Arsenal Ship Lessons Learned Report

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TAB E

ADVANCED RESEARCH PROJECTS AGENCY
3701 NORTH FAIRFAX DRIVE
ARLINGTON, VA 22203-1714

OCT 24 1996

MEMORANDUM OF LAW

SUBJECT: Scope of Section 845 Prototype Authority

Section 845 of the National Defense Authorization Act for fiscal year 19941 authorized the Defense Advanced Research Projects Agency (DARPA) to conduct prototype projects of weapons or weapons systems under the authority of 10 U.S.C. § 2371. Section 804 of the fiscal year 1997 National Defense Authorization Act2 amended section 845 extending the authority to the Military Departments and other Department of Defense components. It also extended the authority until 1999. This memorandum reviews the background, purpose and scope of the statute. It is intended to aid in considering whether a project is a candidate for execution using section 845 and contains a preliminary discussion on the implications of utilizing the authority.

Background

In June 1986 the President's Blue Ribbon Commission on Defense Management (Packard Commission) made its final report to the President. Among the distinguished members of the Commission was Dr. William J. Perry the current Secretary of Defense. The summary final report contained these findings:

All too often, requirements for new weapon systems have been overstated. This has led to overstated specifications, which has led to higher cost equipment. Such so-called goldplating has become deeply embedded in our system today. The current streamlining effort in the Defense Department is directed at this problem.

Developmental and operational testing have been too divorced, the latter has been undertaken too late in the cycle, and prototypes have been used and tested far too little.

In their advanced development projects, the Services too often have duplicated each other's efforts and disfavored new ideas and systems. The Defense Advanced Research Projects Agency has not had a sufficient role in hardware experimentation and prototyping.3

Corollary recommendations were also contained in the report. They were:

Rather than relying on excessively rigid military specifications, DoD should make greater use of components, systems, and services available "off the shelf" It should develop new or custom-made items only when it has been established that those readily available are clearly inadequate to meet military requirements.

A high priority should be given to building and testing prototype systems and subsystems before proceeding with full-scale development. This early phase of R&D should employ extensive informal competition and use streamlined procurement processes- It should demonstrate that the newtechnology under test can substantially improve military capability, and should as well provide a basis for making realistic cost estimates prior to a full-scale developmental decision. This increased emphasis on prototyping should allow us to "fly and know how much it will cost before we buy."

The proper use of operational testing is critical to improving the operations performance of new weapons. We recommend that operational testing begin early in advanced development and continue through full-scale development, using prototype hardware. The first units that come off the limited-rate production line should be subjected to intensive operational testing and the systems should not enter high-rate production until the results from these tests are evaluated.

To promote innovation, the role of the Defense Advanced Research Projects Agency should be expanded to include prototyping and other advanced development work on joint programs and in areas not adequately emphasized by the Services.4

DARPA's charter was amended to include "a greater emphasis on prototyping in defense systems by conducting prototype projects ... and, on request, assist the Military Departments in their own prototyping programs."5

Prototyping is not new to DARPA. Prime examples include the Pegasus launch vehicle which transitioned directly into operational use. In fact, the first operational launches for the Air Force were conducted under the same contract DARPA had used in the development effort and which was transferred to and modified by the Air Force. Ceramic armor kits for Marine light armored vehicles were prototyped and operationally tested during the Gulf War on seventy-six vehicles. Perhaps the most famous example of DARPA prototyping dates back to 1961 when a DARPA sponsored test program fielded one thousand AR- 15 rifles in Southeast Asia for six months. The AR- 15 was the prototype of the M- 16.

Innovative R&D Agreements

Before discussing section 845, a review of the original "other transactions" authority is appropriate. Prior to 1989, the vast majority of DoD research and development contracting was conducted using procurement contracts as the funding installment. The research offices of the Military Departments, particularly the Office of Naval Research, made significant use of grants. Other elements of DoD rarely, if ever, awarded research grants and there was no consensus within DoD as to the authority to award cooperative agreements. Under the existing DoD policies, grants were awarded only to academic institutions and non-profit research organizations.

