UPDATE: Personal Conflicts of Interest (PCIs) Back in the News
In prior articles, we noted that, as contractors have filled more and more of the Federal government’s acquisition workforce needs, the government has become more concerned about organizational conflicts of interest (OCIs) that may arise and taint competitions for new contract awards. More recently, we reported on a proposed rule to revise the FAR to address “personal” conflicts of interest (PCIs).
As we discussed, the proposed FAR rule would address the situation where a contractor has “employees performing acquisition functions closely associated with inherently governmental functions” and would require those contractors to prohibit such employees with access to non-public governmental information from using it for personal gain. The proposed rule would define a “personal conflict of interest” as “a situation in which a covered employee has a financial interest, personal activity, or relationship that could impair the employee's ability to act impartially and in the best interest of the Government when performing under the contract.”
The proposed rule lists several sources of PCIs, including (but not limited to)—(i) financial interests of the covered employee, of close family members, or of other members of the household; (ii) other employment or financial relationships (including seeking or negotiating for prospective employment or business); and (iii) gifts, including travel. The proposed rule provides more details regarding what financial interest issues may give rise to a PCI, which include—
- Compensation, including wages, salaries, commissions, professional fees, or fees for business referrals
- Consulting relationships (including commercial and professional consulting and service arrangements, scientific and technical advisory board memberships, or serving as an expert witness in litigation)
- Services provided in exchange for honorariums or travel expense reimbursements
- Research funding or other forms of research support
- Investment in the form of stock or bond ownership or partnership interest (excluding diversified mutual fund investments)
- Real estate investments;
- Patents, copyrights, and other intellectual property interests;
- Business ownership and investment interests
We remind you of the foregoing because PCIs are back in the news again.
First, we note a November 24, 2009 memorandum from Dr. Ashton Carter, Under Secretary of Defense (Acquisition, Technology & Logistics) to various senior Pentagon executives, discussing contractor PCIs. The memo noted that “The Government's increased reliance on contracted technical, business and procurement expertise has increased the potential for PCls. Unlike Government employees, contractor employees are not required to disclose financial or other personal interests to the Government that may conflict with the responsibilities they are performing on behalf of the Government.”
The memo contains two attachments designed to sensitize DOD employees to the risks of contractor PCIs. The first attachment “depicts levels of risk created as a function of the relationship between potential impacts of PCIs and the likelihood that contractors will influence Government decisions.” The memo notes that contract type and the items being acquired affect the risk that a contractor PCI will affect the acquisition, with fixed-price supply acquisitions denoted as being low risk. The second attachment provides six scenarios and discusses the associated risks, and sensitizes Pentagon employees as to the issues involved.
For example, one scenario discussed in the memo runs as follows—
Shirley is an employee of government contractor Company X. Company X has assigned Shirley to work supporting a Government office. That office has contract responsibility to ensure the swift and effective performance of specific aspects of a contract. The contract to which Shirley is assigned was awarded to Company X. The award is a cost-plus-award-fee contract. Shirley’s yearly bonus will be based on the award-fee Company X receives on the contract. Shirley finds that the performance of the contract is impeded by an operational conflict over which she has influence.
Risk: High. Shirley has two personal conflicts of interest. First she has a conflict because she has oversight responsibilities on a contract between the government and her employer. Second, she has another conflict because her bonus is not based on how well she carries out her contract oversight responsibilities in support of the Government Office, but rather on the overall quality of the performance of her employer’s contract--the same contract on which she has oversight responsibilities. There is an actual or perceived risk that her decisions, rather than being based only on the best interests of the Government, might be influenced on what is best for Company X and her own financial interest.
Another scenario in the attachment is as follows—
Mr. Jones is an employee of government contractor Company G. After full and open competition, Company G has been awarded a firm fixed-price contract to manage a Defense Agency’s depot. Company G has appointed Mr. Jones as their project manager for this contract. Mr. Jones’ wife owns a moving franchise. In his role as project manager for Company G, Mr. Jones orders boxes, pallets, tape, and other like items from his wife’s moving company.
