Weapons Reform Statute Directs New Defense Regulations Alert - June 30, 2009
Weapons Reform Statute Directs New Defense Regulations on Organizational Conflicts of Interest
June 30, 2009
Alan Dickson- Los Angeles
Richard O. Duvall- Northern Virginia
The recently enacted Weapon Systems Acquisition Reform Act of 2009 (the Act)1 is a comprehensive effort to curtail rising costs and questionable results in “major defense acquisition programs.”2 Significantly, Congress included a requirement that the Secretary of Defense promulgate additional regulatory coverage addressing organizational conflicts of interest (OCI) in these programs. In so doing, Congress gave legislative expression to the widely held belief that major defense acquisitions are too often infected with organizational conflicts and that existing regulations, as administered, are too porous.
Section 207 of the Act directs the Secretary of Defense, within 270 days of enactment, to revise the Defense Federal Acquisition Regulation Supplement “to provide uniform guidance and tighten existing requirements for organizational conflicts of interest by contractors in major defense acquisition programs.” Section 207(c) (1) also requires the existing Panel on Contracting Integrity (the Panel)3 to submit to the Department of Defense (DoD) Secretary, within 90 days of enactment, recommendations “on measures to eliminate or mitigate organizational conflicts of interest in such programs.”
How much shoring up of existing rules will be required and what form the new regulations will take remain uncertain. Congress did not announce new principles by which OCIs are to be defined, or describe what constitutes satisfactory avoidance or mitigation of OCIs, or establish procedures or grounds of waiver. Rather, Congress in Section 207 identifies four circumstances, described below, in which possible conflicts of interest could arise in major defense program acquisition, and requires DoD, “at a minimum,” to adopt regulations that address the organizational conflicts that could arise in these circumstances.
The range of policy choices in implementing the mandate of Section 207 is broad. The Defense Acquisition Regulation (DAR) Council could conceivably draft sparse supplemental OCI regulations to address only the limited number of specific concerns expressed in Section 207. Alternatively, it could significantly expand DFARS Subpart 209.5 to encompass all or most of the content of the current Federal Acquisition Regulation (FAR) provisions for OCI. (See discussion below.) Further, it could adopt complex rule-based systems similar to what has been done by the Department of Energy, or more radical bright-line prohibitions, or one-size-fits-all requirements – each of which would eschew the basic FAR method of avoiding or mitigating OCIs through the negotiation of future restrictions. Finally, there is a significant choice to be made as to the scope: whether the new DFARS OCI guidance will be limited to major weapons programs or applied more broadly within DoD. How these issues are resolved could have a significant impact, at least on major defense acquisitions.
Background
Currently, the policies and procedures of most federal agencies, including DoD, are set forth in Subpart 9.5 of FAR. The two basic underlying principles as stated in the FAR are: “(a) Preventing the existence of conflicting roles that might bias a contractor’s judgment; and (b) Preventing an unfair competitive advantage.”4
The current FAR OCI coverage had its genesis in what was called Appendix G, which was added to the former Armed Services Procurement Regulation (ASPR) in 1963. Although a few changes have been made from time to time in the OCI rules, the current FAR policies are in large part the same as they were in Appendix G.5 The rules focus on several key measures:
a) Preventing “systems engineering,” “technical direction” and “advisory and assistance” contractors from later supplying products and technology derived from or influenced by such companies’ prior roles as neutral advisors to the government – the concept being to prevent, avoid or mitigate unfair competitive advantages over other competitors in subsequent procurements. (FAR 9.505-1)
b) Preventing contractors that had prepared specifications or statements of work from offering the very products or services resulting therefrom – the concept being to avoid unfair advantage from having set up the “ground rules” for the subsequent competition, and/or to prevent biased initial work product in drafting the specifications or work statements. (FAR 9.505-2)
c) Disqualifying contractors from taking contracts to test their own products, or those of their competitors, or advise the government as to the merits of those products – the concept being to avoid biased advice or evaluations. (FAR 9.505-3)
d) Requiring contractors that were allowed to have access to the proprietary data of other parties to enter into appropriate nondisclosure agreements – the concept being to prevent misuse of the data and encourage those supplying the data to cooperate in that way with what the government was trying to accomplish by allowing the access. (FAR 9.505-3)