In 1989 Congress enacted experimental authority for DARPA to conduct its research and technology development activities by "cooperative agreements or other transactions."6 Cost sharing, though not absolutely required, was to be used if "practicable." The authority was available only if a "standard contract or grant" was not "feasible or appropriate." Later the authority was made permanent and extended to the Military Departments. Minor amendments have been made without substantive change on subsequent occasions, most recently in the fiscal year 1997 defense authorization. 8 DARPA made extensive use of this authority to conduct technology development efforts not subject to the procurement laws or regulations nor to the regulations governing standard grants and cooperative agreements.9

DARPA has found many occasions for using "other transactions" to support science and technology projects. These have included multi-party consortium agreements; agreements for the purpose of establishing standards, reference architecture, or common interfaces; transitioning technology into use; establishing industrial capabilities; technology development agreements with commercial firms, as well as combinations of these or other objectives.

Congress has endorsed DARPA's use of 10 U.S.C. § 2371 on several occasions in committee reports. Most recently, the conference report for the fiscal year 1997 authorization stated:

The conferees direct the Services to follow the example of the Defense Advanced Research Projects Agency in the aggressive use of this authority under section 2371.10

There is no definition of an "other transaction." In a sense an "other transaction" is defined in the negative. It is not a standard procurement contract, grant or cooperative agreement. Thus, it is not subject to laws, rules and regulations that govern those instruments. Under 10 U.S.C. § 2371, "other transactions" can be used to stimulate and support research and development and for other purposes but may not be used for the principal purpose of acquiring goods and services for the direct benefit or use of the Federal Government.

Projects conducted under 10 U.S.C. § 2371 have typically, but not exclusively, supported dual-use technology developments or technologies with both military and civil applications. Industry's incentive to commercialize the technology serves as the rationale for cost-sharing and reduced government oversight. Cost-sharing and the limitation on the transaction's principal purpose being to acquire goods and services greatly reduces the utility of 10 U.S.C. § 2371 for the acquisition of military systems.

Prototype Project Authority

After nearly three years of experience using 10 U.S.C. § 2371 to conduct cost-shared, dual-use technology development projects, a floor amendment to the fiscal year 1994 National Defense Authorization Act, extended DARPA's "other transactions" authority to prototype projects of weapons systems. The text of that amendment was:

AUTHORITY OF THE ADVANCED RESEARCH PROJECTS AGENCY TO CARRY OUT CERTAIN PILOT DEMONSTRATION PROJECTS AND PROTOTYPE PROJECTS.

(a) Authority. --The Director of the Advanced Research Projects Agency may, under the authority of section 2371 of title 10, United States Code, carryout pilot technology demonstration projects and prototype projects that are directly relevant to weapons or weapon systems proposed to be acquired or developed by the Department of Defense.

(b) Exercise of Authority. --(I) Subsections (d)(2) and (d)(3) of such section 2371 shall not apply to pilot projects carried out under subsection (a).

(2) The Director shall, to the maximum extent practicable, utilize competitive procedures when entering into agreements to carry out projects under subsection (a).

(c) Period of Authority. --The authority of the Director to carry out projects under subsection (a) shall terminate 3 years after the date of-the enactment of this Act."

The following colloquy related to the amendment constitutes the principal legislative history of the measure:

Mr. BINGAMAN. Mr. President, the amendment which I am offering would allow the Advanced Research Projects Agency to use cooperative agreements authority on a pilot basis to execute some of its defense projects. ARPA already has the authority to use cooperative agreements and other transactions to implement its dual-use projects, where industry contributes its own resources and use of contracts would not be appropriate. Indeed, ARPA expects to utilize that authority extensively to implement the programs under the Technology Reinvestment Project.

My amendment would permit ARPA on a pilot basis over the next 3 years to experiment with use of cooperative agreements in carrying out its purely military research and development projects, to which we should not expect industry to contribute its own resources. Use of this more flexible authority is consistent with the thrust of the National Performance review which the Vice President submitted to the President yesterday and with the desire for more flexibility in the defense acquisition system. ARPA led the way in use of cooperative agreements for dual-use projects, such as the high performance computing program. I am sure the agency will make good use of this new authority and urge my colleagues to support this amendment.

Mr. NUNN. This amendment allows ARPA to use the authority in section 2371 of title X, U.S.C. to carry out pilot projects that are directly relevant to weapon or weapons systems. This amendment will allow ARPA to use the cooperative agreements for purely military research as a 3-year test.

The PRESIDING OFFICER. The chair, hearing no further debate, without objection, the amendment offered on behalf of the Senator from New Mexico [Mr. Bingaman] is agreed to.

The amendment (No. 802) was agreed to.

Mr. NUNN. Mr. President, I move to reconsider the vote by which the amendment was agreed to.

