On April 22, the Department of Defense (DOD) published a proposed revision to the regulations governing Organizational Conflicts of Interest (OCI). OCI is defined to mean that a company is unable to be impartial or objective in performance of government work due to some other relationship or activity. The Federal Acquisition Regulation (FAR) requires federal agencies to screen prospective contractors for OCIs, and to either avoid or mitigate such circumstances. The effect has been to deny contracts where the prospective contractor has: the ability to set ground rules for a future acquisition; obtains sensitive non-public information that could be competitively advantageous; or has potentially impaired objectivity that would allow a company to evaluate itself favorably (or a competitor unfavorably). In practice, the determination of OCI is sensitive to appearances and agencies have had a difficult time performing adequate factual analysis to support their conclusions. Because the stakes can be large contracts, there has been substantial litigation in this area.

The proposed revision to the Defense Federal Acquisition Regulation Supplement (DFARS) was necessitated by the enactment of the Weapon Systems Acquisition Reform Act (WSARA) in 2009. While WSARA only required tighter rules for major defense acquisition programs, the proposed DFARS rewrite applies more broadly to almost all DOD acquisitions and is viewed as a template for government-wide changes that are pending.

DOD's proposed rule introduces new risks for contractors, is very burdensome, and likely will substantially reduce the technical and engineering expertise available to the government. The propose rule: requires voluminous new disclosures going back five years; requires an affirmation that “all relevant” information that is “associated with” the offer for a new contract has been disclosed; and contains a conclusion that “there is no basis to distinguish between a firm and its affiliates.” It offers no guidance regarding the meaning of “affiliate.” In this regard, the proposed rule focuses on a corporation's narrow financial interest in a particular procurement and ignores both the fact that corporations have longer term ethical and reputational interests, and the fact that the government itself relies on corporations to implement effective internal controls that reject a unitary financial interest theory in many other contexts throughout the federal acquisition system.

As a result of this approach, the proposed rule–while professing to prefer mitigation of OCIs–offers little in the way of mitigation guidance or alternatives. Because it is difficult to design appropriate mitigation measures in practice, the lack of guidance is very likely to deter government officials from attempting mitigation. The proposed rule does not recognize that companies can create internal structural barriers in myriad ways to protect against potential conflicts and that such internal barriers are regularly used. Because of its narrow focus, the proposed rule may place companies that do or expect to do business with the government in the very difficult position of losing work, or even having to divest business areas based on mere perceptions of potential conflicts. Comments on the proposed rule are due June 21.