New conflict of interest rule grants government greater flexibility

May 15, 2011

A new government-wide proposal on managing organizational conflicts of interest, issued on the heels of a Pentagon rule adopted late last year, would offer agencies increased flexibility in how to deal with potential conflicts.

Last year, many defense contractors moved to divest potentially problematic business units in anticipation of new regulations aimed at avoiding the sort of conflicts of interest that occur when, say, one company has contracts to both build and test a piece of equipment.

As it turned out, the Pentagon decided against drawing a bright line. In the interests of promoting competition, it said companies could take steps to mitigate potential conflicts in order to bid for work.

A proposed federal rule governing procurement across agencies would go even further in giving contracting officers greater leeway in evaluating the potential risks.

The proposal issued late last month advises contracting officers to take steps to ensure potential conflicts do not damage the integrity of the acquisition process. However, if barring a company from bidding threatens the government’s business interests, contracting officers can assess and opt to live with the risk of a conflict.

“[I]t may be appropriate to accept this potential harm as a performance risk,” the regulation said. “Acceptance of performance risk represents a novel means of addressing” such conflicts.

Alison L. Doyle, a partner in McKenna Long & Aldridge’s government contracts practice, said the provision essentially adopts a more hands-off approach than the existing rule.

“This is frankly moving the line in terms of how much [risk] the agency can choose to accept,” she said.

The proposal, now open to comments, notes that federal acquisition regulations on conflicts of interest have changed little since 1984.

The flexibility of the proposed rule “really opens up the whole discussion around conflicts of interest,” said Alan Chvotkin, executive vice president and counsel at the Professional Services Council, an industry association. The draft regulation is “not an immediate threat, unlike the [Defense Department] rule, where you could see the significant problems.”

Chvotkin, whose organization had been critical of the Pentagon’s draft regulations, praised the new rule for separating a section on unfair access to information.

The government has proposed new safeguards meant to prevent companies from unfairly accessing information — and potentially gaining a competitive edge — through other contracts they have. However, this proposal has been moved to a separate section of the federal acquisition regulations.

Scott Amey, general counsel at the Project on Government Oversight, said the draft regulation is reasonable but puts too much of the burden for dealing with potential conflicts on contracting officers. The nonprofit watchdog had criticized the final Pentagon rule, arguing that the department caved to industry pressure.

Amey said the proposal is unlikely to be successfully implemented given the time constraints of the acquisition workforce.

“It seems as if the government continues just to accept the premise that organizational conflicts of interest . . . are a part of doing business with contractors,” he said.

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