Defense Acquisitions: DOD Has Implemented Section 845		 
Recommendations but Reporting Can Be Enhanced (09-OCT-02,	 
GAO-03-150).							 
                                                                 
In April 2000, GAO reported on the Department of Defense's (DOD) 
use of Section 845 agreements, also referred to as "other	 
transactions" for prototype projects. These are transactions	 
other than contracts, grants, or cooperative agreements that	 
generally are not subject to federal laws and regulations	 
applicable to procurement contracts. In December 2000, DOD	 
revised its Section 845 guide. The guide specifies when Section  
845 agreements may be used and provides criteria for tailoring	 
terms and conditions for each agreement. Officials from the	 
military services and defense agencies have found the new guide  
useful and a significant improvement over the prior version. The 
Secretary of Defense has required a metric--the number of	 
participating nontraditional defense contractors--which is	 
measurable and directly related to each agreement. This metric is
tracked and reported internally. DOD explored additional metrics,
but concluded that the number of nontraditional contractors was  
the only one that was quantifiable and tied directly to Section  
845 outcomes. DOD's annual report to Congress on Section 845	 
agreements consists of summaries on each agreement. However, the 
key metric--the number of nontraditional contractors--is not	 
clearly presented in these reports, making it difficult to gauge 
DOD's progress in achieving success on this objective. Further,  
DOD is not regularly assessing reporting on the benefits derived 
from completed Section 845 projects. In the absence of such	 
assessments, congressional and DOD decision makers lack a vital  
piece of information that would help them determine whether this 
flexible procurement authority is achieving expecting results.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-150 					        
    ACCNO:   A05270						        
  TITLE:     Defense Acquisitions: DOD Has Implemented Section 845    
Recommendations but Reporting Can Be Enhanced			 
     DATE:   10/09/2002 
  SUBJECT:   Department of Defense contractors			 
	     Performance measures				 
	     Defense agreements 				 
	     Defense procurement				 
	     Procurement regulations				 
	     Voluntary compliance				 

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GAO-03-150

Report to the Chairman and Ranking Minority Member, Committee on Armed
Services, U. S. Senate

United States General Accounting Office

GAO

October 2002 DEFENSE ACQUISITIONS DOD Has Implemented Section 845
Recommendations but Reporting Can Be Enhanced

GAO- 03- 150

Page i GAO- 03- 150 Defense Acquisitions Letter 1

Results in Brief 1 Background 2 DOD Revised Section 845 Guide as
Recommended 5 Number of Nontraditional Contractors Is Captured as a

Performance Metric 7 Section 845 Reports Lack Sufficient Information 8
Conclusion 9 Recommendations for Executive Action 10 Agency Comments 10
Scope and Methodology 11

Appendix I Comments from the Department of Defense 13

Appendix II Report of Other Transactions for Prototype Projects 15

Figure

Figure 1: Section 845 Agreements Awarded in Fiscal Year 2001 4

Abbreviations

DARPA Defense Advanced Research Projects Agency DOD Department of Defense
NIMA National Imagery and Mapping Agency Contents

Page 1 GAO- 03- 150 Defense Acquisitions

October 9, 2002 The Honorable Carl Levin Chairman Committee on Armed
Services United States Senate

The Honorable John Warner Ranking Minority Member Committee on Armed
Services United States Senate

In April 2000, we reported on the Department of Defense*s (DOD) use of
Section 845 agreements, also referred to as *other transactions* for
prototype projects. 1 These are transactions other than contracts, grants,
or cooperative agreements that generally are not subject to federal laws
and regulations applicable to procurement contracts. 2 In that report, we
recommended that the Secretary of Defense (1) update DOD*s Other
Transactions Guide for Prototype Projects to lay out the conditions and
provide a framework for using Section 845 agreements and (2) establish and
require the use of performance metrics. The Senate report accompanying the
National Defense Authorization Act for Fiscal Year 2001 3 directed the
Secretary to implement these recommendations by March 1, 2001. It also
directed us to report on DOD*s compliance with our recommendations. This
report responds to that mandate. In addition, we determined whether DOD is
providing Congress with sufficient information on Section 845 agreements.

