Personal Conflicts of Interest: A Primer of the Proposed FAR Amendment
An important line of business for many professional services contractors is providing technical support services to federal agencies relating to acquisition planning, procurement and monitoring the performance of other contractors. In the past, there has been no legal requirement that contractors screen and monitor the potential personal conflicts of interest (PCIs) of the employees, subcontractors and independent consultants they assign to these contracts. This is about to change.
Under a proposed amendment to the Federal Acquisition Regulation (FAR), federal contractors and subcontractors who provide services relating to certain federal acquisition functions will be required to implement significant new internal controls and procedures to identify and prevent PCIs among personnel performing such contract – or face severe penalties for failing to comply.
As the size of the federal acquisition workforce has declined over the past two decades, federal agencies have relied more and more on professional services provided by outside contractors to plan acquisitions, support procurements and administer contracts. These technical support services are often relied upon by the government agencies to make highly discretionary determinations, such as what they need to buy, which proposals offer the best value and whether a contractor's work satisfies contractual requirements. As a policy matter, in order for government agencies to make smart decisions, it is important for outside technical support services to be rendered impartially, objectively and unmarred by any conflicting financial or personal interest.
Until now, there has been a loophole in the PCI laws applicable to federal employees and contractors involved in acquisition functions. In a nutshell, federal statutes and regulations made it illegal for federal employees to participate personally and substantially in acquisitions in which they had a PCI while no similar legal restriction applied to federal contractors and subcontractors providing acquisition-related services.
In 2008, Congress decided to address this issue. In the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, Congress required the development of new FAR provisions and contract clauses to prevent PCIs by contractor employees performing acquisition functions closely associated with inherently governmental functions.
On November 13, 2009, the FAR Councils issued a proposed new subpart under FAR part 3 and a new clause for contracting officers to use in contracts to prevent PCIs for contractors and subcontractors providing acquisition-related support services on behalf of a federal agency (the "proposed rule"). Public comments on the proposed rule were due on January 12, 2010. After considering the public comments, the FAR Councils are expected to issue the final FAR rule regarding contractor PCIs sometime in the spring or early summer of 2010.
The Proposed Rule's Approach to PCIs
The proposed rule is worth studying because its provisions are likely to be substantially similar to the final version of the rule when it is issued later this year. The following is a synopsis of the key provisions of the proposed rule.
1. Who Is Affected?
As currently drafted, the proposed rule would impose new procedural requirements and potential liability on (i) prime contractors, (ii) subcontractors at any tier, and (iii) any independent consultants to the prime contractors and subcontractors who perform contracts that include "acquisition function closely associated with inherently governmental functions." (Although the proposed FAR language and contract clause uses the term "covered employee," the FAR Councils made clear that the regulation extends to the subcontractors and independent consultants who are working for a prime contractor.)
The proposed rule defines "acquisition function closely associated with inherently governmental functions" (hereafter "Acquisition Functions") to mean "supporting or providing advice or recommendations with regard to the following activities of a Federal agency:" (1) planning acquisitions; (2) determining what supplies or services are to be acquired, including developing statements of work; (3) developing or approving any contract documents, including incentive plans or evaluation criteria; (4) evaluating contract proposals; (5) awarding government contracts; (6) administering contracts (including evaluating contractor performance, accepting or rejecting contractor products or services, or ordering changes or giving technical direction in contract performance); (7) terminating contracts; and (8) determining whether contract costs are reasonable, allocable and allowable.
The new PCI requirements would apply only to future contracts that are (i) awarded on or after the effective date and (ii) that are above the simplified acquisition threshold. If only a portion of a contract involves Acquisition Functions, the new PCI requirements would apply only to that portion of the contract. The new PCI clause would be a required flowdown clause in all subcontracts in excess of $100,000 in which the subcontractor's employees "may perform" Acquisition Functions.
2. What Is Required?
The proposed rule would use a new contract clause (FAR 52.203-16) to impose new procedural requirements on contractors, including a cascading flowdown requirement. Proposed procedures that would become mandatory include the following:
- obtain a financial disclosure statement from each person assigned to the contract who may perform Acquisition Functions, which must then be updated at least annually
- require each person performing Acquisition Functions to promptly self-report any changes to his/her personal or financial circumstances that impact his/her disclosure statement
- prevent or remove any covered employee who has a PCI (whether he/she works for the prime contractor or a subcontractor) from working on the contract
- prohibit the use of non-public government information for personal gain, including obtaining a signed non-disclosure agreement with each covered employee that prohibits disclosure of non-public government information
- train covered employees regarding their obligations to disclose and prevent PCIs, not to use non-public government information for personal gain, and to avoid even the appearance of a PCI
- maintain effective oversight to verify compliance with PCI safeguards (i.e., periodic audits)
- take appropriate disciplinary action when covered employees violate PCI safeguards (and maintain records of these actions)
- include the substance of FAR 52.203-16 in all subcontracts exceeding $100,000 in which the subcontractor may perform Acquisition Functions
The proposed rule also includes a mandatory disclosure provision that requires contractors to report to the contracting officer any PCI violation by a covered employee "as soon as it is identified."
