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Ethics Corner 

New Rule Proposed For Organizational Conflicts of Interest 

2,010 

By Paul F. McQuade and William M. Jack 

The Defense Department issued a proposed rule on April 22 to amend the Defense Federal Acquisition Regulation Supplement to impose uniform guidance and tighten existing regulations on organizational conflicts of interest (DFARS Case 2009-D015).

The proposed rule requires contractors to disclose facts bearing on the existence of conflicts both prior to award and during contract performance. Any identified conflicts must be resolved by avoidance, mitigation or a limitation on future contracting. Unlike the present FAR rule, which is also being revised under FAR Case 2007-018, the department explicitly states a preference for using mitigation to resolve conflicts. The proposed rule also recognizes that some conflicts cannot be mitigated, requiring the contracting officer to select another offerer or request a waiver.

The proposed rule would apply to most Defense Department contracts, task and delivery orders, and modifications for both profit and nonprofit organizations. It would not apply to the purchase of commercial-off-the-shelf items, but would apply to other commercial items.  

The rule defines three types of conflicts: Impaired objectivity, unfair access to nonpublic information, and biased ground rules. These types of conflicts may arise, for example, when contractors provide pre-solicitation acquisition support services, offer advisory assistance or services to the department or access nonpublic information while working at a government facility.

Contracting officers must consider potential conflicts during preparation of the solicitation and during the evaluation of offers. If a conflict is identified during preparation of the solicitation, the contracting officer must include a clause requiring offerers to make disclosures and representations and to explain plans to resolve conflicts. During the evaluation of offerers, the contracting officer must determine if there are conflicts by reviewing information from the offerer and other sources, such as other contracting offices, credit rating services and trade journals.

If conflicts are found, they may be resolved by avoidance, limitation of future contracting, mitigation, or some combination of these methods.  Avoidance generally involves a contractor foregoing a contracting opportunity in order remain eligible for future work. A limitation on future contracting allows the contractor to perform the initial contract, but precludes the contractor from submitting offers on future contracts.  Mitigation, the department’s preferred method of resolution, involves actions by a contractor to mitigate a conflict by implementing firewalls, giving nonpublic information to other offerers or using a conflict-free subcontractor or team member to perform the work. The head of an agency may waive the requirement to resolve a conflict if the agency determines that resolution is not feasible or is not in the best interests of the government.

Except when a waiver is requested or in the case of task and delivery order contracts, the contracting officer must award the contract to the apparent successful offerer only if all conflicts are resolved. The contracting officer will not withhold award from an offerer without first explaining its reasons in writing and giving the contractor an opportunity to respond. To the extent a conflict can be identified at the time of task or delivery order award, the contracting officer should include a resolution plan in the overarching contract and evaluate conflicts at the time of award of each order. For multiple award task or delivery order contracts and GSA schedules, the contracting officer for the ordering agency may determine a conflict precludes award of an order unless a mitigation plan is incorporated into the order.

If a contractor discovers a conflict after the award, the contractor is required to make a prompt and full disclosure in writing to the contracting officer. If the conflict cannot be resolved, the contracting officer may terminate the contract for the convenience of the government. A nondisclosure or misrepresentation regarding a conflict may also result in breach, which can result in a termination for default or the government pursuing other remedies. Subcontractors would also be required to comply with post-award requirements through a flow-down provision.

Most defense contractors will already be familiar with the principles embodied in the proposed rule, but may struggle to comply with certain vague requirements. For example, when potential conflicts exist, contractors will need to disclose “all relevant information” regarding conflicts and describe work performed on contracts and subcontracts within the past five years “associated with the offer.” Assembling this information may be difficult for small contractors who do not have comprehensive compliance programs to keep track of such information.  Large contractors will have the opposite problem as they review voluminous information to determine what information may be relevant to a potential conflict.

Contractors who fail to identify relevant information or fail to identify conflicts at the proposal stage should also be concerned that any undisclosed conflicts may be considered “credible evidence” of violations of the False Claims Act, which, under the FAR Mandatory Disclosure Rule, would require disclosure to the government.

Finally, the proposed rule’s specificity regarding the contracting officer’s obligations, which expands upon FAR Subpart 9.5’s present examples, may lead to more bid protests. Contractors will likely argue that any failure on the part of the contracting officer to comply with the detailed regulations and clauses for identifying and evaluating conflicts is grounds to protest award decisions.

Although the Defense Department was still considering comments on the rule until June 21, some contractors are already taking steps to address the proposed rule. Other contractors would be wise to begin assessing how this rule may impact their relationship with the department agencies, affiliates, subcontractors and teaming partners and how they may need to tailor their ethics compliance programs and internal control systems to address these new requirements.

Paul F. McQuade (mcquadep@gtlaw.com), a shareholder, and William M. Jack (jackw@gtlaw.com), a senior associate, are with the international law firm of Greenberg Traurig LLP. The views expressed are solely those of the authors.

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