Mr. WARNER. I move to lay that motion on the table. The motion to lay on the table was agreed to. 12

As finally enacted the text of the statute reads as follows:

"(a) Authority.--The Director of the Advanced Research Projects Agency may, under the authority of section 2371 of title 10, United States Code, carry out prototype projects that are directly relevant to weapons or weapon systems proposed to be acquired or developed by the Department of Defense.

"(b) Exercise of authority.--(I) Subsections (c)(2) and (c)(3) of such section 2371, as redesignated by section 827(b)(1)(B), shall not apply to projects carried out under subsection (a).

"(2) The Director shall, to the maximum extent practicable, use competitive procedures when entering into agreements to carry out projects under subsection (a).

"(c) Period of authority.--The authority of the Director to carry out projects under subsection (a) shall terminate 3 years after the date of the enactment of this Act.13

The text of this version is virtually identical to the original amendment except for technical changes in subsection (b) and the deletion of the words "pilot technology demonstration projects and" before "prototype" in subsection (a). It is clear that no substantive change was intended by the wording change. Indeed the House report on the provision of the current authorization Act which amends section 845 states: "This section would reauthorize and expand to the military services the authority provided by section 845 of the National Defense Authorization Act for Fiscal Year 1994 (Public Law 103-160) to allow additional flexibility in the acquisition of prototype technologies and systems."14

Section 804 of Public Law No. 104-201 reads as follows:

SEC. 804. MODIFICATION OF AUTHORITY TO CARRY OUT CERTAIN PROTOTYPE PROJECTS

(a) Authorized Officials. (1) Subsection (a) of section 845 of the National Defense Authorization Act for Fiscal Year 1994 (Public Law 103-160; 107 Stat. 172 1; 10 U.S.C. 2371 note) is amended by inserting ", the Secretary of a military department, or any other official designated by the Secretary of Defense" after "Agency".

(2) Subsection (b)(2) of such section is amended to read as follows:

"(2) To the maximum extent practicable, competitive procedures shall be used when entering into agreements to carry out projects under subsection (a).".

(b) Extension of Authority. Subsection (c) of such section is amended by striking out "terminate" and all that follows and inserting in lieu thereof "terminate at the end of September 30, 1999.".

(c) Conforming and Technical Amendments. Section 845 of such Act is further amended (1) in subsection (b)

(A) in paragraph (1), by striking out "(c)(2) and (c)(3) of such section 2371, as redesignated by section 827(b)(1)(B)," and inserting in lieu thereof "(e)(2) and (c)(3) of such section 2371 "; and

(B) in paragraph (2), by inserting after "Director" the following: Secretary, or other official"; and

(2) in subsection (c), by striking out "of the Director".

Subsection (e)(2) and (e)(3) of 10 U.S.C. 237 1, as amended, are the provisions on cost sharing and limiting use of non-procurement agreements to situations where standard contracts, grants or cooperative agreements are not feasible or appropriate. Both provisions are inapplicable to section 845 agreements.

Expanded Authority

As amended by section 804 of the fiscal 1997 Authorization Act, subsection (a) of 845 now reads as follows:

(a) Authority.-- The Director of the Defense Advanced Research Projects Agency, the Secretary of a military department, or any other official designated by the Secretary of Defense may, under the authority of section 2371 or title 10, United States Code, carry out prototype projects that are directly relevant to weapons or weapons systems proposed to be acquired or developed by the Department of Defense."

The authority flows directly to the Director of DARPA, secretaries of military departments, and the Secretary of Defense. Secretaries of military departments may delegate the authority within their departments. The Secretary of Defense may designate other officials (such as Directors of Defense agencies) to exercise the authority. Thus, the authority is potentially available to all elements of the Department of Defense. This is, of course, extremely important to DARPA. In many cases DARPA prototype projects win be conducted jointly with another Department of Defense component and at some point DARPA will want to transition the project to the ultimate user (e.g., the Air Force in the case of high altitude unmanned aerial vehicles, or the Navy in the case of Arsenal Ship). This is now possible. Furthermore, DARPA-funded prototype projects can now be contracted entirely through a Service contracting agent or through another DoD component designated by the Secretary of Defense.

Appropriate Uses of Section 845

Section 845, as amended, authorizes non-procurement agreements ("cooperative agreements and other transactions") to "carry out prototype projects that are directly relevant to weapons or weapons systems proposed to be acquired...... Section 845's grant of authority is bounded by the definition of "prototype projects" and "weapons or weapons systems proposed to be acquired."

