Wednesday, December 9, 2009

Personal Conflicts of Interest (PCIs) of Contractors' Employees - Part 4

The Government has proposed regulations to ensure that its acquisition process is not compromised with personal conflicts of interest by contractors and contractor employees engaged in buying goods and services for the Government. Existing regulations that help prevent personal conflicts of interest by Government employees engaged in the acquisition process, do not extend to contractor employees performing the same or similar contracting function. As the Government increases its reliance on contractors to assist in procurement-related matters, the risks associated with personal conflicts of interests (PCIs) by contractor employees increase as well. To close this loophole, the OFPP in concert with the FAR councils have proposed new regulations requiring certain contractors to implement policies to identify and prevent PCIs. These new regulations will add a new Part 3.11 to the FAR. In Parts 1, 2, and 3 (go here, here, and here), we discussed background information related to the perceived need for such a regulation, the fundamental requirements of the proposal, definitions, and contractor and contractor employee responsibilities under the regulation. In this final post on the subject (for now), we will provide our own commentary on the proposed regulation and some of the considerations for implementation.

This proposed rule, when implemented, will impose significant specific requirements on contractors that provide acquisition support to the Government and their employees. Employees will be required to prepare and maintain financial disclosure statements. Contractors will have to collect, review, and maintain these documents and then monitor them to ensure that no PCIs exist. If PCIs exist, contractors are required to disclose them to the contracting officer and also to take corrective action. These regulations could be problematic to administer. For example, what financial information will an employee be required to disclose? And, what is the definition of "close family members, or of other members of the household".

Financial Disclosure Statement

We believe that the Government's OGE Form 450 (go here to download a copy of the current Form 450) is a good starting place for determining the kinds of information that covered employees should disclose. This form is the Executive Branch's Confidential Financial Disclosure Report that is completed annually by Government employees whose duties and responsibilities require disclosure in order to avoid involvement in a real or apparent conflict of interest (e.g. by those involved in the acquisition process). Information required on this form include:
  • Assets held for investment with a value of $1,000 or more and assets held for investment which produced income more than $200 for the employee, his spouse, and dependent children. All assets are required to be specifically indentified.
  • Liabilities over $10 thousand including mortgages, student loans, credit cards, personal loans, auto loans, etc for the employee, his spouse, and dependent children.
  • Outside positions (except for positions with religious, social, fraternal, or political entities)
  • Agreements or arrangements such as continuing participation in a pension or benefit plan by a previous employer, a leave of absence, future employment, or continuation of payment by a former employer.
  • Gifts and travel reimbursements for the employee, his spouse, and dependent children.
This form is prepared annually, reviewed and approved by the employee's supervisor and also, reviewed and approved by the Agency's ethics officials. There are considerable privacy issues involved when collecting this information. There could be considerable push back by contractor employees who are not accustomed to providing this kind of information. There certainly was within the Government circles when the requirement was first imposed on them. In many cases, Government employees left their positions (resignation or transfer) rather than disclose all their financial information.

Economic Impact on Contractors

There is no question that these regulations will impose a significant economic burden on contractors whose employees are performing acquisition functions closely associated with inherently governmental functions. The framers of the regulation indicated that they have attempted to reduce that burden. There is no requirement that the collected information be reported to the contracting officer, no certification requirement, no formal training requirements, and making provision for mitigation under exceptional circumstances. Nevertheless, we would expect to see some oversight. For example, contract auditors, in reviewing ethics programs, might include the contractor's compliance with this regulation. Recall from part 3 of this series, that there are serious ramifications for contractors who do not comply.


Contracting officers are to include a clause in solicitations and contracts that include a requirement for services that involve performance of acquisition functions closely associated with inherently governmental functions for or on behalf of a Federal agency or department - even if only a portion of the contract is for the performance of such. We expect that each department will implement guidance as to what kind of work qualifies under this definition. Contractor's should be concerned that the Government might err on the side of caution and include the clause into solicitations and contracts that do not necessarily include activities involving acquisition functions. Contractors should be alert for the clause at FAR 52.203-16 and inquire as to its applicability, if not obvious.

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