Personal Conflict of Interest Rules to Apply to More Contractor Employees

Back in 2010, a section was added to FAR that addressed PCIs or Personal Conflicts of Interest. At the time, we wrote fairly extensive analysis of the new provision. See for example, here and here and here. Government employees engaged in the acquisition process are bound by all kinds of regulations to help prevent personal conflicts of interest. There was great concern however that since existing regulations didn't extend to contractor personnel performing the same or similar acquisition functions, there existed an internal control weakness that might allow personal conflicts of interest to influence Government acquisitions.

So, the Government developed some regulations pertaining only to contractor employees that were, in some manner, associated with Government acquisitions. These regulations required covered employees to prepare financial disclosure statements, rules regarding prevention, training, internal audits to test compliance, disciplinary actions, and reporting.

Recently, the FAR committees issued proposed regulations to significantly expand the number of employees covered by the PCI (Personal Conflict of Interest) regulations from those engaged in procurement related activities to anyone engaged in activities that are inherently governmental. Those inherently governmental positions are listed in FAR 7.5 which contains a listing of functions considered to be inherently governmental functions or which shall be treated as such. The regulations warn that the listing is not all inclusive meaning they're giving themselves a bit of wiggle room should they decide that it is in their best interest to call a function inherently governmental. This is an extensive listing, containing 20 functions that are by definition, inherently governmental.

This expansion of an existing regulation will have a significant impact on contractors because it will greatly increase the number of personnel required to prepare financial disclosures and go through indoctrination and training. It will also increase the number of employees that contractors need to monitor though their internal audit processes and other oversight.

Its probably not possible at this point to head off the new regulation as the requirement is statutory (i.e. it is based on the 2013 National Defense Authorization Act). Nevertheless, interested parties, and that's every contractor that is potentially affected by the expansion, have the opportunity to study it and provide comments to rule making authorities.

For more information on the proposed regulation including instructions on how to comment, click here.

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.

Applicability

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.

Personal Conflicts of Interest (PCIs) of Contractors' Employees - Part 3

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 intersts (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 and 2 of this series, we discussed the the reasons the Government is proposing these regulations, the fundamental requirements imposed by the regulations, and some definitions that are necessary for understanding the requirements. Today, in Part 3, we discuss contractor responsibilities under this proposed regulation and Government responsibilities. 

Responsibilities for Contractor and "Covered Employees"

1. Employee Financial Disclosure Statement. In order to comply with the proposed regulations, contractors will be required to develop and implement procedures to screen covered employees for potential personal conflicts of interest. These procedures must include:

• obtaining and maintaining a financial disclosure statement from each "covered employee" when the employee is initialy assigned to the task under the contract,
• ensuring that the disclosure statements are updated by the covered employees at least on an annual basis, and
• requiring each covered employee to update the disclosure statement whenever a new personal conflict of interest occurs

2. Prevention. Next, for each "covered employee", the contractor must

• prevent personal conflicts of interest, including not assigning or allowing a covered employee to perform any task under the contract if the contractor has identified a personal conflict of interest for the employee that the contractor or employee cannot satisfactorily prevent or mitigate in consultation with the contracting agency
• prohibit use of non-public Government information for personal gain; and
• obtain a signed non-disclosure agreement to prohibit disclosure of non-public Government information

3. Inform Employees. Contractors must inform "covered employees" of their oblications to

• disclosue changes in personal or financial circumstances and prevent personal conflicts of interest
• not to use non-public Government information for personal gain
• to avoid even the appearance of personal conflicts of interest

4. Internal Audits. Maintain effective oversight to verify compliance with personal conflict-of-interest safeguards.

5. Discipline. Take appropriate disciplinary action in the case of "covered employees" who fail to comply with policies established pursuant to this section; and

6. Report Violations to the Contracting Officer. Report to the contracting officer any personal conflict-of-interest violation by a "covered employee" as soon as identified. This report shall include a description of the violation and the actions taken by the contractor in response to the violation.

7. Flow Down the Provisions to your Subcontractors. Contractors must "flow-down" these requirements to subcontracts greater than $100 thousand where subcontractor employees may perform acquisition functions closely associated with inherently governmental functions.

Responsibilities of the Contracting Officer

Contracting Officer responsibilities kick in only when a contractor reports a PCI violation. When a contractor makes such a report, the contracting officer will review the actions taken by the contractor, decide whether the contractor has resolved the violation satisfactorily and take any other appropriate action in consultation with agency legal counsel.

The proposed regulation makes no provision where, for example, a violation arises from say, a whistle-blower, or an audit finding. Look for something addressing these omissions in the final regulation.

Mitigations and Waivers

In exceptional circumstances, contractors may be unable to satisfactorily prevent a personal conflict of interest. In those cases, contractors can submit a mitigation plan for the head of contracting activity approval or request a waiver from the requirements. The head of contracting activity authority cannot be redelegated.

Violations

If a contracting officer "suspects" violation of the PCI clause, he is to contact legal counsel for advise and recommendations on a course of action. If there is sufficient evidence of a violation, the contracting officer shall pursue remedies that incluce suspension of payments, loss of fee, termination for default or cause, disqualification for future contracts or suspension/debarment.

Tomorrow we will conclude this series with some thoughts on some of the difficulties that contractors might encounter in implementing these proposed requirements.

Personal Conflicts of Interest (PCIs) of Contractors' Employees - Part 2

In Part 1 of this series we discussed efforts by the Government to ensure that the acquisition process is not compromised with personal conflicts of interest by those 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 intersts (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.

