Government Contracts Alert - Fall 2009

RECENT DEVELOPMENTS

Personal Conflicts of Interest: The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (Councils) recently proposed to amend the Federal Acquisition Regulation (FAR) to address personal conflicts of interest with respect to Government contractor employees who perform acquisition functions. 74 Fed. Reg. 58584 (Nov. 13, 2009). The proposed rule implements Section 841(a) of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, Pub. L. 110-417 (2009 NDAA). Specifically, the proposed rule amends FAR Part 3 to require all contracting officers (COs) to insert the new standard contract clause at FAR § 52.203-16, Preventing Personal Conflicts of Interest, into all contracts in which contractor employees perform acquisition tasks closely associated with inherently governmental functions, such as supporting or providing advice with regard to acquisition planning, development of statements of work, proposal evaluation, contract award, contract administration, and contract termination. The clause requires contractors to prevent all personal conflicts of interest as defined in the clause, or, for conflicts that cannot be avoided, to submit a mitigation plan or request for a waiver through the CO to the Head of the Contracting Activity. In addition, if there is confirmation that a contractor has violated a requirement of the clause, the CO must pursue an appropriate remedy as specified in FAR § 52.203-16(d), which includes suspension of contract payments, loss of award fee, termination for default or cause, disqualification from future related contracts, and suspension or debarment. Interested parties should submit written comments to the Regulatory Secretariat on or before January 12, 2010, to be considered in the formulation of a final rule.

Contractor Integrity and Performance: The Councils also proposed to amend the FAR to implement Section 872 of the 2009 NDAA, which requires the General Services Administration to establish and maintain a data system, called the Federal Awardee Performance and Integrity Information System (FAPIIS), which will contain specific information on the integrity and performance of covered Federal agency contractors and grantees. 74 Fed. Reg. 45579 (Sept. 3, 2009). Specifically, the proposed rule amends FAR Part 9 to require COs to enter data regarding most contracts and orders into the FAPIIS if the CO has made a final determination that an otherwise successful offeror is not a responsible source due to lack of a satisfactory performance record or lack of a satisfactory integrity and business ethics record. The planned FAPIIS will permit Federal Government personnel to view past performance and integrity information on all such contractors, and contractors will be permitted to view, and comment on, their own profiles. In addition, the proposed rule amends FAR Part 9 to require awarding officials to review the FAPIIS and other past performance information when making any past performance evaluation or responsibility determinations. On November 18, 2009, the FAR Acquisition Law Team was tasked with reviewing public comments and drafting the final rule. The team's report was due December 16, 2009.

Post-DoD Employment Ethics Issues: The Department of Defense (DoD) adopted a final rule amending the Defense FAR Supplement (DFARS) to implement Section 847 of the 2008 NDAA, which addresses requirements for certain senior DoD officials to obtain post-employment ethics opinions before accepting compensation from a DoD contractor within two years after leaving DoD service. 74 Fed. Reg. 59913 (Nov. 19, 2009) (adopting, without change, interim rule issued at 74 Fed. Reg. 2408 (Jan. 15, 2009)). Specifically, the final rule amends DFARS Parts 203, 209, and 252 to not only require former senior DoD officials to obtain the aforementioned ethics opinion before accepting compensation from their new employers, but also to provide for potential suspension or debarment for contractors that knowingly provide compensation to a former DoD official without the required ethics opinion.

Whistleblower Protections: The DoD adopted a final rule amending the DFARS to implement Section 846 of the 2008 NDAA and Section 842 of the 2009 NDAA. 74 Fed. Reg. 59914 (Nov. 19, 2009) (adopting, without change, interim rule issued at 74 Fed. Reg. 2410 (Jan. 15, 2009)). These statutory provisions address protections for contractor employees who disclose information to Government officials with regard to waste or mismanagement, danger to public health or safety, or violation of law related to a DoD contract. In particular, the final rule amends DFARS Parts 203 and 252 to prohibit contractors from discharging, demoting, or otherwise discriminating against an employee as a reprisal for making such a disclosure to Congress, an Inspector General, the U.S. Government Accountability Office, a DoD employee responsible for contract management or oversight, or an authorized official of an agency or the Department of Justice. The final rule also sets forth contractor requirements for filing, investigating, and remedying employee complaints regarding such reprisals.

National Industrial Security Program: On September 2, 2009, the DoD issued Directive-Type Memorandum (DTM) 09-019, which amended the National Industrial Security Policy Operating Manual (NISPOM), DoD 5220.22-M. Under the NISPOM, a "cleared company," i.e., a contractor with DoD-issued facility clearances (FCLs), must submit to the Defense Security Service (DSS) a certificate pertaining to foreign interests that contains relevant information regarding the company's foreign ownership, control, or influence (FOCI). Under NISPOM § 1-302(g)(5), any material change regarding a cleared company's FOCI that may have previously been reported to the Defense Security Service must be amended by the submission of a new certificate. The NISPOM amendments promulgated by DTM 09-019 will be incorporated into the next published version of the NISPOM (likely in Spring 2010), but for now DTM 09-019 governs certain FOCI issues. One important change is that the DoD, when presented with FOCI issues arising from a merger or acquisition involving a cleared company and a foreign entity, will no longer accept the validity of a FCL simply on the basis that an acceptable FOCI mitigation instrument is being negotiated. Rather, as a matter of policy, the DSS will only maintain the validity of a FCL where an acceptable FOCI action plan has been presented and agreed upon by the parties to the transaction. DTM 09-019 is available in its entirety at http://www.dtic.mil/whs/directives/corres/pdf/DTM-09-019.pdf.

