Pentagon Issues Conflict Of Interest Rule For Contractors

The Pentagon last week issued a new rule on organizational conflicts of interests — or instances in which a company provides multiple services that could have conflicting interests, such as building a system and then testing it — that instructs contracting officers to promote competition.

The rule has been a hot-button issue in the contracting industry, as Congress has pushed for clearer and stricter regulations while industry organizations have pushed back against requirements they considered too broad or too burdensome.

The new rule “applies to the most important defense programs,” said Thomas C. Papson, a partner in McKenna Long & Aldridge’s Washington office who focuses on government contracting. Companies that provide engineering or analysis support “cannot then subsequently supply the weapon systems that come out of that . . . work, so that’s very significant.”

Many area companies, including Lockheed Martin, Northrop Grumman and CSC, have already divested business units that they said posed potential conflicts of interest. For instance, Northrop Grumman sold off Chantilly-based TASC, which operated as Northrop’s advisory services business.

The regulations implemented last week depart from a draft version, which favored mitigation as a way to address potential conflicts. In the final version — which only applies to big-ticket defense programs — the Pentagon said it will instead seek “to promote competition and, to the extent possible, preserve DOD access to the expertise and experience of highly-qualified contractors.”

The Defense Department said the revised language will encourage contracting officers to consider many different ways to resolve a potential conflict.

“We really feel strongly that competition is very, very important to us, and we don’t want to do things to discourage competition unless there’s a good reason for that,” said Frank Kendall, the Pentagon’s principal deputy undersecretary of defense for acquisition, technology and logistics.

Alan Chvotkin, executive vice president and counsel at the Professional Services Council, an industry group, said “there’ll be some sigh of relief here that the rule is narrowly focused.”

But Danielle Brian, executive director of the nonprofit group Project on Government Oversight, criticized the final rule as watered-down and disappointing.

“We think this is a win for the contractors,” Brian said. “They were successful in undermining the spirit of what the proposed rule had set out to do.”

Industry analysts said they don’t expect the new regulations to kick off another round of divestitures.

“Our sense is that there’s nothing here in these final rules that was so different from what everybody thought,” said Mitchell Martin, a senior managing director with the investment firm McLean Group.

The Pentagon will now focus on training its workforce to implement the new regulations, according to Kendall. At the same time, the government is working on a broader conflict-of-interest rule that will apply to all federal agencies, not just the Defense Department.

“That’s not finished yet, so we may have to make some adjustments later, but I’m hopeful that won’t be necessary,” Kendall said.

Marjorie Censer Capital Business January 3, 2011