The proposed OCI rule implementing the Preventing Organizational Conflicts of Interest in Federal Acquisition Act has just dropped. We started discussing the Act back in early 2023 after it was passed in late 2022, and I outlined my predictions at the Court of Federal Claims judicial conference. This 108-page rule will propose some major changes for organizational conflicts of interest.
Here is a summary of some of the big changes proposed in this new rule. For those concerned about potential organizational conflicts of interest, the examples included in this proposed rule are greater in number than before, and very specific about the situations that may give rise to conflicts. This could empower agencies to look at OCIs more closely than they have in the past. Stay tuned for more updates on SmallGovCon.
The proposed rule was published on January 15, 2025 with comments due on March 17, 2025. Here are some initial thoughts on some of the important changes proposed in this rule, as well as a recap of the original statute and my earlier predictions.
The OCI Statute
The Preventing Organizational Conflicts of Interest in Federal Acquisition Act was made effective on December 27, 2022. The entire law, however, was less than two pages. It focused on a few key aspects:
- Examples. Congress would really like the FAR to focus on additional examples
- Definitions. the FAR must update “definitions related to specific types of organizational conflicts of interest, including unequal access to information, impaired objectivity, and biased ground rules.”
- OCI Disclosures and Procedures. New rules were requested to “update such procedures as needed to address agency-specific conflict of interest issues.” As well as add more procedures to require contractors “to disclose information relevant to potential organizational conflicts of interest.”
- Private Sector. The law specifically required “an example of the awarding by a Federal regulatory agency of a contract for consulting services to a contractor if employees of the contractor performing work under such contract are permitted by the contractor to simultaneously perform work under a contract for a private sector client under the regulatory purview of such agency.”
- Professional Standards. One other specific update was for the new rules to “take into consideration professional standards and procedures to prevent organizational conflicts of interest to which an offeror or contractor is subject.”
Predictions for New Rules
Here was my earlier prediction on some ways in which the FAR Council might implement these updates.
- Definitions. Incorporating definitions of the various categories of OCIs from existing case law.
- Private Sector. The current examples in FAR 9.508 don’t address the specific issue of work involving a “private sector client.” One likely update is that agency OCI solicitation clauses will now specifically require disclosure and mitigation of potential conflicts involving private sector clients. And there should be additional examples dealing with this type of scenario, as the current examples only refer to a specific licensing situation.
- Professional Standards. Current FAR 9.506 simply commands contracting officers to review OCIs, but with little guidance for agencies. While it’s hard to know exactly what Congress is referring to, it could mean professional standards such as those established by industry groups including public accounting rules. Those standards are already applicable to review of certain financial statements for publicly traded companies under 17 C.F.R. § 210.10-01. Other sources of standards could include business standards, legal, IT, and other professional groups. Will the proposed rule specifically list examples, or will it leave it up to federal contractors to address how professional standards fit into their OCI mitigations plans?
The New Proposed OCI Rule
Revamping of the FAR and General Policy
Interestingly, there was a proposed OCI issued back in 2011, but it was withdrawn ten years later due to “the amount of time that had passed since publication of the proposed rule.” This rule proposes to move the entire OCI regulatory scheme from current FAR subpart 9.5 to a new subpart in FAR part 3. It will also change the title of the part from “Improper Business Practices and Personal Conflicts of Interest” to “Business Ethics and Conflicts of Interest.”
While OCI “requirements are applicable to most procurements, acquisitions below the simplified acquisition threshold (SAT) and those for commercial products are exempt, as well as subcontracts for commercial products or commercial services.” Interestingly, the “rule directs contracting officers to explore all available methods to address an OCI based upon unequal access to information before selecting disqualification of an offeror to alleviate unfair competitive advantage.
The rule will note that “Incumbent contractors may have a natural advantage that is not unfair when competing for follow-on contracts because of knowledge and expertise developed during contract performance.”
Definitions
The proposed rule will expand the list of definitions to include definitions of ““unequal access to information, impaired objectivity, and biased ground rules” and these will generally follow the accepted definitions from the case law. These definitions will be added to the general FAR definition section in FAR 2.101. We predicted this, and it makes sense for contractors not to have to sift through examples and case law to find the pertinent categories of OCIs.
There is a new definition for firewall, stating:
Firewall means a barrier against the unauthorized flow of information. Firewalls may consist of a variety of elements, including organizational and physical separation; facility and workspace access restrictions; information system access restrictions; independent compensation systems; and individual and organizational nondisclosure agreements.
Examples
The rule will provide “illustrative examples” for potential OCIs that could result from “relationships of contractors with public, private, domestic, and foreign entities” at new section 3.1204. The rules will focus on impaired objectivity and unfair competitive advantage. Unequal access to information and biased ground rules are both subsets of unfair competitive advantage. Many of these examples look quite similar to the existing examples found in FAR 9.508. The old rule had 9 examples and the new rule has about 15 examples.
Here are a few that appear different from the old ones:
- “A contractor is assisting an agency in developing policies or regulatory procedures and the contractor or one of its affiliates may, at some future point, be governed by or subject to (or be a subcontractor or consultant to an entity governed by or subject to) such policies or regulatory procedures.”
- “A contractor is providing consulting services to an agency that is responsible for regulating an industry and the contractor is performing work under a contract for a public or private sector client that is regulated by that agency. Organizational conflict of interest is more likely to occur if the contractor’s employees are simultaneously performing work under both contracts.”