Under the proposed regulations, contractors that have employees performing acquisition functions closely associated with inherently governmental functions to identify and prevent personal conflicts of interest for such employees. In addition, these contractors will be required to prohibit covered employees with access to non-public Government information from using it for personal gain. Note the highlighted words. Each of these terms has a precise meaning within the context of the proposed regulation and are defined within the new regulations as follows: 

Eemployee means an individual who

• is an employee of the contractor or subcontractgor, a consultant, a partner, or a sole proprietor
• performs an acquisition function closely associated with inherently governmental functions

Acquisition functions closely associated with inherently governmental functions means supporting or providing advice or recommendations with regard to the following activities;

• planning acquisitions,
• determining what supplies of services are to be acquired including developing statements of work,
• developing or approving any contractual documents, to include documents defining requirements, incentive plans, and evaluation criteria,
• evaluating contract proposals,
• awarding Government contracts,
• administering contracts (including ordering changes or giving technical direction in contract performance or contract quantities, evaluating contractor performance, and accepting or rejecting contractor products or services),
• terminating contracts, and
• determining whether contract costs are reasonable, allocable, and allowable.

Personal conflict of interest means a situation in which a covered employee has a financial interest, personal activity, or relationship that could impair the employee's ability to act impartially and in the best interest of the Government when performing under the contract.

• Among the sources of personal conflicts of interest are;
• financial interest of the covered employee, of close family members, or other members of the household
• other employment or financial relationships (include seeking or negotiating for prospective employment or business); and
• gifts, including travel
• Financial interest may arise from
• compensation, including wages, salaries, commissions, professional fees or fees for business referrals
• consulting relationships (including commercial and professional consulting and service arrangements, scientific and technical advisory board memberships, or serving as an expert whitness in litigation);
• services provided in exchange for honorariums or travel expense reimbursments;
• 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, or other intellectul property interests; or
• business ownership and investment interests 

Non-public Government information means any information that a covered employee gains by reason of work under a Government contract and that the ocvered employee knows, or reasonably should know, has not been made public. In includes information that

•  is exempt from disclosure under FOIA or otherwise protected from disclosure by statute, Esecutive order, or regulation, or
• has not been disseminated to the general public and is not authorized by the agency to be made available to the public

In tomorrow's post, we will address some of the specific implementation issues associated with the proposed regulation.

Personal Conflicts of Interest (PCIs) of Contractors' Employees - Part 1

The Government's increasing reliance on contractors to assist in procurement-related matters has heightened concerns over potential connflicts of interest. For a number of years, the concerns focused on organizational conflicts of interest, e.g. preventing the existence of conflicting roles that might bias a contractor’s judgment or preventing unfair competitive advantage because a contractor has proprietary information or source selection information (see FAR 9.5). Recently, the focus has shifted to include concerns about personal conflicts of interest (PCIs) by contractor employees performing acquisition functions.

The 2009 National Defense Authorization Act (Section 841) directed the OFPP (Office of Federal Procurement Policy) to issue policies to prevent PCIs by contractor employees performing acquisition functions closely associated with inherently governmental functions. To implement the statute, OFPP collaborated with the FAR Councils to develop regulatory guidance to prevent personal conflicts of interest for contractor employees performing acquisition functions for or on behalf of a Federal agency or department. The results of this collaboration was published in the Federal Register on November 13, 2009, as proposed regulations.  The 60 day public comment period ends on January 12, 2010.

Pending finalization of new regulations, the Department of Defense issued guidance on November 24, 2009 instructing its "acqusition community" to follow the policies and procedures of FAR 9.5 (organizational conflicts of interest). Of course, this guidance does not require contracting officers to do anything they haven't already been doing but does serve to highlight the potential risk factors and increase employee awareness. The guidance instructs contracting officers to consider "risk" factors when performing acquisition functions closely associated with inherently governmental functions on behalf of DoD. According to DoD, "risk" increases when contractor employees are involved with substantially subjective judgmental work. Consider a case where a contractor employee is assisting a Governmental agency in source selection and his wife works for one of the offerors. That would constitute a personal conflict of interest.

Many contractors already have policies and procedures covering personal conflicts of interest as it relates to subcontractors and suppliers. It would seem a simple task then to extend those policies and procedures to cover situations where they perform acquisition functions on behalf of the Government. However, the proposed regulations have features and reporting requirements that are certainly not part of their existing practices and will probably be considered onerous by affected contractors.

Over the next few postings, we will be unpacking the proposed regulations to help readers understand the fundamental regulation requirements and to provide our assessment on ease (or unease) of implementation and the continuing cost of compliance. Keep in mind that these are proposed regulations at this point and the final regulations may look a lot different. We wouldn't be surprised to see a significant number of public comments - especially concerns over additional burdens placed upon contractors.

Basic Requirements (proposed FAR 3.1102)

The new policy will require contractors that have employees performing acquisition functions closely associated with inherently governmental functions to identify and prevent personal conflicts of interest for such employees. In addition, these contractors will be required to prohibit covered employees with access to non-public Government information from using it for personal gain. The proposed rule also makes contractors responsible for

1. having procedures to screen for potential conflicts of interest,
2. informing covered employees of their oblications with regard to these policies,
3. maintaining effective oversight to verify compliance,
4. reporting any personal conflict-of-interest violations to the contracting officer, and
5. taking appropriate disciplinary action with employees who fail to comply with these policies.

In Part 2 of this series, we will cover "definitions". There are a number of terms used in the regulations that have very precise definitions. In order to understand the full scope and magnitude of the requirements, it is necessary to fully understand what the terms mean.