' is ``an entity that 
has not, for a period of at least 1 year prior to the date that a 
transaction (other than a contract, grant, or cooperative agreement) 
for a prototype project under the authority of this section [Sec. 845 
of Pub. L. 103-160] is entered into, entered into or performed with 
respect to--(1) Any contract that is subject to full coverage under the 
cost accounting standards prescribed pursuant to section 26 of the 
Office of Federal Procurement Policy Act (41 U.S.C. 422) and the 
regulations implementing such section; or (2) any other contract in 
excess of $500,00 to carry out prototype projects or to perform basic, 
applied, or advanced research projects for a Federal agency, that is 
subject to the Federal Acquisition Regulation.'' (10 U.S.C.  2371 
note.) Apparently, this definition also applies to ``other 
transactions'' that involve research.
    \20\ U.S. Department of Defense, Office of the Inspector General, 
``Statement for the Record, Robert J. Lieberman, Deputy Inspector 
General, Department of Defense, to the Subcommittee on Technology and 
Procurement Policy, House Committee on Government Reform, on The 
Services Acquisition Reform Act (SARA) of 2002,'' Mar. 12, 2002, Report 
No. D-2002-064, pp. 11-12.
---------------------------------------------------------------------------
    The DOD IG also provided the following suggestions involving OT 
authority: (a) Consider the use of OT authority only when it is clear 
that the agency cannot acquire the goods, services, and technologies 
through existing vehicles (for example, contracts, grants, or 
cooperative agreements); and (b) tailor OT legislation so that such 
transactions are used only to attract nontraditional contractors and 
only for transactions involving technologies, research capabilities, 
and processes that are not available through traditional procurement 
methods.\21\ The DOD IG also recommended that audit access rights be 
given to the Government for OTs, and that, for research OTs, agency 
heads be required to make a determination that an OT is necessary to 
convince a nontraditional contractor to engage in a project with the 
Government. Additionally, the determination would include a finding 
that a contract, grant, or cooperative agreement is not appropriate or 
feasible and a statement that waivers to procurement regulations and 
statutes are not sufficient for meeting the agency's needs.\22\
---------------------------------------------------------------------------
    \21\ Ibid., p. 12.
    \22\ Ibid.
---------------------------------------------------------------------------
    In 2002, the RAND Corporation evaluated the effectiveness of using 
other transaction authority for prototypes within DOD.\23\ Although the 
study focused on prototypes, it seems likely that most of the findings 
of the study might equally apply to research projects.\24\ 
Specifically, the RAND study asked the following question: Do the 
benefits expected from waiving the Federal Acquisition Regulation 
justify the possible costs that might be incurred? The study examined 
21 of the 72 prototype projects that, at the time of the study, had 
been awarded using other transaction authority. The study noted the 
difficulties involved in devising metrics for determining whether 
``other transaction'' projects achieved policy objectives. In this 
study, the number of nontraditional contractors was ruled out as a 
potential metric for being an unreliable measure. Another potential 
metric, cost avoidance, was rejected for being unverifiable. 
Additionally, the authors of the study noted that it is not practical 
to compare ``other transactions'' with traditional procurements for two 
reasons: (a) It is impossible to find truly analogous projects; and, 
(b) there is no way to determine what would have occurred if a 
different procurement method had been used. Therefore, the study relied 
largely on the judgments and opinions provided by DOD and contractor 
program managers who had experience with both types of OTs.\25\ The 
RAND study concluded that: (a) DOD had gained access to important new 
industrial resources; (b) the flexibility permitted by other 
transaction authority meant that more of the project cost was spent on 
the product than on the acquisition process; and, (c) the Government 
did incur some risks, but those risks were low.
---------------------------------------------------------------------------
    \23\ RAND, National Defense Research Institute, Document Briefing, 
Assessing the Use of ``Other Transactions'' Authority for Prototyping 
Project (Santa Monica: 2002).
    \24\ Another earlier assessment of DARPA's use of ``other 
transactions'' for research and development was prepared for DARPA by 
the Institute for Defense Analyses, Participant Views of Advanced 
Research Projects Agency ``Other Transactions'', IDA Document D-1793, 
Nov. 1995. The observations recorded in this report are generally 
similar to those in the RAND report; i.e., flexibility was important, 
and the work would not have occurred without using ``other 
transactions'' agreements.
    \25\ RAND, National Defense Research Institute, Document Briefing, 
Assessing the Use of ``Other Transactions'' Authority for Prototyping 
Project, pp. 9-10.
---------------------------------------------------------------------------
    Another finding of the study was that those transactions in which 
data rights and cost accounting standards had been loosened the most 
involved firms that expected the commercial sector to be the main 
market for the technology under development with the Government. These 
firms had already expended their own resources on the technology, and 
they brought their own commercial assets and funds to the Government 
project. The study suggested that applying acquisition regulations to 
this type of project would most probably mean that such projects would 
not be accomplished.\26\
---------------------------------------------------------------------------
    \26\ Ibid., pp. 27-28.
---------------------------------------------------------------------------
    On the one hand, it is not possible to determine conclusively 
whether the use of other transaction authority accomplishes what is 
intended, including higher performance and less expensive Government 
end-products. However, the RAND study and the judgments of many people 
involved in OTs suggest that the use of OT authority does expand 
Government access to commercial technology and production capacity and 
involves lower transaction costs and reduced risks for the projects.
           dhs's experience with other transaction authority
    Evaluating how DHS has used other transaction authority, and 
whether the use has been successful, would be a complex undertaking for 
several reasons, including some of the challenges encountered by RAND 
in the course of conducting its study. Adding to the complexity of such 
an undertaking would be the need to do field research to obtain 
information that is sufficiently detailed and comprehensive. An 
evaluation might include a series of questions such as these:
   What companies are involved in OT projects?
   What does each company bring to the project in terms of 
        technology, manufacturing capability, or engineering resources?
   To what extent do each company's resources reside in, or 
        take advantage of, the commercial market?
   How much cost sharing, if any, has occurred?
   Has the Department experienced any unintended consequences 
        as a result of using OT authority?
   How have DHS and its partners addressed certain elements of 
        their transactions, such as data rights and cost accounting 
        standards?
   For OTs that have been completed, did the terms and results 
        of the transactions match the rationale for and expected 
        benefits of the transactions?
   How many nontraditional Government contractors and 
        traditional contractors have participated in DHS transactions? 
        \27\
---------------------------------------------------------------------------
    \27\ The term ``nontraditional Government contractor'' has the same 
meaning as ``nontraditional defense contractor,'' which is defined in 
Sec. 845(e) of Pub. L. 103-160 and 10 U.S.C.  2371 note. The 
definition also is included above, in another footnote.
