Debate over contractor conflicts of interest heats up

The Government Accountability Office has sustained its second bid protest this year involving an organizational conflict of interest, an issue that has recently received increased scrutiny.

In the most recent case, GAO agreed with Kansas City-based Greenleaf Construction Co.'s argument that the Housing and Urban Development Department failed to evaluate a potential conflict of interest when it awarded a contract for home management and marketing services to Cleveland-based Chapman Law Firm Co.

The owner of Chapman formerly had owned a company that worked as the closing agent for HUD's Ohio properties, and was still receiving related weekly payments. The home management and marketing services contract required Chapman to oversee that closing agent.

Greenleaf argued that such an arrangement constituted an organizational conflict of interest, because the owner of Chapman would be receiving payments from a company he was charged with overseeing. "There's not a lot of difference between having ownership interest in a company and a company you don't own but that owes you so much money," said Margaret Dillenburg, a lawyer for Greenleaf. The exact amount of the weekly payments was not made public.

"We find that HUD failed to reasonably consider or evaluate the potential [organizational conflict of interest]," the GAO decision stated. Based on that finding and other problems, GAO recommended that HUD re-evaluate the bid proposals.

Organizational conflict of interest, where a company is hired to perform duties that conflict with its other obligations, has been a hot topic among government contractors since the fall, when Daniel Gordon, managing associate general counsel for procurement law at GAO, published an article on the subject in the American Bar Association's Public Contract Law Journal.

"There's been commentary among us that when you read that thing, it's GAO putting everyone on notice that they're not going to be a passive player here," said Jim DelSordo, a lawyer for Chapman and a partner at the law firm Cohen Mohr in Washington, D.C. "From my clients' perspective, we just need to internally make sure we're cleaner than Caesar's wife. If there's any potential subsidiaries, any connections, you need to build up walls and explain ahead of time."

GAO recently sustained another protest over an organizational conflict of interest involving a contract awarded by the Defense Information Systems Agency.

Alion Science & Technology Corp. protested the award, arguing there was a conflict because ITT Industries' Advanced Engineering & Sciences Division had a "significant interest" in manufacturing and marketing spectrum-dependent products, and the contract called for "subjective judgments that may affect the sales or use of spectrum-dependent products of the awardee, the awardee's competitors and the awardee's customers."

Spectrum-dependent products include radar and satellite systems.

DelSordo said the issue is probably heating up now because agencies increasingly rely on contractors, and especially consulting services. The Federal Acquisition Regulation prohibits contractors that help an agency prepare a solicitation from bidding on the contract.

"This should be done in order to avoid a situation in which the contractor could draft specifications favoring its own products or capabilities," the FAR states.

Companies often have their own internal rules preventing organizational conflict of interest, as well. If one part of a company is advising an agency on a contract that is at all related to something another part of the company is working on, then the company can set up firewalls and prevent employees from talking to each other about it, for example. Many big contractors require their employees to be trained to avoid such conflicts.

DelSordo said that in the Chapman case, his client will stop taking payments from the company he formerly owned, even though that's a costly decision. "The contract is worth more," DelSordo said.