Rick Dunn’s Strategic Institute for Innovation in Government Contracting must be the only organization in the world to have made R&B and punk2 versions of songs about Other Transaction Authority. It is fair to say that Rick and the Institute are obsessed with the non-FAR buying authority, hence the recent publication of the third edition of its “Guide to Other Transaction Authority.”
Here, Rick explains what should be a no-brainer: that other transactions can and should be used to fund Small Business Innovation Research (SBIR) projects. Referred to as “America’s Seed Fund” by the Small Business Administration, SBIR funds startups and small businesses using funds set aside by federal agencies with large R&D portfolios.
Twelve agencies have SBIR programs along with Small Business Technology Transfer (STTR) programs, which together provided approximately $3 billion to small U.S. companies through nearly 5,000 awards in 2018. The hope is that federal support will allow these companies to commercialize their innovative products, which often have application in federal agencies as well.
As Rick points out, both SBIR and OTA were designed to promote innovation by attracting innovators into federal agencies and funding them. Both seek to lower some of the usual barriers created by complex and arcane federal procurement rules. And both try to create environments more similar to those in commercial markets.
Hence the two seem like natural partners. Peanut butter and jelly, chicken broth and noodles, macaroni and cheese. Yet they’ve rarely been paired, even though Congress has directed the Defense Department to create a preference for using other transactions for R&D. Rick attributes this to a lack of education about OTs. So here, NCMA is doing its part to help remedy that lack.
You can read Rick’s vision for an entire acquisition based on OTs in the August 202 issue of Contract Management.
It is time to up the game in the Small Business Innovation and Research (SBIR) Program by using other transaction authority (OTA) to award SBIR funding. OTA enables the use of commercial-style practices familiar to innovative small companies new to the federal market, which the SBIR program was designed to attract. Plus, Congress expressly told the Defense Department to use OTA for research contracts.
The goal of SBIR is to support small innovative businesses whose commercial products and services will create jobs to stimulate the economy and benefit government by providing capability to support agency missions. OTA was designed to award contracts for research and development, prototyping, and production. Other transaction agreements (OTs) are not subject to most Federal Acquisition Regulation requirements and instead, use commercial practices more familiar to small businesses without federal market experience. Thus, SBIR and OTA would seem a perfect match.
The real question is why the two have not been joined since the beginning. The SBIR program was created in the 1980s, well after OTA came into existence in the late 1950s and had been extended to 11 federal agencies (See Figure 1 on page) by 2011. Their separate trajectories since is likely due in large part to the dearth of education about OTs in the acquisition and R&D community in the Defense Department and the other agencies with other transaction authority.
To help remedy the lack of knowledge and spur a convergence of these two innovation tools, it is useful to review the origins and operation of OTA and the SBIR program.
Origins and Operation
Other Transactions (10 U.S. Code 2371 and 2371b) provide specific authority designed to award contractual instruments for R&D, prototyping and follow-on production. Congress has directed DOD to create a preference for using those authorities to conduct contracted R&D (section 863, National Defense Authorization Act, 2018) and in the same law, Section 867, mandated that the DOD provide adequate education for “management, technical and contracting personnel” involved in the award and administration of OTs.
The SBIR program authorizing legislation is codified at 15 U.S.C. 638. The program is funded from a percentage of the extramural R&D budgets of Federal agencies with large R&D spending. The purpose is to use federal R&D funding to promote commercialization of innovative technologies by small businesses. The SBIR statutory policy and goals point to small businesses as playing key roles in economic development and job creation.
Some agencies’ SBIR programs focus on commercialization in a literal sense, aimed at enhancing the national economy and well-being through development of innovative products. Some mission-oriented agencies, including the military departments and defense agencies, primarily use SBIR programs to support commercialization of items that are of potential interest to the agency, which will become the primary market for the developed product. The statute recognizes this as a legitimate approach.
Procurement contracts, though widely used to conduct research and development by the DOD, are not the preferred, or even appropriate, instrument for that purpose. Federal Acquisition Regulation Part 35 (FAR 35.002/35.00 ) states that the purpose of contracted R&D is to advance scientific and technical knowledge and apply it to achieve agency and national goals. Regulations also state that most R&D efforts are unlike contracts for supplies and services and that procurement contracts shall only be used for the primary purpose of acquiring supplies and services.