Risk: Low to None. Although Mr. Jones’ behavior may not appear ethical, this personal conflict of interest has no inappropriate financial effect on the Government. Company G’s award was based on a firm fix price that was determined fair and reasonable as the result of full and open competition. Any loss to Company G due to Mr. Jones’ actions has no effect on the Government.
See the entire memo here.
In an interesting coincidence, the Department of Justice announced on December 1, 2009 that a former NASA scientist had been sentenced to a fine, probation, and community service for a “felony conflict of interest charge” in connection with his participation in the award of NASA contracts to his wife’s company. According to the announcement, Mark Schoeberl—
admitted that: between July and September 2004, after encountering resistance to his proposal to appropriate $20,000 directly to Animated Earth, he asked a colleague to approve the appropriation, knowing that the funds would eventually reach Animated Earth[his wife’s company]; between January and March 2009, Schoeberl asked GSFC personnel that Animated Earth be paid incrementally for work completed in one of its NASA contracts and after receiving advice from NASA personnel, Schoeberl instructed his wife as to how to invoice NASA for work performed by her company; in May 2009, Schoeberl prepared a ‘sole source justification’ document to justify Animated Earth being the only company eligible for a new contract for maintenance on kiosks that Animated Earth had previously installed on NASA grounds; in June 2009, Schoeberl directed financial personnel to initiate a $60,000 procurement of software to be purchased from Animated Earth and provided a ‘sole source justification’ document for that procurement; and in June 2009, Schoeberl asked a NASA colleague to speak with another colleague about awarding federal stimulus package funds to Animated Earth.
The DOJ release stated that—
As a senior NASA manager, Schoeberl was required to disclose in annual ethics reports any income he and his wife earned from outside activities. Schoeberl’s 2007 financial disclosure form omitted any mention of his interest in Animated Earth, even though the company had generated over $50,000 in income from NASA that year and Animated Earth had been included in Schoeberl’s 2006 financial disclosure form.
As GovExec.com reports, “Prosecutors agreed Schoeberl did not deserve to go to jail, noting in court documents that he quickly accepted responsibility for his conduct, had no criminal history and had a lengthy record of service at NASA.” Even though records show that Animated Earth received “more than $190,000 in NASA contracts” over a three-year period—all of which were awarded without competition—“prosecutors said the government does not seem to have suffered a financial loss because ‘Animated Earth appears to have completed the work that it contracted with the federal government,’ according to the article.
To conclude, government employees have long been subject to PCI controls which—as can be seen from the story of Mr. Schoeberl—are not always completely effective. As the line between contractor and government employee blurs, the government is moving to have similar controls imposed on contractor employees who are deeply involved in governmental activities. Contractors with employees embedded in governmental support activities should consider getting in front of this issue, and not waiting for the final FAR rule to be issued, as this would seem to be an issue that will only become more sensitive over time.
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DOD Outlines DCMA/DCAA Dispute Resolution Process
We frequently have written about issues—both real and imagined—concerning the jurisdiction and authority of DCAA and DCMA with respect to oversight of Government contractors. For example, we reported on hearings held by the Commission on Wartime Contracting in Iraq and Afghanistan in which DCMA was lambasted for “caving to the contractors and not acting properly on the Defense Department’s behalf.” Another article reported that “a lack of cooperation" between DCMA and DCAA "is hindering the oversight of contractors' business systems." We’ve even gone so far as to ask whether DCAA and DCMA would merge to form one agency dedicated to oversight of DOD contractors.
In the midst of finger-pointing within the Defense Department, attacks from without continued. GAO reported abysmal DCAA audit report quality for the second year in a row (corroborated by an independent audit by the DOD Inspector General). We reported on hearing s in both the Senate and House that rose to levels of near-hysteria. More relevantly, the audit quality findings subsequently were utilized in another GAO report to criticize DCMA (and DOD in general) for relying on DCAA audit reports to perform surveillance over contractors, saying “The effectiveness of DOD’s cost surveillance process depends, to a large extent, on the adequacy of [ ] DCAA procedures. Our recent work has raised concerns in this regard.”