In December 2000, DOD revised its Section 845 guide. The guide specifies
when Section 845 agreements may be used and provides criteria for
tailoring terms and conditions appropriate for each agreement. Officials

1 U. S. General Accounting Office, Acquisition Reform: DOD*s Guidance on
Using Section 845 Agreements Could be Improved, GAO/ NSIAD- 00- 33
(Washington, D. C.: April 7, 2000). 2 This authority comes from Section
845 of the National Defense Authorization Act for

Fiscal Year 1994, P. L. 103- 160, Section 845, hereinafter referred to as
*Section 845 agreements.* 3 Senate Report 106- 292.

United States General Accounting Office Washington, DC 20548

Results in Brief

Page 2 GAO- 03- 150 Defense Acquisitions

from the military services and defense agencies have found the new guide
useful and a significant improvement over the prior version. For example,
the current guide provides more details on the appropriate use of terms
and conditions such as intellectual property, accounting systems, and
costsharing arrangements between the government and the private sector.
DOD*s new guide complies with our April 2000 recommendation.

The Secretary of Defense has required a metric* the number of
participating nontraditional defense contractors* which is measurable and
directly related to each agreement. This metric is tracked and reported
internally. DOD explored additional metrics, but concluded that the number
of nontraditional contractors was the only one that was quantifiable and
tied directly to Section 845 outcomes.

DOD*s annual report to Congress on Section 845 agreements consists of
summaries of each agreement. However, the key metric* the number of
nontraditional contractors* is not clearly presented in these reports,
making it difficult to gauge DOD*s progress in achieving success on this
objective. Further, DOD is not regularly assessing or reporting on the
benefits derived from completed Section 845 projects. In the absence of
such assessments, congressional and DOD decision makers lack a vital piece
of information that would help them determine whether this flexible
procurement authority is achieving expected results.

We are making recommendations to the Secretary of Defense concerning
reporting to Congress on (1) the extent of nontraditional defense
contractor participation in Section 845 agreements and (2) the benefits
derived from completed projects.

In commenting on a draft of this report, DOD agreed to include in the
summary section of the annual report to Congress the number of new
agreements and the reason Section 845 authority was used. However, DOD did
not agree to include in the summary the total number of nontraditional
contractors. DOD agreed to make available to Congress any studies that
assess the use of *other transaction* authority for prototype projects.
DOD*s written comments are in appendix I.

Congress has incrementally expanded the use and scope of *other

transaction* authority since first authorizing its use more than a decade
ago. In 1989, Congress gave DOD, acting through the Defense Advanced
Research Projects Agency (DARPA), authority to temporarily use *other

transactions* for basic, applied, and advanced research projects. In 1991,
Background

Page 3 GAO- 03- 150 Defense Acquisitions

Congress made this authority permanent and extended it to the military
services. In 1993, Congress enacted Section 845 of the National Defense
Authorization Act for Fiscal Year 1994, which provided DARPA with
authority to use, for a 3- year period, *other transactions* to carry out
prototype projects directly relevant to weapons or weapon systems proposed
to be acquired or developed by DOD. The National Defense Authorization Act
for Fiscal Year 1997 temporarily extended DARPA*s Section 845 authority
and provided similar authority to the military services and defense
agencies. Congress subsequently extended this authority*s expiration date
until September 30, 2004.

In an era of a shrinking defense industrial base and new threats, DOD
views *other transaction* prototype authority as a key to attracting
nontraditional defense contractors. Section 803 of the Floyd D. Spence
National Defense Authorization Act for Fiscal Year 2001 defined a
nontraditional defense contractor as an entity that has not, for at least
a period of one year prior to the date of entering into or performing an

*other transaction,* entered into or performed (1) any contract subject to
full coverage under the cost accounting standards or (2) any other
contract in excess of $500,000 to carry out prototype projects or to
perform basic, applied, or advanced research projects for federal
agencies.

DOD also views Section 845 authority as a way to test creative procurement
strategies* such as the use of teaming and consortia* with traditional
defense contractors and in industry areas not normally associated with
government contracts. Under this authority, new business relationships,
which could involve changes in traditional business processes or
intellectual property rights agreements, are created to leverage
commercial investments and to permit DOD to influence the design,
development, and availability of commercial technologies to address
national security needs.

