Update Emerges For New Personal Conflicts of Interest Rule

By Sean M. Connolly
Effective Dec. 2, 2011, the Federal Acquisition Regulation requires U.S. government contractors and subcontractors to prevent personal conflicts of interest that arise during their employees’ performance of certain acquisition functions closely associated with inherently governmental functions for or on behalf of federal agencies and departments (76 Fed. Reg. 68017).

This final rule comes two years after the office of federal procurement policy and the civilian agency and defense acquisition councils first proposed the rules at the behest of a congressional directive in November 2009 (41 U.S.C. § 2303 and FAR Case 2008-025 at 74 Fed. Reg. 58584). The February 2010 Ethics Corner explained this 2009 proposal for monitoring contractor employees with personal conflicts of interest. Over the past two years, the councils received and reviewed public comments on the proposed rules before incorporating changes for the final rule.

Under the new rule, a personal conflict of interest arises when a “covered employee” has personal or family financial or other interests or relationships that could impair impartiality, and thereby harm the government’s best interests. Examples of financial interest include compensation, consulting arrangements, stock and real estate investments and intellectual property.

The rule requires a standard contract clause, (FAR 52.203-16, Preventing
Personal Conflicts of Interest, Dec. 2011) in all service contracts that exceed the simplified acquisition threshold of $150,000 and involve “acquisition functions closely associated with inherently governmental functions.”  The requirement must also be “flowed down” in subcontracts greater than $150,000 when subcontractor employees will perform similar acquisition functions.

Covered acquisition functions include supporting or providing advice or recommendations to the government for: planning acquisitions; developing statements of work; evaluating proposals; and awarding, administering and terminating contracts. Contractor employees performing these functions are referred to as “covered employees.”

The final rule and clause apply to future task or delivery orders of existing contracts, as contractors must accept modifications of current contracts or risk being ineligible for additional orders. However, the councils included a new, specific exception barring inclusion of the clause in commercial-item contracts, and also added a “de minimis interest” exception for personal conflicts of interest that would not impair a covered employee’s impartiality in the best interest of the government.

The councils made several other changes to the original version.  For example, they broadened the scope of the disclosure statements required of covered employees beyond solely financial matters, to include reporting of certain relationships and gifts, and reduced the disclosure statement updating requirement from an annual basis to an “as needed” basis, dependent on changed circumstances.

Finally, the councils added to the list of possible personal conflicts of interest violations a covered employee’s failure to abide by a relevant non-disclosure agreement and removed the disciplinary remedies laid out in the earlier proposed version, such as: suspension of contract payments; loss of award fee; contract termination; and suspension and debarment.  However, such remedies remain generally available for contractors’ non-compliance with material contract requirements.

The rule also continues to direct contracting officers to “take any appropriate action in consultation with agency legal counsel” when they determine that contractors have not appropriately cleared up and stopped a violation.

Contractors must augment existing ethics programs with processes that find and prevent personal conflicts of interest, and prevent covered employees from using non-public information obtained during government contract performance for personal gain.

The final rule dictates step-by-step procedures that should be incorporated into ethics and compliance programs for contractors engaged in acquisition function-type contracts:

  • Obtain and maintain disclosure statements from all covered employees with any personal conflicts of interest, including family financial interests, prospective employment opportunities or business opportunities and any relevant gifts;
  • Require covered employees to update disclosure statements when circumstances change;
  • Block assignments of covered employees to tasks when relevant personal conflicts of interested cannot be mitigated;
  • Obtain signed non-disclosure agreements prohibiting disclosure of information derived from government contract performance;
  • Train employees on and discipline employees for violations of all of these obligations; and,
  • Report violations to the contracting officer “as soon as identified.”
If a contractor does not meet the commercial item or de minimis exceptions noted above, all is not lost. The contractor may seek, as a last alternative, a mitigation agreement or waiver of the requirement to prevent the conflicts.
Only the head of the relevant contracting activity, not the contracting officer, may agree to a mitigation plan or waiver. The heads may not delegate such determinations.

Contractors that effectively identify and thereby prevent conflicts will avoid serious negative outcomes.

Some are unavoidable, but can still be mitigated with the agreement of the head of the relevant contracting activity. Ultimately, however, the bottom line is that personal conflicts of interest analysis for contractors engaged in acquisition functions is essential.

Sean M. Connolly, assistant counsel at Pratt & Whitney, a United Technologies Company, is also a U.S. Army Reserve major serving as a judge advocate. The views above are solely his.

Topics: Defense Contracting, Defense Contracting

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