---------------------------------------------------------------------------
   Finally, based on these questions and possibly others, has 
        OT authority enabled DHS to acquire research, technologies, and 
        prototypes that it would not have been able to acquire 
        otherwise?
    This concludes my remarks. Thank you for your attention. I am 
accompanied by a colleague, Dr. John Moteff, who is a Specialist in 
Science and Technology Policy with CRS. We welcome your questions.

    Mr. Langevin. Thank you, Ms. Halchin. Thank you for your 
testimony.
    I now recognize Mr. Needham to summarize your statement for 
5 minutes.
    Welcome.

STATEMENT OF JOHN K. NEEDHAM, ACTING DIRECTOR, ACQUISITION AND 
     SOURCING MANAGEMENT, GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Needham. Thank you, Mr. Chairman, Ranking Member McCaul 
and other Members of the subcommittee. I appreciate the 
opportunity to discuss the Department of Homeland Security's 
use of other transaction authorities under the Homeland 
Security Act.
    I am John Needham, acting director of the Acquisition and 
Sourcing Management Team of the Government Accountability 
Office.
    In my statement, I am going to cover three points. First is 
the extent of DHS' use of OT authority under the Homeland 
Security Act, the status of DHS' implementation of GAO's 
previous recommendations and accountability challenges 
associated with the use of these agreements based on GAO's 
previous work at the Department of Homeland Security and the 
Department of Defense.
    While OTs provide great flexibility in attracting 
contractors that have not typically pursued Government 
contracts, they also carry the risk of reduced accountability 
and transparency, and fewer safeguards have been found FAR-
based procurements. Accordingly, GAO will be continuing to 
review DHS' use of OT agreements this year.
    In discussing the extent to which DHS has used its 
authority, I would point out that the $153 million that DHS 
spent on OTAs in the Science and Technology Directorate in 2006 
is approximately 1 percent of DHS' total procurement 
obligations. Based on data that we recently reviewed, DHS 
entered into 37 OT agreements between fiscal years 2004 and 
2007, most of which were initiated in 2004 and 2005.
    Though it is using its authority less frequently, it 
continues to obligate funds for its earliest agreements. The 
agreements from the first 2 years account for 88 percent of OT 
spending by DHS in its Science and Technology Directorate. 
Furthermore, about 77 percent of dollars spent on these 
agreements have been obligated under seven of DHS' 37 
agreements. According to DHS, all the agreements to date were 
for prototype projects and that each included at least one 
nontraditional contractor.
    Regarding the recommendations that we made in our 2004 and 
2005 reports, DHS has taken several steps to address these 
recommendations. It has created guidance on when to include 
audit provisions in OT agreements, established a training 
program on using these agreements and improved controls over 
potential conflicts of interest.
    However, it has not implemented all of them. For example, 
we also recommended that DHS capture knowledge gained from OTs 
it has awarded, while DHS has compiled lessons that relate to 
DOD rather than DHS' experience, as opposed to that of DOD.
    Challenges that I would like to talk about are the four, 
and they are inherent in the flexibilities provided by OT 
authority. The first is attracting and ensuring the use of 
nontraditional contractors. DHS has said that it had the 
nontraditional contractor involved in each of its 37 OT 
agreements in the Science and Technology Directorate.
    It should be noted that DHS' management directive 
identifies conditions under which it can enter into OTs without 
using nontraditional contractors. While we have not assessed 
the extent of the involvement of nontraditional contractors or 
what portion of the funding they receive; however, our review 
of OT agreements at DOD found that DOD departed from the 
original rationale of using these agreements, as most were 
entered into with traditional DOD contractors and nonprofit 
institutions.
    Second, intellectual property rights. A large appeal of 
using an OT is to provide greater protection to a firm's 
intellectual property rights. Alternatively, and just as 
important, insufficient intellectual property rights on the 
part of the Government could hinder the Government's ability to 
adapt developed technology for use outside the initial scope of 
the project. Therefore, while an OT agreement may help reduce 
the development costs early on, there is no assurance that the 
total cost to the Government will be reasonable when the cost 
of producing the final product is considered as well.
    Third, financial controls and cost accounting. OTs are 
exempt from cost accounting standards and audit requirements. 
While OT recipients have flexibility in tracking costs, they 
still need to provide cost information and demonstrate that 
Government funds are being used responsibly. This is 
particularly true for traditional contractors that are 
performing work under both FAR-based contracts as well as OT 
agreements.
    Furthermore, DHS also needs a way to assess the 
reasonableness of the contractor's reported value of in-kind 
contributions.
    Now, finally, maintaining a skilled acquisition force is 
also a key challenge. As prior GAO work has noted, maintaining 
institutional knowledge sufficient to maintain Government 
control and contractual-type relationships is critical. The 
unique nature of OT agreements means that the Federal 
Government acquisition staff working with these agreements need 
to be experienced in doing R&D acquisitions, have strong 
business acumen and sound judgment to operate effectively in a 
relatively unstructured business environment.
    Retaining a skilled acquisition workforce has been a 
continual challenge at DHS overall, and we have ongoing work in 
this area for this committee.
    Mr. Chairman, this concludes my oral statement. I would be 
pleased to take questions from the subcommittee Members. Thank 
you.
    [The statement of Mr. Needham follows:]

                 Prepared Statement of John K. Needham
                            February 7, 2008

 DEPARTMENT OF HOMELAND SECURITY: STATUS AND ACCOUNTABILITY CHALLENGES 
      ASSOCIATED WITH THE USE OF SPECIAL DHS ACQUISITION AUTHORITY
GAO HIGHLIGHTS: HIGHLIGHTS OF GAO-08-471T, A REPORT TO THE SUBCOMMITTEE 
    ON EMERGING THREATS, CYBERSECURITY, AND SCIENCE AND TECHNOLOGY, 
   COMMITTEE ON HOMELAND SECURITY COMMITTEE, HOUSE OF REPRESENTATIVES

Why GAO Did This Study
    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.

What GAO Recommends
    While GAO is not making recommendations in this testimony, GAO has 
made recommendations over the past few years to help improve DHS's 
Science and Technology Directorate's use its other transaction 
authority. The Department has generally concurred with these 
recommendations and has taken action to improve its use of other 
transaction authority, but has not fully addressed all of GAO's 
recommendations.

 DEPARTMENT OF HOMELAND SECURITY: STATUS AND ACCOUNTABILITY CHALLENGES 
      ASSOCIATED WITH THE USE OF SPECIAL DHS ACQUISITION AUTHORITY

What GAO Found
    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:
   creating guidance on when to include audit provisions in 
        other transaction agreements;
   creating a training program on using these agreements; 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.



