When people speak of "government contracting" or "doing business with government," there is the tendency (and we’re as guilty of this as anyone) to equate such terms with "government procurement," as if they’re all one and the same.

In reality, government contracting is more than procurement. A company can contract with the federal government, for example, and for all practical purposes avoid procurement regulations altogether, on the basis that the "business" they're doing is not deemed procurement. Avoiding the FAR can mean staying away from, among other things, onerous intellectual property and auditing requirements.

There’s more.

This other non-procurement area of contracting has a market size nearly as large as the $200 billion-plus procurement market. This non-procurement market is built on three principal contracting tools:

• Cooperative agreements (CAs)
• Cooperative research and development agreements (CRADAs)
• Other transactions (OTs)

The main thing these three contract types have in common is that they’re not procurement contracts (with the exception of some "other transactions"). The basic rule regarding procurement contracts is that they are used when the property or services being acquired are for the direct benefit or use of the United States. 31 U.S.C. sec. 6303.

Because of their wider application and their likely importance in the new Department of Homeland Security, we will focus here on this third contract type, other transactions (or "OTs"). But first, a brief explanation of the other two.

Cooperative Agreements and CRADAs

Cooperative agreements (CAs) are similar to grants in that their primary purpose is to transfer a thing of value to a state government, local government or other recipient to carry out a public purpose of support or stimulation. The key difference is that, in the case of CAs, substantial involvement is expected between the federal government and the recipient; in the case of grants, no substantial involvement is expected.

A CRADA is a contract between a federal laboratory and other party to conduct research and development. CRADAs facilitate the transfer of commercially useful technologies from federal labs to private industry.

Other Transactions

Presently, the only departments with authority to use other transactions (OTs) are Defense and Transportation.

OTs fall under two types: (1) Research or Science and Technology and (2) Prototype Authority. Contracting officers may use the first type only when it is not feasible to use a standard contract, grant or cooperative agreement. Research or Science and Technology OTs cannot be procurement contracts.

Prototype OTs, however, can be. The primary restrictions on the use of Prototype OTs are:

• No duplication of research
• Competitive procedures must be used to the maximum extent practicable
• Annual reporting to Congress
• The program must be directly relevant to weapons or weapons systems proposed to be acquired by DOD

Section 803 of the National Defense Authorization Act for 2001 established new conditions for the use of OT authority for prototype projects. Specifically, no official may enter into a transaction for a prototype project under this section unless:

(A) there is at least one nontraditional defense contractor participating to a significant extent in the prototype project; or

(B) no nontraditional defense contractor is participating to a significant extent in the prototype project, but at least one of the following circumstances exists:

(i) At least one third of the total cost of the prototype project is to be paid out of funds provided by parties to the transaction other than the Federal Government.

(ii) The senior procurement executive for the agency determines in writing that exceptional circumstances justify the use of a transaction that provides for innovative business arrangements or structures that would not be feasible or appropriate under a contract.

These are not burdensome restrictions. When describing OTs, commentators often use terms that sound out of place within the world of government contracting, terms such as "blank page" and "freedom of contract."

Advantages of Other Transactions

Why do companies like OTs? Two main reasons: they can avoid -- at least partially -- often onerous intellectual property restrictions and auditing requirements.

Contracting officers may authorize independent public accountants to perform audits in accordance with generally accepted government auditing standards that are on par with standards used in the commercial sector.

Contracting officers have wide discretion to negotiate patent and technical data rights without the restrictions imposed by the FAR or the Bayh-Dole Act.

As a result, companies that traditionally did not perform research for DOD (Hewlett-Packard, Cray Research, the commercial division of IBM, for example) are now more interested and are actually doing government work, either as consortium members or single parties. DOD estimates that about 42 percent of the 275 commercial firms that participated in one or more agreements were firms that traditionally had not performed research for DOD. ("Acquiring Research by Nontraditional Means," Letter Report, 03/29/96, GAO/NSIAD-96-11.)

Department of Homeland Security

It appears that the new Department of Homeland Security will have "other transaction" purchasing authority. As a result, these contacting vehicles may grow out of their semi-obscurity into something that affects a larger number of companies. It’s something to look out for.

Something else worth noting: Representative Davis (R-VA) is pushing for a provision to provide incentive awards of up to $20,000 for innovative solutions to homeland defense problems. Twenty-five percent of the incentive awards in a fiscal year would be reserved for small business.