How the DoD Allows Contractors to Grade Themselves and Write Their Own Contract Terms, Part II

In last week's Solutions column, Dina Rasor focused on the findings of a DoD Inspector General (IG) report that described Organizational Conflicts of Interest (OCI) along with contractor performance of inherently governmental functions in the management of the MRAP logistics program. This report caught my eye, as it was similar to a DoD IG report on the Iraq and Afghanistan ill-conceived

LOGCAP Support contract that led to so much fraud and waste. Bob Bauman and I discussed this report in two Solutions columns on contractors managing other contractors. (one and two) In this column I will tackle the issue of how DoD is increasingly creating these OCIs and is actually changing the regulations to encourage even more problems.

For many years the DoD has been increasingly contracting out services such as maintenance of vehicles, soldier life support, warehousing of equipment, and so forth. While there have been numerous problems with these efforts, they generally do not involve inherently governmental functions, nor do they create conflicts of interest.

Unfortunately, the DoD has also increasingly contracted out the management and oversight of these services. This has led to the insidious problem of contractors potentially making decisions which should be made by government employees. Contractors write the requirements for performing work on which they may bid. As Dina's column pointed out last week, they may make decisions or gain information which will allow them to have a competitive advantage in obtaining future business. Both of these potential situations may result in poor support to soldiers and the waste of taxpayer dollars. This should not be tolerated or encouraged and must be corrected.

Inherently governmental Functions

The Federal Acquisition Regulation (FAR) subpart 2.1 defines an inherently governmental function as a function that is so intimately related to public interest as to mandate performance by government employees. These functions include activities that require either the exercise of discretion in applying government authority or the making of value judgments in decisions for the government. These functions are those which should be performed by a government employee who acts only as an agent of the government. Contractor personnel are always acting as employees of the specific contractor as their first responsibility. This does not mean that they are evil people or even mistaken in their responsibilities. They just know who writes them a paycheck and for those companies that write the paychecks, their first duty is to maximize the profits to their shareholders.

For this reason, it just doesn't work to assign contractor employees to government agent roles, such as that of a government contracting officer or a program manager. In these roles, they may make decisions, write requirements documents, draft specifications, or perform other functions which decide the outcome of competitive procurements. These functions are either inherently governmental or, a fairly new term of art, close to inherently governmental.

Organizational Conflict of Interest

The FAR describes OCI (subpart 9.502(c): “An organizational conflict of interest may result when factors create an actual or potential conflict of interest on an instant contract, or when the nature of the work to be performed on the instant contract creates an actual or potential conflict of interest on a future acquisition. In the latter case, some restrictions on future activities of the contractor may be required.” This FAR requirement is based upon the law 10 U.S.C. §2383 (2010) which provides in the federal code the requirements to preclude organizational conflicts of interest.

The FAR also indicates the most common situation where such a conflict may occur:

This subpart is not limited to any particular kind of acquisition. However, organizational conflicts of interest are more likely to occur in contracts involving –

1. Management support services;
   
2. Consultant or other professional services;
   
3. Contractor performance of or assistance in technical evaluations; or
   
4. Systems engineering and technical direction work performed by a contractor that does not have overall contractual responsibility for development or production.

The alarming dilemma is the potential advantages that these contractors may obtain for future contracts to actually perform the services managed or supply the items that are engineered and managed. Such an advantage may thwart a full and open competition among equally placed competitors and that can waste money and threaten troops' lives with less that competent support.

Case Study One: LOGCAP Support Contract

This contract was originally designed by me in 2005 to provide planning for contingency operations to support and provide logistics for the combatant commanders in Europe, Southwest Asia, the Pacific, Asia and the Americas. However, the Army, after my involvement, allowed contractors to perform financial management and other activity over the operational LOGCAP contractors, along with program management support. By doing so, they created the potential for the conflicts of interest which, not surprisingly, ended up going beyond the potential of conflicts of interest to actual conflicts of interest. I unsuccessfully fought this trend while I trying to oversee the management of this contract.