The Defense FAR Supplement (DFARS) did not include any additional OCI guidance to the military agencies elaborating on the basic FAR rules until the addition of an interim rule (Interim Rule) effective January 10, 2008, as directed in Section 807 of the National Defense Authorization Act for Fiscal Year 2007, placing limitations on contractors acting as “lead system integrators” (LSIs) in the acquisition of major DoD systems. That 2007 legislation had been influenced by a chorus of criticism of the progress and reliability of several major projects led by LSI companies (a technique that became popular in the late 1990s), and arguments about whether the government itself should or could reclaim day-by-day management of large projects that had been developed, administered and managed by companies with costly investments in private sector engineering and project management expertise.6
As a result of the Interim Rule, such lead system integrator contractors may have no direct financial interest in the development or construction of any individual system or element of any “system of systems” unless an exception applies. This guidance has been placed in DFARS Subpart 209.5 as the single DoD-specific rule on OCI matters, but currently the coverage is confined to the lead system integrator situation itself.7
Key Concerns in the Legislation, and What Changes May Occur
The Act now superimposes on existing OCI policies a directive to create additional regulatory requirements to address, with respect to major defense acquisition programs, the inadequacies perceived in some quarters with the current OCI prevention and mitigation system; it will also probably require substantial expansion of the DFARS OCI guidance. Ironically, therefore, DoD will now be obliged to supplement what were originally its own agency-specific regulations. The new legislation sets forth key concerns that are to influence the content of the revised regulations.
A. The Four Key Concerns
1. “Lead system integrator” contracts
The stated concern in Section 207 is that LSIs may lead to follow-on contracts [apparently meaning to the same or an affiliated company] on the same program, particularly contracts for “production.” Yet the specifics of what additional regulation is required of LSIs are not clear. The Interim Rule already substantially lessens the possibility that an LSI could be permitted to have a direct financial interest in a company doing development or construction work on a system or an element of any “system of systems” being integrated by that lead system integrator contractor under a prime contract. Both the current FAR OCI guidance and the current DFARS coverage of LSI contracts could be read to discourage military officials from allowing contractors having close connections with government program offices to benefit from inside information to the prejudice of other competitors.
Had Congress regarded the Interim Rule as sufficient to deal with LSIs, arguably it would not have called out LSIs for regulatory attention in Section 207. As a result, the DAR Council will likely decide that something more is required than merely promulgating the Interim Rule as a final rule, in order to satisfy the mandate as to LSI regulation in major defense acquisition programs. The “something more” could conceivably include a range of measures such as additional reporting obligations; closing the door to high-level waivers of OCIs for LSIs and their affiliates; attempting to tighten the current Interim Rule by eliminating the “escape hatch” in DFARS 209.570-2(b)(2) that permits an LSI or affiliate to serve as a lower-tier subcontractor selected through a process over which the prime contractor appears to have had no control; and outright prohibitions on LSIs being involved in any fashion in later development or production efforts.
2. “Systems engineering”
Congress expressed its concern where “systems engineering or technical assistance functions, professional services, or management support services in relation to major defense acquisition programs” are being or have been performed by companies that simultaneously own business units competing to perform as either the prime contractor or the supplier of a major subsystem or component under the same program that is or was being engineered, assisted, managed or supported by the systems engineering or similar companies.
Existing OCI coverage in FAR 9.505 can be read as already addressing this perceived problem in the typical “first contract/second contract” scenario (first being advisory, second being supplying), although it does not specifically address owned or otherwise affiliated entities, but it appears likely that some additional rules will be formulated to eliminate any doubt.
One important proviso to the existing FAR restrictions is that they were never intended to apply to contractors that have overall contractual responsibility for development of the given system, or its integration, assembly, checkout or production. (FAR 9.505-1(a); FAR 9.505-2(a)(3)) Contractors expressly deemed development contractors are exempted from the OCI rules with respect to follow-on work, because the concept is that the development contractor will stay with the program for its entire duration through several phases. It is not clear whether the new Act is intended to upset that long-existing OCI exemption.