A principal canon of statutory construction is to apply the plain meaning to words. The standard dictionary classifies "prototype" as a noun and defines it as "an original model on which something is patterned" and also as "a full-scale and (usually] functional form of a new type or design of a construction (as an airplane)."16 the engineering definition of prototype is "[@j model suitable for use in complete evaluation of form, design and performance."17

The same conference report which contains the amended section 845 language contains numerous references to "prototypes" such as: "component prototypes for insertion into current undersea weapons"; "operational prototype"; "advanced technology "flyable prototype"; "JASS high band prototype"; 1. prototype prototype improvements"; ground-based radar"; "prototype plant."" Clearly Congress is aware that the term "prototype" is used in a wide variety of contexts including its dictionary definitions. However, the authority to conduct projects involving "full-scale," "functional," "operational" or "pre-production" prototypes does not limit the authority to conduct projects of lesser scope such as technology demonstrations, sub-system or component prototypes. As noted above, the original version of section 845 expressly included "pilot technology demonstration projects." Furthermore, the legislative history of the amendment to section 845 refers to "additional flexibility in the acquisition of prototype technologies and systems."19 Thus, "prototype projects" under section 845 includes prototype "systems" but also includes lesser projects involving sub-systems, components, technology demonstrations and technologies.

The breadth of section 845 is also limited by the term "weapons or weapons systems." The statute does not define "weapons." Again, a common sense, plain-meaning approach should be used in interpreting this phrase. A useful reference n-tight be the United States Munitions List published by the Department of State .20 If the prototype project involves equipment of the types included on the Munitions List, it would be deemed to involve a "weapon." This is not a complete answer, however, since other items of equipment not included on the list may clearly fit the definition of a "weapon."

It should also be noted that the statute does not require that the prototype project be for the development of a weapon. The statutory requirement is for the project to be "directly relevant" to "weapons or weapon systems proposed to be acquired or developed..."21 This emphasizes the point made above that sub-systems, components, and technologies are included in the scope of Section 845. Furthermore, this language is broad enough to include training, simulation, auxiliary and support equipment "directly relevant" to weapons or weapon systems."

From the plain meaning of its language, it is clear that the scope of section 845 is extremely broad. It would at least include the major categories of equipment contained in the U.S. Munitions list: firearms; ammunition; artillery projectors; launch vehicles, guided missiles, rockets, torpedoes, bombs and mines; explosive propellants and incendiary agents; vessels of war and special naval vessels; tanks and military vehicles; aircraft, spacecraft and associated equipment; military training equipment; protective personnel equipment; military and space electronics; fire control, range finder, optical and guidance and control equipment; auxiliary military equipment; toxicological agents and equipment and radiological equipment; nuclear weapons test and design equipment; and, submersible vessels, oceanographic and associated equipment. Weapons can be either offensive or defensive in character.

Given the trend toward utilizing off-the-shelf components and technologies in defense systems, section 845 prototype projects may often involve the adaptation, testing, or integration of commercial items for military purposes. Indeed it is interesting to note that the Packard Commission recommended greater use of "off-the-shelf' systems and components in the paragraph immediately preceding the recommendations on increased prototyping.22 A significant "off-the-shelf" content does not preclude a prototype project from being conducted under section 845; indeed, in the future use of off-the-shelf technology, components and systems, as well as prototyping, will probably increase. Furthermore, consistent with the Packard Commission recommendation quoted above, a prototype project could continue through initial low-rate production in order to support operational testing. 23

Finally, there is no reason to assume that 1. proposed to be acquired" means anything more than "if it works it may be the kind of thing we would buy." Certainly "proposed to be acquired" does not mean that a formal requirement has already been established. The purpose of DARPA has been defined as to "change people's minds." Thus a successful prototype may result in the creation of a requirement (e.g., HAVE BLUE). In 1991 Dr. Perry clarified the Packard Commission recommendation by stating that their purpose was not to insert DARPA into the formal acquisition process but to expand DARPA's role and have the Services act more like DARPA. Thus, prototype projects should not be limited to established requirements or already approved programs.

Effect of Section 845 - In General

Section 845, as amended, authorizes prototype projects to be conducted under the provisions of 10 U.S.C. 2371. Section 2371 in turn authorizes the use of "cooperative agreements and other transactions" for certain research and technology development efforts. Section 2371 efforts will be conducted using cost sharing "to the extent practicable." Section 845 is exempt from that proviso. Section 2371 efforts are authorized only if "a standard contract ... is not feasible or appropriate." Section 845 is also exempt from that requirement. Competition shall be used in section 845 to the maximum extent practicable.

