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Ethics Corner 

Further Government Contracting Reform on the Obama Agenda 


By Richard L. Moorhouse and Sean M. Connolly 

Contractors should prepare for major federal contracting reforms within the next several months. President Obama advised in his fiscal year 2010 budget highlights and in his March memorandum to executive agencies to expect more accountability and competition in federal procurements. The administration has committed to take specific steps to reduce wasteful spending, overcharges, and fraud, including:

• restricting use of noncompetitive and cost-reimbursement contracts;
• ensuring inherently governmental functions are not outsourced;
• improving acquisition workforce quality;
• implementing Government Accountability Office (GAO) recommendations to reduce overpayments and cost overruns; and
• reviewing GAO-specified high-risk acquisition programs.

President Obama confirmed as federal government policy a preference for competitive fixed-price contracts. Noting that cost-reimbursement contracting since 2000 had ballooned from $71 billion to $135 billion, the president directed that, cost-reimbursement contracts shall be used “only when circumstances do not allow the agency to define its requirements sufficiently to allow for a fixed-price type contract,” and combined this mandate with a directive to severely limit non-competitive awards.

This is not new policy; indeed, it reinforces the Competition in Contracting Act (CICA). Passed in 1984, CICA requires specific justifications and approvals for any procurement not awarded based upon full and open competition. Implemented by the Federal Acquisition Regulation (FAR), CICA permits noncompetitive awards in seven instances:

• if only a limited number of responsible sources exist;
• in the event of an unusual and compelling urgency;
• to maintain a producer or supplier in case of a national emergency or to establish or maintain an essential capability;
• if full and open competition is precluded by an international agreement or treaty;
• if a statute authorizes other than full and open competition or a brand name is required;
• if disclosing agency needs would compromise national security; or
• full and open competition is not in the public interest for a particular acquisition.

To implement this policy, the director of the Office of Management and Budget has been directed to issue agency guidance by July 1 to review and identify existing, wasteful contracts that should be modified or cancelled.  The OMB director was also tasked to issue guidance by Sept. 30 for governing sole source and other noncompetitive contracts and to maximize full and open competition.

The administration also is committed to clarify and bar outsourcing of inherently governmental functions, noting that the line has been blurred and inadequately defined. The fiscal 2010 budget highlights that such functions “will not be performed by the private sector for purely ideological reasons.”

These concerns began in the last administration. For instance, last year, Shay Assad, director of defense procurement and acquisition policy, told the House defense readiness subcommittee that contractors are engaged in inherently governmental functions related to acquisition. Former comptroller general and head of GAO David Walker also testified last year to the House defense appropriations subcommittee on his concern that the blurring of inherently governmental tasks increases the risk that these contractors are “influencing the government’s control over and accountability for decisions that may be based, in part, on contractor work.”  The Defense Department’s acting inspector general, Gordon Heddell, also recently testified that the department extensively relies on contractor support workforce that performs inherently governmental functions.

The FAR currently lists examples of inherently governmental functions, including:

• setting agency policy;
• establishing federal program priorities for budget requests;
• directing or controlling intelligence or counter-intelligence operations;
• determining those supplies or services to be acquired by the government;
• administering contracts, including awarding or terminating contracts, serving on  evaluation boards as voting members, or determining contract costs deemed reasonable, allocable, and/or allowable.

The Obama administration’s call for outsourcing reform is fully supported by GAO’s 2006 call for the Defense Department to examine use of contractors for inherently governmental work. GAO highlighted a major increase in contract awards for services for interpreters, security, intelligence, and acquisition support during the Iraq and Afghanistan conflicts. Walker also urged OMB to clarify the ambiguity of inherently government functions in a revised definition. The Sept. 30 deadline to the OMB director for acquisition guidance requires a definition of those services not appropriate for outsourcing.

Government contracting is clearly in for hard scrutiny and overhaul in the coming months. Both during the campaign and in his recent guidance to OMB, President Obama focused on targeting corruption, cost overruns and wasteful spending in defense contracting. Ethics requirements inevitably will be revisited to complement additional oversight and controls.
Corporate leaders should review carefully for efficiency existing contracts, in light of evolving federal procurement standards, and otherwise be fully prepared to demonstrate to their government customers that they are full partners in optimizing efficiency and economy.

Richard L. Moorhouse is a shareholder and Sean M. Connolly is a senior associate with the international law firm of Greenberg Traurig LLP, as members of the government contracts practice group. The views expressed are solely those of the authors.
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