Using Other Transactions (OTs) authorities in the SBIR Program makes sense. Many small businesses with potential to contribute to government R&D efforts are outsiders and lack knowledge of arcane government contracting practices. As testament, there are hundreds of procurement technical assistance centers throughout the country and a growing number of Partnership Intermediaries (15 U.S. Code 3715) and other go-betweens to aid DOD in connecting with and assisting small businesses.
OTs are legally preferred for contracted R&D and congruent with SBIR goals. In addition, for DOD, Congress has expressed the preference explicitly. OTs can provide greater accessibility to defense industry outsiders. OTs allow the government to pursue business arrangements and capability development in line with the commercial principles and best practices, which, are, of course, better understood by defense outsiders and are congruent with the motivations of high-performing industry.
In addressing OTs and the SBIR program it is pertinent to review the basic eligibility requirements for a company’s participation. A company participating in the SBIR program must be:
- A small business with 500 or fewer employees
- Independently owned and operated and organized for profit
- Must have its principal place of business in the United States
- At least 51% owned by U.S. citizens or lawfully admitted permanent resident aliens
- Work must be performed in the United States
- The Principal Investigator must spend more than one-half of the time employed by the proposing firm
- A minimum of two-thirds of the research work must be performed by the proposing firm in Phase I and one-half in Phase II.
The SBIR program is divided into three phases. The initial award results from an SBIR competitive call for proposals. Phase I awards are for what might be called concept definition--to assess scientific and technical merit and feasibility for commercialization. Phase II awards result from a down-select among companies that executed Phase I awards. The Phase II selection criteria are scientific and technical merit based on Phase I results and feasibility for commercialization. In Phase II, the concept is further developed and typically takes on demonstrable form as a prototype. Phase III involves further development leading to full product development. Phase III is to be conducted with commercial funding or non-SBIR government program funding.
OTs Are Contracts, But Not Procurement Contracts
The SBIR statute defines a “funding agreement” as “any contract, grant or cooperative agreement.” It does not use the term “procurement contract,” which is the term used in the Federal Grant and Cooperative Agreement Act, FG&CA, 31 U.S.C. 6301-6306. Instead, the SBIR statute uses the terms “contract” and “funding agreement.”
In some statutes the terms “contract, grant and cooperative agreement” used in conjunction suggest a relationship to the FG&CA with “contract” meaning “procurement contract.” In the case of the SBIR statute use of “any” rather than “a” contract suggests the term is generic rather than specific to a procurement contract. There is no express prohibition or inclusion of OTs as funding agreements. DARPA has used OTs selectively in its SBIR program. Some agencies, including DOD, primarily use procurement contracts. Others such as the National Science Foundation use grants. Yet others use a mix of procurement contracts and grants.
I have found no example of a cooperative agreement being used for SBIR although they are used in the related STTRSPELL OUT program. Interestingly, the only expressly authorized instrument with the word “agreement” in it apparently is not used as a “funding agreement.”
Although OTs generically are “contracts” they are not procurement contracts, which is what “contract” has apparently been interpreted to mean by some agencies. Prototype OTs can be used in circumstances in which a procurement contract could also be used. As indicated in the FAR Part 35 references above the primary purpose for using a procurement contract is to acquire goods and services for the direct benefit and use of the government. However, that is not the primary purpose of the SBIR program.
The SBIR program statute’s second section is titled “Assistance to Small-Business Concerns.” The program’s purpose is to assist in the commercialization of federally funded R&D. The government may end up benefiting by being able to purchase a successfully commercialized product. That purchase takes place once a SBIR project is successful, typically during or after Phase III, in which no SBIR funding is used.
OTs under 10 U.S.C. 2371 (2371b OTs are carried out under the authority of 2371) are “additional forms of transactions authorized” and may be used “in addition to contracts, grants or cooperative agreements.” Thus, for DOD at least it is clear that OTs can be used in addition to expressly authorized SBIR “funding agreements” – contracts, grants, or cooperative agreements.
