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Project on Government Oversight

Stronger Contractor Organizational Conflicts of Interest Regulations Needed

General Services Administration
Regulatory Secretariat (V P R)
1800 F Street, NW
Room 4035
ATTN: Laurieann Duarte
Washington, DC 20405


Sent by Facsimile: (202) 501-4067

Subject: FAR Case 2007-018

Dear Ms. Duarte:

The Project On Government Oversight (POGO) provides the following public comment to FAR Case 2007-018, "Organizational Conflicts of Interest" (73 Fed. Reg. 34686, June 18, 2008). The advance notice of proposed rulemaking issued by the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the Councils) seeks comments on whether additional regulation of organizational conflicts of interest (OCI) is needed. As an independent nonprofit organization committed to achieving a more accountable federal government, POGO supports the implementation of various new standards and procedures to better detect and avoid organizational conflicts of interest and increase public confidence in government contracting.

Definitions and Existing Regulations

"'Organizational conflict of interest' means that because of other activities or relationships with other persons, a person is unable or potentially unable to render impartial assistance or advice to the Government, or the person's objectivity in performing the contract work is or might be otherwise impaired, or a person has an unfair competitive advantage."[1] In short, organizational conflicts of interest can result in contract awards based on bias or unfair competitive advantages, compromising the impartiality of the federal government and the integrity of its contracting procedures.

FAR Subpart 9.5 on organizational and consultant conflicts of interest "prescribes responsibilities, general rules, and procedures for identifying, evaluating, and resolving organizational conflicts of interest."[2] Organizational conflicts present one type of ethics risk to the government and must be identified and avoided through careful government oversight.

OCIs are often grouped into three general categories based on the problems they create: unequal access to information, impaired objectivity, and biased ground rules. Contracting officials are to avoid, neutralize, or mitigate potentially significant conflicts of interest so as to prevent an unfair competitive advantage or the existence of conflicting roles that might impair a contractor's objectivity. The FAR notes that organizational conflicts of interest are more likely to occur in contracts involving certain services, such as management support services and consultant or other professional services.[3] Agency heads or designees may waive OCI policies governed under FAR Subpart 9.5.[4]

In theory, the contracting agency is responsible for determining whether an actual or apparent OCI is present and to what extent it should impact the contract award.[5] In practice, however, government reliance on contractor employees to identify potential organizational conflicts of interest can create problems when they are assigned to a procurement on which their company or one of its employees, divisions, affiliates, subsidiaries, and subcontractors is bidding.

Why Organizational Conflicts of Interest Matter

As the Acquisition Advisory Panel (the Panel) noted in its final report, "In some cases, contractors are solely or predominantly responsible for the performance of mission-critical functions that were traditionally performed by civil servants, such as acquisition program management and procurement, policy analysis, and quality assurance."[6]

While the possibility of a contractor having an organizational conflict of interest has always been a cause for concern, industry consolidation and growing government reliance on contractors for assistance in decision-making have increased both the potential for conflicts of interest and the chance that a conflict of interest will adversely impact governmental impartiality. According to the Panel's report, "acquisition of goods and services from contractors consumes over one-fourth of the federal government's discretionary spending, and many federal agencies rely extensively on contractors in the performance of their basic missions," while "procurement spending on services accounts for more than 60 percent of total procurement dollars."[7]

The Panel also stated:

Over the last two decades, a number of factors have led to an increasing probability of—and [an] increasing need to protect against—OCIs. Three industry trends appear to be responsible for the increase in OCIs. First, the government is buying more services that involve the exercise of judgment, such as evaluating technical platforms or assessing the goods or services provided by contractors. Second, industry consolidation has resulted in fewer and larger firms, which results in more opportunities for conflicts. Third, use of contract vehicles such as indefinite-delivery, indefinite-quantity ("IDIQ") umbrella contracts result in awards of tasks to a limited pool of contractors.[8]

The government's use of lead systems integrators (LSIs)[9] also increases the risk for OCIs. For example, an LSI might favor its own or a subsidiary's proposals over those of other contractors. Further, if the LSI stands to benefit from the continuation of a program into production, it has a financial stake in the outcome that could compromise its decisions. As demonstrated by the Coast Guard's Deepwater program, the government's ability to oversee and act independently from the LSIs has weakened as experienced government managers have retired and dependence on the LSIs has increased.

