Defense Dept. Pursues Conflicts of Interest at Contractors

The Department of Defense is taking a much harder look at potential organizational conflicts of interest at its largest contractors.

Last month the DoD issued final rules that provide uniform guidance and tighten existing requirements on organizational conflicts of interest. And while the final rules are less comprehensive than the ones proposed, they are causing some contractors to make big changes to comply with them.

The rules implement a provision in the 2009 Weapons Systems Acquisition Reform Act, which required the DoD to crack down on such conflicts. The Federal Acquisition Regulation subpart 9.5, and years of decisional law from the Government Accountability Office and the Court of Federal Claims, categorizes organizational conflicts of interest into three basic types: unequal access to information, biased ground rules, and impaired objectivity.

For example, a conflict of interest could occur when a firm has access to non-public government information that would give it a leg up in competing for future government business. Another potential conflict of interest could occur if a company wins a contract to build a weapon, while one of its affiliates gains a separate government contract to test the weapon.

Peter Eyre, a counsel in the government contracts group of law firm Crowell & Moring, says the rule is a causing a lot of consternation among defense contractors.  He says potential organizational conflicts of interest are “driving decisions not only about specific programs and contracts, but also about buying and selling entire business units. This is a big, big deal,” he says.

Some of the largest defense contractors, for instance, already have divested business units that they said posed potential conflicts of interest. In June 2010, two months after the DoD issued its draft rules, Lockheed divested most of its Enterprise Integration Group and Pacific Architects and Engineers, two units within its Information Systems and Global Services business. Northrop Grumman also agreed to sell its advisory services unit, TASC, to avoid the conflict of interest it created.

However, the final rules depart significantly from the draft version issued in April 2010. Unlike the proposed rule, which was much more comprehensive and would have applied to virtually all defense contracts, the final rule applies only to major defense acquisition programs.

Major defense acquisition programs are defined as those programs with total expenditures for research, development, testing, and evaluation that exceed $300 million (in 1990 dollars), or programs with a total procurement cost that exceeds $1.8 billion (in 1990 dollars). The DoD reasoned that extending coverage to include all defense contracts could have delayed the release of the final rules and would have created unnecessary confusion.

“While the final rule has these overarching policy guidelines for the contracting officers to follow, it still doesn't give the contracting officers any more definitive guidance in identifying potential OCIs.”

—Nicole Owren-Wiest,

Partner,

Wiley Rein

Government industry groups largely cheered that decision. Stan Soloway, CEO of the Professional Services Council, the national trade association of the government professional and technical services industry, said the final rule provides “much needed clarity and focus.” He also praised the DoD for not applying a “one size fits all” approach to all defense procurements, as the proposed rule would have done.

Yet some watchdog groups are unhappy with the change. The Project on Government Oversight, an independent non-profit that investigates and exposes corruption and other misconduct, said it wished the proposed rule had been “clarified and strengthened and applied to all DoD acquisitions,” said Scott Amey, general counsel for POGO.

Guidance Wanted

The general consensus, though, is that contracting officers still need more guidance around conflicts of interest. “While the final rule has these overarching policy guidelines for the contracting officers to follow, it still doesn't give the contracting officers any more definitive guidance in identifying potential OCIs or coming up with potential ways to resolve them,” says Nicole Owren-Wiest, a partner at law firm Wiley Rein.

“Also missing are clearly defined penalties for violating conflict-of-interest regulations, including termination of a contract, fines, withholding of payments, and suspension or debarment,” said Amey. “A lack of a remedy clause will hamper the DoD's ability to hold contractors accountable for failing to disclose an actual or apparent OCI.”

While the final rule does not state the penalties for failing to disclose or mitigate organizational conflicts of interest, Eyre notes that the consequences can range from the loss of a contract to allegations that a contractor has violated the False Claims Act.

The rule also contains some additional changes to address conflicts of interest. It provides that a contractor, or its affiliates, who perform Systems Engineering and Technical Assistance (SETA) functions cannot then participate as a prime contractor or major sub-contractor in the development or production of a weapon system under the major defense acquisition program, unless they submit a conflict of interest mitigation plan that's been approved by the government.

PROPOSED RULE AMENDMENTS

What follows is an excerpt from the Department of Defense's "Discussion and Analysis" regarding changes that were made to the proposed rule on the Defense Federal Acquisition Regulation Supplement (DFARS):

The DoD received comments from 21 respondents in response to the

proposed rule. Some respondents expressed general support for the

rulemaking. Others expressed concern that the rule did not achieve the

overall objectives of section 207, either because the proposed coverage

was too stringent or not sufficiently strong. Based on public comments,

changes were made to the proposed rule, including the following:

Removing from the DFARS final rule the proposed changes

that would have provided general regulatory coverage on OCIs to

temporarily replace that in FAR subpart 9.5.

Locating the core of the final rule in subpart 209.5 and

252.209.

Making clear that this final rule takes precedence over

FAR subpart 9.5, to the extent that there are inconsistencies.

Adding to the policy an explanation of the basic goals to

promote competition and preserve DoD access to the expertise of

qualified contractors.

Tightening the exception for "domain experience and

expertise" to require a head of the contracting activity determination

that DoD needs access to the domain experience and expertise of the

apparently successful offeror; and that, based on the agreed-to

resolution strategy, the apparently successful offeror will be able to

provide objective and unbiased advice.

Refining the definition of ``major subcontractor'' to

include upper and lower limits on application of the percentage factor

test for determining if the value of the subcontract in relation to the

prime contract warrants classifying the subcontract as major;

specifically:

— A sub-contract less than the cost or pricing data threshold

would not be considered a major subcontract; and

— A sub-contract equal to or exceeding $50 million would

automatically be considered a major subcontract.

Addressing pre-MDAP as well as MDAP programs.

Source

Department of Defense DFARS Ruling (Dec. 29, 2010).

On a practical level, this means contracting officers must now insert this new language in any solicitations for SETA awards going forward. Likewise, if government contractors want to requests an exception to the prohibition, they must then submit an Organizational Conflict of Interest Mitigation Plan with the offer.

“For contractors who qualify, it can't just be a paper plan that gets approved and implemented,” says Owren-Wiest. “They're going to have to make sure to have robust compliance policies and procedures to ensure they are complying with their mitigation plan. Otherwise, they're jeopardizing their or their affiliates' ability to compete on the production contract.”

The final rules also eliminate the DoD's “preferred method” of using mitigation—such as institutional firewalls or delegating certain tasks to a sub-contractor—to resolve conflicts of interest. The department decided that such a strategy could have had unintentionally encouraged contracting officers to make resolution decisions without considering all the facts and information.

Instead, the DoD encourages agencies to obtain advice on major defense acquisition programs from sources that are “objective and unbiased.” Furthermore, the DoD said, “contracting officers generally should seek to resolve organizational conflicts of interest in a manner that will promote competition and preserve DoD access to the expertise and experience of qualified contractors.”

According to Owren-Wiest, if there's a way to potentially mitigate or otherwise resolve an issue then that should be the goal, rather than disqualifying an offer.

Thomas Papson, a partner in the law firm of McKenna Long & Aldridge, says he expects the Federal Acquisition Regulation Council to soon issue its own organizational conflict-of-interest modifications. “I'm guessing in a few months, the proposed FAR rule will be issued and everybody can have at it again on those broader issues.”