Appropriate Appropriations – Other Transactions

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written by Richard L. Dunn 

It has been erroneously asserted on occasion that only Research, Development, Test and Evaluation (RDT&E) appropriations are available for execution of projects as other transactions pursuant to 10 U.S.C. 2371 or 2371b. The question of whether Operations and Maintenance (O&M) appropriations, or for that matter other appropriations, are available to fund other transaction (OT) agreements involves two questions. First, is there anything in the statutes that restricts their use to solely to R&D funding? Second, does a traditional fiscal law analysis restrict OT agreements to only R&D funding? Both questions involve the common issue of what the purpose limitations of OTs are.

Authority and Limitations in the statutes.

The operative words that describe the purpose of 10 U.S.C. 2371 as stated in its current version are “may enter into transactions…in carrying out basic, applied, and advanced research projects.” Useful definitions of the terms basic, applied and advanced research are found in the DOD Financial Management Regulation 7000.14-r (FMR). A superficial analysis might lead to the conclusion that the words of section 2371 and the FMR mean the same thing and that section 2371 is restricted to that meaning. Such is emphatically not the case.

As originally enacted (section 251, P.L. 101-189) the operative language of section 2371 read “The Secretary of Defense, in carrying out advanced research projects through the Defense Advanced Research Projects Agency, may enter into…other transactions with any person…” When the language was changed to its current form (section 827, P.L. 103-160) there was no indication that a change in meaning was intended. Section 827 was meant to repeal redundant provisions with no indication of other substantive change was intended. Thus, the question becomes what was the meaning of “advanced research projects”? What was meant both in the original and amended language was “the kinds of things DARPA does.” The kinds of things DARPA did and does involves activities that do not always fit the definitions of research and development found in the current financial management regulation.

A famous example will illustrate the previous statement. As part of its Viet-Nam support program (Project Agile) DARPA purchased 1,000 commercially available AR-15 rifles and arranged for their shipment to Viet-Nam. The purchase typically would have involved procurement funds while the shipment, O&M funds. This point is driven home by the fact that when the Army made a “one time buy” of 8,500 AR-15s to expand the test program it used procurement appropriations rather than R&D funds. The AR-15 became the M-16EX1. Eventually the M-16 was adopted as the Army (Marines and Air Force) standard infantry weapon. The project has been extensively documented and was approved at the highest level of DOD.

One provision of section 2371 would seem to restrict the broad scope of the meaning of “advanced research projects.” Subsection 2371(e) (2) specifies the authority may be used only if a “standard contract” is not feasible or appropriate. Standard contract means procurement contract. A procurement contract is to be used for the principle purpose of acquiring property and services for the direct benefit or use of the government (cf. 31 U.S.C. 6303; 10 U.S.C. 2303). Most R&D contracts are unlike contracts for supplies and services (FAR 35.002). Therefore, while 10 U.S.C. 2371 can be used for R&D, acquiring property should only be incidental to the transaction rather than the principle purpose of a section 2371 OT.

Section 2371b is currently available to “carry out prototype projects that are directly relevant to enhancing the mission effectiveness of military personnel” and their supporting platforms and so forth, or improvements thereto (section 2371b (a)(1)). Subsection (e)(2) of section 2371 does not apply to section 2371b. The proviso is expressly made inapplicable by section 2371b (b)(1). Thus, 2371b OTs may be used in the same circumstances in which a procurement contract would be used. Section 2371b would be appropriate authority with which to execute a project like the AR-15 project described above.

The words basic, applied and advanced research do not restrict section 2371 projects to the way those terms are defined in the FMR. Section 2371b OT projects, being exempt from the (e)(2) restriction of 2371, may be used for the principle purpose of acquiring property and services just as a procurement contract might be used. With that established, the question becomes does a general fiscal law analysis restrict OT funding to R&D appropriations.

Finally, it should be noted that section 2371b (f) provides for follow on production of a successful prototype project with production authorized as an OT.

Fiscal Law Analysis

Funds appropriated by Congress are available for expenditure only in authorized amounts, for the period of time specified, and for authorized purposes. This discussion addresses authorized purposes and limitations.

A fiscal law analysis is best done in a specific factual setting on a case by case basis. However, a theoretical discussion can provide useful insights. A common understanding of the basic question is memorialized on the Defense Acquisition University (DAU) website:

First, you say you are using O&M funds for this work, which is R&D. In my experience, R&D efforts are normally funded with R&D funds. But I understand under certain circumstances other types of funds may be appropriate based on the circumstances.           (DAU – Ask the Professor, 11/20/2006).

OT projects under both section 2371 and 2371b have been executed using Defense Production Act Title III funding. DPA projects require high level approval. O&M funds have also been used to fund section 2371b prototype projects. Their use is supported by FMR policies.

As noted above the FMR definitions and the interpretation of the OT statutes are two different things, The OT statutes are sui generis. They are interpreted by the plain meaning of their words and legislative history. Guidance in directives not specific to OTs does not inform the interpretation of the statutes. However, the FMR is helpful to the discussion of a general fiscal analysis. FMR Vol 2A, chapter 1 provides numerous examples of the intersection between R&D, O&M and procurement funds.

Paragraph 010213, RDT&E Definitions and Criteria is but one section that addresses relevant issues. “Expenses of operational military forces…that may…be engaged in or support R&D activities will be funded in the O&M appropriation.” (C.1.f). Testing after fielding and operational use will be funded with O&M or procurement funds. The AR-15 example seems to be reflected in C.5.c, acquisition of commercial or non-developmental items for testing and operational evaluation will be funded from O&M or procurement. There are exceptions for agencies like DARPA all of whose operations are conducted with R&D funds. Likewise, items regularly procured to support testing (C.5.d); or, product improvement of fielded systems (C.7.a). The first launch of a space launch vehicle or satellite may be funded by either R&D or procurement.

Other paragraphs of the FMR deal with parallel examples relating to information technology, ship systems, and other matters. Suffice to say a simplistic assertion that all R&D activities must be funded with R&D appropriations is simply wrong. Thus, OTs whether under section 2371 or 2371b may, depending on the circumstances and purpose of the transaction, be funded with appropriations other than R&D appropriations.

The fiscal law discussion with respect to sections 2371 and 2371b is generally applicable to their companion statute 10 U.S.C.2373. In the U.S. Code, section 2373 is titled Procurement for Experimental Purposes. However, the word procurement appears no where in the text of the current version of the statute as enacted by Congress. The title was added by the codifiers of the Code. In subsection (a) buy is used while in subsection (b) purchase is used. The original version of this statute (Air Corps Act of 1926, sec. 10 (k), P.L. 69-446) does use the term procurement. The language corresponding to (a) and (b) respectively was purchase and procurement. Experimental buys were exempt from competition and general procedures applicable to quantity procurements. Interestingly the discussion of this provision in the Section 800 Commission report and in several recent opinions issued by DOD legal offices only traces the origins of the statute back to the 1939 and not to its original form in 1926. Consistent with the discussion above section 2373 buys “by contract or otherwise” are not restricted to any single type of appropriation.

Conclusion

It is clear from the foregoing discussion that various R&D activities can be funded by appropriations other than R&D appropriations such as O&M or procurement funds. The Government Accountability Office (GAO) generally takes the view that when an agency has two or more appropriations that are consistent with the purpose of a transaction it may make a choice as to which appropriation it uses. However, once having made the choice it should consistently use that same appropriation account for similar transactions.

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