    Mr. Chairman and Members of the subcommittee, 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.\1\ 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.
---------------------------------------------------------------------------
    \1\ We followed up on recommendations made in GAO, Homeland 
Security: Further Action Needed to Promote Successful Use of Special 
DHS Acquisition Authority; and GAO-05-136 (Washington, DC: Dec. 15, 
2004), and GAO, Homeland Security: DHS Needs to Improve Ethics-Related 
Management Controls for the Science and Technology Directorate, GAO-06-
206 (Washington, DC: Dec. 22, 2005).
---------------------------------------------------------------------------
                                SUMMARY

    In fiscal years 2004 through 2007, DHS entered into 37 other 
transaction agreements with a total value of $443 million. DHS entered 
into most of the agreements in the first 2 fiscal years, with only 
seven new agreements in 2006 and 2007 combined. Most of the spending 
was for a small number of its earliest agreements. Science and 
Technology (S&T) Directorate contracting representatives stated that 
all of the 37 agreements were for prototype projects and included at 
least one nontraditional contractor.
    DHS has taken steps to improve its use of other transaction 
agreements and to avoid conflicts of interest. Specifically, the 
Department has developed guidance on when to include audit provisions 
in agreements, developed an other transaction agreement training 
program, and improved management controls over conflicts of interest. 
DHS also created a document on lessons learned to capture knowledge 
gained from using other transactions, but the document is not specific 
to DHS's experience.
    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.

                               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 \2\ 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.\3\
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    \2\ DHS's Management Directive No. 0771.1, July 8, 2005, defines a 
nontraditional Government contractor as a business unit that has not, 
for at least a period of 1 year prior to the date of entering into or 
performing an other transaction agreement, entered into or performed: 
any contract subject to full coverage under Federal Cost Accounting 
Standards (CAS); or any contract in excess of $500,000 to carry out 
prototype projects or to perform basic, applied, or advanced research 
projects for a Federal agency that is subject to compliance with the 
Federal Acquisition Regulation (FAR).
    \3\ Consolidated Appropriations Act, 2008, Pub. L. No. 110-161, 
Dec. 26, 2007.
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    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.\4\ 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.
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    \4\ The Homeland Security Act of 2002, Pub. L. 107-296, Sec. 101, 
Nov. 25, 2002, defined the Department's missions to include preventing 
terrorist attacks within the United States; reducing U.S. vulnerability 
to terrorism; and minimizing the damages, and assisting in the recovery 
from, attacks that occur within the United States.
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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.\5\
---------------------------------------------------------------------------
    \5\ According to S&T, total spending through other transaction 
agreements includes four that are managed by DHS's Domestic Nuclear 
Detection Office (DNDO). S&T contracting representatives told us that 
these agreements were entered into by the S&T Directorate before DNDO 
was created.



    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.\6\ 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.
---------------------------------------------------------------------------
    \6\ Payable milestones are predetermined, observable technical 
events or other measures of progress that the contractor and government 
agree upon in advance.
---------------------------------------------------------------------------
   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.\7\ 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.
---------------------------------------------------------------------------
    \7\ The guidance grants GAO access for a period of 3 years after 
the final payment is made.
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   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.\8\ 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 2-year term.
---------------------------------------------------------------------------
    \8\ The Intergovernmental Personnel Act (IPA) of 1970, U.S.C.  
3371-76, allows employees to be temporarily assigned to a Federal 
agency.
---------------------------------------------------------------------------
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.\9\
---------------------------------------------------------------------------
    \9\ GAO, Acquisition Reform: DOD's Guidance on Using Section 845 
Agreements Could Be Improved, GAO/NSIAD-00-33 (Washington, DC: April, 
2000).
---------------------------------------------------------------------------
    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 
towork 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,\10\ DOD would have to purchase 300 vehicles or pay an 
additional $20 million to $45 million.\11\ Therefore, using an other 
transaction agreement could potentially limit competition and lead to 
additional costs for follow-on work.
---------------------------------------------------------------------------
    \10\ Government purpose rights enable the Government to allow 
others to use the data for Government purposes. See GAO, Intellectual 
Property: Information on the Federal Framework and DOD's Other 
Transaction Authority, GAO-01-980T (Washington, DC: July 2001).
    \11\ GAO-01-980T.
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    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.
         Appendix I: Selected DHS Other Transaction Agreements



    Mr. Langevin. Thank you, Mr. Needham.
    I want to thank the witnesses for their testimony, and I 
will remind each Member that he or she will have 5 minutes to 
question the panel.
    I will now recognize myself for questions.
    Mr. Essig, let me begin with you. Basically, three areas I 
want to get into. Just briefly, first, is the Department still 
planning on asking this committee for an extension of the other 
transaction authority beyond the 2008 sunset?
    Next, I want to point out and ask this question: On section 
831 of the Homeland Security Act, it requires that a report be 
submitted to Congress each year for awards made in the 
preceding fiscal year, pursuant to OT authority. This includes 
all initial awards and options exercised. My question here is, 
where are these reports?
    Then, finally, I would like you to address Mr. Needham's 
point with respect to those recommendations that have not been 
implemented that GAO had recommended. Why haven't you addressed 
those areas?
    If you would start with the sunset question first.
    Mr. Essig. Thank you, Mr. Chairman. As I mentioned in my 
opening comments, we are very appreciative and fully support 
Ranking Member McCaul's proposal to extend our authority to 
2012. We believe that other transaction authority is an 
absolutely critical tool for us to close some critical homeland 
security vulnerabilities.
    Regarding the second question, regarding section 831 and 
the requirement for an annual report to Congress, I have been 
the chief procurement officer just since last month, and I am 
now aware that the Department has not submitted the reports as 
required by section 831. As the chief procurement officer, I am 
responsible for ensuring that those reports are submitted, and 
I will commit and go on the record as indicating that I will 
have that report submitted this year. I will also put 
procedures in place to ensure that those reports are submitted 
on a timely basis in the future.
    Regarding the specific GAO recommendations, regarding full 
implementation of the knowledge capturing system, what I would 
like to identify for the group, the book I have in front of 
me--it is about a 2-inch binder--is a training manual we use 
for all of our OT contracting officers. Now, my background is 
primarily in the area of DOD, but one thing that DHS does over 
and above what I have seen before is we only warrant our 
contracting officers to do other transactions after they have 
successfully completed this training course.
    Now, the manual you see here is the guide book they are 
given in the class. It includes the lessons learned from the 
Department of Defense. It includes some recommendations from 
the Logistics Management Institute on actions taken at the 
Department of Homeland Security. All of this information is 
available to our OT contracting officers when they evaluate 
whether or not to do OTs in the future.
