Avoiding Conflicts of Interest
New organizational conflict of interest rules are coming. Contractors and agencies must prepare.
By Daniel Vest
Recent enactment of new federal organizational conflict of interest (OCI) legislation means new regulations are on the way. Contractors and agencies alike should be preparing for revisions to the Federal Acquisition Regulation (FAR).
The Federal Acquisition Regulatory Council (FAR Council) has 18 months from the December 27, 2022, enactment to revise existing regulations implement new FAR provisions and contract clauses.
Contractors should be on the watch within the next year for the FAR Council to publish proposed rules in the Federal Register for public comment. This will be the first opportunity to see and respond to proposed changes and the council’s directions regarding agency-specific rules under the 2022 Preventing Organizational Conflicts of Interest in Federal Acquisition Act.
Contractors should be preparing to implement OCI compliance programs to be successful in bidding for new opportunities, subcontracting, and minimizing the risk of OCI violations.
What is Organizational Conflict of Interest?
FAR Part 2.101 defines an OCI as resulting from activities or relationships with other persons and/or contractors that may result in a contractor being unable, or potentially unable, to render impartial advice or assistance to the government, perform under the contract without impaired objectivity, or submit proposals on potential work without having an unfair competitive advantage.1
Contractors should distinguish between a personal conflict of interest and an OCI when implementing policies, procedures, and compliance programs. Although personal conflicts of interest and OCIs share similarities, such as jeopardizing the integrity of the procurement process, they are different in the benefit sought. An OCI does not directly benefit an individual; it benefits the organization.
The three broad categories of OCIs defined by decisions made by the Government Accountability Office (GAO) and the Court of Federal Claims (COFC) include:
➢ Unequal Access to Information – a contractor has access to nonpublic, proprietary, or source-selection information or government data under an existing government contract and is competing for a new government contract for which the information would provide an unfair competitive advantage.
➢ Impaired Objectivity – a contractor uses subjective judgment under an existing government contract for a potential financial gain or the contractor is biased due to conflicting roles and uses subjective judgment for its own benefit.
➢ Biased Ground Rules – a contractor working for the government intentionally or unintentionally influences competition for a new contract in its favor by evaluating proposals, writing the scope of work, or performing preliminary studies.
Missing OCI Guidance
OCI regulations have been around since the 1970s, but federal agencies and contractors have been challenged in complying because OCIs are complex and must be handled differently depending on the circumstances. Complexities include consolidation of businesses, greater dependence on contractor services requiring subjective judgment, and expanded use of indefinite delivery/indefinite quantity contracts.
A key reason for increasing OCI violations in the past decade is lack of guidance, training, and well-defined legislation to assist contracting officers and contractors in preventing and mitigating conflicts of interest.
FAR Subpart 9.5 Organizational and Consultant Conflicts of Interest imposes requirements on federal agencies to identify and evaluate potential OCIs and resolve them prior to awarding contracts.
Although some federal agencies have expanded on Subpart 9.5 in their FAR supplements – for example, the Nuclear Regulatory Commission Acquisition Regulation (NRCAR), Department of Defense Federal Acquisition Regulation Supplement (DFARS), and National Aeronautics and Space Administration Federal Acquisition Regulations Supplement (NFS) – governmentwide guidance still is absent.
“Organizational Conflicts of Interest: Cautionary Tales,” a 2022 article by Jessica Tillipman, 2 identifies areas where legislation has fallen short in ensuring compliance through standardized, mandatory FAR solicitation provisions and OCI contract clauses. The lack of standardization and legislation led to violations, such as:
➢ “Significant and long-running conflicts of interest due to overlapping and conflicting work for FDA and opioid manufacturers” by McKinsey & Company over 10 years and 37 FDA contracts, costing taxpayers more than $65 million.3 “McKinsey frequently staffed consultants on both FDA and opioid manufacturer projects, including at the exact same time, increasing the risk of biased advice to federal officials who had hired McKinsey to help stem the nation’s opioid addiction crisis.” McKinsey “repeatedly leveraged the firm’s work for FDA and other federal agencies to solicit new private sector business or serve existing private sector clients.”