Early identification and mitigation of OCIs could have various financial benefits for the government.  Ensuring that the best qualified, not the best connected, contractor is providing the government with essential goods and services could potentially decrease cost overruns resulting from less qualified contractors encountering difficulties fulfilling contractor requirements.  While such savings are rather hypothetical, proper regulation of OCIs would almost certainly reduce the significant problems related to bid protests after contracts have been awarded.  As the Panel stated in its report, "the cost and delay associated with resolving potential OCIs after-the-fact adversely affects agency programs and the public interest."[10]

Eliminating OCIs is more than a question of ensuring that government money is well spent; it is a question of restoring and preserving public trust in government. The Panel found that "the public expects there to be no preferential treatment for particular contractors, no self-interest in the decision-making process, and no hidden agenda impacting contractor selections."[11] Sadly, this public expectation has been repeatedly disappointed in the past several years by several highly publicized cases of alleged fraud and misconduct by contractors such as Boeing, IBM, Halliburton, CACI, Titan, and Blackwater. P ublic skepticism of federal contracting has been further fueled by the recent media frenzy surrounding the Air Force's improper awarding of its lucrative air tanker contract. These and other cases of contracting problems have contributed to growing cynicism about the federal government by giving many people the impression that contracting is a widely flawed and corrupt system in which the government acquiesces to special interests, corporations regularly benefit, and taxpayers are stuck paying the bills.

POGO's Recommendations

To help restore public faith in government and ensure that contract awards are not based on biased advice, divided loyalties, insider dealings, or unfair competitive advantages, the Councils must strengthen regulations and procedures for proactively detecting and avoiding OCIs.

Accurate information regarding the business relations of a contractor assisting in the acquisition process is essential to avoiding conflicts of interest. POGO recommends that the Councils:

1. Insert a set of standard OCI clauses into all contracts and subcontracts. These clauses should clearly define future restrictions on the contractor, including a restriction on use and disclosure of proprietary information from other contractors for as long as that information remains proprietary.

2. Create clearly defined penalties for violating conflict of interest regulations, possibly including fines, withholding of payments, and suspension or debarment.

3. Require acquisition officials to provide written reports explaining adherence to OCI regulations throughout all stages of contract award and performance. Acquisition officials could be required to provide reports upon award of the contract, annually during the duration of the contract, and upon conclusion of the contract.

4. Require a government agency to review all lead systems integrator contract and subcontract awards to identify and eliminate OCIs.

5. Make any OCI waiver and supporting documentation freely available to the public.

6. The government shall publicly disclose any participation by a contractor or contractors in the acquisition or procurement process.

7. Require contractors to include written OCI identification and mitigation plans in bids or proposals.

8. Require contractors to fully disclose to an agency any divisions, affiliates, subsidiaries, partners, and subcontractors with which they have been associated within two years prior to contract bidding.

9.  Require contractors that have been awarded contracts to seek written approval from government officials for any subsequent changes in business operations or relations that might create an actual or apparent OCI.

10. Require all contractor employees to sign agreements not to disclose proprietary information, including but not limited to proprietary data, cost or pricing data, bid or proposal data, to other contractors for as long as that information remains proprietary.

Thank you for your consideration of this comment.  If you have any questions, you may contact me at (202) 347-1122.

Sincerely,


Scott H. Amey 
General Counsel 
scott@pogo.org

and

John Cappel
Researcher


1 FAR Subpart 2.101.

2 FAR Subparts 9.504 and 9.505.

3 FAR Subpart 9.502(b).

4 FAR Subpart 9.503.

5 FAR Subpart 9.505.

6 Acquisition Advisory Panel, "Report of the Acquisition Advisory Panel to the Office of Federal Procurement Policy and the United States Congress," January 2007, at p. 392.
Available at http://acquisition.gov/comp/aap/24102_GSA.pdf.

7 Panel Report, at p. 391.

8 Panel Report, at p. 405.

9 "A lead systems integrator is a contractor, or team of contractors, hired by the federal government to execute a large, complex, defense-related acquisition program, particularly a so-called system-of-systems (SOS) acquisition program." Congressional Research Service, "Defense Acquisition: Use of Lead System Integrators (LSIs) — Background, Oversight Issues, and Options for Congress," Updated June 6, 2008. Available at http://www.fas.org/sgp/crs/natsec/RS22631.pdf.

10 Panel Report, at p. 407.

11 Panel Report, at p. 407.
 

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