Well, the storm waves are starting to settle as the calendar year draws to an end. DCAA Director April Stephenson has been “reassigned” to another SES-level position in the DOD and Shay Assad (Director, Defense Procurement and Acquisition Policy) has emerged as the mediator between DCMA and DCAA—thus positioning DOD to report back to the Commission on Wartime Contracting that significant progress has been made in resolving differences between the two Defense oversight agencies. On December 4, 2009 Assad issued a memo entitled “Resolving Contract Audit Recommendations” that established a framework for how the resolution process will work.
The memo, which can be found here, discusses how the two agencies will resolve “significant disagreements”—defined as when a contracting officer’s pre-negotiation memorandum indicates that “less than 75 percent of the total recommended questioned costs in a DCAA audit report on a contractor proposal valued at $10 million or more.” It’s interesting that the resolution process memo seems to be aimed at contractor proposals—including “price proposals” for new work as well as cost impact proposals, and forward and final indirect cost rate proposals. The memo seems to omit any discussion of how DCMA and DCAA would resolve differences of opinion regarding the adequacy of contractor internal control “business systems” or noncompliances with Cost Accounting Standards or allegations of “defective pricing”. Thus, it focuses on a subset of oversight interactions but not the entire universe of activity. And the omitted areas are the areas the critics have pointed at, such as the adequacy of contractor control systems. As we say, interesting ….
The first step of the resolution process is to discuss the differences of opinion. DCMA contracting officers are required to “discuss the basis of the disagreement with the auditor prior to negotiations”. The DCMA contracting officers must then “document that discussion, and the basis for disagreement, in the pre-negotiation objective (or pre-business clearance) and in a written communication to the auditor prior to negotiations ….” The memo notes that an email to the auditor is considered to be an adequate written communication. Once the negotiation objective is approved, “the contracting officer may proceed with negotiations.”
The next step of the resolution process takes place with the auditor continues to disagree with the contracting officer’s position. In such circumstances, “DCAA management” may request that the DOD “Component management” review the contracting officer’s decision. The DCAA request for review must be submitted within three business days after receiving the written communication from the contracting officer.
The next step of the resolution process takes place if DCAA management and the DOD “Component’s highest management level” cannot resolve the difference of opinion. In such circumstances, the DCAA Director will bring the matter to the attention of Mr. Assad. If that doesn’t work to resolve the differences, the DCAA Director may bring the matter to the attention to the Under Secretary for Defense (Acquisition, Technology & Logistics) and/or the Under Secretary for Defense (Comptroller).
In addition to the foregoing, the memo notes that the DCAA Director can bring any matter to Mr. Assad’s attention that “he believes requires my attention (e.g., precedent setting or of high interest to the Department).”
The memo concludes as follows—
It is neither expected nor necessary that the contracting officer and contract auditor agree on every issue. They have different, yet complementary, roles in the process. It is expected that the auditor and contracting officer will work together, recognizing that it is the contracting officer’s ultimate responsibility to determine fair and reasonable contract values.
As noted above, this memo positions DOD to report back to the various stakeholders (e.g., Commission on Wartime Contracting) that it has made significant progress toward resolving the alleged dysfunctional relationship between DCAA and DCMA. Even if it curiously omits discussion of the more contentious areas, it is nonetheless progress. And the memo positions Mr. Assad as the mediator between the two DOD oversight agencies, hopefully to resolve differences of opinion before they become grist for the various Commissions and Committees. It seems to be a good first step.
It will be interesting to see whether the process outlined in the memo actually can be worked by the contracting officers and auditors in the field.