3. A prime contractor awarding subsystem contracts to its affiliates (particularly where the award involves “software integration or the development of a proprietary software system architecture”).
The congressional expression of concern on this point is somewhat ambiguous. Does “prime contractor” in this sense include not only a contractor working to produce end products or services for the program itself, but also an advisory-type contractor working closely with the government on the initial stages (or subsequent decisional points) of a program? Assuming that a proposed subcontract arrangement falls within the scope of regulatory concern, what type of regulation would satisfy the congressional mandate? The DAR Council might do the following: (i) adopt bright-line prohibitions; (ii) establish a presumption against approval of subcontracts to affiliates, with some procedure for waiver or exception; or (iii) more likely, establish criteria which mitigation plans would have to satisfy, based on a case-by-case review. The latter approach would preserve greater flexibility to approve arrangements with affiliated subcontractors where potential OCI concerns can be put to rest, and there is a public benefit to the proposed arrangement.
4. The final basic concern expressed in the statute is the conflict of interest that could arise where a contractor performs or assists “in technical evaluations on major defense acquisition programs.”
This concern has always been expressed in the FAR OCI regulations and their predecessors. Such a contractor is not to be permitted to evaluate its own products or services, or those of its competitors, absent “proper safeguards to ensure objectivity to protect the Government’s interests.”8 Does the Act now direct mere adoption of current FAR coverage on this point, or will the DAR Council have to make the point more directly by abolishing any concept of “safeguards”?
B. The Second Key Commandment of the Act
Congress also commands in Section 207 that the revised OCI regulations must “ensure that the Department of Defense receives advice on systems architecture and systems engineering matters with respect to major defense acquisition programs from federally funded research and development centers or other sources independent of the prime contractor.”
To the extent this actually means “hire only the FFRDC,” this would represent a major reversal of policy from current FAR OCI coverage and its predecessor regulations, which were born from the findings of the Bell Commission as set forth in its report in 1962. That report9 was created by a Cabinet-level panel chaired by David Bell, Director of the Bureau of the Budget. It warned of increasing reliance on private sector contractors to provide systems engineering and similar advisory services, but concluded that restricting advisory roles to FFRDCs was not yet practical and would essentially be wasteful of the substantial expertise found in private sector companies engaged in significant national projects.
If FFRDCs are not to be the sole provider of neutral advice, the DAR Council will have to produce regulations on ensuring that “other sources,” if they include contractors, are “independent” of prime contractors (the latter term presumably meaning development or production contractors). The question is what mechanisms for doing this are necessary and practical beyond the current FAR OCI coverage and the currently limited DFARS guidance on lead systems integrators, and how they will be constructed.
C. The Third Requirement of the Act
The Act requires that contracts for engineering and technical assistance on a major weapons project must prohibit the contractor or any affiliate from participating as a prime contractor or a major subcontractor in the development or construction of a weapon system under the program.
This concept has been part of the FAR and its earlier incarnations from the start, although the DAR Council would likely make explicit the barring of a contractor’s affiliate. Possibly the current OCI coverage could be adopted as part of the new DFARS regulations, but with greater emphasis on prohibitions and less on ways to “mitigate” a potential conflict.
D. The Fourth Requirement
Finally, the Act requires that the regulations must provide for “limited exceptions” to the second (use of FFRDCs or other “independent” advisors) and third (barring advisors from also developing or producing products or services) commandments so that DoD can continue to access qualified contractors “with domain experience and expertise, while ensuring that such advice comes from sources that are objective and unbiased.”
The Department of Defense is undoubtedly pleased to retain the ability to make exceptions. The question is whether anything very different from the current FAR and DFARS coverage will emerge in this respect.
Additional Considerations
Congress and the President have directed additional regulatory action addressing avoidance of OCIs in major defense programs. How this is carried out could involve a wide variety of choices, which Congress has placed in the hands of the DoD Secretary. In a positive sense, the rulemaking affords an opportunity to develop a clear and modern set of OCI regulations.