In fiscal year 2001, the most recent year for which complete data are
available, DOD awarded 61 Section 845 agreements, totaling $392 million in
federal government funds. Contractors contributed another $97 million

Page 4 GAO- 03- 150 Defense Acquisitions

in cost- sharing funds. 4 Figure 1 shows these agreements by awarding
organization.

Figure 1: Section 845 Agreements Awarded in Fiscal Year 2001

Note: The National Imagery and Mapping Agency did not award any Section
845 agreements in fiscal year 2001.

Source: Office of Defense Procurement.

DOD is required to submit an annual report to Congress addressing both
research and prototype *other transaction* agreements awarded in the
preceding fiscal year. 5 The report, which is prepared and signed by the
Director, Defense Research and Engineering, includes input from the
Director of Defense Procurement on Section 845 agreements. The report is
to address (1) the technology areas in which the work was focused; (2) the

4 Section 803 of the National Defense Authorization Act for Fiscal Year
2001 established a requirement that when a nontraditional contractor does
not participate to a significant extent in a prototype project, the
nonfederal parties must pay at least one- third of the project*s cost. In
the absence of this arrangement, the Senior Procurement Executive (as
defined by 41 U. S. C. Sec. 414 [3]) must provide a written justification
for the use of an

*other transaction.* 5 10 U. S. C. Section 2371( h).

Page 5 GAO- 03- 150 Defense Acquisitions

extent of cost sharing among federal and nonfederal sources; and (3) how

*other transactions* contributed to a broadening of the technology and
industrial base and fostered new relationships and practices that support
U. S. national security interests.

In December 2000, the Under Secretary of Defense for Acquisition and
Technology 6 issued a revised guide that sets out the conditions and
framework for using Section 845 agreements. 7 The guide is effective for
all solicitations issued after January 5, 2001, and provides a useful
framework for tailoring the terms and conditions appropriate for each
agreement. DOD agreements officers view the new guide as a significant
improvement over the prior version. 8 Several key improvements are as
follows:

 The previous guide contained very limited information on the terms and
conditions to be tailored when crafting a Section 845 agreement. The
current guide provides additional details on the appropriate use of terms
and conditions such as intellectual property, accounting systems, and cost
sharing. It instructs agreements officers not to view previously issued
agreements as a template or model, but to rely on their skill and
experience and to consider Federal Acquisition Regulation clauses and
commercial business practices, as well as prior *other transactions,* when
formulating agreements. The current guide also requires an acquisition
strategy that identifies and discusses the rationale for using a Section
845 agreement.

 The previous guide did not define *nontraditional* contractors. The
current guide defines the term, based in part on the definition in Section
803 of the National Defense Authorization Act for Fiscal Year 2001. It
also requires that information on these entities be collected. DOD
considers nontraditional defense contractors to be *business units,* which
can be

6 This position is now the Under Secretary of Defense for Acquisition,
Technology, and Logistics. 7 The Office of Defense Procurement prepared
the guide, Other Transactions (OT) Guide for Prototype Projects. This
office is responsible for policy, guidance, and oversight of

*other transactions* for prototype projects, while the Director, Defense
Research and Engineering performs similar functions for *other
transactions* for research. 8 An agreements officer has authority to enter
into, administer, or terminate *other

transactions.* DOD Revised Section

845 Guide as Recommended

Page 6 GAO- 03- 150 Defense Acquisitions

any segment of an organization or an entire business organization that is
not divided into segments.

 The previous guide listed eight examples of benefits to be considered
under Section 845 agreements, including attracting business entities that
normally do not do business with the government. However, it did not
identify a specific metric that should be used on all Section 845
agreements. The current guide clearly states that DOD will track, as a
metric, the participation of nontraditional defense contractors.