GAO Discusses RATB and ARRA Funds
On November 30, 2009 the Government Accountability Office (GAO) issued report GAO-10-216R with the catchy title, “Recovery Act: Contract Oversight Activities of the Recovery Accountability and Transparency Board and Observations on Contract Spending in Selected States.” In related news, there is an entity called the Recovery Accountability and Transparency Board (RATB) with oversight responsibilities covering the use of American Recovery and Reinvestment Act (ARRA) funds. But that’s not the only set of eyes scrutinizing the use of ARRA funds. In addition to the RATB, various Federal agency Inspectors General (IGs) “are expected to audit the programs, grants, and projects funded under the Recovery Act, both within their particular agency or department and collectively.” Moreover, “the Recovery Act requires GAO to perform bimonthly reviews of the use of funds by selected states and localities and to comment on estimates of jobs created or retained in the quarterly reports of Recovery Act fund recipients.” In its report, GAO discusses the RATB’s oversight of Federal agency spending of ARRA funds, as well as how 16 states (and the District of Columbia) are awarding ARRA contracts, after six months of activity.
The RATB consists of a chair, 12 Federal agency IGs, and 39 staff (20 of whom are seconded from other Federal agencies). The RATB includes three committees: (1) Recovery.gov Committee, (2) Accountability Committee, and (3) Recovery Funds Working Group Committee. According to the GAO report, the RATB monitors various Federal data sources, operates the Recovery Board Fraud Hotline, and operates the Recovery Operations Center (ROC). The RATB ROC “provides two core functions—predictive analytics and in-depth risk analysis. The [ROC] uses software that allows for in-depth analyses of a large volume of publicly available data on entities receiving Recovery Act funds. … The results provide oversight authorities with information to focus limited resources on cities, regions, and high-risk government programs where historical data and current trends suggest the likelihood of future risk.” GAO noted that “… about two weeks after the center became operational, Board staff told us they had two active investigations under way based on the in-depth analysis tool.”
The RATB has been busy providing oversight for a lot of activity. According to the GAO report, there have been (to date) 27,774 ARRA-related contract actions. The General Services Administration (GSA) has issued 16,878 of the total and the Department of Defense (DOD) has issued 6,357 of the total number of contract actions. Of the total number, 25,666 (or 92 percent) were competitively awarded. Interestingly, while DOD contract actions comprise only 23 percent of the total, DOD’s number of contract actions awarded without competition accounted for 59 percent of the total number of single or sole-source awards.
The other ARRA oversight team, consisting of the Federal agency IGs, has been busy as well. GAO reported—
As of September 30, 2009, the [IGs] reported they had 77 investigations and 391 audits, inspections, evaluations, or reviews in process. They also reported they have issued 163 reports on Recovery Act-related issues since the act was passed—70 reports were issued but not published because they contain proprietary information that cannot be made available to the public, and 93 reports have been published on Recovery.gov. For example, the Department of Energy [IG] had issued 8 reports as of September 30, 2009, that addressed aspects of Recovery Act issues…. These reports identified the relevance of their issues to Recovery Act implementation. As another example, the General Services Administration [IG] has issued two reports since the Recovery Act was passed. The most recent report, issued in September 2009, provided observations on the Public Building Service’s major construction and modernization projects being funded under the Recovery Act.
GAO also looked at how states were awarding contract actions that used ARRA funds. According to the GAO report, 122 such contracts were reviewed, of which 87 percent were awarded competitively. Of the 122 contracts reviewed, 73 percent were awarded on a fixed-priced basis.
(Note these metrics are important because of the Obama Administration’s expressed commitment to using competition and fixed-price contract types to manage contract cost-growth. See the Administration’s memo here.)
We visited http://www.recovery.gov and looked at how the states were spending ARRA funds. According to the Government’s site, California has awarded $18.5 billion in awards, Texas has awarded $10.7 billion, and New York has awarded $10.6 billion in Recovery-related awards. In contrast, Arkansas has awarded $1.36 billion in such awards, while Delaware has awarded only $514 million in awards.
To conclude, after six months of activity, billions in ARRA funds are being spent by many states and Federal agencies, and the RATB is trying to stay on top of it all. That GAO had little to offer in the way of criticism says quite a bit about how well the RATB is doing so far … or perhaps maybe it is simply too early for any conclusions to be drawn.
See the GAO’s entire report here.
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