    This is a living document. This is a document which will be 
updated for every successive class. Our intention is as we 
identify additional lessons learned, we incorporate this into 
the manual so that as people go through training they have the 
latest available lessons learned, both from other agencies as 
well as DHS. So if we find cases where the Department has not 
yet fully implemented a GAO recommendation, I can tell you, I 
fully concur with the recommendations of GAO, and we will fully 
implement those recommendations.
    Mr. Langevin. Thank you. Well, that certainly is 
reassuring, and I appreciate that answer.
    Let me ask this: The DOD audit found departures from the 
original rationale for using OT agreements, which was to 
attract nontraditional defense contractors. Data collected from 
fiscal year 1990 to 1997 revealed that 85 percent of the funds 
for other transactions went to traditional DOD contractors, 
which isn't quite how Congress envisioned the authority. 
According to the 2004 GAO report, DHS relied on self-
certification by contractors of their status as a 
nontraditional Government contractor. Is this still the 
practice today?
    Mr. Essig. Actually, at the time DOD received its authority 
for other transactions on prototypes, I was the director for 
surface systems contracts with the Naval Sea Systems Command, 
so I was with DOD at that time. I recall very specifically when 
DOD received this authority there was heavy interest in 
demonstrating that we are able to implement the authority 
received. The unfortunate consequence, in my perception, the 
unfortunate consequence of that is that it was used in cases 
where it did not provide the greatest value to the Government. 
It was used in cases with traditional Government contractors. 
It did not provide the benefits, it did not give us access to 
those nontraditional contractors, it did not provide the cost-
sharing arrangements we have seen.
    That is one of the lessons learned, okay, I think that we 
have now. We understand how it was incorrectly used in the 
past. It was a lesson learned for the future. At DHS, every one 
of our OTs is reviewed, not only by the contracting officer but 
by a review panel that includes both the Office of General 
Counsel and some senior personnel within the contracting 
office, and the goal is to ensure that the justification and 
the documentation for an other transaction at DHS meets the 
appropriate measures.
    Mr. Langevin. So the answer is that this issue of these 
contractors of self-certifying is no longer the case?
    Mr. Essig. As I said, I have been at this for a month. I do 
not have the information in front of me. I can take that 
question for the record and get back to you as to whether or 
not we are using any self-certification within the Department.
    Mr. Langevin. Okay. Thank you. I would hope that the answer 
comes back, ``No,'' but I will wait to hear from you.
    Mr. Essig. Yes, sir. I would like to confirm that.
    Mr. Langevin. Thank you.
    With that, I will stop now and recognize the Ranking 
Member, Mr. McCaul, the gentleman from Texas, for 5 minutes.
    Mr. McCaul. I thank the Chairman, and I thank the 
witnesses.
    Mr. Essig, congratulations on your new position. I must 
say, we both met with you prior to this, and I was impressed by 
your professionalism, your sincerity and your experience in 
terms of procurement. I think you are going to be a great asset 
to the Department.
    There are some concerns and reservations that have been 
raised, but I believe that, in my view, the benefits of these 
other transactions far outweigh the risk.
    Now, we talked about innovation, flexibility, bringing 
barriers down to businesses, some small businesses, the cost 
savings, cost-sharing arrangements, the fact that we, through 
this other transaction authority, developed handheld chemical 
agent detection systems, which have been used in larger cities, 
the fact that the DOD has been doing this for quite some time, 
and the RAND study seemed to be somewhat favorable that this 
has worked quite well in areas where we really need it. NASA 
has used it, the Department of Energy.
    My question to Mr. Essig is, this is getting ready to 
expire in September 2008, it will sunset: If Congress allows 
this to expire, what will be the impact at the Department of 
Homeland Security and your ability to protect this Nation from 
potential terrorist threats?
    Mr. Essig. Thank you for that question. I believe that the 
loss of the other transaction authority would have at least two 
serious and possibly devastating consequences from the ability 
of the Department to meet its mission requirements.
    First, given the nature of the homeland security mission, 
it is essential that we have access to all available commercial 
technologies, including those that are from companies that do 
not currently or traditionally do business with the Government. 
Technologies such as the four S&T systems I identified in my 
written statement, including the LACIS project, which you just 
mentioned, sir, on the chemical agent detectors, would not have 
been achievable without this authority.
    The second consequence of the loss of this authority would 
be that it would significantly reduce the ability of the 
Department to share the cost of developing dual-use 
technologies with industry. Now, these are technologies that 
may have application both commercially and for homeland 
security where the cost of developing that technology is too 
great for industry to develop it on its own.
    So in the absence of the OT authority where we can share 
the cost of developing that with industry, the Department would 
be forced either to forego the development of technology and be 
unable to close those areas of identified risk or bear the full 
cost of its development, increasing the cost to the taxpayer.
    If I could ask, I guess, Keith, if he had anything to add 
to that?
    Mr. Ward. Yes, I would be happy to.
    Mr. Essig has asked me to give a few examples of particular 
products that have come out of some of our currently funded R&D 
efforts in the Department of Homeland Security S&T Directorate.
    The first I want to show you--and I apologize for the 
committee Members not being able to see this, but I am not 
going to apologize for how small it is, because, in fact, one 
of the goals of this particular project--it is part of the 
Autonomous Rapid Facility Chemical Agent Monitoring System, 
which is specifically being developed to protect the 
facilities, rail and transport security systems and 
infrastructure protection--is small affordable systems.
    This particular gadget name is actually longer and bigger 
than the gadget itself. This is a differential mobility 
spectrometer combined with a convention ion mobility 
spectrometer. How about that?
    It was developed by a company called Sionex out of New 
Bedford, Massachusetts. They were the nontraditional contractor 
that the prime, Hamilton Sundstrand, teamed with in response to 
our initial broad agency announcement, which encouraged people 
to team with unconventional contractors.
    This is an extremely innovative technical solution to the 
general problem of building affordable, lightweight, highly 
effective chemical monitoring systems, and I think it is an 
excellent example of the power of OTAs. This particular 
company, in my opinion, would not have been able to provide 
this sort of technology to homeland security without our having 
other transaction authority.
    One final example, if I may mention it briefly, is in the 
biological defense arena. As many of you know, one of our 
projects, called the Bioagent Autonomous Network Detector, 
BAND, aims to develop the third generation biowatch system. One 
of the major performers of the three that are left in the 
program is a company called Microfluidics, Incorporated. They 
chose to team with a small company called Cycle Smart, 
Incorporated in Sunnyvale, California.