On January 7, 2011, the DoD IG issued a report entitled, “Logistics Civil Augmentation Program Support Contract Needs to Comply with Acquisition Rules.” This report found, “LOGCAP officials instructed the LOGCAP support contractor to provide requirements development assistance for at least 71 non-LOGCAP contract requirements valued at approximately $1 billion and did not appropriately address potential organizational conflicts of interest or the support contractor's access to proprietary information with regard to non-LOGCAP contracts.” In other words, the Army allowed these “management” contractors to go way beyond their contracts and the rules and regulations of the federal government. This was exactly the problems I feared as I fought to keep conflict of interest out of the LOGCAP contract.

This report found:

Military Professional Resources Incorporated (MPRI), a subcontractor on the LOGCAP support contract with Serco, had MPRI employees working in the LOGCAP DPD [Deputy Program Director] office in Kuwait when Serco began assisting in developing PWSs [Performance Work Statement] for non-LOGCAP contracts.

MPRI was also part of the Combat Support Associates team performing work on the Combat Service Support Contract-Kuwait, a non-LOGCAP contract that Serco provided contract support to as part of its work under the LOGCAP support contract. This created a potential conflict of interest because, as a subcontractor for both the LOGCAP support contract and a non-LOGCAP performance contract, MPRI may have been in a position to favor its own products or capabilities when developing performance work statements for requirements that it may perform. A LOGCAP support contractor employee in the LOGCAP DPD office in Kuwait identified the potential conflict of interest and reported it to the LOGCAP DPD in Kuwait. In response, the LOGCAP support contractor discontinued the use of MPRI as a subcontractor in the LOGCAP DPD office in Kuwait and converted all of the MPRI employees to Serco employees. However, the LOGCAP DPD in Kuwait stated that he did not inform the PCO [Procuring Contracting Officer] of the situation, and the PCOs did not recall hearing about the potential conflict of interest with MPRI. Consequently, the LOGCAP support contract was never modified to prevent this from occurring in the future.

Had the military developed their own scopes of work and managed the process for providing them to a government contracting officer for solicitation, no such conflict of interest would have occurred. By turning this function over to a contractor who, in turn, employed subcontractors to perform part of the work, this became a barefaced conflict of interest. While this was a failure of the contracting office involved, it is also a failure of a system which asks contractors to perform what are inherently governmental functions.

Case Study Two: MRAP JLI Contract

As Dina outlined in her column last week, the Army has hired a Joint Logistics Integrator (JLI) for the Mine Resistant Ambush Protected (MRAP) vehicle program. On May 2, 2007, the secretary of defense designated the MRAP program as the highest priority DoD acquisition program and stated that all options to accelerate the production and fielding of the MRAP capability to the theater should be identified, assessed and applied where feasible. As usual these days, the military responded by outsourcing the JLI contractor to make up for the lack of internal Army abilities. The JLI contractor will provide:

• Maintenance
• Parts inventory control management
• Battle damage assessment and repair
• Deprocessing and warranty spares management
• Integrated logistics support
• Joint logistics operations
• Fielding services
• Theater personnel management
• Configuration management
• Transportation
• Logistics analyses

According to the Joint Supportability Plan, JLI support provides an operational view of all theater logistics efforts associated with the MRAP vehicle program, including oversight and management of fielding, training and sustainment operations. Additionally, JLI support provides the JPO MRAP forward with the capability to perform logistics engineering analysis and provides insight into MRAP vehicle fleet readiness and sustainment.

Four years later, the DoD IG issued Report No. D-2011-081 on July 11, 2011, entitled “Contract Management of Joint Logistics Integrator Services in Support of Mine Resistant Ambush Protected Vehicles Needs Improvement.” The findings of conflict of interest and other problems are similar to those on the LOGCAP Support Contract. The IG found that the contractor was required to perform inherently governmental actions and created organizational conflicts of interest.

One of the inherently governmental actions which Dina mentioned in last week's column was rather incredible. The IG found, “The officials inappropriately allowed the contractor to direct DoD personnel, participate in disciplinary actions of DoD personnel, prepare and sign SOPs [(Standard Operating Procedures], and participate in other situations where contractor employees could be assumed to be DoD employees or representatives.”

