Capturing Industrial Base from the DoD

With ever-increasing threats from the Chinese Communist Party, recently exposed vulnerabilities in the United States' supply chain and decades of outsourcing that has left the defense and industrial base vulnerable, there is bipartisan/apolitical consensus to improve defense-critical supply chains. For the last several years, the federal government has increased its funding exponentially to rebuild, reshore and sustain the domestic industrial base. Contractors that can present a compelling offering to solve for identified shortfalls or vulnerabilities stand to capture revenue and increased market share.

Much of the increased funding being allocated does not use traditional acquisition methods. (Goodbye, RFP.) While Federal Acquisition Regulation (FAR)-based contracting is still alive and well, there are alternative procurement methods that are becoming increasingly popular. (Hello, white papers.) These alternative methods offer the U.S. Department of Defense (DoD) and contractors advantages, namely flexibility, speed and an opportunity for true negotiation. There are two primary, alternative contract instruments utilized by DoD: 1) the Technology Investment Agreement (TIA) and 2) the Other Transaction Authority Agreement. This blog post is the first in a series that will explore these two types of vehicles, including advice to contractors on capturing awards and negotiating the terms of such awards.

It is helpful to first understand the appropriations that fund these awards and the background by which they are awarded. This article discusses the Defense Production Act (DPA) and TIA, the instrument of choice for awarding funds under this statutory authority.

Defense Production Act Title III

The DPA authorizes the president to take certain actions to ensure that American industry is available for the defense, essential civilian and homeland security requirements of the United States. DPA Title III (50 U.S.C. §§ 4531-4534) has three main focus areas: 1) sustaining critical production, 2) commercializing research and development investments, and 3) scaling emerging technologies. The DPA provides the president with broad authorities to "create, maintain, protect, expand, or restore domestic industrial base capabilities essential for the national defense." To this end, the government may utilize economic incentives – including loans, purchases, commitments and other mechanisms (e.g., grants and/or cost share agreements) – to incentivize industry activity/production. Government Purchases and Purchase Commitments fall under Section 303 (50 U.S.C. § 4533).

Within the Office of the Secretary of Defense (OSD), the Manufacturing, Capability Expansion and Investment Prioritization Directorate (MCEIP) oversees the Title III office and DPA Title III funding. The U.S. Air Force serves as the executive agent for the Title III program and is based at Wright-Patterson Air Force Base in Dayton, Ohio. The DPA Title III Executive Agent Program Office (EAPO) – which includes program managers, scientists, engineers, subject matter experts, support contractors and importantly, contracting – is part of the Air Force Research Laboratory's (AFRL) Materials and Manufacturing Directorate.

To utilize DPA Title III authorities, the president must issue a Presidential Determination (PD) identifying a specific domestic industrial base shortfall. PDs do not expire and are able to be leveraged for different projects addressing the same shortfalls. Under normal conditions, the DPA statute imposes the following constraints on the exercise of Purchases and Purchase Commitments (Section 303 authorities):

• All investments require a PD;
• All actions greater than $50 million require congressional notification and a 30-day waiting period before action can be taken; and
• All actions greater than $50 million require additional congressional authorization.

However, these requirements can be waived if the president or Congress declares a period of national emergency or if the president issues a determination that action is "necessary to avert an industrial resource or critical technology item shortfall that would severely impair national defense capability." 50 U.S.C. § 4533(a)(7). Such waivers are being issued with increasing frequency.

In February 2021, the White House issued Executive Order (EO) 14017, America's Supply Chains. This EO directed a whole-of-government effort to assess risk, identify impacts and propose recommendations in support of a healthy manufacturing and defense industrial base – a critical aspect of economic and national security. Based on EO 14017, the DoD conducted an assessment of supply chains in the Defense Industrial Base (DIB) and developed a strategy to ensure the supply of items vital to national security.

In a Feb. 27, 2023, memo, President Joe Biden waived the DPA Title III $50 million statutory ceiling for supply chains enumerated in the June 2021 White House report, "Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth," as well as the February 2022 DoD report, "Securing Defense-Critical Supply Chains." These reports covered critical supply chains, including those in electronics, kinetic capabilities, castings and forgings, minerals and materials, and power and energy storage.

Based in part on these actions, DPA funding has exploded in recent years. In fiscal year (FY) 2019, only $53.6 million was appropriated for DPA. That number ballooned to $1 billion in FY 2020, thanks to emergency COVID-19 funding passed through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In FY 2022, the DoD was appropriated a total of $1.2 billion for DPA, which included $600 million through the Additional Ukraine Supplemental Appropriations Act to mitigate industrial base constraints for faster missile production and expanded domestic capacity for strategic and critical minerals, and $250 million through the Inflation Reduction Act (IRA) for expanding capabilities for domestic mining, mineral processing and related industrial sectors for large-capacity batteries.¹ It is expected that Title III funding will continue to rise in the future as both the executive and legislative branches increasingly view DPA authorities as valuable tools to be leveraged against urgent and emerging issues.