This point was reinforced in the 2018 NDAA Section 864 (b) through which Congress amended 10 U.S.C. 2371b to clarify that OT authority covers small businesses participating in SBIR and STTR: “(including small businesses participating in a program described under section 9 of the Small Business Act (15 U.S.C. 638)).” Non-DOD agencies that have OT authority also can use OTs as SBIR funding instruments in light of the “any contract” language in the SBIR statute.
OTs Are Built for Research
OTs are well suited to a program such as SBIR, including where the program emphasizes commercialization but also desires a potential payoff for the agency. In fact, use of a procurement contract seems inconsistent with the primary purpose definition in the Federal Grant and Agreement Act (31 U.S. Code 6303) and Federal Acquisition Regulation Part 35 (FAR 35.002/003), as well as the characterization of the program as assistance rather than acquisition.
For the SBIR program a multi-phase OT could be negotiated anticipating successful down selects at Phase II and Phase III. At each phase, funding could be added by a simple modification of the OT agreement. For phase III, the modification could name a new cognizant agency to fund and administer that phase if applicable. If private sector funding is applied at Phase III, that phase of the agreement could be used to facilitate transition to the private concern involved.
The Office of Naval Research applied this approach in its Accelerated Delivery & Acquisition of Prototype Technologies (ADAPT) pilot program for its 20.1 SBIR solicitation. ADAPT was designed to quickly address high priority Navy challenges with dual use Navy and commercial solutions. Seeking increased innovation and participation of non-traditional businesses with existing commercial technologies, ONR adopted within its SBIR program “a different approach to funding awards, accelerating decision timelines, minimizing to the extent possible application requirements and proposal processes, and otherwise removing commonly cited barriers to entry.” While the Navy historically used negotiated FAR contracts for SBIR awards, in ADAPT, it proposed to use OTs under appropriate circumstances. “OTAs provide the flexibility to adopt business practices that reflect commercial industry standards,” according to the ADAPT frequently Asked questions. “The goal is to gain access to state-of-the-art technology solutions from businesses whose customer base has not included the Federal Government.”
Richard L. Dunn
- Founder and consultant at Strategic Institute for Innovation in Government Contracting (www.strategicinstitute.org).
- Served as the first general counsel of DARPA and in several positions at NASA and as a Judge Advocate in the U.S. Air Force.
- Member, editorial advisory board, Government Contractor magazine.
- Frequent author and contributor for numerous publications and scholarly journals and numerous research papers.
 SBIR-STTR America’s Seed Fund, Small Business Administration, https://www.sbir.gov/
2 10 USC 2371: Research projects: transactions other than contracts and grants, https://uscode.house.gov/view.xhtml?req=(title:10%20section:2371%20edition:prelim)#,
10 U.S. Code § 2371b - Authority of the Department of Defense to carry out certain prototype projects, https://www.law.cornell.edu/uscode/text/10/2371b
3 National Defense Authorization Act for Fiscal 2018, Public Law 115-91, Dec. 12, 2017, https://www.congress.gov/115/plaws/publ91/PLAW-115publ91.pdf
4 15 U.S. Code § 638 - Research and Development, https://www.law.cornell.edu/uscode/text/15/638
5 FAR Part 35 - Research and Development Contracting, https://www.acquisition.gov/far/part-35#FAR_35_002
6 Procurement Technical Assistance Program, Defense Logistics Agency, https://www.dla.mil/SmallBusiness/PTAP/
7 15 U.S. Code § 3715 - Use of partnership intermediaries, Legal Information Institute, Cornell Law School, https://www.law.cornell.edu/uscode/text/15/3715
8 31 U.S. Code CHAPTER 63—USING PROCUREMENT CONTRACTS AND GRANT AND COOPERATIVE AGREEMENTS, Legal Information Institute, Cornell Law School, https://www.law.cornell.edu/uscode/text/31/subtitle-V/chapter-63
9 15 U.S. Code § 638 - Research and development, Legal Information Institute, Cornell Law School, https://www.law.cornell.edu/uscode/text/15/638
11 Accelerated Delivery & Acquisition of Prototype Technologies (ADAPT) FAQs v. 3, Office of Naval Research, https://www.navysbir.com/ADAPT/ADAPT_FAQ_v3.pdf
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