➢ “Organizational conflicts of interest (OCI) in connection with the award and performance of task orders on government contracts” were committed by Cape Henry Associates in performing manpower analysis, personnel analysis and training services for the U.S. military. The company “failed to disclose that one of the company’s officers had an ownership interest in KOVA Global, a company to which Cape Henry awarded subcontracts to provide warehouse services in connection with two sole source task orders issued by the Army and General Services Administration (GSA).” It also “failed to disclose relevant information about a conflict of interest arising from advisory & assistance services (A&AS) performed in 2015 by QED Systems Inc. (QED), a Cape Henry subcontractor. In connection with a multi-year delivery order under a Navy SeaPort e-contract, Cape Henry would submit project-specific proposals to a Navy program management office that was responsible for determining the scope and funding for each project. At the same time that Cape Henry was submitting proposals to the Navy, Cape Henry also was funding the direct labor of a QED employee through a subcontract. This QED employee was providing A&AS services to the Navy program office and making recommendations that could potentially affect Cape Henry’s funding and treatment in connection with these project proposals.4
The McKinsey OCI triggered the enactment of the Preventing Organizational Conflicts of interest in Federal Acquisition Act.
Modernizing OCI Regulations
By June 27, 2024, the FAR Council must revise the FAR to include the following:5
➢ Definitions related to specific types of organizational conflicts of interest
➢ Definitions, guidance, and illustrative examples related to relationships of contractors with public, private, domestic, and foreign entities that may cause contract support to be subject to potential organizational conflicts
➢ Illustrative examples of situations related to the potential organizational conflicts identified
➢ Solicitation provisions and contract clauses agencies can use to prevent or mitigate organizational conflicts, requiring contractors to disclose information relevant to potential organizational conflicts and limit future contracting with respect to potential conflicts with the work to be performed under awarded contracts
➢ Authorization for agencies to tailor such solicitation provisions and contract clauses as necessary to address risks associated with conflicts of interest and other considerations that may be unique to the agency
➢ A requirement that “agencies establish or update their conflict-of-interest procedures to implement the revisions to the FAR made under this act and periodically assess and update such procedures as needed to address agency-specific conflict issues”
➢ Updated FAR procedures “to permit contracting officers to take into consideration professional standards and procedures to prevent organizational conflicts of interest to which an offeror or contractor is subject.”
This new law will modernize OCI regulations by providing guidance, training, and well-defined terms in the FAR to assist contracting officers and contractors in proactively identifying, preventing, and mitigating potential and actual OCIs. The lack of well-defined terms, illustrations, guidance, and standardized FAR provisions and clauses have been leading factors in recent OCI violations.
For example, a June 6, 2022 Government Accountability Office (GAO) decision sustaining a protest by Guidehouse LLP against Deloitte turned in part upon “a fundamental misunderstanding on the part of the contracting officer regarding the legal standards related to impaired objectivity OCIs.”
“The contracting officer did not in fact take a ‘close look,’ or carefully consider, whether Deloitte’s ability to render impartial advice to the agency under the . . . task order would be undermined by the firm’s competing interests under [a task order it already held with the same agency]. The analysis demonstrates that the agency failed to give meaningful consideration to whether a significant organizational
conflict of interest exists.
“Quite simply, while the Deloitte quotation represents that the . . . team [on the new task order] would involve [DELETED]—but not evaluating the work of—the Deloitte . . . team [on the task order Deloitte already held], the contracting officer’s OCI review does not confirm this statement or specifically analyze for potential OCIs any of the possible work activities under the respective task orders.”6
Increased Compliance Risk for Contractors
It is too early in the rulemaking process to foresee the exact effects the new OCI law will have on federal agencies and contractors. However there will be plenty of opportunities for contractors to review, comment, and participate during the rulemaking process prior to the codification of any new regulations. During the next year, proposed rules from the FAR Council will be available in the Federal Register
for public comment.
Although contractors are required by mandatory FAR provisions and clauses to implement ethics policies and procedures, internal controls, and training governing gratuities and personal conflicts of interests, currently no mandatory FAR provisions and clauses cover OCIs. Thus, contractors will have to put in place new OCI policies and procedures, internal controls, and training, adding OCI compliance risk. Agency-specific OCI regulations will add further challenges.
Contractors’ new OCI policies and procedures should:
➢ Identify whether the contractor/subcontractor has unequal access to information that would provide unfair competitive advantage while competing for a new government contract/subcontract.
➢ Identify whether the contractor/subcontractor would have impaired objectivity by using subjective judgement under an existing government contract/subcontract for some type of financial gain.
➢ Identify whether the contractor/subcontractor under an existing government contract/subcontract can skew competition, intentionally or not, in favor of itself by evaluating proposals, defining scope of services, or performing preliminary studies to create biased ground rules.
