Afterthoughts: Organizational Conflicts of Interest

On April 25, 2017, Professor Ralph Nash and Tim Sullivan hosted a virtual classroom on the topic of Organizational Conflicts of Interest. Following the virtual classroom, I interviewed Professor Nash to ask questions related to the discussion during the training.

Can you provide an overview of the respective obligations and responsibilities of contractors, with respect to monitoring, reporting and complying with Organizational Conflicts of Interest rules?

The main burden for the contractor comes with contracts for advisory kinds of services. Contractors must consider what other projects this might cut them out of. Essentially this requires contractors to predict what future projects might be. If the contractor will be advising on how to construct a procurement, they have to determine if that will later prevent them from competing for the work that they are advising on. Thus, contractors may decide not to compete for an advisory contract so that they can later compete on the second contract.

If contractors are being asked to advise on something that is already in progress, they must consider whether some of what they are advising on is their own work. If their work is involved, they would not want to waste their B&P money competing on that contract. Contracts for advisory services require the contractor to do a lot of analysis up front.

Once the contractor is awarded an advisory service contract, they must be aware that such work could create a conflict. The contractor may want to do a study of what the agency is buying and obtain a subcontractor to analyze what the agency is buying from them.

How does that compare to the Government’s responsibilities?

Most protests on the basis of Organizational Conflicts of Interests (OCI) have been denied. This is because the contracting officer and others in the agency have already completed a careful review of OCIs before they finalize the contract. Reviewing potential OCIs is not always easy to do because contracting officers may have to figure out a way around potential OCIs for contractors that have been advising the agency. This may require contracting officers to put language in the RFP that explains to competitors that if they are going to compete for the contract with conflicts, they must detail a mitigation plan in their proposal. If the plan is sufficient, the Comptroller General (GAO) usually will go along with the mitigation plan. Overall, from the agency’s point of view, the contractors must put thought and work up front.

There is a possibility that the FAR will be revised to include a set of clauses that will standardize the process for OCIs. Until then, the NASA clauses are the best to follow. So far the contracting community has been waiting approximately 6-7 years for those FAR revisions. From our understanding, the final draft was completed last year but has gotten caught in the administration’s regulation reduction policy.

You discussed that OCI rules are changing the market/business structures of many government contractors. Particularly, that many companies have begun creating spin off divisions that offer support services to the federal government due to the fact that performance of those types of contracts could block a contractor’s ability to bid on contracts downstream. Is there any possibility that this sort of market self-correction may eventually reduce the compliance burdens for contracting officers?

I suspect that it already has begun reducing compliance burden for contracting officers. I do not know how many spin offs there have been. I have seen four or five but there are others. If contractors complete advisory work in another company, that solves a large part of the OCI problem. It was previously common for big conglomerates to have advisory divisions that would give the appearance of an OCI, even though a division that was competing on work may not even know of the work being done by the advisory division. To the extent that the appearance of an OCI is eliminated, a lot of the problem is solved. However, we still see OCI protests on a fairly regular basis.

Are any OCIs particularly difficult to mitigate?

Biased ground rules are certainly difficult. It is common in an agency that half the people are company and half are government, which makes it difficult to separate the functions of the two groups. Company people are functioning as government staff to a large extent. They are doing research, helping write work statements and helping write RFPs. This type of work gives them access to a lot of inside information, which raises concerns that they may slant RFPs to favor their own company’s products. This at least makes it look suspicious and once they are already in the agency, it is hard to create a mitigation plan. In order to fix the issue, a firewall should be created to make sure that those people can’t have any contact with others in the company.

Another OCI that is hard to mitigate is when you are providing services to evaluate the work or products of a bunch of companies and one of the products is your own.

What is the difference between an unfair competitive advantage versus a natural competitive advantage?

It has always been a puzzlement. The rule says that if a company drafts a specification for their product and delivers it to an agency with permission for them to use it for their procurement, that is an OCI by definition. If there is a development contract and the government pays a contractor to develop a specification, that does not create an OCI. The difference between the two scenarios is that one gives an unfair competitive advantage and the other one does not. I don’t believe that anyone has been able to explain the logic. In the original armed services regulations (which was later carried over into the FAR) there was a rule that allowed for payment to develop specifications without creating an OCI. This rule recognized that the government gets new products by paying for development with the intention of buying the product from the company that developed it. This is common with big products but for little products and commercial products, the government does not have to pay for development. Essentially, this rule bars a company from coming in and getting a sole source contract by convincing the government to adopt its specifications. I am not sure anyone can really explain it.

How is the access to nonpublic information not a problem with respect to incumbent contractors? Why doesn’t this exclude incumbent contractors from bidding on the next contract for the same work?

That is similar to the development contract situation. The government does not want to cut out incumbents because they may be the best person to do the work. This is not an OCI but a natural advantage. It’s a practical issue of making sure that the government finds the best person to do the jobs.

The new rule stresses that people should not be excluded from competition. In some instances, there will be a waiver situation. Agencies will have to take mitigation plans seriously. The goal is to have a rule that makes the system look fair, but also gets the best contractors. The government will not write a rule that keeps incumbents out since they obviously know more about the work than anyone else.

You discussed that the proposed OCI rule is fully drafted but hasn’t been released yet. How is the pending rule going to treat unfair access to information as an issue separate from organizational conflicts of interest?

Although I have not actually seen the rule, the public statement and the proposed rule state that they will separate the two. The logic (if you can call it that) is that it is an independent problem bigger than the OCI problem. There are all kinds of other issues regarding who should have access to information and under what conditions, including nondisclosure agreement requirements. The goal was to pull all of that together into one rule that is separate from the OCI issue.

The rule makes sense from a regulation writing proposition and is likely to work out. Although I don’t think it will change the way we look at OCIs. From a practical perspective, it will no longer be valid that you can’t have an OCI issue due to access to nonpublic information.

Comments are closed.