[Federal Register Volume 69, Number 110 (Tuesday, June 8, 2004)]
[Rules and Regulations]
[Pages 31907-31909]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12939]



48 CFR Part 206

[DFARS Case 2002-D023]

Defense Federal Acquisition Regulation Supplement; Follow-On 
Production Contracts for Products Developed Pursuant to Prototype 

AGENCY: Department of Defense (DoD).

ACTION: Final rule.


SUMMARY: DoD has issued a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to provide an exception from 
competition requirements to apply to contracts awarded under the 
authority of section 822 of the National Defense

[[Page 31908]]

Authorization Act for Fiscal Year 2002. Section 822 provides for award 
of a follow-on production contract, without competition, to 
participants in an ``other transaction'' agreement for a prototype 
project, if the agreement was entered into through use of competitive 
procedures, provided for at least one-third non-Federal cost share, and 
meets certain other conditions of law.

EFFECTIVE DATE: June 8, 2004.

FOR FURTHER INFORMATION CONTACT: Mr. Thaddeus Godlewski, Defense 
Acquisition Regulations Council, OUSD(AT&L)DPAP(DAR), IMD 3C132, 3062 
Defense Pentagon, Washington, DC 20301-3062. Telephone (703) 602-2022; 
facsimile (703) 602-0350. Please cite DFARS Case 2002-D023.


A. Background

    Section 845 of the National Defense Authorization Act for Fiscal 
Year 1994 (Pub. L. 103-160; 10 U.S.C. 2371 note) provides authority for 
DoD to enter into transactions other than contracts, grants, or 
cooperative agreements, in certain situations, for prototype projects 
that are directly relevant to weapons or weapon systems proposed to be 
acquired or developed by DoD. Such transactions are commonly referred 
to as ``other transaction'' (OT) agreements for prototype projects.
    Section 822 of the National Defense Authorization Act for Fiscal 
Year 2002 (Pub. L. 107-107) permits award of a follow-on production 
contract, without competition, to participants in an OT agreement for a 
prototype project if--
    (1) The OT agreement provided for a follow-on production contract;
    (2) The OT agreement provided for at least one-third non-Federal 
cost share for the prototype project;
    (3) Competitive procedures were used for the selection of parties 
for participation in the OT agreement;
    (4) The participants in the OT agreement successfully completed the 
prototype project;
    (5) The number of units provided for in the follow-on production 
contract does not exceed the number of units specified in the OT 
agreement for such a follow-on production contract; and
    (6) The prices established in the follow-on production contract do 
not exceed the target prices specified in the OT agreement for such a 
follow-on production contract.
    DoD published amendments to the ``Other Transactions'' regulations 
at 32 CFR part 3 on March 30, 2004 (69 FR 16481), to implement section 
822. This DFARS rule provides the corresponding exemption from 
competition requirements for follow-on production contracts awarded 
under the authority of section 822.
    DoD published a proposed DFARS rule at 68 FR 33057 on June 3, 2003. 
Two sources submitted comments on the proposed rule. A discussion of 
the comments is provided below. The difference between the proposed and 
final rules is addressed in the discussion of Comment 3 below.
    1. Comment: A company may submit a proposal below cost for 
production during the initial competition in hopes of recovering costs 
in a sole source environment. The Government should not facilitate 
recovery of these costs, and this should be addressed prior to 
finalizing the rule.
    DoD Response: This concern is not unique to this rule, but exists 
in any competition where only one offeror is selected for award. The 
companion rule at 32 CFR 3.9 requires that the offered prices for 
production be evaluated during the original competition. This, coupled 
with the inherent responsibility of a contracting officer to ensure 
that contractors honor their commitments, obviates the need for any 
special DFARS text regarding this concern.
    2. Comment: The requirement for production may change such that the 
prototype no longer represents a clear solution to the Government's 
needs and, in such a case, other companies should be afforded the 
opportunity to offer solutions for the production phase. The rule 
should specify the procedures to be used for such a follow-on 
competition (e.g., solicit only original competitors, open 
    DoD Response: The companion rule at 32 CFR 3.9 outlines the upfront 
limitations for use of this authority and specifies in paragraph (c) 
that the authority should be used only when the risk of the prototype 
project permits realistic production pricing without placing undue 
risks on the awardee. This limits use of the authority for higher-risk 
prototype projects where the production requirement, and thus the 
pricing, may be less certain. This limitation, coupled with the 
inherent responsibility of a contracting officer regarding scope 
determinations, obviates the need to specify any unique scope 
determination for use of this follow-on authority. Additionally, if the 
contracting officer determines that the follow-on production is beyond 
the scope of that originally contemplated, the contracting officer must 
then develop an acquisition strategy for the new requirement. The 
contracting officer must determine, in accordance with the FAR and the 
particulars of the acquisition, the appropriate acquisition strategy. 
It is not practicable to stipulate in regulation what constitutes a new 
requirement, nor the nature of any follow-on competition for such a new 
    3. Comment: The reference in the parenthetical at 206.001(S-70)(2) 
should be corrected from ``32 CFR 3.9(c)'' to ``32 CFR 3.9(d)''.
    DoD Response: Concur. The correction has been incorporated into the 
final rule.
    This rule was not subject to Office of Management and Budget review 
under Executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

    DoD certifies that this final rule will not have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., 
because the rule applies only to production contracts for DoD weapons 
and weapon systems. Such contracts typically are not awarded to small 
business concerns.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the rule does 
not impose any information collection requirements that require the 
approval of the Office of Management and Budget under 44 U.S.C. 3501, 
et seq.

List of Subjects in 48 CFR Part 206

    Government procurement.

Michele P. Peterson,
Executive Editor, Defense Acquisition Regulations Council.

Therefore, 48 CFR part 206 is amended as follows:
1. The authority citation for 48 CFR part 206 continues to read as 

    Authority: 41 U.S.C. 421 and 48 CFR chapter 1.


2. Section 206.001 is amended by adding, after paragraph (b), a new 
paragraph (S-70) to read as follows:

206.001  Applicability.

* * * * *
    (S-70) Also excepted from this part are follow-on production 
contracts for products developed pursuant to the ``other transactions'' 
authority of 10 U.S.C. 2371 for prototype projects when--
    (1) The other transaction agreement includes provisions for a 
follow-on production contract;
    (2) The contracting officer receives sufficient information from 

[[Page 31909]]

agreements officer and the project manager for the prototype other 
transaction agreement, which documents that the conditions set forth in 
10 U.S.C. 2371 note, subsections (f)(2) (A) and (B) (see 32 CFR 
3.9(d)), have been met; and
    (3) The contracting officer establishes quantities and prices for 
the follow-on production contract that do not exceed the quantities and 
target prices established in the other transaction agreement.

[FR Doc. 04-12939 Filed 6-7-04; 8:45 am]