    This particular gadget that I hold in my hand is a highly 
innovative and clever Microfluidic Systems made with this 
nontraditional contractor. It is this particular part of the 
overall third generation biowatch system. It is the actual part 
that--both the whole organisms and spores from biological 
agents so that the system can get to the DNA to allow it to 
identify exactly what the agent is.
    Another great example of a nontraditional contractor coming 
to the fore. Again, it is my professional opinion that we would 
have never been able to capture this sort of innovative 
technology had we not had other transaction authority for 
prototype development.
    Mr. McCaul. Thank you, Dr. Ward.
    I submit, then, Mr. Chairman, that we work with the GAO to 
better improve the other transaction authority but that we not 
throw out the baby with the bath water. I think that it 
provides innovation, flexibility, cost savings, it is good for 
the American taxpayer, and, ultimately, it is the kind of 
flexibility that, in my view, the Department needs to protect 
this Nation. So I hope that this committee and this Congress 
will reauthorize this provision and give DHS the tools that it 
needs.
    Thank you.
    Mr. Langevin. I thank the gentleman for his questions and 
his comments.
    Mr. Ward, just as a followup, on that third generation 
biodetector you were holding up, that is something that 
requires little to no human interaction, and that is something 
that is real time?
    Mr. Ward. Yes, sir, Mr. Chairman. We have currently three 
performers all competing to see who can build the best system, 
and all of those systems will be completely autonomous, work in 
real time and conduct all of the analysis of the biological 
agent in place, on the box. That is quite different from what 
our current biowatch system does, as you probably know.
    Mr. Langevin. Well, I agree. I am not at all satisfied with 
our current biodetection system we have in place, and I am 
anxious to get to that third generation technology as quickly 
as possible.
    Do you have, as a side note, a best guess as to when that 
technology will be ready to be fielded?
    Mr. Ward. Yes, sir, Mr. Chairman. Currently, there will be 
the final stages of the developmental testing and evaluation, 
which will allow us to hand this off to the Office of Health 
Affairs, the DHS customer who is actually running biowatch, and 
that will occur in the latter part of 2009, with early 
deployment in 2010.
    Mr. Langevin. Thank you. The sooner the better, as far as I 
am concerned. We are all concerned about our preparedness in 
that area, which is sorely lacking, and I am anxious to get 
that new equipment fielded.
    So thank you for the brief on that and the update.
    With that, the Chair now recognizes the gentleman from 
North Carolina, Mr. Etheridge, for 5 minutes.
    Mr. Etheridge. Thank you, Mr. Chairman, and let me thank 
our witnesses for being here.
    If OT is designed to allow nontraditional commercial firms 
to do business with the Federal Government and inject 
entrepreneurial energy into the Federal research enterprise, 
one would expect that small business would be the prime 
benefactors. However, there are still a lot of large businesses 
making agreements under OT.
    Mr. Needham and Dr. Halchin, can you describe some of the 
impediments to using OT for small businesses?
    Mr. Needham. Congressman, when we did our work back in 
2004, one of the things that we did was spend time with the 
procurement effort in terms of the outreach that DHS did. One 
of the things we were impressed with was they did an extensive 
outreach. They used what they called industry days where they 
would basically go out and discuss what some of the technology 
they were looking for. They tried to do a fairly wide 
announcement as to bring as many small businesses as possible.
    They then followed that up with technical conferences where 
businesses could come in and kind of get a closer----
    Mr. Etheridge. No, I understand the process, but what are 
the impediments?
    Mr. Needham. Well, the impediments are that they have a 
good knowledge of what small businesses are out there, what 
kind of knowledge base they have and where they are located and 
are they reaching them. One of the things that they would have 
to do is evaluate how well their outreach has been.
    Mr. Etheridge. Okay.
    Dr. Halchin, do you have anything to add to that?
    Ms. Halchin. I would agree with Mr. Needham. One other item 
I could add, I know that DHS and DOD do post at least some if 
not all of their--I guess usually they use something called a 
broad agency announcement when they are about to embark on some 
sort of other transaction, and they may post it on their Web 
site. I am not sure if it always gets posted on the Federal 
Business Opportunities Web site. It is possible but that could 
be an impediment if these types of opportunities are not 
publicized as widely as traditional procurements are.
    Mr. Etheridge. Thank you, because that is one of the issues 
that this was all about initially, trying to reach out to small 
folks.
    Mr. Essig, do you know what percentage of OT agreements go 
to large versus small businesses?
    Mr. Essig. There are a couple of different things there. In 
2006, approximately 34 percent of our S&T other transaction 
dollars went to small businesses as small business prime 
contractors. I do not have the visibility into how----
    Mr. Etheridge. What is your definition of small versus 
large?
    Mr. Essig. It depends upon the particular category. That is 
defined by the Small Business Administration.
    Mr. Etheridge. So you use the Small Business Administration 
as your cut line.
    Mr. Essig. Yes, sir.
    Mr. Etheridge. You are saying 34 percent?
    Mr. Essig. Thirty-four percent in 2006, and the good news 
here, two things: One, in 2007, 54 percent of our S&T OT 
dollars went to small businesses, and one of the things we do 
with our use of broad agency announcements and the use of OTs 
is we are looking for participation from as broad a sector of 
the marketplace as possible, be it small businesses, large 
businesses or mid-size businesses.
    We are also looking at promoting unusual teaming 
arrangements. We are not constrained by traditional prime 
subcontractor relations. We could get consortiums to apply. It 
gives us opportunities to reach teams of companies, which may 
involve, again, a mixture of large, small and mid-size. The 
data we capture on awards, as it reflects the awards to prime 
contractors, and, again--so small businesses can get a portion 
of the total work without necessarily being prime contractors. 
Notwithstanding that, the results for small businesses looks 
fairly good at this point.
    Mr. Etheridge. Well, since we are on that topic, let me ask 
you another one. OT, as you know, was originally created to 
attract nontraditional commercial firms to do business with the 
Federal Government, small business, et cetera, but there is 
some flexibility in DHS' management directive for implementing 
OT that allows traditional firms to enter agreements in 
exceptional circumstances. Can you offer examples of these 
exceptional circumstances that would allow DHS to issue an OT 
for a prototype project without the participation of a 
nontraditional Government contract, and how often does this 
exceptional circumstance clause apply?
    Mr. Essig. First off, again, and having only been the chief 
procurement officer for a month, I am not personally aware of 
any exceptions approved. In accordance with the management 
directive that you are speaking to, any of those agreements 
would have to be approved as the senior procurement executive.
    I have not seen any since I have been at DHS, but I can 
take the question and get back to you as to whether or not 
there have been any----
    Mr. Etheridge. Would you? And submit that to the committee 
for the record.