DARPA has a five year history of interpretation and practical application of section 237 1. DARPA has made numerous reports to Congress on its use of the authority. In addition, Congress has received testimony at committee hearings, reports of the General Accounting Office, and other information on DARPA's use of both the basic 10 U.S.C. § 2371 authority and section 845 prototype authority. Congress has appropriated millions of dollars to DARPA for projects knowing that they were to be conducted using "other transactions." Statements in floor debate, as well as committee and conference reports, endorse DARPA's interpretation and use of this flexible authority. The interpretation of the effect of "other transactions" authority contained in this section may thus be viewed as ratified not only by Congressional statements but by Congress' act of appropriating millions of dollars in light of DARPA's application and interpretation of the statutes, and by Congress' reenactment of both 2371 and 845 with knowledge of DARPA's interpretation.24

"Other transactions" conducted under 10 U.S.C. 2371 and section 845 are transactions conducted outside the procurement laws and regulations and outside most laws and regulations applicable to assistance relationships. Laws of general applicability such as title VI of the Civil Rights Act,21 the Trade Secrets-Act,26 and Conflict of Interest statute27 are applicable. Laws and regulations specifically applicable to the procurement system are not applicable. Among the laws not applicable are chapters 137, 141, and 144 of title 10, United States Code and title 48, Code of Regulations. Neither the Armed Services Procurement Act28 or other principal procurement laws apply. The Federal Acquisition Regulation (FAR) and the Defense Acquisition Regulation Supplement (DFARS) do not apply. DoD regulations and Military Specifications and Standards applicable to the procurement system do not apply. A number of statutes not falling within the principal title 10 chapters governing procurement are clearly procurement statutes since they reference or use terms defined in chapters 137 or 144 (e.g. 10 U.S.C. 2362, 2365 and 2366).

Contracting under FAR and DFARS is subject to an extensive regulatory system. It might be worth briefly reviewing the 'impact of the procurement regulatory system at this point.

Professor Ralph C. Nash recently reported that a change in DFARS allowing submission of interim vouchers caused him to recall that a similar proposal had been rejected twenty-eight years ago:

I remembered the incident because I used it in teaching for many years - as an illustration of the idiosyncrasies of Government procurement. After describing the proposal, which had been made by an industry association, THE GOVERNMENT CONTRACTOR, in 1968, described the outcome as follows:

After reviewing this proposal, the ASPR (Armed Services Procurement Regulation] Committee observes that - although prior DCAA review is in many cases "perfunctory and therefore unnecessary" - it is nevertheless a control which "should not be lightly discarded." Moreover, it does not appear to the Committee that DCAA reviews cause any significant delay in invoice payment. Accordingly, the Committee has decided not to adopt the proposed procedure.

I always liked this description because it seemed to say something about how the regulatory mind worked. It may be "perfunctory and unnecessary" but it looks good and only does a little harm! That's the regulatory process - an accumulation of hundreds of those critters.29

Management consultant Robert C. Spreng compared DoD RDT&E contract awards with the Business Week R&D scorecard and the Fortune 500 Industrials.30 In addition to a startling concentration of RDT&E dollars in a very small number of firms, Spreng found that 95% of the industry/group leaders that invested the greatest percentage of their sales in R&D received insignificant or no DoD RDT&E awards." These firms were usually on the leading edge of technology developments in their industry. Also 70% of the firms that invested the most total dollars in R&D in their industry/group had insignificant or no DoD RDT&E awards.32 These 39 leading firms invested $32 billion in R&D in 1993. According to Spreng "a significant share of the most valuable research and product development activity in commercial companies is virtually unavailable to the Federal Government, despite potential benefits to both parties."33 Spreng's conclusion is that: "Commercial firms will offer the government significantly more of the needed technologies, some right off the laboratory shelf, when the Government can make available adequate protection for commercially oriented intellectual property and the use of existing commercial accounting methods for R&D."34

Finally, Senator Jeff Bingaman has noted that our government procurement system is one that spends millions to save thousands.

The potential benefits of deregulating the government procurement system are enormous. Deregulation means firms which are unwilling or unable to comply with government rules can be included in government R&D programs. Billions of dollars in privately funded R&D can be leveraged. Government regulations and procedures that do not add value to the process can be abandoned. Contracting techniques can be tailored to take advantage of available opportunities on a case by case or technology by technology basis.

