Yesterday, the FAR Council issued a proposed rule that would update the U.S. Government’s approach to organizational conflicts of interest (OCIs). While the proposed rule is not finalized and may change in response to forthcoming comments from interested parties, the proposed rule contemplates major changes to the FAR’s existing framework in this area. In this post, we summarize the background leading up to the proposed rule and highlight key areas of proposed change.
Background
The proposed rule is the latest installment in a years-long effort by Congress, GAO, and the FAR Council to update the OCI guidance in the FAR. Many years ago, in 2011, the FAR Council issued a proposed rule to amend the FAR’s guidance on OCIs with a particular focus on OCIs related to unequal access to nonpublic information. The 2011 proposed rule was motivated in part by a GAO report recommending that the FAR Council provide additional protections for contractors accessing sensitive information.
The 2011 proposed rule was never finalized and was ultimately withdrawn in 2021. Many of the key changes in the most recent proposed rule, however, were foreshadowed by the 2011 proposed rule. For example, the 2011 proposed rule would have moved OCI guidance to FAR Part 3, allowed agencies to determine that a risk is acceptable in the context of impaired objectivity OCIs (without requiring a formal waiver), and provided standard solicitation provisions and contract clauses.
As previously discussed on this blog, in December 2022 Congress passed the ‘‘Preventing Organizational Conflicts of Interest in Federal Acquisition Act” (the Act), which directed the FAR Council to issue new rules for OCIs. The Act itself did not establish any new OCI standards but directed the FAR Council to: (1) provide definitions of the different types of OCIs; (2) provide illustrative examples of OCIs, including in situations where contractors’ other clients may have interests that potentially conflict with those of the contracting agency; and (3) provide solicitation provisions and contract clauses, but allow executive agencies to tailor them. The proposed rule gives effect to each of these three mandates, and makes other significant changes as well.
Highlights from the Proposed Rule
- Move to FAR Part 3: The proposed rule moves OCI coverage from FAR Part 9, which addresses contractor qualifications, to FAR Part 3, which currently addresses improper business practices and personal conflicts of interest. While the change in FAR placement may seem less important than the substantive changes in the proposed updates, the move reflects the FAR Council’s understanding that “the larger issues that underlie efforts to identify and address OCI are more directly associated with business practice issues” than with issues of contractor qualifications. FAR Part 3, which is currently titled “Improper Business Practices and Personal Conflicts of Interest,” will be retitled “Business Ethics and Conflicts of Interest” in accordance with its expanded scope.
- Agency Discretion to Accept the Risk of an OCI: In the context of impaired objectivity OCIs, the proposed rule allows the contracting officer to make a determination that the risk arising from such an OCI is acceptable. Such a determination may be made when the risk is outweighed by the expected benefit of having the offeror with an OCI perform the contract and the risk of the conflict is manageable. This process is separate from the agency head’s authority to waive the requirement to address an OCI in a particular acquisition.
- Standard Provisions and Clauses: The proposed rule includes two new standard solicitation provisions and three new contract clauses that, among other things, require offerors to certify they that have disclosed all relevant information regarding any OCI at the time of proposal, and also require contractors to quickly disclose any new or newly discovered OCI during performance. Contracting officers may tailor the standard language as appropriate to a particular contract. New prescriptions for the provisions and clauses will be added at FAR 3.1208.
- FAR 52.203-XX, Potential Organizational Conflict of Interest—Disclosure and Representation, is intended to “provide notice to offerors that the nature of the work described in the solicitation is such that OCIs may result from contract performance.”
- FAR 52.203-DD, Postaward Disclosure of Organizational Conflict of Interest, will require the contractor “to make a prompt and full disclosure of any new or newly discovered OCI during contract performance.”
- FAR 52.203-MM, Mitigation of Organizational Conflicts of Interest, will be incorporated into contracts that may “involve an OCI that can be addressed by an acceptable offeror-submitted mitigation plan prior to contract award.” Among other things, this clause will incorporate the mitigation plan into the contract award.
- FAR 52.203-LL, Limitation on Future Contracting, is a model clause for the contracting officer to use when the agency decides to address a potential conflict of interest through a limitation on future contracting.
- FAR 52.203-AA, Unequal Access to Information—Representation, will require the offeror “to identify, prior to submission of its offer, whether it or any of its affiliates had unequal access to any information that could provide an unfair competitive advantage.”
- Updated Definitions: The proposed rule includes updated definitions of several key terms, including an updated definition of OCI. The new definition of OCI includes the three categories developed by the Government Accountability Office and the Court of Federal Claims — (1) impaired objectivity, (2) biased ground rules, and (3) unequal access to information — but ties those categories to the underlying risks of impaired objectivity and unfair competitive advantage. The updated definitions include specific definitions for each of the three OCI categories and a definition of “firewall.”
- Scope of Application: The new rule, as proposed, will not be applicable to acquisitions of commercial products or to acquisitions below the Simplified Acquisition Threshold. Prime contracts for commercial services, however, are not exempt. In deciding to exempt commercial products but not commercial services, the FAR Council noted that “[m]any of the situations in which the Government is vulnerable to OCI occur when it acquires services from the commercial sector,” and that the Act explicitly requires protection of particular acquisitions against OCIs. Additionally, the proposed rule expressly states that any existing agency-specific conflict of interest statutes will take precedence over the new FAR rules.
- Disqualification as a Last Resort: Under the proposed rule, agencies must consider all other methods of resolution before disqualifying an offeror on the basis of an unequal access to information OCI.
- Natural Advantage: The proposed rule draws a distinction between the “natural advantage” that incumbent and development contractors gain from prior work performed versus an “unfair competitive advantage” gained through unequal access to information.
- Exchanges with Offerors: The proposed rule adds a paragraph to FAR 15.306 stating that exchanges with offerors to address OCIs do not constitute discussions as long as OCIs are not an evaluation factor and the exchanges do not result in a change to the offeror’s technical or cost proposal.
- OCI Examples: The proposed rule provides several illustrative examples of contractual tasks and situations likely to create OCIs and groups them based on whether they are likely to create an OCI due to impaired objectivity or an unfair competitive advantage.
- Methods for Addressing OCIs: The proposed rule provides that contracting officers may address OCI risk through avoidance of the OCI, limitations on future contracting, mitigation measures, acceptance of risk, or a combination of these techniques. FAR 3.1205 within the proposed new subpart describes each of these techniques.
- Novation Agreements: Consistent with the proposed language at FAR 3.1207-4, the proposed rule modifies FAR 42.1204 to no longer require the contracting officer to resolve an OCI prior to approving a novation request. Under the proposed rule, the contracting officer may elect to accept a risk when the conflict results from impaired objectivity (and the risk to performance is low) and approve the novation request without seeking a waiver.
The proposed rule was released by the FAR Council, which is a working group consisting of the Department of Defense, the General Services Administration, and the National Aeronautics and Space Administration. If implemented, it will be broadly applicable across the federal procurement landscape. However, the Act also requires executive agencies to establish or update their own OCI procedures to ensure that they implement and conform to the amended FAR rules. We can therefore expect future, agency-specific regulation changes addressing OCIs if the proposed FAR rule is adopted.
We will continue to monitor developments as the FAR Council progresses towards a final rule. Interested parties must submit written comments through the Federal eRulemaking portal on or before March 17, 2025.