Transparency at What Cost?
New interim rule expands government contractors' reporting requirements.
October 19, 2010 at 08:00 PM
3 minute read
The original version of this story was published on Law.com
As of October 1, government contractors must disclose first-tier subcontract awards more than $25,000, as well as certain executive compensation for the prime contractor and such first-tier subcontractors for newly awarded subcontracts if the prime contract is $550,000 or more. There is no exception for commercial items.
These requirements call for public disclosure of information that many contractors typically have viewed as competitively sensitive. In addition, the rulemakers evidently gave little consideration to the prospect that the new requirements will require companies to report the same information multiple times.
These requirements are imposed by an interim rule to implement the Federal Funding Accountability and Transparency Act, as amended by the Government Funding Transparency Act of 2008. Contractors must report a variety of data for their first-tier subcontracts, including the amount and “overall purpose and expected outcomes” of the subcontract. The definition of “first-tier subcontract” excludes “supplier agreements with vendors, such as long-term arrangements for materials or supplies that would normally be applied to a Contractor's general and administrative expenses or indirect cost.”
Under the interim rule, contractors also must report the compensation of the five most highly compensated “executives” of the contractor and first-tier subcontractors if (i) the entity receives 80 percent or more (and $25 million) of its gross revenue from federal contracts, subcontracts, loans, grants, subgrants and cooperative agreements and (ii) the public does not already have access to such information through periodic reports required by the Securities and Exchange Commission (SEC) or Internal Revenue Service (IRS) reporting requirements. The underlying statutes referred to “officers” of the recipient of funds rather than the more broad term “executives” that is used in the interim rule. All reporting is done through the prime contractor.
The new reporting requirements raise a variety of concerns.
First, the interim rule does not contain an exception for commercial items. The only rationale given for application of these novel reporting requirements to such items is an interest in reducing “wasteful and unnecessary spending.”
Second, the use of an interim rule rather than a proposed rule to introduce such broad-ranging requirements is troubling. As a result of this approach, the requirements are being imposed before there is adequate time for the rulemakers to consider comments from interested parties on their scope and impact.
Finally, the interim rule (like the underlying statutes it implements) emphasizes “transparency” without regard to, and at the possible expense of, an efficient contracting process that encourages more participants and, thereby, greater competition. Transparency has a value in government contracting, but it entails considerable costs. The reporting requirements will impose cost and administrative burdens on contractors and may deter entities from participation in government contracts. Such direct and opportunity costs are understated or disregarded by the interim rule.
The new reporting requirements may lead to greater public awareness of how taxpayer funds are spent for government contracts, but they do little directly to encourage more competition based on well-defined requirements, which is the best way to reduce “wasteful and unnecessary spending.”
Read David Dowd's next column.
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