Proposed Rule on Conflicts of Interest in Procurements Could Pose Challenges for Industry

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WASHINGTON — The U.S. Defense Department on April 22 released a long-anticipated proposed rule outlining how it intends to police conflicts of interest in procurement.

The proposed rule on organizational conflicts of interest is part of the Weapons Systems Acquisition Reform Act, made law in May 2009. Among other things, the rule would prohibit companies from performing systems engineering and technical assistance (SETA) work — such as advising the Department of Defense (DoD) on aspects of a procurement — while serving as a prime contractor or major subcontractor for products on the same program.

The proposed rule outlines three basic types of conflicts:

  • Impaired objectivity: when a contractor’s job is to give technical advice about a procurement, and the contractor also has a financial interest in the decision.
  • Unfair access to nonpublic information: when a contractor can get nonpublic information that could give it an unfair advantage in a later competition.
  • Biased ground rules: when a contractor is working on one contract but could set the ground rules for a future acquisition it could compete for.

The proposed rule says contracting officers have to resolve any conflicts before awarding contracts, but it also says there are ways to avoid or mitigate conflicts. For example, one step could be blocking a contractor from creating specifications for a contract if the contractor can bid for it later.

Alan Chvotkin of the Professional Services Council, an Arlington, Va.­based trade group for U.S. government contractors, said the rule would provide standardization where procurement offices have been using individual approaches. But the group also has concerns, he said.

“When you look at what a contracting officer has got to do, it’s not at all clear what the work that they need to do upfront is in order to identify areas of conflict,” Chvotkin said. “There’s a lot of shifting of responsibility to the contractor community rather than accepting any responsibility within the government … to identify those areas of conflict.”

At a December meeting, several industry representatives told the Pentagon they prefer proposed rules to interim rules. Unlike an interim rule, a proposed rule allows for public comment and is not binding. DoD will collect comments on the rule until June 21.

Pentagon industrial base chief Brett Lambert said he hopes DoD will have a final rule out this summer. “I think that [in] this next 60 ­day period, where there’s review by industry, we should get a lot more positive and constructive inputs,” he said on the April 25 broadcast of “This Week in Defense News.”

Large companies will struggle with the rule, especially with firewalls, said Jeff Bialos, a former DoD deputy undersecretary for industrial affairs, now a lawyer with Washington-based law firm Sutherland.

Firewalls are proposed as one form of mitigation, but only for the “unfair access” conflict.

“The rules create a challenge for large multibusiness-unit companies that are now considered one company [under the rule], and yet can’t resolve issues that arise with their other business units through firewalls,” Bialos said. “The issue that’s left open by the rules is, what beyond firewalls can resolve these types of problems?”