CDAO pilots shared-savings AI contract under $100M OTA
Traditional defense contracts pay whether the thing works or not, this one pays only when the vendor proves it saved the department money.
TL;DR
The Pentagon's Chief Digital and AI Office is piloting a "shared savings" contract model with venture studio Red Cell Partners under a one-year OTA worth up to $100 million. Red Cell covers all upfront costs; its portfolio companies earn revenue only from proven cost reductions. The model is adapted from healthcare and energy contracting and amounts to a third option alongside traditional procurement: vendors deploy AI tools for free, then take a percentage of whatever savings they generate. A Red Cell portfolio company is developing an AI audit agent that would identify high-value consulting contracts the Air Force could cancel.
The structure is simple enough that the novelty is almost the point. Red Cell Partners, a McLean-based venture studio, will serve as prime on an Other Transaction Authority agreement with CDAO, covering all upfront costs while its portfolio companies deploy AI tools across the department. A portfolio company gets paid only when it can demonstrate that its tool saved the Pentagon money, and then it takes a portion of those savings.
The concept originated not with CDAO but through conversations between Red Cell and the Department of the Navy's Office of the Chief Technology Officer, where the teams were exploring how AI agents could save money on repeatable processes. It migrated to CDAO, which has been the department's institutional home for AI procurement experimentation, including a $100 million production OTA to Anduril for edge data mesh capabilities in late 2024.
The model adapts purchasing processes widely used in healthcare and energy but rarely applied to defense. A Red Cell spokesperson told DefenseScoop the firm wants to prove it's "a viable, taxpayer-friendly third contract option." The hypothetical example offered: an AI-powered audit agent that identifies high-value consulting contracts the Air Force could cancel, with the portfolio company taking a percentage of the resulting savings.
What the DefenseScoop reporting doesn't address
The piece doesn't describe how the parties will resolve disputes over what counts as a saving, and earlier government experiments with shared-savings models typically foundered on exactly that question. Attribution is the hard part. If a contract was going to be canceled anyway, or if savings result from multiple overlapping initiatives, who gets the credit? The OTA structure pushes that problem downstream, but it doesn't solve it.
The pilot also sits at the intersection of multiple administration procurement priorities: Hegseth's March 2025 edict directing components to use OTAs and the Software Acquisition Pathway, the Anything-as-a-Service pilot Congress mandated in the FY2024 NDAA, and the APFIT program's push into software-only capabilities. Whether shared-savings contracting becomes a durable mechanism or a one-off experiment depends on how the attribution problem gets resolved in practice.
Published ·Deep Fathom