- “A contractor is providing support to an agency involving a subject area or issue while it is also performing work for other entities with a competing interest involving the same subject area or issue. For example, a contractor assisting an agency with implementing legislation or regulations may have a conflict if the contractor is also assisting industry with compliance on that same legislation or regulations.”
- “A contractor is providing enforcement support to an agency (e.g., cost recovery, litigation) while also assisting or representing parties subject to those activities. In addition, when a contractor supports enforcement activities for an agency, and those enforcement activities continue beyond the life of the contract, such conflicting client relationships could continue to jeopardize enforcement actions for a time even after the contract ends, especially if the contractor had access to sensitive information about the agency’s enforcement or litigation strategy.”
- “A contractor is conducting research for an agency, but that contractor or its researchers has financial or non-financial ties to a foreign entity that seeks capability or advantage related to the topic of that research and is likely to exert undue influence on the contractor. Undue influence in this context describes a situation in which an entity that is not party to a contract, through financial support, position of authority, or other ties, persuades the contractor to take actions that it would not have taken otherwise, such as taking the research in a certain direction or engaging in unauthorized information-sharing with other parties.”
- “A contractor is providing services to an agency related to national security or foreign policy matters, but that contractor is also providing similar services to a foreign government or other foreign entity (e.g., foreign state-owned or private enterprise) with a competing or opposing interest in those matters, which could result in the foreign entity having undue influence on the contractor’s performance on the contract.”
- “A contractor is providing a product or service to the Government and employs a former Government employee who was involved in developing the requirement for the product or service as part of such employee’s Government job.”
Methods and Responsibilities
The FAR council describes methods to address OCIs: “OCIs and their associated risks may be addressed by means of avoidance; limitations on future contracting; mitigation; and/or the Government’s assessment that the risk inherent in the conflict is acceptable.” Drafting the solicitation can help to avoid OCIs: “such as developing a statement of work that does not require contractors to utilize subjective judgment and, when required, soliciting advice from more than one contractor rather than relying on the advice of a single contractor.”
Limitations on future contracting to address OCIs can be needed when “the contractor’s work on a current contract could be impaired by virtue of its expectation of future work” but there should be a “reasonable duration” and “a specific end date for the limitation.” A new requirement is for mitigation plans to become part of a contract, and the proposed rule will require that “the offeror-submitted and Government-approved mitigation plan be incorporated into the contract.” “The mitigation plan should provide sufficient details commensurate with the complexity of the organizational conflict of interest and the value of the acquisition.”
Mitigation techniques can include things like
- Using a team member to perform some portion of work but there must be “controls to ensure that the entity with the organizational conflict of interest has no input or influence on how the party without the organizational conflict of interest performs the work.”
- Use of “structural or behavioral barriers, internal controls, or both.” “However, a firewall intended to limit the sharing of information may not adequately address an organizational conflict of interest regarding an affiliate.”
Where an agency weighs the risk of an OCI, it must “assess whether some or all of the performance risk is acceptable because the risk is outweighed by the expected benefit of having the offeror perform the contract, and whether the performance risk is manageable.”
For the contracting officer, there are guidelines for evaluating OCIs and managing them. “While existing case law requires the contracting officer to determine that a conflict has been adequately mitigated, the proposed rule allows the contracting officer to accept a risk when the conflict results from impaired objectivity and the risk to performance is low.” A contracting officer will have to consider OCIs at time of award and when issuing an order. The CO may review aspects such as (1) “extent to which the contract requires the contractor to exercise subjective judgment and provide advice”; (2) “whether it is expected to occur only once or twice during performance or to impact performance throughout the entire contract”; (3) agency oversight controls; (4) “risk of awarding to a contractor with significant financial ties to or other interests in that same industry”; (5) how “how professional standards or the contractor’s operating procedures” can reduce OCI but that professional standards are not sufficient by themselves.
Clauses
A new FAR clause at at FAR 52.203-XX, Potential Organizational Conflict of Interest—Disclosure and Representation, will “provide notice to offerors that the nature of the work described in the solicitation is such that OCIs may result from contract performance.” The clause will require an offeror to:
(1) Disclose all relevant information regarding any OCI (including active limitations on future contracting and specific clients or industry relationships that may create OCI if identified by the contracting officer);
(2) Disclose any professional standards to which it is subject, or any procedures it has in place, to prevent OCIs;
(3) Represent, to the best of its knowledge and belief, that it has disclosed all relevant information regarding any OCI;
(4) Explain the actions it intends to use to address any OCI ( e.g., submit a mitigation plan if it believes an OCI may exist or agree to a limitation on future contracting); and
(5) Update their disclosure(s) for new information not previously disclosed or if there is a change to any relevant facts relating to a previously disclosed OCI.
There will also be clauses for
- Postaward Disclosure of Organizational Conflict of Interest.
- Mitigation of Organizational Conflicts of Interest.
- Limitation on Future Contracting.
- Unequal Access to Information—Representation, “which requires the offeror to identify, prior to submission of its offer, whether it or any of its affiliates had unequal access to any information that could provide an unfair competitive advantage.”
It will be interesting to see how these rules are implemented and how courts interpret them. Be sure to comment by the March 17 deadline if you have concerns.
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