    Mr. Essig. Now, I could speculate as to some reasons for 
that, but I have no concrete examples of where that authority 
has been used. What it does is recognize the opportunity that 
if we find an arrangement which is basically advantageous and 
helps us basically close a critical vulnerability in homeland 
security, if it doesn't meet one of those two conditions, it 
gives us a way to implement it, nonetheless.
    Mr. Etheridge. So you will submit that in writing for the 
committee.
    Mr. Essig. Yes, sir.
    Mr. Etheridge. Thank you.
    I yield back.
    Mr. Langevin. I thank the gentleman.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Broun, for 5 minutes.
    Mr. Broun. Thank you, Mr. Chairman.
    Mr. Essig, what are the most important protections that the 
Federal acquisition regulation-based contracts contained in 
other transactions do not? Also, how does DHS plan to monitor 
the benefits, dollars, time saved from using its other 
transaction agreements?
    Mr. Essig. The other transactions, as you indicate, they 
are exempt from the Federal acquisition regulations. They are 
also exempt from a number of statutory requirements that apply 
to procurement transactions, which include cost and pricing 
data, which include standard provisions for disputes and 
protests.
    As a result of that, the level of expertise that is 
required from our other transaction contracting officers is 
higher than it is for contracting officers in general. The 
reason for that is, is when we are using standard, what I call, 
boiler-plate provisions that are identified in the Federal 
acquisition regulations, mandatory provisions, we know what 
they do, we know why they are included, and it really doesn't 
require a significant level of expertise.
    When you start to eliminate those, you really need to--or 
you modify a clause, you really need to understand why it was 
there in the first place and what the implications are for 
changing it.
    Some of the keys areas, as I said, and probably one of the 
key areas I ran into in my work while still within the 
Department of the Navy had to do with the issue of cost and 
pricing data. In the absence of cost and pricing data, how do 
you assure that the price you are getting is fair and 
reasonable for the Government? That is less of a problem in 
areas where we are having cost-sharing arrangements, in which 
case we are really concerned with before we pay, for example, 
50 cents on the dollar, did the company reasonably and 
accurately incur the dollar?
    But there are other techniques which are used. Many of 
those are identified. There are some other pricing techniques 
that can be used. But it becomes critical that basically our 
contracting personnel understand appropriate measures for 
analyzing costs in the absence of certified cost and pricing 
data.
    Now, within the Office of the Chief Procurement Officer, we 
have recently hired somebody--we have basically hired from the 
Department of Defense who is an expert, both in the cost 
accounting standards and an expert in cost analysis of 
contracts. He is setting up some training opportunities for the 
contracting personnel within DHS, and the goal is to improve 
the capability of our OT contracting officers, all of our 
contracting personnel in being able to analyze proposed costs.
    So we understand there are some risks. We are putting 
together some basic things to assure that the proper reviews 
are in place.
    Previously, I mentioned that we have reviews over and above 
the level of the contracting officer. For OTs valued at greater 
than $25 million, those are approved by an acquisition review 
board. For those over $50 million, they have to come to me for 
approval. So I think we have proper protections in place on a 
pre- and post-award side. It requires a more detailed review of 
the business deal than your normal contract does.
    Mr. Broun. When those contracts come to you, what kind of 
thought process do you go through to approve or disapprove 
those contracts?
    Mr. Essig. One of the things we are trying to get all of 
our contracting personnel to understand--and the training 
manual, by the way, is not a training manual in other 
transactions. Critical to really understanding this is, this is 
a training manual that is Federal acquisition regulation-based, 
research and development contracting and other transactions.
    The assurance is we need to be sure that our contracting 
personnel and our program personnel understand the implications 
and the benefit and disadvantages of each approach, and they 
both have pros and they both have cons. So we are looking at 
basically ensuring that they are properly trained, we have 
proper checks and balances in place to understand under the 
situations where an other transaction is the greatest benefit.
    One of the things we are starting to use in our broad 
agency announcement is we are not specifying that this will 
result in an other transaction. We are saying it may result in 
an other transaction, it may result in a contract, it may 
result in a grant.
    What that gives is the ability for us to weigh the actual 
proposals, not speculate as to which of these will likely 
provide the greatest benefit but to have real data to look at, 
where you can take a look at what the company has proposed in 
terms of price, terms and conditions on a contractual basis and 
what they have proposed if we are willing to change some of the 
intellectual property rights or we are willing to waive cost 
and pricing data. Based on real data we can then make an 
informed decision as to which of those two approaches provides 
the greater value for the Government.
    Mr. Broun. All right. I thank you very much.
    Dr. Ward, I want to associate myself with the Chairman's 
comments about getting that biological piece of equipment that 
you had. I am a physician, and certainly I would like to see it 
on the ground as quickly as we possibly can.
    I have some other questions that I would like to submit to 
you all for you all to answer and put in the record.
    Mr. Chairman, I ask permission to do so.
    Mr. Langevin. Without objection.
    Mr. Broun. I thank you all for coming today and appreciate 
you all participating in this panel.
    Thank you, Mr. Chairman. I will yield back.
    Mr. Langevin. I thank the gentleman for his questions.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Pascrell, for 5 minutes.
    Mr. Pascrell. Thank you, Mr. Chairman.
    Mr. Needham, are you convinced that our homeland security, 
before it considered nontraditional contracting or whatever, 
were they unable to, let's say, acquire goods or services or 
the needed technologies through existing vehicles and more 
traditional? Are you convinced that that is the case or are you 
not convinced?
    Mr. Needham. At the time we did our review, we didn't have 
any data related to that particular question, but this 
authority was put into the act when the Department was created, 
so they had it from the get-go.
    Mr. Pascrell. But how you use the authority should be 
determined by some oversight----
    Mr. Needham. Right.
    Mr. Pascrell [continuing]. Other than the Department. I am 
asking you whether or not all other means were exhausted? That 
is a very direct and simple question. You had reviews in the 
Department of Defense to that effect, did you not?
    Mr. Needham. Yes.
    Mr. Pascrell. What did you conclude?
    Mr. Needham. There was mixed use. I mean, that they were 
able to get--about 13 percent of the companies they were able 
to get were nontraditionals when we looked at them, and that 
was in 2000.
    We also have found at the time they didn't have a condition 
specified as to when to use nontraditional contractor or to use 
an OT. One of the things that the Department of Defense changed 
was they put these things into policy as well as symmetrics for 
measuring what they were doing with OTs. In fact, when the 
Department of Homeland Security was created and the OT 
authority was given to them, they basically modeled their 
directives and their processes on what was done at DARPA and 
brought in DARPA personnel. Much of what we recommended to 
DARPA was embedded into the management directive at DHS.
