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“NATIONAL DEFENSE MAGAZINE” – By Jay Carey, Homer La Rue and Ethan Syster
“Some changes to the proposed rule are likely to be made in response to written comments submitted by interested parties, which are due by March 17. Regardless, the updates to the framework — if finalized — will be a major development for the defense contractor community.”
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“The Federal Acquisition Regulatory Council Jan. 15 published a new proposed rule on organizational conflicts of interest, or OCIs, that would update the government’s approach to analyzing and addressing these conflicts.
While the proposed rule is not yet finalized and may change in response to forthcoming comments, the current proposal includes several major changes likely to affect defense contractors.
The proposed rule is the latest installment in a years-long effort by policymakers to update the conflicts of interest guidance in the Federal Acquisition Regulation. Most notably, the FAR Council — a working group consisting of the Defense Department, the General Services Administration, the Administrator for Federal Procurement Policy and NASA — issued a proposed rule in 2011 that similarly would have updated the rules on organizational conflicts of interest.
That rule was never finalized but foreshadowed many of the key changes in the most recent proposed rule. While the 2011 proposed FAR rule was not adopted, updates to the Defense Federal Acquisition Regulation Supplement — which is specific to Defense Department procurements — were made around the same time with changes to the rules on OCIs in major defense acquisition programs.
Then, in December 2022, Congress passed a law titled the “Preventing Organizational Conflicts of Interest in Federal Acquisition Act” directing the council to issue new rules. The statute did not establish new standards for the conflicts but directed the council to provide updated definitions, illustrative examples and standard solicitation provisions and contract clauses.
The proposed rule seeks to effectuate the requirements of this law and also proposes several other key changes.
First, the proposed rule would provide updated definitions of several key terms, including organizational conflicts of interest. The proposed definition includes the three categories previously only recognized by case law: impaired objectivity; biased ground rules; and unequal access to information.
The proposed rule ties these definitions to the underlying risks of impaired objectivity and unfair competitive advantage. The updated definitions would also include specific definitions for each of these three categories and a definition of “firewall.”
Second, in the context of impaired objectivity OCIs, the proposed rule would allow the contracting officer to determine that the risk arising from them is acceptable. This determination may be made when the risk is outweighed by the expected benefit of having the offeror with the conflict of interest perform the contract and the risk of the conflict is manageable.
This process is separate from the agency head’s authority to waive the requirement to address an OCI in a particular acquisition. Under the proposed rule, therefore, the contracting officer may address risk through avoidance of the conflict of interest, limitations on future contracting, mitigation measures, acceptance of risk or a combination of these techniques.
Third, the proposed rule would not be applicable to acquisitions of commercial products or to acquisitions below the simplified acquisition threshold. Prime contracts for commercial services, however, are not exempt.
In deciding to exempt commercial products but not commercial services, the FAR Council noted that “[m]any of the situations in which the government is vulnerable to OCI occur when it acquires services from the commercial sector,” and that Congress explicitly required protection of particular acquisitions against them.
Additionally, the proposed rule expressly states that any existing agency-specific conflict of interest statutes will take precedence over the new FAR rules.
Further, the proposed rule would add language to the regulation stating that exchanges with offerors to address OCIs do not constitute discussions so long as they are not an evaluation factor and the exchanges do not result in a change to the offeror’s technical or cost proposal.
Finally, the proposed rule would also modify the FAR’s language about contracting officer approval of novation requests.
Under the proposed rule, the contracting officer may elect to accept an impaired objectivity risk using the procedure above and therefore approve the novation request without seeking a waiver of the conflict of interest from the agency head. That is in contrast to the current Federal Acquisition Regulation provisions, which require the contracting officer to fully “resolve” any organizational conflict of interest or seek a waiver from the agency head before proceeding with the novation. The increased flexibility under the proposed rule reflects the council’s new, risk-based approach to impaired objectivity OCIs.
In addition to the changes highlighted above, the proposed rule would, among other things, provide standard provisions and clauses requiring contractors to certify disclosure of potential OCIs; require agencies to consider all other methods of resolution before disqualifying an offeror on the basis of an unequal access to information situation; and distinguish between the “natural advantage” that incumbent contractors gain from prior work performed, versus an “unfair competitive advantage” gained through unequal access to information.
Additionally, the proposed rule would also provide illustrative examples of contractual tasks and situations likely to create the conflicts.
If implemented, the proposed rule would be broadly applicable across the federal procurement landscape. Executive agencies, however, are also required to update their own conflict of interest procedures to ensure that they implement and conform to the amended FAR rules.Some changes to the proposed rule are likely to be made in response to written comments submitted by interested parties, which are due by March 17. Regardless, the updates to the framework — if finalized — will be a major development for the defense contractor community.”
Jay Carey is a partner and Homer La Rue and Ethan Syster are associates in the Washington, D.C., office of Covington and Burling LLP. Partners Scott Freling, Nooree Lee and Kayleigh Scalzo also contributed to this report.
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