Conflicts of Interest in GovCon

In response to recent global events (i.e. the Russo-Ukrainian War and Chinese cybersecurity hacks) and potential conflicts of interest (COI) in U.S. federal government contracting, new federal contracting policies have been proposed that aim to mitigate the risks of contracting with a company that may also be supporting U.S. adversary interests.

A series of bills and policies target foreign and domestic companies who contract with countries such as China and Russia, requiring them to disclose the nature of their relationship and, in some cases, prohibiting them from winning federal contracts altogether.

The impact of these policies on the contracting industry and Contracting Officials (K/COs) is unclear, raising important questions for both government and industry.

At the time of writing, the FY23 NDAA has passed the House. There are several sections that would impact who the government can work with, depending on the contracting agency and type of work. 

• Section 857 states that the Department of Defense (DOD) is not allowed to contract with companies owned, directed, subsidized, or otherwise affiliated with China on projects relating to passenger boarding bridges at military airports.
• Section 1269 prohibits federal, state, and local public works contracts to be awarded to Chinese-affiliated entities.
• Section 5866 prevents the government from doing business with companies that continue to operate in Russia during the Ukrainian invasion. There are some exceptions to this, such as the operation of U.S. consular offices in Russia, projects that benefit Ukraine, or humanitarian purposes.

Introduced in early October, the CONSULT Act aims to avoid organizational COIs in federal mission support services. Its use of “adversary” refers to China, Russia, Iran, North Korea, Syria, Cuba, state sponsors of terror, and organizations that engage in crimes against humanity. If passed, the Office of Federal Procurement Policy (OFPP) would have a year to develop and implement a government-wide procurement policy to eliminate Conflicts of Interest (COIs) that relate to national security and foreign policy. The OFPP would then have to consider updating the Federal Acquisition Regulation (FAR) with more specific definitions for consulting contracts, advisory and assistance services, and professional and consultant services (FAR Parts 2.101 and 31.205-33).

Consulting firms would have to disclose potential conflicts with banned countries and suspended or debarred companies, including beneficial owners. Failure to do so could result in a suspension of current contracts or permanent debarment from federal contracting. Relevant companies that already do business with adversaries or consulting companies that are adversary-owned may also be banned outright.

This act, passed in the Senate, proposes new disclosure requirements and updates how agencies identify potential COIs with contractors. K/COs would be authorized to assess these potential COIs and determine whether or not the entity can be trusted to work with the government without risking national interests or security. The act also proposes FAR revisions, specifically Part 9.506, to update the definition of organizational COIs and include language that supports the intent of the bill. It is estimated to cost the government $1M between 2023 and 2027 to make these changes.

The bill aims to make federal contractors aware of how working with the government could impact their business relationship with the U.S. and other companies, requiring them to review their internal procedures for determining whether they could have a COI.

Under this act, federal contractors would have to divulge any business relationships that conflict with the interests of the American public or work they have been contracted to do. If a company does encounter a COI, it must determine whether to continue to seek business with the U.S., therefore forgoing any conflicting business, or cease its contracting activities with the government.

More simply referred to as DFARS Case 2022-D010, this interim rule was implemented as a Defense FAR Supplement (DFARS). While it was initially enacted without hearing public comments beforehand, DOD is accepting comments through October 24 before finalizing the rule. It implements FY22 NDAA Section 855 which requires companies to disclose if any of their employees work in China. This policy applies to all DOD contracts and subcontracts valued over $5M, excluding commercial items; it also applies in the pre-award stage as well as for active and post-award contracts. This rule does not automatically mean that the contract will be terminated or the company will not win, it just updated the reporting requirements in order to reduce risks associated with performing DOD contracts in China.

Preventing national security COIs in government contracting has not been updated in a very long time.

The National Security Act of 1947, which created the National Security Council (NSC), Central Intelligence Agency (CIA), and other institutions that redesigned the government’s approach to security, defense, and intelligence, is, to some extent, the last time the topic was written into legislation. Under this act, the Director of the National Intelligence Council was originally responsible for providing security requirements and preventing COIs for contractors working for the Council. Since then, little to no related laws have been passed. If the federal government is still relying on the same guidelines as it was 75 years ago, it is no wonder updating these policies has become a priority.  

While no national security problems have been reported due to a lack of these rules, companies have been caught in violation of them. For example, a contractor recently paid a six-figure settlement after failing to disclose that they were contracting with DOD while advising Chinese and Russian state-owned entities on military efforts. This potentially risked American taxpayer interests, so the government turned to new legislation to rectify the situation and prevent a much larger problem from actually occurring.

Furthermore, the Russian invasion of Ukraine has become a point of concern. Having companies working in Russia for or with the U.S. undermines national security and goes against protecting American interests. The policies relating to the Russian-Ukrainian War may be temporary, but the ideas behind them may eventually be solidified.

The new legislation has varied implications for government and industry and poses unanswered questions regarding how stakeholders will be impacted. Bolded below are some of key questions…

It seems like K/COs will be responsible for checking contractors’ various disclosures and determining if they are allowed to contract with the Government. For example, K/COs are deemed responsible for including the new solicitation provisions and contract clauses for acquisitions that fall under DFARS Case 2022-D010. It may also take longer to make awards with this extra step.

Are K/COs properly trained to make these national security decisions?

If K/COs are given clear guidelines as promised by the legislation, they should be equipped to determine what constitutes a threat and what does not. However, vague instructions or a delay in providing this crucial information could harm the integrity of the process. 

Do K/COs have enough bandwidth to add this additional responsibility?

Each K/CO has become responsible for more dollars in obligations each year since 2015. The addition of overseeing the new COI policies could become an additional burden on K/COs. If K/COs are already feeling the pressure of having to handle more dollars in obligations, the new policies may be at risk of falling through the cracks, which would defeat the purpose.

K/COs need to be properly educated on the new rules and sufficiently supported in making sure they are followed. The legislation is great on paper, but without focused and prepared K/COs, it will make little to no difference.

Like K/COs, contractors are facing additional steps in the acquisition process. If applying for the relevant contracts, the COI disclosure adds a step or three. They must make internal assessments, draw up documentation, and fill out a form. These policies may even become the difference between deciding to bid or not if the company is unsure if its situation will be deemed acceptable by the government. There may even be a protest if a company believes there is no national security risk despite having ties to China or other adversaries.

What will the impact be on small/disadvantaged businesses?

While DoD states that DFARS Case 2022-D010 will not have a large impact on small businesses, that is just one rule. What happens to a small subcontractor who does most of its work with a prime who is suddenly debarred from working with the government because of its ties to adversaries?

Will individual agencies’ policies differ on criteria for labeling something a COI?

This scenario could become complex for contractors that routinely work with various agencies. Different criteria mean more work on the contractor’s end to ensure they meet each agency’s disclosure and conflict-free requirements. 

The newly proposed laws and regulations are important to maintaining U.S. safety, but the details of their implementation are complex and raise important questions about the impacts on Federal Procurement. Of course, national security is of utmost importance, but it’s our job to consider any ramifications to our already clunky and encumbered process.