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Project on Government Oversight




Future Combat System to be Restructured

April 5, 2005 


A media roundtable April 6th with Secretary of the Army Dr. Francis J. Harvey "will discuss the restructuring of business arrangements for the Future Combat Systems program".

Last week, Senator John McCain sent a letter to Secretary Harvey asking the Army to provide an estimate for the costs of converting the Future Combat System contract to a more appropriate procurement authority – Federal Acquisition Regulation Part 15 – from its current status under an Other Transactions Authority agreement, which waives vital taxpayer protections over the contract.

In March, POGO's testimony submitted to the McCain's Airland Subcommittee pointed out that Other Transactions Authority (OTA) was established to encourage non-traditional defense contractors to access the government contracting marketplace. But government reviews show that as much as 97% of OTA dollars go to traditional contractors like Boeing and Lockheed Martin (for full testimony, click here).

POGO recommended that major contracts like the Future Combat System to big established contractors be revisited in order to ensure that the government can protect taxpayer dollars from waste, fraud, and abuse.

Below follows excerpts from POGO's testimony.


EXCERPTS from POGO's Testimony on Other Transactions Authority, March 16, 2005

Other Transactions

"Other transaction authority" is a term commonly used to refer to the DoD's authority to enter into transactions (OT agreements) other than contracts, grants or cooperative agreements.30  DoD has temporary authority to award such agreements in certain circumstances for basic, applied, and advanced research projects.31 Its authority was expanded to allow the Director, Defense Advanced Research Projects Agency (DARPA), to enter into OT agreements to carry out prototype projects that are directly relevant to and weapons or weapon systems proposed to be acquired or developed by DoD.32  OTA is a customized agreement rather than contracts that can be specifically tailored based on the government's needs.33 The inherent problem, however, is that rather than the government controlling what it needs, the OTA contractors are placed in the powerful position of saying "here's what we will do for you."

"Other Transactions" acquisitions generally are not subject to the federal laws and regulations governing procurement contracts.  Therefore, OTA is exempt from the usual contracting controls and oversight mechanisms set forth in contracting statutes, the FAR (in particular Truth in Negotiations Act) (TINA) regulations and Cost Accounting Standards (CAS), DFARS, audit access for examination of contractor records by the GAO or defense auditing agencies, and Small Business Act requirements for small business participation.34  Mirroring the intended reasons behind "commercial items," OTA was created to lure non-traditional defense contractors to bring innovative ideas to the government.35 The numbers do not support the government intent, however, with 72% of the research and 97% of the prototype OTA funding going to traditional DoD contractors in the late-1990s.36  Now we are hearing a new explanation for OTA – that the primary benefit to contractors is that they can fully protect their intellectual property rights.  In addition to the elimination of contracting controls, the companies that enter into OT agreements  retain their ability to make a dollar from programs that were funded by Uncle Sam.

Soon after DoD started using OTA, the DOD IG began documenting problems with those acquisitions.  In 1998, the DOD IG reported on problems for 28 OT agreements awarded by DARPA.37 One recommendation was for better monitoring of the actual costs against the funds paid and inconsistencies with audit provisions.38  One year later, the IG reiterated concerns with OTA, stating:

DoD officials did not receive adequate expenditure reporting needed to monitor "Other Transaction" efforts, did not adjust milestone payments when needed, forfeited interest, and did not receive final research reports. The underlying causes were the lack of management guidance, and a lack of quantifiable performance measures to assess costs and benefits. The Department has issued additional guidance, but establishing the performance measures has been difficult for the Department.

* * *

Given the inapplicability of traditional controls to "Other Transactions," we believe that if this authority is extended to billion dollar production runs of equipment, additional scrutiny of pricing for sole-source items will be needed to protect DoD and taxpayer interests. In these cases, the Department should require access to cost or pricing data, plus audit access for the Defense Contract Audit Agency, in order to ensure fair prices.39

In 2000, the DoD Deputy IG Donald Mancuso pleaded with Congress to reign in OTA, testifying that "Congress may consider legislative proposals for other transactions this year. Given the inapplicability of traditional controls to other transactions, any expansion of the authority for other transactions should provide the needed protections both for the Department and the American taxpayers."40

Two major DOD acquisitions have come under OTA status:  missile defense and Future Combat Systems (FCS) programs.  As stated above, these programs are shielded from normal contract oversight mechanisms and proceed virtually unregulated.  The real issue is what are we getting for our dollar.

On January 2, 2002, Secretary of Defense Rumsfeld issued a memorandum regarding the direction of the missile defense program.  That memorandum included a directive stating that "to encourage flexibility acquisition practices, I delegate to the Director, MDA, authority to use transactions other than contracts grants, and cooperative agreements to carry out basic, applied, and advanced research."41

In 2002, DARPA started awarding "other transactions" for development work for the Future Combat Systems (FCS) program.  Although only $20 billion awarded, the total value of the FCS program is believed to run as high as $120 billion.  That makes the FCS program the largest OTA purchase to date.  Army officials have countered by claiming that FAR provisions apply to the FCS program.  That statement is misleading in the sense that OTA is not subject to the FAR.  Last year, however, DoD finalized FAR-like regulations for "other transactions" for prototype projects, although none of those regulations offered oversight controls that protect federal funds (i.e., TINA and CAS).

POGO is concerned that both the missile defense and FCS programs are ripe for abuse and the use of OTA truly eliminates protections of hundreds of billions of taxpayer dollars.  The OTA mechanism waives many of the financial oversight requirements of typical contracts for goods or services with the aim of attracting so-called non-traditional" defense contractors. "Other transactions" allow contractors to avoid taxpayer protections and transparency requirements in the contract statutes and regulations, which provide protections to ensure fair and reasonable procurement prices.  OTA, however, is exempt from those protections and can exempt a defense contractor from undergoing government audits or providing the federal contracting agency and government auditors with access to the contractor's pertinent records....


Other Transactions:

  1. Restore the original intent to bring innovations to the public from non-traditional government contractors, rather than throwing billions of dollars with no oversight controls to the government's top vendors (i.e., prohibit any contractor who has accepted a FAR contract from being eligible to receive an OTA); and

  2. Renegotiate such agreements under contracting vehicles that provide taxpayer protections (i.e., FAR Part 15).


30. 10 U.S.C. § 2371(a).

31. DoD Annual Report on Cooperative Agreements and Other Transactions Entered into During FY2002 Under 10 USC 2371, no date provided, at p. 1.

32. Mancuso Statement, at p. 15.

33. Congress has granted the Department of Homeland Security, NASA, and the Department of Transportation with OTA.

34. Statement of Eleanor Hill, Inspector General Department of Defense, For the Subcommittee on Readiness and Management Support Senate Committee on Armed Services On Acquisition Reform in the Department of Defense, March 17, 1999, at p. 16.  Hereinafter Hill Statement.

35. Under Secretary of Defense for Acquisition, Technology, and Logistics, "Other Transactions" (OT) Guide for Prototype Projects, January 2001, at p. 11.

36. Mancuso Statement, at p. 15.

37. Hill Statement at p. 17.

38. Id. at p. 16-17.

39. Id. at p. 18-19.

40. Mancuso Statement, at p. 16-17.

41. Secretary of Defense Donald Rumsfeld, Memorandum for Deputy Secretary of Defense Secretaries of the Military Departments et al., Missile Defense Program Direction, January 2, 2002,  attachment at p. 2.

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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