Pentagon Proposes Major Changes To Rules On Contractor Conflicts of Interest

A problem that has plagued defense procurement for many years is the perception that contracts were not awarded based on a fair and open competition. As a result, critics argue, many programs experience schedule delays, technical problems or cost overruns. In addition, questions about improper relationships between contractors and government entities have resulted in an explosion in protests of contract awards that have delayed some programs by years. To address that program, the Obama Administration has pursued the most far-reaching reforms in the weapons acquisition process in decades. The Weapons System Acquisition Reform Act (WSARA) seeks the most comprehensive set of reforms in defense acquisition in at least a generation.

One area called out for reform was Organizational Conflict of Interest (OCI). Simply put, OCI exists when a contractor working for the government can unduly benefit from its existing relationship in competitions for future work. Of particular concern to critics of the current system were situations in which contractors providing system engineering, technical services or administrative support to the government were able to define the terms of future competitions or influence the source selection in a way to benefit themselves. While there have been long-standing prohibitions on companies engaging in improper activities based on an advantageous relationship with the government customer, the goal of the WSARA legislation and its implementing regulations is to more tightly control the government-private company relationships.

Even prior to new government-wide regulations being promulgated to define specifically the parameters for exclusion from competitions based on OCI, a number of agencies moved aggressively to control their contractual relationships. Some such as the Missile Defense Agency and parts of the Intelligence Community have been very aggressive in defining what constitutes OCI. As a result, companies providing services to these agencies have been all but completely barred from bidding on hardware contracts regardless of the mitigation strategies (such as corporate firewalls) proposed.

A draconian approach to OCI can create significant unintended negative consequences. The pool of expertise in sophisticated system engineering and technical analysis for complex, often highly classified defense areas is quite limited. There is only one Skunkworks for example. But if a company such as Lockheed Martin is barred from working on the next stealth fighter or SR-71 because it has helped in the initial research and development effort, the nation will be the loser.

Now the Department of Defense (DoD) has issued a proposed rule that would provide detailed procedures and guidance for identifying, evaluating and resolving OCIs. This effort is most timely. The proposed rule would provide a DoD-wide definition of OCI, establish the range of activities to which OCI considerations are applicable and make clear the range of remedies that may be considered. Most significantly, the proposed rule would bar system engineering and technical assistance contractors, those providing expert support to government departments and agencies, from bidding on major systems defense acquisition contracts. Of necessity, this will require the government to make greater use of non-hardware producing companies that have the requisite systems engineering and technical assistance.

The proposed rule does rein in some of the more egregious efforts to bar support contractors from bidding on new contracts. In particular, the DoD proposal recognizes that not all competitive advantage is unfair. The rule notes that the “natural competitive advantage of an incumbent contractor or an offeror that has performed similar requirements in the past, does not by itself constitute an unfair competitive advantage.” It also makes clear that there are acceptable mitigation strategies in the event of OCI, including use of the traditional firewalls and permitting conflict-free contractors to perform portions of the required work. DoD should identify a set of allowable mitigation steps and require contracting officers to accept these.