The bulk of what the DoD buys in the research and development (R&D) realm complies with customary processes surrounding competition, cost and pricing, and reams of regulations covering everything from labor rights to intellectual property. The Small Business Innovation Research (SBIR) is the prominent avenue for small businesses to tap into DoD R&D funding.
The Defense Department has breathed new life into an existing contracting tool called “Other Transaction Authority, or OTA. OTA's have less restrictive contracting rules, so in theory DoD components can use OTA's to fulfill their needs for the warfighter quicker than traditional contracting methods.
Incentivized for small business
Recent DoD legislation incentivizes the use of small businesses when considering OTA's. In addition, consortiums between industry and academia continue to be formed to pursue the increase in OTA activity. DoD legislation requires these consortiums use small and non-traditional defense contractors or otherwise pay a “cost-share”.
We heartily encourage our R&D clients to look into joining a consortium surrounding their particular technological niche. Here’s a recent list of DoD-focused consortiums.
Contracting with consortiums
Contracts or subcontracts formed under an OTA through a consortium still require close scrutiny in regard to risk and compliance in the areas of performance risk, pricing, accounting, and intellectual property protection.
Whereas most DoD contracts for R&D efforts are performed on a cost-plus basis, contracts with R&D consortiums have the flexibility to use all contract types (Fixed Price, Time and Material, Cost-Plus). Contract performance requirements and risk should be carefully considered to appropriately match the contract type. For example, the highly aspirational development of a prototype unit should probably be a cost-plus type contract, whereas research services could be fixed price or time and material.
While OTA's do provide some relief in this area from the customary DoD approach, it’s fair to say the basics will still apply to pricing:
Project labor – proposed costs are based on an hourly rate representing an annual salary that is actually paid (not deferred). Hours are then estimated and multiplied by the labor rate to derive labor dollars.
Non-labor project costs – costs can be justified through a variety of methods, including quotes, prior history. While the expectation may still be you use competitive sourcing techniques, using a sole source may require less justification.
Indirect rates – The amount of rigor in reviewing indirect rates will likely be much less than traditional DoD contracting. If indirect rates haven’t already been established with the DoD, project cost “burdens” can quickly be determined through an analysis of company financials or pricing history.
The design and rigor of the accounting system would depend on the type of contract and reimbursement methods used. Cost-type contracts, where actual project costs and an allocation of administrative costs are recovered, require intricate design and operation of an accounting system. This requires a discrete isolation of project costs in the accounting system, a timekeeping system, along with a logical method of calculating the administrative cost “burden”.
In this case, it’s unclear if one would still need a DCAA-approved accounting system if using an OTA directly with the DoD or with a consortium partner.
Time and material contracts, or labor hour contracts, may also require a timekeeping system and a method of tagging material or “other direct costs” to a job.
While fixed price contracts may not require any of these accounting techniques, implementing even a basic job costing system would provide a window into project profitability.
We greatly endorse the DoD OTA contracting methods as a funding source for our R&D clients. By using this method directly with the DoD, or by working through a consortium, you should find the path to success much less rigorous.