    But we only looked at--at that time, there were only two 
projects that were underway. They have now completed 37, or 
have 37 underway, so we are going back in this year to look 
at----
    Mr. Pascrell. So you already had a review of two, so they 
have 35 really to review.
    Mr. Needham. Right.
    Mr. Pascrell. So the information you are providing to us is 
not complete, by any stretch.
    Mr. Needham. No.
    Mr. Pascrell. Let me ask you this question: So you only 
looked at two of them. Would you say any percentage of the 
dollar, each dollar that was extended, was in these other 
transactions that we have talked, other traditional contracts, 
is every cent of the dollar accounted for in those two 
projects?
    Mr. Needham. We can't answer that question. We didn't get 
in--in fact, as I mentioned in my statement, we didn't look at 
that, but we will be looking at the financial aspects of this 
when we go back in next month.
    Mr. Pascrell. Now, why would I be asking that question, Mr. 
Needham?
    Mr. Needham. Because it is about dollars. It is tax dollars 
going into these agreements, and what is the accountability 
there?
    Mr. Pascrell. Well, what did the Department of Homeland 
Security in its own oversight, what did it find in the 
accountability of those dollars wherever procurement was 
necessary, be it traditional or nontraditional?
    Very simple question, Mr. Chairman, very simple question.
    Mr. Needham. What I can speak to is what I saw in terms of 
the inspector general's reviews that they did in the chem-bio 
program, and it was dealing with the fact that there were needs 
for more controls to make sure that improvements were actually 
happening. I have seen a limited number of reviews based on 
what I looked at in the last year.
    Mr. Pascrell. So I can conclude--correct me if I am wrong--
that we are nowhere near coming to a conclusion of the review 
of such contracts so that we can make decisions in this 
committee and in the Congress of the United States. We are now 
in 2008, and there have been many contracts, both traditional 
and nontraditional, that have been accepted, and we don't 
really have a firm conception--I don't, let me speak for 
myself--I don't have a firm conception as to whether this works 
or doesn't work since there has only been a review of two 
contracts. I mean, have I----
    Mr. Needham. That was early on, sir.
    Mr. Pascrell. Yes. And who is reviewed? Is there any 
mechanism within the Department that reviews since those first 
two contracts to the present time?
    Mr. Needham. There is an internal review process between 
the Program Office and the Chief Procurement Office.
    Mr. Pascrell. Who is in charge of that?
    Mr. Needham. The chief procurement----
    Mr. Pascrell. If I may ask Mr. Essig, who is in charge of 
that?
    Mr. Essig. I am sorry, sir. Who is in charge of oversight 
of OTs?
    Mr. Pascrell. Yes.
    Mr. Essig. I am, sir. I am responsible for oversight of 
acquisition within the Department.
    Mr. Pascrell. Now, you are just in the job.
    Mr. Essig. Yes, sir.
    Mr. Pascrell. Did you review the reports made by your 
predecessor about what occurred from these two contracts to the 
present time? Have you reviewed that?
    Mr. Essig. Well, I have reviewed the GAO recommendations. I 
have reviewed the----
    Mr. Pascrell. But the GAO recommendations are based upon 
only two contracts. What happened between the two contracts and 
the other 35, you don't have any idea yet.
    Mr. Essig. I have not reviewed them. I have reviewed the 
processes that have been put in place to ensure that they are 
properly reviewed and that proper oversight procedures are in 
place. As a result of that review, I have recently directed 
that a review of other transactions that are contracting 
activities be included as a portion of our periodic procurement 
management reviews, okay? That is a change that I have 
implemented within the last week. So I have reviewed the 
processes, I have not reviewed individual other transactions.
    Mr. Pascrell. Thank you.
    Mr. Chairman, I would hope that this committee would be 
able to obtain within the next 2 or 3 weeks the reports about 
those other 35 contracts. This is unacceptable. Can't blame 
this young man, he just got the job, but it is unacceptable 
that the Department does not have a review. There is no 
oversight, there is no oversight in any part of these 
departments. You know it, and I know it, and anything I have 
heard today is simply in the future, what we are going to do in 
the future.
    Mr. Chairman, you go back over the meetings over the past 3 
years, we always hear about the future, we never hear or have 
any accountability. The citizens do not have any idea how their 
money is being spent, none, zero.
    Thank you.
    Mr. Langevin. Certainly, this is part of that effort to 
exercise the oversight that needs to be exercised in this area, 
and we will continue to give both the contracts and this 
process and the OT contract awards great scrutiny.
    Just as a follow-up, Mr. Essig, so that I am clear, and it 
is for the record, the reports that we required under the 
contracts, have they in fact been done or is this something 
that had not been done but will be as we go forward? Could you 
clarify that point? I was not clear.
    Mr. Essig. Yes, sir. It is my understanding the reports 
have not been done. I have directed that those reports be 
completed, and they are now in the process of being completed. 
I have ensured that among the changes, we incorporate that 
requirement, not only into our overall schedules to make sure 
we don't miss them, but that the requirement is included in our 
training manuals so it is one of the things we don't miss then.
    Mr. Langevin. I appreciate that answer, for the record. We 
will want to follow up on those reports, and as the gentleman 
from New Jersey points out, you can't be--the blame can't be 
put on your shoulders for what happened prior to your arrival, 
which is just recent, but certainly we will want to hear about 
the outcome of those reports and then give greater scrutiny to 
this as we go forward.
    To Mr. Needham, for the record, will you be following up on 
these reviews? Also, I am interested in knowing, will you be 
looking further at the percentage of these contracts that does 
in fact go to nontraditional contractors?
    Mr. Needham. Mr. Chairman, we have a review scheduled. The 
team has been selected, and they are going to start work next 
month, and we will do a full scope initially to look at all 
aspects of the program, and we will be meeting with your office 
to arrange, in terms of the questions and the work, how we will 
be approaching it.
    Mr. Langevin. Thank you.
    I thank the gentleman from New Jersey for that robust line 
of questioning.
    The gentleman from Texas, Mr. Green, is now recognized for 
5 minutes.
    Mr. Green. Thank you, Mr. Chairman. After hearing my 
colleague from New Jersey, I am tempted to say, ``Amen,'' but I 
will simply say, ``A-woman.''
    Let us start with thanking you for appearing today and 
giving us your testimony.
    Ms. Halchin, you have indicated that 95 percent of the 
proceeds from $5.7 million--proceeds of $5.7 million went to 
traditional defense contractors; is that correct?
    Ms. Halchin. Yes, sir; that is correct. The data relates to 
DOD, but that is correct.
    Mr. Green. Mr. Essig, how do you explain how that could 
occur, 95 percent? It is a pretty large number. How does that 
happen?
