DATE: May 20, 2003

SUBJECT: Department of Defense; Audit Policy for "Other Transactions"

SOURCE: Federal Register, May 15, 2003, Vol. 68, No. 97, page 27452

AGENCIES: Department of Defense (DOD)

ACTION: Final Rule

SYNOPSIS: DOD is revising its regulations to provide audit policy for transactions other than contracts, grants, or cooperative agreements for prototype projects ("other transactions" (OTs)).

EDITOR'S NOTE: The regulations for OTs are in Title 32 of the Code of Federal Regulations (CFR), Chapter 1, Office of the Secretary of Defense, Part 3, Transactions Other Than Contracts, Grants, or Cooperative Agreements for Prototype Projects. Additional guidance on OTs can be found on the Defense Procurement website at http://www.acq.osd.mil/dp/dsps/ot/dspsot.htm.

For more on the proposed rule being finalized (in part), see the November 21, 2001, FEDERAL CONTRACTS DISPATCH "Defense of Defense; Comptroller General Access to Records for Transactions Other Than Contracts, Grants, or Cooperative Agreements for Prototype Projects."

For more on the public meeting that was held to discuss the November 21, 2001, proposed rule, see the March 4, 2002, FEDERAL CONTRACTS DISPATCH "Department of Defense (DOD); Meeting on Transactions Other Than Contracts, Grants, or Cooperative Agreements for Prototype Projects."

For more on a proposed rule published today that addresses the award of follow-on production contracts to awardees of OT prototype agreements, see today's FEDERAL CONTRACTS DISPATCH "Department of Defense; Follow-On Production Contracts to Awardees of 'Other Transactions'."

EFFECTIVE DATE: This final rule is effective on June 19, 2003, and will apply to new OT solicitations issued on or after June 19, 2003. This final rule may be used for new OT awards that result from solicitations issued prior to June 19, 2003.

FOR FURTHER INFORMATION CONTACT: David Capitano, 703-847-7486.

SUPPLEMENTAL INFORMATION: Section 845 of the National Defense Authorization Act for Fiscal Year 1994 (Public Law 103-160) authorized the secretary of a military department, the director of Defense Advanced Research Projects Agency (DARPA), and any other official designated by the Secretary of Defense, to enter into "transactions other than contracts, grants or cooperative agreements for prototype projects that are directly relevant to weapons or weapon systems proposed to be acquired or developed by the Department of Defense." These are commonly referred to as "other transactions" (OTs) and they are generally exempt from all the statutes and regulations that govern federal contracts and grants. The purpose of OTs is to overcome the reluctance of many firms with significant technological advances and innovations to share their innovations with the government because of the significant statutory and regulatory requirements involved in government contracts and grants. When using OTs, DOD contracting officials are not required to include standard contract provisions that typically address such issues as financial management or intellectual property rights, but may structure the agreements as they consider appropriate.

On November 21, 2001, DOD published a proposed rule to revise 32 CFR Part 3 to outline the conditions for appropriate use of OTs, define a "nontraditional defense contractor," and provide audit policy which DOD had developed (at that time, 32 CFR Part 3 merely addressed the inclusion of a clause in OTs exceeding $5,000,000 authorizing the Comptroller General access to records). On March 27, 2002, DOD held a public meeting to discuss the proposed rule. Comments on the proposed rule were received from five respondents (3M Company, the American Bar Association (ABA), the Aerospace Industries Association (AIA), the Council of Defense and Space Industry Association (CODSIA), and the Integrated Dual-Use Commercial Contractors (IDCC)), and approximately 50 government and industry representatives attended the public meeting. Since the majority of the written comments and discussion at the public meeting focused on the audit policy, it was decided not to address the audit policy in the final rule at that time, but to address it in a separate rule (for more on the final rule that addressed the conditions for appropriate OT use and defined "nontraditional defense contractor," see the August 27, 2002, FEDERAL CONTRACTS DISPATCH "Department of Defense; Transactions Other Than Contracts, Grants, or Cooperative Agreements for Prototype Projects"). This final rule is that separate rule.

The following are the changes being made to 32 CFR Part 3 by this final rule (significant differences between the OT audit policy in the November 21, 2001, proposed rule (primarily the proposed 32 CFR 3.7, Audit Policy), and new 32 CFR 3.8, DOD Access to Records Policy, are noted):

In addition, the final rule deletes all of the proposed sample audit clauses. Sample audit clauses intended to serve as a guide can be found at http://www.acq.osd.mil/dp/dsps/ot/otguideconformed.doc. These samples may be modified as necessary to address the particular facts and circumstances of each agreement.

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2003 by Panoptic Enterprises. All Rights Reserved.

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