"Other transactions" permit a deregulation of the government R&D system. Existing rules and regulations can be ignored or applied by agreement on a selective basis if deemed to add value. The essence of this non-regulatory system is the principle of freedom of contract.

Freedom of contract should not be a frightening concept. It is the concept upon which the Sales Article (Article II) of the Uniform Commercial Code, as well as many other articles of the Code, is based.35 The U.C.C. sets up a baseline of rules which apply unless the parties agree otherwise.36 Under "other transactions" even the baseline is absent and the parties are confronted with a clean slate. DARPA’s experience has found that a model agreement expedites the negotiation process by serving as an initial baseline. Likewise use of the model as a baseline facilitates the agreement review process.

As a final note, it is worth pointing out that a non-regulatory system is not unprecedented. Alternative authority to buy experimental and prototype systems without regard to the Armed Services Procurement Act "by contract or other-wise" exists at 10 U.S.C. 2373. That provision has been rarely if ever used perhaps exactly because there is no regulatory coverage in FAR. There is no government-wide requirement for the issuance of regulations as a precondition for entering into government contracts. 37

If the Department of Defense or the Military Departments issue regulations on "other transactions" in the future, they should be baseline guidance embodying the freedom of contract principle and not regulatory mandates.

Effect of Section 845 - Selected Issues

Competition to the maximum extent practicable is a statutory requirement of prototype projects conducted under section 845. The requirement is not an absolute but obviously by using the term "maximum extent," Congress has made a strong policy statement in favor of competition. The requirement is tempered by the practicability standard. There should be a well documented rationale for initiating section 845 projects in the absence of competition. The statute does not specify the type or characteristics of the competition. Thus, there is plenty of room to introduce innovative forms of competition in prototype projects. The competition can be modeled on the competitive proposal procedures of FAR 6.102(b) and FAR Part 15 or the broad agency announcement (BAA) technique authorized by FAR 6.102(d)(2) and FAR 35.016. Under the FAR, a BAA would normally not be used for a weapons systems prototype development, but under section 845 it can be. Furthermore, entirely new forms of competition can be utilized. Combinations of proposals and oral presentations could be used. Final award selection can be made only after the agreement(s) have been negotiated in final form. Specially tailored techniques can be adopted for special circumstances. Note that the Packard Commission recommended "informal competition."38

During the competition phase of a prototype project a procedure for handling objections or "protests" should be developed and made known to the competitors. This is necessary because the General Accounting Off-ice protest systems applies only to procurements conducted under the procurement statutes.39 The GAO w inquire into whether a non-procurement instrument was properly used. If it finds use of a non-procurement instrument proper, GAO has no further role. A protester can always go to court but the court's review is based on the Administrative Procedure Act.40 This essentially requires the plaintiff to show that the Government’s action was arbitrary, capricious, an abuse of discretion or unlawful.41 Since relatively few laws apply to section 845 actions, review would typically be focused on whether the action taken by the Government was arbitrary, capricious or an abuse of discretion.

Socio-economic policies implemented specifically through the procurement system do not apply to section 845 projects. For example in the area of equal opportunity while title VI of the Civil Rights Act, applicable to any Federal program applies, Executive Order 11246, applicable to procurement contracts, does not.

As noted by the comments of Robert Spreng, government-required accounting rules and cost principles cause many firms to avoid government R&D contracts. Government-required accounting and purchasing systems are often costly and labor intensive. In the long run the government itself pays for these systems but their initial cost is a serious barrier for commercial firms considering seeking government contracts. Under section 845, there is no requirement to Implement government systems. In fact, cost reimbursement contracting is a rarity in private contracting. DARPA is experimenting with making payment based on technical progress rather than for incurred costs, as well as using multi-factor positive and negative incentives. This is another area open for innovation.

Another major concern of private industry is the protection of intellectual property. Neither the rights in technical data provisions of tide 10, U.S. Code nor the Bayh-Dole Act42 governing patent rights are applicable to "other transactions" under section 845 thus the government can agree to intellectual property rights tailored to each project.