The idea that a contractor participated in disciplinary actions against government employees is truly beyond the scope of anything I have previously seen in my many years of managing Army contracts. The report found that a contractor employed as the assistant program manager in Iraq wrote an email in which “… the assistant program manager (contractor employee) stated that he and the site leads must be perceived as in charge of the MRAP vehicle program.” By confirming this situation, the contractor assistant program manager directed the actions of government personnel, which is incredibly unacceptable in any contractor situation.

In another incident the DoD IG found that:

The assistant program manager [contractor employee] e-mailed the battalion commander and RRAD Liaison Officer to apprise them of this action [his recommendation of a letter of reprimand for a government employee]. Although the battalion commander had requested the assistant program manager's recommendation, it was not appropriate for the assistant program manager to make recommendations concerning a DoD employee.

DoD Actions

These reports come right after the DoD has taken steps to actually loosen the control over conflict-of-interest regulations. In December of last year, Robert Brodsky reported in Government Executive, “Industry officials scored a major regulatory victory at the end of December when the Defense Department agreed to scale back its final rule on organizational conflicts of interests, removing a host of controversial provisions that had drawn the ire of contracting organizations.” Those contracting organizations were industry groups such as the Professional Services Council.

While the Defense Federal Acquisition Regulation (DFAR) still requires companies to voluntarily disclose any possible organizational conflicts of interest before bidding on projects, the new version limits its application to major defense weapons systems programs and systems engineering and technical assistance contracting.

Brodsky additionally reports, “In a surprise to some legal observers, the final rule avoids altogether a host of proposed revisions, included in the draft notice, which would have overhauled the larger federal organizational conflict-of-interest statute. Defense said the policy changes could cause confusion, delays and require possible changes to the Federal Acquisition Regulation (FAR). The DoD IG reports indicate that the situation, with obvious conflicts of interest in contracted activities, is much worse than confusion and delay – it is a green light for contractors to use and promote conflicts of interest to their advantage.”

In the final rule, the DoD made a major change in guidance for contracting officials faced with resolving potential conflicts of interest. Formerly, the preferred method was to mitigate the conflict through institutional firewalls, delegating certain tasks to a subcontractor or disqualification from bidding. Industry officials, of course, did not like this policy. The notice instructs contracting officers to “not impose across-the-board restrictions or limitations on the use of particular resolution methods.” The notice also says that, if the resolution method does not work, then contracting officers may request a waiver.

The Solution

The DoD must take the results of their IG in these two cases very seriously. As we noted above, OCIs damage the integrity of the entire contracting system. If some firms have superior knowledge, gained from participating in the management of a program, then there is unfair competition for the major work on the program. Even the possibility of unfair competition discourages other contractors, who may have a better and less expensive solution, from bidding.

The DoD should take the following steps:

1. The new DFARS rule should immediately be re-examined. A return to mandating mitigation strategies, up to disqualification from bidding, should be the standard. Government contracting officers should be empowered and even required to find the existence of OCIs by possible offerors and exercise a strict control over whether firms with OCIs may participate.
   
2. Solicitations should be structured to eliminate OCIs. When I created the LOGCP Support Contract, I inserted specific language that the holder of this contract could not participate in the operational side of LOGCAP, completely eliminating this OCI potential. Unfortunately, subsequent decisions expanded the scope of the contract and created other OCIs, which were identified by the DoD IG.
   
3. The expected FAR revision of the OCI provision should maintain this standard.
   
4. The DoD needs to curtail the contracting out of program management type functions that are either inherently governmental or near inherently governmental. These functions are the ones which are generating the OCI problems.
   
5. Congress must live up to its oversight responsibilities. If the DoD does not correct these problems and refuses to write effective oversight rules, then the Congress needs to put in tough legal language to stop this insidious practice. They can do this with authorization language in the 2011 defense bill.

Dina suggested in last week's column that the Congress needed to pass criminal statutes to punish government contract managers and government contractors who blatantly ignore the rule and regulation of the conflict-of-interest rules. As an Army government contract manager of many years, I hope it has not come to this as the only remedy. However, if the Army does not take action based upon the IG reports, then Dina's suggestion may be the necessary solution. I would propose that such a statue place the service acquisition leadership (senior executives and political appointees) liable for such actions within their organizations. It is my experience that the working level contract managers are pressured into these actions by “leadership.”