If any of the three potential OCIs is identified during the solicitation stage of a government contract/subcontract, the contractor/subcontractor should immediately notify the contracting officer. Immediate notification will permit the contracting officer and/or the prime contractor to implement a mitigation plan or strategy to prevent an OCI violation. Contractors should be able to offer proposed resolutions to possible OCIs based on their OCI policies and procedures.
The National Aeronautics and Space Administration (NASA) Guide on Organizational Conflicts of Interest offers recommendations to contracting officers for resolving OCIs: Avoid, neutralize, and mitigate:7
➢ Avoid – Prevent an OCI from occurring by excluding sources or modifying requirements during the solicitation stage to avoid the conflict, including removing part of the scope of services that is creating the OCI, finding another way to have the work completed, or using more than one contractor to prepare the scope of services.
➢ Neutralize – Prevent subcontractors from participating in follow-on contracts when there is potential impaired objectivity or a biased ground rule violation. A contract clause that limits future competition for the subcontractor may be used to resolve the OCI. This could become problematic if the industry is not a perfectly competitive market.
➢ Mitigate – Reduce the effects of an OCI to an acceptable level of risk that does not jeopardize the government’s interests or create an unfair competitive advantage or impaired judgement. The following are some common practices for mitigating OCIs:
• Firewalls require the subcontractor to control information within its business during the performance of the subcontract.
• Dissemination of information requires the contractor to provide all data to all potential subcontractors to eliminate unfair competitive advantage that could be caused by unequal access to information and/or biased ground rules.
• Use of a nonconflicted party allows a subcontractor without the conflict to perform the requirement that would create the OCI.
• Restricted transfer of personnel usually is used when there is unfair access that involves source selection information and restricts employees from working on proposals.
Contractors must take the initiative in identifying, avoiding, neutralizing, and mitigating OCIs, to reduce the risk of noncompliance after these regulations have been implemented.
The McKinsey case broke the camel’s back, triggering passage of new OCI legislation. Once the FAR Council revises the FAR, contractors will be on the hook to develop and enact OCI policies and procedures, internal controls, training, and compliance programs. Now is the time for companies to research OCI advice and resolutions so they can be ready to respond when proposed rules are published and quickly put in place a new OCI regime once the regulations are final. CM
Daniel Vest is a consultant for Latham BioPharm Group a Partner of Sia and has more than 17 years of progressive experience in finance, contract and grant administration, procurement, audit control, and oversight of policies and procedures as they support a centralized procurement process. He has primarily worked for public and private higher education research institutions, local governments, and now a consultant for industry for a wide range of programs funded by multiple federal agencies, including BARDA, DARPA, DoD, DTRA, NSF, NASA, ONR, NIH, EPA, DOT, CDBG, and DOE.
ENDNOTES
1 eCFR: 48 CFR 2.101 -- Definitions. (FAR 2.101), https://www.ecfr.gov/current/title-48/chapter-1/subchapter-A/part-2/subpart-2.1/section-2.101
2 Contract Management, August 2022
3 “The Firm and the FDA: McKinsey & Company’s Conflicts of Interest at the Heart of the Opioid Epidemic”, Interim Majority Staff Report Committee on Oversight and Reform U.S. House
of Representatives April 13, 2022, https://oversightdemocrats.house.gov/news/press-releases/committee-releases-report-uncovering-significant-conflicts-of-interest-at
4 “Government Contractor Agrees to Pay $425,000 for Alleged False Claims Related to Conflicts of Interest,” Office of Public Affairs, Department of Justice, May 20, 2022,
https://www.justice.gov/opa/pr/government-contractor-agrees-pay-425000-alleged-false-claims-related-conflicts-interest
5 S.3905 - 117th Congress (2021-2022): Preventing Organizational Conflicts of Interest in Federal Acquisition Act | Congress.gov | Library of Congress,
https://www.congress.gov/bill/117th-congress/senate-bill/3905
6 Guidehouse LLP, B-419848.3; B-419848.4; B-419848.5, https://www.gao.gov/assets/730/722142.pdf
7 “National Aeronautics and Space Administration’s Guide on Organizational Conflicts of Interest,” Reference Guide, National Aeronautics and Space Administration,
https://www.nasa.gov/sites/default/files/atoms/files/nasa_organizational_conflicts_of_interest.pdf