The Procurement Integrity Act (41 U.S.C. 423) applies only to procurement actions not to "other transactions," however, government employees who are involved in source selection, handling sensitive information, and making programmatic decisions are still subject to 18 U.S.C. 1905 (relating to trade secrets and sensitive business 'information) and 18 U.S.C. 208 (relating to conflicts of interest). Furthermore, the practice at DARPA has been to have all personnel, whether government or non-government, who have access to source selection and sensitive information sign non-disclosure agreements, submit financial disclosure forms, and sign statements concerning their relationships with competitors. False statements are, of course, subject to the provisions of 18 U.S.C. 1001.

Many prototype projects involving systems will be conducted with a view toward an eventual decision to go into production. Although the statutes governing survivability, lethality, operational and other test requirements do not apply to section 845 projects, they nonetheless serve as indications of the type of information which a prototype project should generate in order to support a decision to go into production. Section 845 prototype projects should be planned to address test issues in a manner functionally equivalent to statutory test requirements, while avoiding unnecessary bureaucracy and non-value added documentation.

Current legal authority under section 845 does not extend to full-scale production. If it is intended to transition a system from a prototype project directly into production, the project will have to generate, in addition to survivability and operational test data, life cycle cost and other data sufficient to support a special Defense Acquisition Board, or other authorized review, prior to a production (Milestone III) decision.

If a section 845 systems project involves innovative business and contracting practices, advanced planning must be done to obtain appropriate waivers and exemptions for business practices that will be carried over to the production program. This might include having the project designated a pilot acquisition program in order to obtain expanded waiver authority.

Obviously both program decision-making and production contracting would be greatly facilitated by additional statutory authority allowing an approved section 845 prototype project to transition directly into production on the same contracting basis upon which the prototype project was conducted. DARPA is seeking just such legislative authority.

Conclusion

Section 845 prototyping authority allows for flexibility and innovation in military systems development projects as well as in technology demonstrations and prototyping of subsystems and components. It should allow traditional defense contractors to consider new ways of doing business and permit strictly commercial firms to do business with DoD without changing their existing business practices. Section 845 moves away from an R&D regulatory system to freedom of contract. This is both a challenge and an opportunity. Suggestions on effective ways to implement this new authority are welcomed and should be addressed to the undersigned at the address on the letterhead.


END NOTES

1 National Defense Authorization Act for Fiscal Year 1994, Pub. L. No. 103-160, 107 Stat. 1547 (1993).

2 National Defense Authorization Act for Fiscal Year 1997, Pub. L. No. 104-201, 1 10 Stat. 2422 (1996).

3 PRESIDENT'S BLUE RIBBON COMMISSION ON DEFENSE MANAGEMENT, FINAL REPORT (1986)(reprinted in DEFENSE ACQUISITION: MAJOR U.S. COMMISSION REPORTS (1949-1988) vol. I, Committee on Armed Services U.S. House of Representatives (100th Cong., 2d Sess., Nov. 1, 1988), 878) (hereinafter referred to as the Packard Commission).

4 Id. at 880-881.

5 32 C.F.R. Part 358 (1989); DODD 5105.41 (Jan. 25, 1989).

6 National Defense Authorization Act for FY90-9 1, Pub. L. No. 10 I - 1 89, § 251, 103 Stat. 1352 (1989) (codified as amended at 10 U.S.C. § 2371 (1996)).

7 National Defense Authorization Act for FY92-FY93, Pub. L. No. 102-190, § 826, 105 Stat 1290 (1991)

(codified as amended at 10 U.S.C. § 2371 (1996)).

8 National Defense Authorization Act for Fiscal Year 1997, Pub. L. No. 104-201, § 267, 1 10 Stat. 2422 (1996) (codified as amended at 10 U.S.C. § 2371 (1996)).

9 For information on DARPA's use of this authority, see also UNITED STATES GENERAL ACCOUNTING OFFICE, PUB. No. NSIAD-96-1 1, DOD RESEARCH - ACQUIRING RESEARCH BY NONTRADITIONAL MEANS (Mar. 1996); DEPARTMENT OF DEFENSE INTEGRATED PROCESS TEAM, THE SERVICES USE OF 10 U.S.C. § 2371 "OTHER TRANSACTIONS" AND § 845 PROTOTYPE AUTHORITIES, FINAL REPORT (1996); MICHAEL S. NASH, ET AL., INSTITUTE FOR DEFENSE ANALYSES, PUB. No. D- 1793, PARTICIPANT VIEWS OF ADVANCED RESEARCH PROJECTS AGENCY "OTHER TRANSACTIONS," (1995); Richard N. Kuyath, The Untapped Potential of the Department of Defense's "Other Transaction " Authority, 24 Pub. Con. L. J. 521 (Summer 1995); Richard L. Dunn, Testimony before the United States House of Representatives Committee on Science (Nov. 8, 1995) (transcript available from the United States Government Printing Office).

