Open season: The hunt is on for contracting conflicts

Government officials are more candid these days about keeping contractors at a distance to avoid undue influence on their programs. And contractors are trying to figure out how far away they should stay.

Companies need to find the line between jobs they can and cannot do, and beyond that, ask themselves a lot of questions to make certain they are free of any conflicts of interest.

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As businesses in recent years have increased their presence in new areas based on the government’s demands, companies now must assess how far their various divisions have spread. Sometimes that soul-searching has companies facing the decision of which side of the project they want to be on: consulting or working on a project.

Executives say they can’t be sure if their business has crossed the line into forbidden territory without a clear definition of inherently governmental functions. Companies’ ideas about organizational conflicts of interest are questionable until officials draw distinct lines.

Arnold Punaro, executive vice president at Sciences Applications International Corp., said companies need that bright line because gray areas create headaches.

“The government has to come to grips with what is and isn’t inherently governmental,” he said.

Congress gave the Office of Federal Procurement Policy one year to craft a definition. It was due in the fall, but everyone is still waiting.

However, government experts, former officials who struggled with a definition in the early 1990s and industry executives say it isn’t as easy as it seems to distinguish what kind of work only government employees should do.

Nevertheless, “the challenge of appropriately defining inherently governmental remains,” said Lisa Mascolo, managing director of Accenture Ltd.'s U.S. Federal Client Service Group.

Once a definition is released, companies must track down possible organizational conflicts of interest. These days, government oversight officials are diligently hunting for any possible conflicts.

For example, the Defense Department Inspector General's Office scolded the Army for letting SAIC get too close to influencing a program in its own favor.

SAIC had been the primary commercial contractor for advisory and assistance services to the Army’s Future Combat Systems program office since 1999, according to a DOD IG report released in January.

In addition to performing advisory services, the report states that SAIC and another company were serving as lead systems integrators for system development and demonstration of the FCS program. However, the Army’s contract solicitation explicitly excludes a company with significant involvement in developing defense systems.

SAIC told the IG that its service development and demonstration contract was a systems integration contract, not a systems development contract, according to the report. In a separate statement, SAIC said the IG’s conclusions are fundamentally flawed, and the IG “pushes an extreme and unprecedented policy position.”

“The IG espoused an organizational conflict of interest that isn’t in regulation,” Punaro said.

That is why the bright lines of regulation become so important, and companies are waiting to hear about inherently government functions in addition to more rules about conflicts based on the Weapons Systems Acquisition Reform Act, which President Barack Obama signed into law last year.

The government has been cracking down on such organizational conflicts of interest because officials want to prevent companies from getting an unfair advantage and influencing a program.

John Chierichella, partner at Sheppard Mullins Richter and Hamilton law firm, said corporations need to appraise all of the services that their divisions offer to government clients. They must think enterprisewide and across their whole family of businesses.

One of the most prominent examples of a major company recognizing a potential conflict of interest was the Northrop Grumman Corp. and TASC situation. TASC, a former unit of Northrop Grumman, provides advanced systems engineering, technical assistance, and other analysis and advisory services, primarily to the Defense Department and intelligence agencies. Other parts of Northrop Grumman then competed with other contractors to win awards to build and maintain those systems.

As a result, Northrop Grumman announced in November 2009 that it had signed an agreement to sell its TASC unit for $1.65 billion to an investment group led by General Atlantic LLC and Kohlberg Kravis Roberts and Co.

The sale was necessary because Northrop Grumman was feeling pressure to comply with new organizational conflicts of interest laws, experts say. Northrop Grumman declined to comment.

David Langstaff, TASC's chairman of the board, said government officials are searching for consultants with independent advice and companies that can handle the work of building the system.

When it comes to avoiding conflicts, “companies have to decide which side of the fence they want to play on,” he said. And that decision will ultimately help the customer, making government officials more confident that agencies are getting a fair deal.

Joan Wolfle, vice president at Booz Allen Hamilton Inc., said the company’s reputation depends on how it serves its clients and that the company strives to meet the highest standards. Booz Allen has policies and programs to avoid even the perception of a conflict, she said. The company also has tested processes for uncovering and resolving potential conflicts.

“Our overarching policy is to avoid rather than mitigate conflicts of interest" by continually monitoring the company’s work, she said.

Preparing for different scenarios, SAIC has devised various mitigation plans to meet the new definition of an inherently governmental function and the regulations on organizational conflicts that officials are developing, Punaro said. He and the rest of industry are waiting to find out what the new regulations say and how industry will need to respond when government customers begin asking about their plans.

“We want to be ready so we can answer that question quickly," he said.