The proposed rule contemplates the possible mitigation or waiver of specific PCIs by the Agency. However, such waiver or mitigation is limited to "exceptional circumstances" where the contractor "cannot satisfactorily prevent" a PCI. In addition, the authority to waive or mitigate a PCI is limited to the "head of the contracting activity" and this authority may not be delegated. In practice, this waiver or mitigation authority is unlikely to be exercised unless a particular employee with a PCI is indispensable to the Agency's program.
3. What Are the Consequences of Noncompliance?
Under the proposed rule, the failure to implement required procedures or the failure of those procedures to prevent a PCI can have severe adverse consequences for the company. As currently drafted, a failure to comply with the requirements discussed above will render a contractor subject to: suspension of contract payments; loss of award fee; termination of the contract for default; disqualification of the contractor from subsequent related contractual efforts; or suspension or debarment.
4. What Is a "Personal Conflict of Interest" That Must Be Screened and Addressed?
The real risk of the proposed rule is the scope of PCIs that must be identified and prevented. The definition of "PCI" in the proposed rule is treacherously broad and subjective and requires continuous monitoring. Unless the economic and professional lives of a company's employees and their families are simplistic and secluded, it is hard to imagine a company that will not inevitably deal with employees who violate the PCI requirements.
Significantly, the PCI definition applies to potential or hypothetical conflicts of interest (instead of just actual conflicts). The proposed rule states that a PCI includes "a financial interest, personal activity, or relationship that could compete with the employee's ability to act impartially and in the best interest of the Government when performing under the contract." (Emphasis added). Although it is not clear how the government will apply and enforce this language, one possibility is a "zero tolerance" standard under which the mere appearance of a financial interest, personal activity, or relationship with any company potentially affected by the Acquisition Functions supported by the covered employee constitutes a disqualifying PCI.
Next, the PCI definition is not limited to the interests of the employee but extends to the financial interests, personal activities and relationships of the employee's "close family members, or other members of the household." This increases the burden and intrusiveness of the initial financial disclosure requirement as well as the obligation to monitor and update changing circumstances. An employee must not only keep up with his own activities, relationships and financial interests but also with those of his close family and household members.
The types of activities, relationships and financial interests that may constitute a PCI (and about which a company should request information on its disclosure form) is extensive. The proposed rule states:
Among the sources of personal conflicts of interest are/;
(i) Financial interests of the covered employee, of close family members, or of other members of the household;
(ii) Other employment or financial relationships (including seeking or negotiating for prospective employment or business); and
(iii) Gifts, including travel.
(Emphasis added). The proposed rule states that "financial" interests of employees, close family or household members can arise from:
- various types of compensation (including wages, commissions, or referral fees)
- consulting relationships (including commercial and professional consulting or service arrangements, scientific and technical advisory board memberships, or serving as an expert witness in litigation)
- services provided in exchange for honorariums or travel expense reimbursements
- research funding or other forms of research support
- investment in the form of stock or bond ownership or partnership interest (excluding diversified mutual fund investments)
- real estate investments
- patents, copyrights and other intellectual property interests
- business ownership and investment interest
Thus, the scope of personal activities and financial relationships that must be monitored and that may disqualify employees from working on contracts is very broad. For each close family member and each household member, a covered employee must continuously monitor and disclose any changes in the member's employment, investments, professional activities and relationships. Moreover, as a covered employee learns of new companies potentially affected by the Acquisition Functions he is supporting (like teaming members of a proposal he is evaluating), the covered employee arguably should go back to his family and household members and inquire about their financial interests, activities and relationships vís-a-vís those companies. With a PCI "net" cast this wide, companies must act aggressively to implement procedures that minimize violations and be prepared to act proactively and responsibly when PCIs are discovered after initially slipping through the cracks.
Although the proposed PCI rule addresses a valid policy concern, it will impose substantial new administrative burdens and business risks on contractors providing technical support services to federal agencies relating to acquisition planning, procurement, and contract performance. Contractors and subcontractors in this field will be required to implement strict screening and monitoring procedures regarding the potential PCIs of each employee and their family and household members. The breadth of PCIs that must be continuously monitored and disclosed will prove to be an enormous challenge.
Ultimately, the new rule may reduce the pool of employees who are eligible to work on contracts supporting Acquisition Functions. Given the broad scope of PCIs covered by the proposed rule, many employees who today provide technical services to support Acquisition Functions may be disqualified by the tangential relationships or investments of family members with companies affected by the Acquisition Functions the employees are supporting.
Affected companies also must be mindful of other ongoing requirements, such as prompt mandatory disclosure of PCI violations and adherence to subcontract flowdown requirements. Given the potentially catastrophic consequences of noncompliance (including termination or debarment), companies subject to the new rule should be prepared to aggressively implement internal compliance procedures once the final rule is issued later this year.