Process for Awarding DPA Title III Money

Contractors who can help shore up the domestic industrial base may well find themselves competing for award of a TIA funded with DPA Title III money. The AFRL oversees the process for issuing a TIA by first issuing a Funding Opportunity Announcement (FOA). Open FOAs for DPA Title III opportunities are posted online by the OSD.

The FOA provides guidance to contractors on how to compete for an award. Companies must submit what is known as a white paper (similar to a proposal). The FOA will contain very specific directives for white paper content, structure and submission. The government will always require proof that the submitter is a domestic source as defined by the DPA, as well as how the project addresses each of the following DPA Title III criteria:

1. The industrial resource, material or critical technology item is essential to the national defense;
2. Without presidential action under this section, United States industry cannot reasonably be expected to provide the capability for the needed industrial resource, material or critical technology item in a timely manner; and
3. The proposed action is the most cost-effective, expedient and practical alternative method for meeting the need.

White papers must provide a discussion on the submitter's technical approach and a rough order of magnitude (ROM) but can include other items, depending on the contents of the FOA. The government will then review the white papers. Contractors whose white papers have been reviewed favorably will move on to the next phase and will be asked to submit a statement of work and a detailed cost proposal.² The government will then evaluate these items and select an offeror for award. At this point, if found to be meritorious, the government will issue a TIA for performance of the project.

Understanding the TIA

TIAs are agreements awarded under either 10 U.S.C. § 4001, "Research and development projects" (formerly 10 U.S.C. § 2358) or 10 U.S.C. § 4021 (formerly 10 U.S.C. § 2371), "Research projects: transactions other than contracts and grants." They are used for basic, applied and advanced research projects. The research function is critical, and Agreements Officers (AOs) are specifically directed to only use TIAs where the principal purpose of the project is to support research rather than acquisition. 32 C.F.R. § 37.205(a). Importantly, the contractor should take a wide view of what can constitute "research" as the government has and does. However, the DPA project – and resultant TIA – are issued in order to provide the DoD a capability, not to spit out widgets.

The FAR and agency-specific supplements (i.e., DFARS) do not apply to TIAs. Instead, TIAs are governed by Part 21 and Part 37 of the DoD Grant and Agreement Regulations (DoDGARs).³ The application of DoDGARS also makes TIAs unique in that no other procurement vehicle – whether traditional FAR-based or Other Transaction Authority (OTA) agreements – is subject to these regulations.

The stated purpose of TIAs is to foster civil-military integration, and they are designed to 1) reduce barriers to commercial firms' participation in defense research, 2) promote new relationships among performers in both the defense and commercial sectors of that technology and industrial base, and 3) stimulate industry to develop, use and disseminate improved practices. 32 C.F.R. § 37.115. Only the military and those agencies that fall under (or have a delegation of authority from) the Secretary of Defense may use TIAs (32 C.F.R. § 37.120). Additionally, one or more for-profit firms must be involved in either the performance of the project or the commercial application of the research results.  (32 C.F.R. § 37.210.) 

TIAs can be expenditure-based (analogous to cost-type procurement) or fixed-support (analogous to fixed-price procurement). 32 C.F.R. § 37.300. One other unique aspect of a TIA is that no recipient or participant is permitted to receive fee or profit. 32 C.F.R. § 37.230; 32 C.F.R. 22.205(b). However, a TIA recipient will typically receive government contribution to the costs of the project, which is known as cost share.

Conclusion – Negotiating the TIA

After completion of the FOA process outlined above, the government selects an offeror for award of the TIA. However, before executing the TIA, contractors have a unique opportunity to negotiate the substantive terms of the agreement. While DoDGARs provides guidance to the AOs, there are very few aspects of a TIA that are absolutely set in stone – and even those "firm" conditions can still be subject to waiver. See 32 C.F.R. § 21.335 (authorizing the "Head of the DoD Component or his or her designee [to] authorize individual deviations from the DoDGARs"). This is advantageous to contractors because it means that negotiation is possible on an array of terms, including data rights, as well as contractor and government cost share.

In our next article, Holland & Knight's Government Contracts Group will discuss ways that a contractor may successfully advocate for itself to obtain a TIA at a lower recipient cost share than the default of 50 percent.

Notes

¹ These numbers were taken from a presentation published by the OSD Industrial Base Policy team.

² It is outside the scope of this article to discuss the interplay between the white paper submission on ROM cost and the detailed cost proposal. Suffice it to say that a contractor's initial submission will echo into subsequent submissions to the government.

³ In addition to Part 21 and Part 27, three additional portions of DoDGARs apply to TIAs: 1) Part 1125 (2 C.F.R. Part 1125) on non-procurement debarment and suspension; 2) Part 26 (32 C.F.R. Part 26) on drug-free workplace requirements, and 3) Part 28 (32 C.F.R. Part 28) on lobbying restrictions. 32 C.F.R. 37.130(b).