Defense scales back organizational conflict-of-interest rule

Industry officials scored a major regulatory victory at the end of December when the Defense Department agreed to scale back its final rule on organizational conflicts of interests, removing a host of controversial provisions that had drawn the ire of contracting organizations.

On Wednesday, the department published in the Federal Register final regulations detailing the steps contracting officers should take to manage circumstances in which a prospective bidder could have an unfair advantage over competitors. Nearly two years in the planning, the rule implements a provision in the 2009 Weapons Systems Acquisition Reform Act.

The change to the Defense Federal Acquisition Regulation still requires companies to voluntarily disclose any possible organizational conflicts of interest before bidding on projects, and also implements several changes recommended by industry, which narrow the scope of the rule.

For example, the proposed draft rule, published in April, applied to all Defense contracts, including task and delivery orders, with the exception of those for commercially available off-the-shelf items.

Critics argued the proposal applied an unwise "one-size-fits-all" approach to Defense procurements. The amended version released in December limits its application to major defense weapons systems programs and systems engineering and technical assistance contracting.

"The department's final rule provides much-needed clarity and focus," said Stan Soloway, president of the Professional Services Council, an industry trade association that had been highly critical of the proposed rule. "As Undersecretary of Defense Ash Carter told PSC, his goals for this regulation were to address conflict-of-interest risks to the department in major systems and to 'rule with reason.' This final DFARS rule accomplishes both of those goals."

In a surprise to some legal observers, the final rule avoids altogether a host of proposed revisions, included in the draft notice, that would have overhauled the larger federal organizational conflict-of-interest statute. Defense said the policy changes could cause confusion, delays and require possible changes to the Federal Acquisition Regulation. The Federal Acquisition Regulation Council is expected soon to issue its own organizational conflict-of-interest modification for civilian agencies.

Organizational conflicts of interest occur when a firm has access to nonpublic information that would give it a leg up in competing for work. Conflicts also could crop up when a contractor is performing tasks that are subjective and could have an impact on its bottom line. These situations would include a company helping to prepare a statement of work and then bidding on the same project.

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.

But in its final rule the department made a significant change in how contracting officials should attempt to resolve potential conflicts of interest, backing off its original mandate that mitigation -- such as institutional firewalls or delegating certain tasks to a subcontractor -- was the preferred option. Industry officials said the mitigation strategy was not practical.

Rather, the revised notice instructs contracting officers to "not impose across-the-board restrictions, or limitations on the use of particular resolution methods" unless they are required for a particular acquisition. Resolution strategies also should not restrict the pool of potential offerors and must "promote competition and, to the extent possible, preserve DoD access to the expertise and experience of highly qualified contractors," the notice said. If the resolution method does not work, then contracting officials could select another offeror, or request a waiver, according to the rule.

Thomas Papson, a partner at the Washington law firm of McKenna Long & Aldridge, said the final rule recognizes that it's in government's best interest "to retain the discretion of contracting officers to deal appropriately with particular procurements. You want to avoid handcuffing contracting officers."

Despite some of the major changes, Papson argued the rule still accomplishes its core intention: forcing early disclosure of conflicts that could call into question the integrity and fairness of the competitive procurement process. Companies now recognize that if they don't come forward to disclose these issues, their competitors will raise them likely with a high degree of success, during a contract bid protest, he said.

"Over time, companies have taken a more sophisticated approach to conflicts of interest," Papson said. "They understand it's short-sighted not to put these issues on the table upfront and bring them to government's attention rather than hoping no one will notice them."