10 142 Cong. Rec. H9249 (daily ed. July 30, I 996).

11 139 Cong. Rec. S 1 1158, S 1 1296 (daily ed. Sept. 9, 1993).

12 139 Cong. Rec. S I 1 158, S 1 1288 (daily ed. Sept. 9, 1993).

13 National Defense Authorization Act for Fiscal Year 1994, Pub. L. No. 103-160, 107 Stat. 1547 (1993).

14 H. R. REP. No. 563, 104th Congress, 2nd Sess., 325-326 (1996).

15 Section 845, Pub. L. No. 103-160 as amended by section 804 Pub. L. No. 103-160.

16 WEBSTER'S NINTH NEW COLLEGIATE DICTIONARY 947 (1985).

17 McGRAW-HILL DICTIONARY OF SCIENTIFIC AND ENGINEERING ARMS I 1 83 (1974).

18 H.R. REP. No. 724, 104th Cong., 2nd Sess. (1996).

19 H.R. REP. No. 563, 104TH CONG., 2ND SESS. 326 (1996).

20 22 C.F.R. § 121.1 (1994).

21 National Defense Authorization Act for Fiscal Year 1994, Pub. L. No. 103-160, § 845, 107, Stat 1547 (1993), as amended by the National Defense Authorization Act for Fiscal Year 1997, Pub. L. No. 104-201, § 267, 1 10 Stat. 2422 (1996).

22 Packard Commission.

23 Id.

24 T.V.A. v. Kinzer, 142 F. 2d 833, 837 (6th Cir. 1944) ("The voting of such appropriations, in the face of the construction placed upon the Act by the Authority, has an effect similar to that resulting from reenactment of a statute the provisions of which had, theretofore, been interpreted ... they are deemed to have received legislative ratification, and thereby, to have become embedded in the law.") See also U.S. v. Two Tracts of Land, 456 F. 2d 264 (6th Cir.), cert. denied, 409 U.S. 887 (1972).

25 42 U.S.C. § 2000(d) (1964).

26 18 U.S.C. § 1905 (1992).

27 18 U.S.C. § 208 (1994).

28 10 U.S.C. Chapter 137.

29 Ralph C. Nash, Payment Procedures: Processing of Interim Vouchers, 10 Nash & Cibinic Report ¶47 (Sept. 1996).

30 ROBERT C. SPRENG, LEADING COMMERCIAL FIRMS SHUN DOD AND R&D (1994).

31 Id.

32 Id.

33 Id. at 3.

34 Id. at 3.

35 U.C.C. § I- 102(3) (1962).

36 {T}he idea of flexibility in contracting is embedded in contract theory. Most analyses of commercial contract law simply assume that flexibility exists and should be fostered.... The idea that parties are free to choose terms can be justified in a number of ways. It leads to a preference for laws that provide background rules, playing a default or gap-filling function in a contract relationship. A default rule applies if the parties do not agree to the contrary . . . . The second commercial law promise ... is approached ... by an effort to identify existing patterns of commercial practice and to follow a presumption that the goal of the drafting is to identify, clarify and, where needed, validate existing patterns of contracting to the extent that these are not inconsistent with modern social policy .... Uniform contract laws do not regulate practice. They seek to sustain and facilitate it. The benefits ... lie in defining principles consistent with commercial practice which, because of their codification and their relevance to actual practice, can be relied on and are readily discernible and understandable to commercial parties." National Conference on Commissioners on Uniform State Laws, Uniform Commercial Code, Article 2B. Licenses ix-x (Dec. 1, 1995) (Draft available from the National Conference on Commissioners on Uniform State Laws).

37 5 U.S.C. § 553(a)2) (1966).

38 Packard Commission.

39 Energy Conversion Devices, B-260514, June 16, 1995, 95-2 CPD 1121.

40 5 U.S.C. §§ 701-706 (1994). See also Scanwell Laboratories v. Schaffer, 424 F.2d 859 (D.C. Cir. 1970).

41 5 U.S.C. § 706 (1994).

42 35 U.S.C. Chapter 18 (1982).

This Memorandum of Law modifies and supersedes a memorandum for internal DARPA distribution on the same subject dated September 27, 1996.

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