Federal Acquisition Circular 2005-37: FAC 2005-37 includes several interim rules amending the FAR. 74 Fed. Reg. 52846 (Oct. 14, 2009). Specifically, an interim rule has been issued amending the FAR to implement Section 868 of the 2009 NDAA. Under the interim rule, FAR 15.403-1 is amended to provide that when the Government purchases services that are not offered and sold competitively in substantial quantities in the commercial marketplace, but are of a type offered and sold competitively in substantial quantities in the commercial marketplace, such services may be considered commercial items only if the CO has made a written determination that the offeror has submitted sufficient information to evaluate the reasonableness of the price of the services. In making this determination, the CO may request offerors to submit prices paid for similar commercial items under comparable terms and conditions by both Government and commercial customers. In addition, an interim rule implementing Section 866 of the 2009 NDAA amends the FAR to minimize excessive pass-through charges by contractors for work performed by subcontractors when the higher-tier contractor adds negligible value to performance of the contract. Specifically, the interim rule amends FAR 15.408 and the contract clauses at FAR 52.215-22 and FAR 52.215-23 to require contractors to notify COs when the level of subcontractor effort exceeds 70% of the total cost of the work to be performed under the contract (or when a lower-tier subcontractor's effort exceeds 70% of the work to be performed under its subcontract). If the CO determines that excessive pass-through charges exist, the excessive pass-through charges are unallowable under FAR Part 31 (or the Government shall be entitled to appropriate price reductions in the case of a fixed-price contract). Finally, FAC 2005-37 includes an interim rule implementing Section 814 of the 2007 NDAA and Section 867 of the 2009 NDAA. The interim rule amends FAR Part 7 and FAR Part 16 to implement new agency requirements in connection with award fee contracts, including requiring agencies to link award fees to acquisition objectives in the areas of cost, schedule, and technical performance, prescribe narrative ratings to be utilized in award fee evaluations, and prohibit the issuance of award fees for a rating period in which the contractor's performance is judged to be below satisfactory.

RECENT DECISIONS

Federal Supply Schedule Contracts: The U.S. Government Accountability Office ("GAO") sustained a bid protest challenging the Department of State's award of a Federal Supply Schedule ("FSS") purchase order for gamma ray vehicle and cargo inspection systems because the order contained items that were not on the awardee's FSS contract at the time the order was issued. Science Applications International Corp., B-401773, Nov. 10, 2009. The Department of State conceded that two of the order's eight line items were not on the awardee's FSS contract when the order was issued. However, the agency argued that, because the solicitation did not state that all items had to be on a vendor's FSS contract by award, the awardee could still receive the order as long as the missing items were added to its FSS contract before the required delivery date. The GAO disagreed, holding that, where an agency announces its intention to order from an existing FSS contract, all items quoted and ordered are required to be on a vendor's FSS contract "as a precondition to its receiving the order." The GAO further noted that the Department of State's position, if accepted, clearly would undermine the requirement that non-FSS items be purchased using normal full and open competition procedures, since there is no way to determine with certainty whether a vendor's FSS contract will include the ordered items in the future.

Organizational Conflicts of Interest: The GAO sustained a bid protest regarding the award of an Air Force Space Command contract for communication and information technology services (the "Uni-Comm" procurement) because the Air Force unreasonably determined that the awardee did not have any organizational conflicts of interest (OCIs) resulting from a proposed subcontractor's prior work assisting the agency with planning for the procurement. L-3 Services, Inc., B-400134.11 et al., Sept. 3, 2009. At the time that the task order for these procurement planning services was issued in 2005, the Contracting Officer determined that the subcontractor had an unmitigable OCI that would not allow it to participate in the subsequent Uni-Comm procurement. More than a year later, however, the Contracting Officer reversed his initial determination because he found a lack of a definite OCI and because he found the subcontractor's OCI mitigation plan to be reasonable. The GAO concluded that this reversal, and the Air Force's subsequent decision to award the Uni-Comm contract to an offeror whose team included the subcontractor who performed the task order for procurement planning services, was unreasonable for two reasons. First, the GAO found that the Air Force lacked a reasonable basis for its conclusion that the subcontractor's performance under the task order for procurement planning services did not place it in a position to skew the Uni-Comm competition in favor of itself. In that regard, the GAO stated that the Contracting Officer's OCI analysis failed to appreciate the way in which performance of the task order shaped the statement of work, thus making it inappropriate for the subcontractor to participate in the Uni-Comm procurement. Second, the GAO also found that, while the subcontractor's performance of the task order for procurement planning services may have given it unequal access to competitively useful, non-public information, the Air Force failed to adequately investigate and reasonably determine the extent and type of information to which the subcontractor had access or the efficacy of its OCI mitigation plan. The GAO therefore recommended that, at a minimum, the subcontractor be excluded from the competition. (The GAO also sustained a separate protest by another offeror regarding this procurement because the Air Force failed to properly evaluate offerors' technical proposals. Northrop Grumman Information Technology, Inc., B-400134.10, Aug. 18, 2009.)