    Mr. Essig. Sir, here again, I don't have data to be able to 
answer for DOD. I can only tell you based on my personal 
involvement while working for the Navy Department was we were 
looking for ways, basically, to implement other transaction 
authority. We had no group of lessons learned back then such as 
we have today. When you try things with no experience, with no 
background, you have some successes and you have some failures. 
I think what I am looking at in my position, as the chief 
procurement officer, is where is the Department today, how did 
we get here, and where do we need to go?
    Mr. Green. Do we know what an OTA looks like today?
    Mr. Essig. In our training manual, we include several 
examples of OTAs that have been used. Again, each OTA is 
negotiated individually. What we are trying to do is put 
together some samples, some models of prior OTAs, of prior 
provisions that have been used successfully without taking 
authority away from the OT contracting officer to tailor that 
to the unique needs.
    Mr. Green. Do we have a definition of an OTA?
    Mr. Essig. We have a specific definition of an OT in our 
management directive and----
    Mr. Green. An OT, excuse me. Continue, an OT.
    Mr. Essig [continuing]. And I believe that comes from the 
Homeland Security Act. It is modeled on DOD's authority. The 
language, though, about other transactions comes specifically 
from the Homeland Appropriation Act, and it talks to the use of 
transactions other than contracts, grants or a cooperative 
agreement.
    Mr. Green. Is a small business, by virtue of being a small 
business, considered an OT?
    Mr. Essig. No, sir. However, small businesses have an 
opportunity under OTs because of the way the definition of a 
nontraditional contractor is worded. The way it is worded is a 
nontraditional contractor is a company that has not in the past 
year performed on a contract that is subject to full coverage 
under the cost accounting standards, which is $15 million worth 
of contracts or a contract in excess of $500,000 to carry out 
prototype projects or perform basic, applied, or advanced 
research projects for a Federal agency subject to compliance 
with the FAR.
    Now, what that means, if you have a business that hasn't 
had $15 million of work in the past year, is not subject to 
cost accounting standards, and has not had $500,000 of R&D 
contracts with a FAR-covered Federal agency, it qualifies as a 
nontraditional source. Many small businesses would meet those 
requirements even if they had contracts with the Federal 
Government. Those could be support contracts, they could be 
supply contracts, or research and development contracts that 
don't reach that threshold.
    Mr. Green. So do you have any other examples of 
nontraditional businesses that you can call to our attention, 
small businesses? What other categories do you have?
    Mr. Essig. We do. I think Keith has some examples.
    Mr. Green. Okay. Thank you.
    Mr. Ward. Yes, sir.
    Mr. Green. Would a business owned by a female be considered 
a traditional or nontraditional business?
    Mr. Ward. Actually, the definition of a nontraditional 
contractor, which would be necessary in order for a team to 
qualify for an other transaction agreement, actually is the 
definition that Mr. Essig just gave you, and that has to do not 
with their ownership but how much previous work they have done 
under FAR contracts or other sorts of contracts.
    However, I might point out, because it may be of interest, 
that this third generation biowatch system that seeing 
developed now started out with eight to 10 major performers. 
The only ones that are left are three. They have done the best 
work, and the other ones have all dropped off. Every one of 
those happens to be small businesses, just by accident and the 
good work that they happen to have been done.
    We also have some examples of nontraditional contractors 
who have qualified and allowed their teams to qualify for OTAs 
that do happen to be women-owned small businesses. The 
particular one there is----
    Mr. Green. What percentage have been women-owned?
    Mr. Ward. I am sorry, I don't have that in front of me. I 
will be happy to take that for the record. Maybe Mr. Essig 
knows.
    Mr. Essig. Our contract database and our other transaction 
database captures information on the prime contractors. It will 
identify them as small businesses. I will verify but I do not 
believe we have visibility into which specific small or 
socioeconomic category they may fall into.
    Now women-owned small business is one of the socioeconomic 
categories that we identify goals for contract awards within 
the Department. Within the Department, we support all of our 
small business and socioeconomic preference programs. So, 
again, we look at them every year.
    Basically, we establish goals for contracting within each 
of those groups, and each of those goals is identified and 
provided to the heads of the contracting activities at the 
beginning of each year.
    But I will verify, I can take it for the record and get 
back to you. I don't believe we have visibility into the award 
data by socioeconomic category.
    Mr. Green. If I can ask one more question, Mr. Chairman?
    Mr. Langevin. Briefly.
    Mr. Green. Okay. Is there a reason why you don't have that 
kind of visibility? Is there some rule that prohibits that kind 
of visibility?
    Mr. Essig. Two things. The Federal Procurement Data System, 
FPDS, currently data on procurement contracts. Other 
transactions are not procurement vehicles, and, as a result, 
they are not currently captured in FPDS. Because that data is 
important to us at the Department of Homeland Security, all of 
the other transactions issued by the Office of Procurement 
Operations is included in our contract database, our prism 
contract database. So we are gathering that data for Department 
of Homeland Security.
    One of the other things I have done is I have had 
discussions with the director of our Office of Small and 
Disadvantaged Business Utilization looking at establishing 
goals for the Department that go beyond just contracting goals, 
that include other transactions in the base. So what we would 
identify is we are looking at goals for awards for small and 
other socioeconomic organizations, firms, okay, regardless of 
whether or not it is an other transaction or a contract. We are 
looking at total awards from the Department, how much is going 
to these organizations.
    Mr. Green. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Langevin. I thank the gentleman.
    Before the hearing concludes, the Ranking Member and I just 
wanted something clarified, Mr. Needham, that you had brought 
up.
    With respect to the teams you are putting in place, the 
reviews you are conducting, when do you expect that those would 
be concluded?
    Mr. Needham. Mr. Chairman, what we typically do is go in 
and do a period of work where we survey what is being done in 
the Department and then come back and then meet with the 
various committee staffs to lay out what would be an approach 
that we would take. At that point, we would lay out when we 
would conclude the work. We would expect, though, after several 
months we would be able to kind of define what that period 
would be. But I would expect that we are going to be able to 
brief you prior to September 2008 on what we are getting at 
that point. Whether we will hope to conclude the work at that 
point is another question, depending on the scope of what we 
cover.
    Mr. Langevin. We will look forward to the reports when they 
are done.
    Mr. Needham. Okay.
    Mr. Langevin. With that, I want to thank the witnesses for 
their valuable testimony and the Members for their questions.
    Members of the subcommittee may have additional questions 
for the witnesses, and I would ask that you respond 
expeditiously in writing to those questions.
    Hearing no further business, the subcommittee stands 
adjourned.
    [Whereupon, at 3:25 p.m., the subcommittee was adjourned.]

                                 
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