Ethics Corner

April 2006

Companies Must Avoid “Impaired Objectivity,” Conflicts of Interest

By Jim D'Agostino, Dick Moorhouse and Dave Hickey

Conflicts of interest entailing “impaired objectivity” typically arise when government contract work involves contractor self-evaluation, or reviews of affiliates, customers or competitors. A presumption exists that individual loyalty to an employer responsible for salary, benefits or stock options conflicts with contractual obligations to render impartial advice to the government.

The Government Accountability Office recently sustained widely publicized protests involving “impaired objectivity” conflicts of interest, which undoubtedly will cause companies and program officials to take a harder look at this issue.

In two protests by Alion Science & Tech Corp., GAO recently overturned awards to ITT Industries by the Defense Information Systems Agency (DISA). Those awards required performance of electro-magnetic spectrum engineering support services that included analysis, evaluation and the exercise of subjective judgment in setting Defense Department policies and regulations governing the sale or use of spectrum-dependent products.

DISA’s problem was that the successful offeror is a major manufacturer and marketer of electromagnetic spectrum-dependent products. Thus, contract performance would impact the contractor, its competitors and customers directly and economically. GAO sustained the protests primarily based on DISA’s failure to consider the extent of the organizational conflict of interests reasonably. GAO disagreed with DISA’s view that the conflict would be “minimal,” even though DISA tried to demonstrate a low “maximum potential” for conflicts of interest to occur.

The Federal Acquisition Regulation requires contracting officers to identify and evaluate an organizational conflict of interest “as early in the acquisition process as possible.” This is critical. For example, in a 2002 Ktech Corp. case, GAO sustained a protest because the Defense Threat Reduction Agency failed to consider or mitigate an organizational conflict of interest based upon the activities of a proposed subcontractor on a prior contract for testing and operations support services. GAO found that the agency failed to recognize the potential for conflict.

One surefire “red flag” for impaired objectivity arises whenever individual contractor employees must exercise subjective judgment that may affect their company’s interests. In a 2004 PURVIS Systems Inc. protest, the GAO examined the statement of work and rejected the Navy’s argument that the successful offeror merely would conduct non-subjective measurements. The GAO found that the work involved analytical and technical support for anti-submarine warfare readiness and clearly included subjective input or judgments.

The FAR requires contracting officers to thoroughly analyze potential conflicts of interest and whether the activities of a potential awardee conflict with an “official duty” required in performing a contract. The Internet provides a great deal of information, such as company annual reports, making an effective conflict-of-interest analysis a much less daunting task today.

Contractors have a reasonable opportunity to address this issue before a contract award, but should reveal potential conflicts of interest to agencies early in the process. Procurements based upon solicitations containing broad performance work statements or simple statements of objectives that require detailed contractor work statements increase the chances that conflict-of-interest issues are overlooked.

The FAR requires contracting officers to “avoid, neutralize, or mitigate significant conflicts before contract award.” Once conflicts are identified, officers should never play down their significance. A thorough, subjective examination of the nature of the work and the activities of the company is required. The Alion decision emphasized this when GAO found that, despite DISA’s attempt to quantify the work, the performance work statement contained significantly intertwined elements, making accurate quantification impossible.

Measuring “impaired objectivity” conflicts of interest presents unique problems. In “unfair competitive advantage” cases, mitigation is easier. A contractor may gain a competitive advantage through access to nonpublic information beneficial in subsequent competitions. Mitigation plans may include physical separation, separate work forces, separate management, separate computer systems, and non-disclosure agreements. These measures that may prove unworkable with impaired objectivity conflicts of interest.

GAO has yet to rule that certain impaired objectivity cases are “non-mitigatable,” but has demonstrated its skepticism about the feasibility of “blind subcontracting” as a way to mitigate impaired objectivity conflicts of interest. It simply isn’t enough to recognize that a particular company’s interest may influence an employee’s judgment. Instead, very specific actions, including recusal, may be the only solution. If the contractor is deemed essential, the agency head may issue a waiver.

Impaired objectivity conflicts of interest now have the attention of Congress and the administration, and will influence many future procurement decisions. This issue also will affect future company merger and acquisition decisions.

Jim D’Agostino, Dick Moorhouse and Dave Hickey are attorneys at the international law firm of Greenberg Traurig. The opinions expressed here are solely those of the authors and are not intended to provide legal advice or represent the view of NDIA or the NDIA Ethics Committee.

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