Proposed conflict of interest rule is a lightning rod for criticism

By Robert Brodsky

July 27, 2010

Industry groups have voiced near unanimous disapproval of a proposed Defense Department rule change that would require contractors to disclose possible organizational conflicts of interest before bidding on projects.

Nearly three dozen individuals, companies, organizations or trade groups provided detailed comments on the proposed amendment to the Defense Federal Acquisition Regulation before a deadline last week. Many respondents criticized the proposal as unnecessarily vague, burdensome, too broad in scope and intrusive.

"The proposed rule may have the unintended consequence of driving contractors that lack sophisticated tracking systems out of the marketplace," wrote Mitchell Vakerics, policy manager for the Coalition for Government Procurement, a contractor trade group. "Contractors without internal systems to track sales of commercial items and services will be unable to accurately identify organizational conflicts of interest. These contractors will be forced to add such systems at a significant cost, or decide against doing business with DoD."

The Professional Services Council, another industry organization, argued the proposal offers little guidance on how procurement officers should find and resolve conflicts and unfairly places the burden for identifying organizational conflicts of interest on the contractor.

"We do not believe this will be a good rule for the department's industrial base and it will certainly put the industry through several years of needless turmoil," said Alan Chvotkin, PSC's executive vice president and counsel.

The 2009 Weapons System Acquisition Reform Act required the Pentagon to provide uniform guidance and tighten existing requirements for organizational conflicts of interest by contractors in major defense acquisition programs. The proposed rule, however, would apply to all Defense contracts with the exception of those for commercially available off-the-shelf items.

TechAmerica, an industry association that represents 1,200 technology companies, suggested Defense focus initially on weapons systems and then evaluate the results before developing a departmentwide approach.

"We believe that DoD's expansion of the rulemaking beyond [Major Defense Acquisition Programs] is unnecessary, inefficient, and counterproductive," wrote Trey Hodgkins III, TechAmerica's vice president of national security and procurement policy.

The group also expressed concern the rule could be redundant. The Federal Acquisition Regulation Council is expected to issue its own organizational conflict of interest modification for civilian agencies. Defense has indicated that it will adopt some of the changes that apply to military contractors. It is unclear at this point how much crossover would occur between the two rules.

An organizational conflict of interest arises when a firm has access to nonpublic information that would give it a leg up in competing for work, the proposed rule stated. Conflicts also could crop up when a contractor is performing tasks that are subjective and could have an effect on its bottom line. These situations would include a company helping to prepare a statement of work and then bidding on that project.

In a tactic decried by many groups, the rule defined a contractor as the entire company, even if large segments of the business do not work directly with the government. Several commenters complained this definition would lead to excessive determinations of organizational conflicts of interest.

The Project on Government Oversight, however, suggested the rule does not go far enough and should be broadened to include subcontractors. "Treating contractors as a single entity, including all subsidiaries and affiliates, and subcontractors, will help the government better identify and mitigate OCIs," wrote Scott Amey, general counsel for the watchdog group.

The rule would mandate that bidders voluntarily disclose facts that could relate to an organizational conflict of interest both prior to the award and on a continuing basis during performance of the contract. Mitigation is the department's preferred method to resolve problems, the draft rule stated.

Contracting officials could attempt to establish institutional firewalls, delegate certain tasks to a subcontractor or share previously private information with all offerors. If mitigation is not an option -- the strategy would apply only for three categories of organizational conflicts of interest -- then the official could select another offeror or request a waiver, according to the rule.

Some commenters suggested that setting a preference for mitigation limits the contracting officer's discretion and could provide competing bidders grounds for protest. "The contracting officer needs the flexibility and authority to determine whether avoidance, neutralization, or mitigation is the correct approach in a particular situation," said Georgia attorney Charles J. McManus. "He/she must seek the best value while protecting the integrity of the procurement system."

George Pedersen, chairman and CEO of ManTech International Corp., one of a handful of federal contractors to publicly support the rule change, encouraged Defense to consider possible penalties for companies that fail to follow organizational conflict of interest mitigation plans.

"In some cases, such situations may give rise to false claims," Pederson wrote. "In all cases, however, considering the stakes at issue, a contractor who fails to adhere to its own mitigation plan should face potential suspension and debarment proceedings."

By Robert Brodsky

July 27, 2010