DOD also included a draft audit policy in the revised guide. According to
DOD officials, the impetus for including a draft audit policy came from
two DOD Inspector General reports. The first, a 1997 report, questioned
the adequacy of audit coverage on DARPA*s *other transactions* for
research. 9 Although *other transactions* agreements for research included
an audit clause, the report noted that agency officials intended to
require audits only if they suspected fraud. The Inspector General argued
that without final cost audits, agency officials could not ensure
compliance with the statutory requirement pertaining to cost- sharing
provisions. In a 1999 follow- up study on cost- sharing, the Inspector
General raised similar concerns about prototype projects and included
recommendations regarding audit policy for *other transactions* for
prototype projects. 10

On August 27, 2002, DOD issued a final rule codifying the definition of a
nontraditional defense contractor and setting forth the conditions for
using Section 845 agreements consistent with Section 803 of the National
Defense Authorization Act for Fiscal Year 2001. The notice accompanying
the final rule stated that the audit policy is being discussed and will be
addressed by a separate rule.

9 Office of the Inspector General, Department of Defense, Award and
Administration of Contracts, Grants, and Other Transactions Issued by the
Defense Advanced Research Projects Agency, Report No. 97- 114 (Washington,
D. C: Mar. 28, 1997). 10 Office of the Inspector General, Department of
Defense, Cost Charged to Other

Transactions, Report No. D- 2000- 065 (Washington, D. C.: Dec. 27, 1999).

Page 7 GAO- 03- 150 Defense Acquisitions

After exploring a number of performance indicators for Section 845
agreements, DOD selected one quantitative performance metric* the extent
of nontraditional contractor participation* which is tracked by the Office
of Defense Procurement. Officials believe that this metric is key because
involving firms that do not traditionally do business with DOD increases
DOD*s opportunity to leverage commercial technology investments and to
take advantage of commercial business processes, such as using an
integrated team approach rather than a traditional primesubcontractor
structure. Congress also has encouraged the participation of commercial
firms in the development of defense systems and has recognized the
critical contributions of nontraditional participants in areas such as
biotechnology and pharmaceuticals in today*s national security
environment.

DOD contracted with RAND, a nonprofit institution, for a study to assess
the overall effectiveness of the Section 845 acquisition approach and to
explore the possibility of using additional metrics. 11 In addition to
this effort, a DOD working group, composed of officials from across DOD,
considered the types of metrics that could be used to assess the
effectiveness of Section 845 agreements. These two efforts identified
several difficulties, as follows:

 Traditional metrics* such as cost growth, schedule slips, and
performance shortfalls* are inappropriate for Section 845 projects that
are inherently risky.

 A *path not taken* cannot be measured; that is, when a Section 845
agreement is used rather than a procurement contract, a statistical
comparison between the two acquisition approaches cannot be made.

 Too many variables and too few Section 845 agreements would limit the
results of a quantitative analysis.

 Few Section 845 projects have been completed, limiting the results to
date. RAND concluded that important new technological capabilities* a
desirable benefit of *other transaction* agreements* mostly come from
segments of major firms that formerly focused on commercial projects but

11 RAND*s National Defense Research Institute, Assessing the Use of *Other
Transaction* Authority for Prototype Projects (Documented Briefing),
(Santa Monica, CA: 2002). Number of

Nontraditional Contractors Is Captured as a Performance Metric

Page 8 GAO- 03- 150 Defense Acquisitions

are now willing to apply their skills to the development of military
prototypes. RAND also pointed out that there are other benefits associated
with the flexibility inherent in this authority. For example, the
flexibility to change project plans based on mutual agreement between DOD
and industry managers, with minimal documentation or administrative
burden, provides more powerful opportunities to cope with the problems and
opportunities that occur when developing new systems and components.
However, RAND emphasized the difficulties in developing quantifiable
metrics that would be accepted as credible.

In its effort to focus on collecting information on nontraditional
contractors, DOD uses the Report of Other Transactions for Prototype
Projects (DD Form 2759), which is completed by the agreements officer.
(App. II contains a sample form.) According to the DOD guide, when funding
actions are taken, the agreements officer must record information on
whether the prime or subcontractor awardees are traditional contractors,
nontraditional defense contractors, or non- profit organizations. The
agreements officer also must record the names and addresses of significant
nontraditional defense contractors. The summary information is sent to
DOD*s Office of Defense Procurement, where it is aggregated. 12

According to the DD 2759 reports for Section 845 agreements awarded in
fiscal year 2001, 16 nontraditional prime contractors and 29 significant
nontraditional subcontractors participated in a total of 61 agreements.
Nontraditional participants included commercial business units of U. S.
traditional firms as well as foreign corporations.