The DAR Council should require consideration of costs and benefits in the exercise of discretion left to the agency head or contracting officers under the regulatory scheme. OCI determinations that limit competition or exclude a qualified contractor from fulfilling certain requirements impose costs on the public and the government. Decisions to exclude a contractor limit competition and may limit a highly qualified provider. A regulatory scheme that permits loose policy notions to be applied without any analysis of financial impact can often produce arbitrary and harmful decisions.10
The DAR Council should also be concerned about the timeliness of decisions regarding OCIs – not only how long it takes to make decisions when the matter arises, but also how early in the process decisions will be made. The current FAR coverage cautions contracting officers to “avoid creating unnecessary delays, burdensome information requirements, and excessive documentation” in connection with OCI analysis and determination.11 Will this value judgment be superseded or weakened by new procedures and documentation requirements? It is certainly possible.12
The DAR Council should address process and be attentive to the value of contractor participation. The FAR authorizes agencies to request a waiver of OCI restrictions from the agency head or designee.13 Other than by offering commentary or responding to questions from the contracting officer, the affected contractor does not have a direct role in this process. Should there be a system for more vigorous contractor participation, e.g., in the nature of an expedited “appeal” from a refusal to waive a potential conflict, or from a refusal to negotiate a suitable restriction?
Conclusion
The drafting and commentary process for the new rules will have important consequences and could be very interesting. Given the range of policy choices and the potential impact of new OCI rules in the DFARs, contractors are encouraged to follow and participate in the rulemaking proceeding.
For more information, contact:
Alan Dickson
213.896.2415 | alan.dickson@hklaw.com
Richard O. Duvall
703.720.8620 | richard.duvall@hklaw.com
1 Introduced as Senate Bill 454 by Senators Carl Levin and John McCain, the Act passed both houses of Congress by unanimous votes and was signed by President Obama on May 22, 2009. The formal name of the new law is the Weapons Acquisition Systems Reform Through Enhancing Technical Knowledge and Oversight Act of 2009.
2 Such programs are those so designated by the Secretary of Defense or that are estimated by the Secretary to require statutorily set dollar amounts for research, development, test and evaluation or eventual total procurement costs. 10 U.S. Code § 2430.
3 The Panel was established pursuant to Section 813 of the Fiscal Year 2007 Defense Authorization Act (P.L. 109-364; 120 Stat. 2320). The new Act also extends the term of the Panel’s existence.
4 FAR 9.505.
5 Although the FAR OCI coverage was initially, in the ASPR Appendix G, a creature of DoD, it is now used by many federal agencies.
6 See, e.g., “Troubled Waters” by Alice Lipowicz, Washington Technology, June 9, 2007, citing the Army’s reliance on two large aerospace and defense contractors as LSIs for the “Future Combat Systems” project in 2002, the Coast Guard’s decision to dump its LSI joint venture of two other contractors for the “Deepwater” project and attempt to resume its own control, and other examples; and the Government Accountability Office’s June 2007 Report No. GAO -07-380, “Role of Lead Systems Integrator on Future Combat Systems Program Poses Oversight Challenge.”
7 DFARS Subpart 209.5 [Interim rule; 73 Fed. Reg. 1823].
8 FAR 9.505-3.
9 Bureau of the Budget, Report to the President on Government Contracting for Research and Development, Sen. Doc. No. 94, 87 Cong., Second Sess. (May 17, 1962).
10 For example, if a contractor skilled in some aspects of missile defense hardware technology also happens to have a renowned analytical competence suitable for employment in an advisory role for a daring breakthrough program, will more stringent separation rules operate to deprive DoD of the most competent advisory contractor? Or the most competent production contractor? And if so, how will the “cost” of the absence of such a company from critical input to the government in the early stages of the program be assessed? What factors will be enunciated to guide officials in this regard?
11 FAR 9.504(d).
12 For example, under the current FAR 9.504(a) coverage and agency usage, contracting officers are supposed to anticipate the possible need for restrictions on contractor eligibility as early in the acquisition process as possible and take action to avoid, neutralize or mitigate “significant” potential conflicts. But it is still possible to reject an offeror for OCI reasons at the time the proposal is submitted, absent a waiver of the conflict. When that happens, significant waste of offeror time and resources (and often that of the government agency) obviously occurs and the field of competition can be sharply reduced.
13 FAR 9.503.
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