Past Performance Evaluations: The GAO sustained a bid protest regarding the award of a TRICARE Management Activity (TMA) regional contract for managed health care support services because the TMA lacked a reasonable basis for crediting the awardee with the past performance of its parent and corporate affiliates. Health Net Federal Services, LLC, B-401652.3 et al., Nov. 4, 2009. An agency properly may attribute the experience or past performance of a parent or affiliated company to an offeror where the firm's proposal demonstrates that the resources of the parent or affiliate will affect the performance of the offeror. Here, however, the awardee – Aetna Government Health Plans, LLC – repeatedly used the brand name "Aetna" throughout its proposal. As a result, the TMA did not know the specific roles, if any, that the various Aetna entities would have in performance of the solicited contract, nor did the agency know which specific Aetna entities performed the contracts referenced in the awardee's past performance proposal. Absent some more definitive indications of what entities performed what contracts and what roles they would have in performing the solicited effort, the GAO stated that there was no basis for the TMA to consider, let alone give credit for, the generic "Aetna" past performance submitted with the awardee's proposal. In addition, the GAO concluded that the TMA's decision to assign the awardee the highest past performance rating was not supported by the record because the agency failed to consider the fact that the prior contracts submitted by the awardee for evaluation were very small compared to the size of the solicited contract. The GAO also sustained the protest on multiple other grounds, including grounds relating to (1) the TMA's failure to reasonably consider the awardee's proposed staffing in the price realism evaluation, (2) the TMA's failure to consider risk associated with the awardee's plan to hire incumbent employees with lower compensation rates, (3) the TMA's failure to consider network provider discounts associated with the protester's existing TRICARE network, and (4) an unfair competitive advantage created by the awardee's use of a former high-level Government employee in preparing its proposal. (The GAO also sustained a separate protest regarding the award of another regional TRICARE contract in this procurement because, again, the TMA failed to adequately account for network provider discounts associated with the protester's existing TRICARE network. Humana Military Healthcare Services, B-401652.2 et al., Oct. 28, 2009.)

OMB Circular A-76: The GAO sustained a bid protest challenging a public-private competition conducted under Office of Management and Budget (OMB) Circular A-76 because the U.S. Army's selection of a private sector offeror to perform a cost-reimbursable contract for public works functions was based upon a materially flawed cost realism analysis. Frank A. Bloomer–Agency Tender Official, B-401482.2 et al., Oct. 19, 2009. The GAO found that the Army had no reasonable basis for concluding that the awardee's proposal of reduced fringe benefit ratios – which were achieved by shifting fringe benefit costs from one category to another – accurately reflected the offeror's accounting policies, procedures, and practices. In addition, the Army had no reasonable basis for accepting the awardee's unsupported assumption that it could perform a significant portion of the workload with 10 percent fewer labor hours than identified in the solicitation. The Army also unreasonably allowed the awardee to omit the labor costs associated with the material supply function.

Ostensible Subcontractors: The U.S. Small Business Administration (SBA) Office of Hearings and Appeals (OHA) held that an SBA Area Office erroneously concluded that the awardee of a National Institutes of Health contract for administrative support services, which was set aside for small business concerns, violated the "ostensible subcontractor" rule when the firm entered into an agreement with a large business concern to perform part of the solicited work. Size Appeal of Alutiiq International Solutions, LLC, SBA No. SIZ-5098, Dec. 10, 2009. The ostensible subcontractor rule provides that when a subcontractor is actually performing the primary and vital requirements of a contract, or the prime contractor is unusually reliant upon a subcontractor, the two firms are considered to be engaged in a joint venture and, thus, affiliated for small business size purposes. The purpose of the rule is to prevent other than small businesses from forming relationships with small businesses in order to evade the SBA's size requirements. Based upon this rule, the Area Office concluded that the awardee was not a small business concern, and ineligible for award of the contract. OHA, however, concluded that the Area Office failed to properly analyze all aspects of the relationship between the awardee and the large business subcontractor. OHA first noted that the subcontractor was not providing either of the two key personnel identified by the solicitation and, instead, was providing a non-key program manager to lead its own program management office, which would be established to manage the task orders assigned to it by the awardee. OHA further concluded that, because the subcontractor was not providing key personnel or the majority of the labor required by the contract, the subcontractor would not be performing the primary and vital contract tasks. In addition, the OHA observed that (1) the awardee's proposal did not indicate that it would share profits with the subcontractor, (2) the Teaming Agreement between the two companies did not provide that the subcontractor would have a direct line of communication with the Government under the contract, and (3) the awardee was not forced to rely on the subcontractor's past experience in submitting its proposal, since only one of the four relevant experiences identified in the proposal was for the subcontractor. OHA therefore reversed and vacated the Area Office's size determination.

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