Congress requires DOD to report annually on all *other transaction*
projects* for research as well as prototypes* awarded in the preceding
fiscal year. While the Section 845 portion of the report addresses the
issues set forth in the congressional reporting requirement, it does not
present the number of nontraditional contractors in a clear,
straightforward format, such as a summary table. Because information on

12 DOD eventually will record this type of information electronically. The
Washington Headquarters Services* Directorate for Information Operations
and Reports has primary responsibility for developing an operational
database for Section 845 projects and is the focal point for data
collection. Problems have arisen because some agencies have computer
firewall systems that interfere with their ability to input data and
access reports from this database. Section 845 Reports

Lack Sufficient Information

Page 9 GAO- 03- 150 Defense Acquisitions

nontraditional participants* DOD*s key performance metric* is not
summarized, it is difficult for Congress to assess how successful DOD has
been in achieving this metric. The annual report includes a 1- or 2- page
summary of each project that discusses (1) government and contractor cost
contributions, (2) the reason for using the Section 845 authority, and (3)
how the agreement contributed to a broadening of the technology base or
fostered relationships and practices that support U. S. national security
interests. In the fiscal year 2001 report, these individual summaries
totaled 152 pages. In a fiscal year 2000 supplemental report to Congress,
DOD did present a narrative summary of the number of nontraditional
contractors; however, this was the only occasion when the information was
clearly imparted. 13 DOD officials stated that they are reluctant to add
another reporting element and that the current report format meets
congressional requirements. They added that they view the number of
nontraditional contractors as secondary to the agreement- level
information presented in the report.

DOD also is not regularly reporting on or assessing the benefits derived
from completed Section 845 agreements. In 1996, the Under Secretary of
Defense for Acquisition and Technology requested a comparison of the
benefits and drawbacks of completed agreements with the expected benefits
at the time of award. However, this attempt to compile *lessons

learned* was abandoned because many DOD officials believed that the
results were parochial and not useful across the department. A draft
version of the current Section 845 guide included a requirement for an
assessment of completed agreements, but the requirement was not
incorporated in the final version because DOD officials believe that
another reporting requirement was not likely to produce a meaningful
assessment of Section 845 results. DOD officials commented that the law
only requires them to report on projects awarded in the previous fiscal
year. They acknowledged, however, that periodic assessments of the
benefits derived from completed agreements could be useful.

By updating the Section 845 guide and requiring the number of
nontraditional contractors to be measured as a performance metric, DOD has
implemented our April 2000 recommendations. However, the reporting on the
benefits derived from this alternative acquisition approach could be

13 This supplemental report was requested in Senate Report 106- 50 on the
National Defense Authorization Act for Fiscal Year 2000. Conclusion

Page 10 GAO- 03- 150 Defense Acquisitions

improved. A summary table in the annual report to Congress, setting forth
the number of nontraditional contractors brought in under Section 845
agreements during the preceding year, would provide a clear picture of the
extent to which DOD*s performance metric is being achieved. The current
report format, consisting of summaries of each agreement, requires the
reader to review each summary sheet in order to determine how the Section
845 authority was used* including the number of nontraditional contractors
participating in the agreement. Thus, its usefulness to Congress is
limited.

Further, in the absence of regular assessments of the benefits derived
from completed projects, DOD and the Congress lack vital information on
the results the government is deriving from this flexible procurement
strategy. The experience that DOD has gained from the use of Section 845
authority can be useful to Congress as it makes decisions about subsequent
extensions of this authority to DOD and in future congressional
deliberations.

We recommend that the Secretary of Defense

 incorporate in the annual report to Congress summary information on the
extent of nontraditional contractor participation and

 periodically report to Congress the results of studies on the benefits
derived from completed Section 845 projects, including how key private
sector participants contributed to the results.

