Pentagon partners with venture studio to pilot shared services contract model via $100M OTA

The Pentagon’s Chief Digital and AI Office is piloting a new “shared savings” contract model with venture studio Red Cell Partners that marks a clear pivot from long-standing traditional government buying structures.

This unique agreement for AI assets is designed to demonstrate a contracting framework where vendors are paid only for the costs they eliminate and the outcomes they deliver for the Defense Department, officials from the agency and venture firm revealed on Tuesday. 

The work will unfold via an Other Transaction Authority deal worth up to $100 million in the first year.

“It’s our belief that the OTA can help speed up AI adoption by providing services for free until savings are captured. If a portfolio company can use AI to cut an existing contract, they get to keep a portion of the savings and sell ongoing services,” a Red Cell spokesperson told DefenseScoop. “We want to prove this is a viable, taxpayer-friendly third contract option.”

The firm official pointed to a portfolio company developing an AI-powered “audit agent” that enables the Air Force to cancel existing high-value contracts it holds with consulting firms, as a hypothetical example — noting in an email that, “then the [portfolio company or] portco gets a % of the savings.” 

DOD has pursued aggressive cost-cutting actions, including moves involving major contract changes and terminations since the start of the second Trump administration. 

“Artificial Intelligence-related solutions offer opportunities to introduce automation into a process to enable cost savings,” a source who requested to be called a War Department official told DefenseScoop. “This prototype allows the vendor to receive a portion of the recognized savings from specific solutions.”

(President Donald Trump signed an executive order rebranding DOD as the Department of War last year. Officially changing the department’s name requires an act of Congress.)

Echoing CEO & founder Grant Verstandig’s blog post, the Red Cell Partners spokesperson said this agreement makes it “the first-ever venture firm to get a contract with the DOW.” Red Cell will cover all upfront costs under this new model, while its portfolio companies will only earn revenue based on proven cost reductions that they generate for the U.S. military.

“We’ll be the prime; portfolio companies will do work through it and get paid if they can prove they saved the department money,” the Red Cell spokesperson told DefenseScoop.

Launched in the early 2020s and headquartered in McLean, Virginia, the venture studio bills itself as an incubator that builds, funds, and scales technology companies across national security, cybersecurity and healthcare.

Healthcare executive and UnitedHealth Group alum Grant Verstandig founded Red Cell. Other advisors include former Defense Secretary Mark Esper, a partner who chairs the national security practice, and former Virginia Gov. Glenn Younkin, who joined the firm as partner and chairman of the board in July.

The Red Cell spokesperson said Verstandig worked to develop the OTA contract for about two years. 

The concept originated through conversations between the firm and the Department of the Navy’s Office of the Chief Technology Officer, they said, when the teams were collaboratively exploring how AI agents could “save the department money on route or repeatable processes.” 

“Ultimately, it ended up sitting with CDAO,” the venture studio’s spokesperson said. 

The shared services model is adapted directly from purchasing processes that are widely used in healthcare and energy contracting but have rarely been applied for defense and military purposes. 

Red Cell’s spokesperson noted that the agreement also serves as a mechanism for early stage companies to do business with the Pentagon in a quicker manner and use compliance infrastructure the firm has been building for itself.

The source who identified themselves as a War Department official said that the Pentagon “will assess the effectiveness of this approach based on mission outcomes, cost efficiency, and implementation feasibility, while preserving the option to expand to additional use cases under a similar framework if the prototype demonstrates value.”

When asked whether CDAO will make more awards using this shared services framework, beyond Red Cell, in the near term, the official told DefenseScoop: “Regarding future contracts, we have nothing to preview at this time.”