In written comments on a draft of this report, DOD agreed to incorporate
in the summary of the annual report to Congress information on the number
of new agreements and to break out the reasons for using the authority.
However, DOD did not agree with our recommendation to include the number
of nontraditional contractors in the annual report, stating that a raw
count does not necessarily indicate the extent of nontraditional
contractor participation and that it is secondary information derived from
a separate reporting system. We agree that a raw number alone can be
misleading. However, we do not understand why DOD is reluctant to publish
the total number of nontraditional contractors* along with the other
information to be reported* when those numbers are being internally
collected and when this is the key performance metric DOD has established.
Including the number of nontraditional contractors, along with the other
information DOD has Recommendations for

Executive Action Agency Comments

Page 11 GAO- 03- 150 Defense Acquisitions

agreed to provide, would give Congress a more complete basis on which to
assess the achievements gained through the use of Section 845 authority.

DOD concurred with our second recommendation but stated that it would
oppose the establishment of a regular reporting requirement. We are not
advocating a new reporting requirement; however, we believe that periodic
assessments of completed Section 845 projects would provide Congress
useful information on the benefits the department is deriving from use of
this authority.

To assess the comprehensiveness of DOD*s new Section 845 guide, we
compared it to the November 1998 guide that was in effect during our prior
review. To determine the adequacy and usefulness of the revised guide and
the performance metrics used, we interviewed officials in the Office of
Defense Procurement and in the Office of Acquisition Initiatives* Office
of the Under Secretary of Defense for Acquisition, Technology and
Logistics; Washington Headquarters Services* Directorate for Information
Operations and Reports; the headquarters offices of the Army, Navy, and
Air Force; DARPA; and NIMA. We also reviewed reports prepared by DOD*s
Office of the Inspector General, RAND, and GAO. In addition, we reviewed
various directives, memorandums, publications, correspondence, and
legislation concerning Section 845 authority.

To determine the number and value of fiscal year 2001 Section 845
agreements and the number of agreements having nontraditional defense
contractors, we analyzed data compiled by the Office of Defense
Procurement. In addition, at each military service and DARPA, we reviewed
the Reports of Other Transactions for Prototype Projects (DD Form 2759)
for all agreements awarded in fiscal year 2001. We did not validate or
verify the information reported on these forms, including whether the
cited nontraditional defense contractors met the definition in Section 803
of the National Defense Authorization Act for Fiscal Year 2001.

To determine whether Congress is receiving adequate information on the
number of nontraditional defense contractors participating in Section 845
agreements and whether DOD is assessing the benefits derived from
completed projects, we reviewed the Section 845 portion of the annual
reports for fiscal years 1999 through 2001 and the supplemental reports
provided to Congress in fiscal years 1999 and 2000. We also reviewed DOD*s
guidance and memorandums and held discussions with officials from the
Office of Defense Procurement. Scope and

Methodology

Page 12 GAO- 03- 150 Defense Acquisitions

We conducted our review between April and August 2002 in accordance with
generally accepted government auditing standards.

We are sending copies of this report to interested congressional
committees; the Secretaries of Defense, the Army, the Navy, and the Air
Force; the Director, DARPA; the Director, NIMA; and the Director, Office
of Management and Budget. We will also make copies available to others
upon request. In addition, the report will be available at no charge on
the GAO Web site at http:// www. gao. gov.

Please contact me at (202) 512- 4841 or Michele Mackin at (202) 512- 4309
if you have any questions regarding this report. Other major contributors
to this report were William M. McPhail, Rosa M. Johnson, and Kenneth E.
Patton.

David E. Cooper Director, Acquisition and Sourcing Management

Appendix I: Comments from the Department of Defense

Page 13 GAO- 03- 150 Defense Acquisitions

Appendix I: Comments from the Department of Defense

Report is now numbered GAO- 03- 150.

Appendix I: Comments from the Department of Defense

Page 14 GAO- 03- 150 Defense Acquisitions

Report is now numbered GAO- 03- 150.

Appendix II: Report of Other Transactions for Prototype Projects

Page 15 GAO- 03- 150 Defense Acquisitions

Appendix II: Report of Other Transactions for Prototype Projects

(120138)

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