Government Contracts Monitor

Contractors Performing Acquisition Functions Must Prevent Personal Conflicts of Interest

November 9, 2011

Effective December 2, 2011, contractors and subcontractors who are performing acquisition functions will be required to identify and prevent personal conflicts of interest of their employees and prohibit employees who have access to non-public information from using such information for personal gain.  This Final Rule applies to certain contracts, as well as task orders and delivery orders, over the simplified acquisition threshold (currently $150,000) awarded on or after the effective date.

Specifically, the Rule applies only to contracts and subcontracts involving “acquisition functions closely associated with inherently governmental functions.”  This means supporting or providing advice or recommendations with regard to the following activities of a Federal agency:

• Planning acquisitions
• Determining what supplies or services are to be acquired by the Government, including developing statements of work
• Developing or approving any contractual documents, to include documents defining requirements, incentive plans, and evaluation criteria
• Evaluating contract proposals
• Awarding Government contracts
• Administering contracts (including ordering changes or giving technical direction in contract performance or contract quantities, evaluating contractor performance, and accepting or rejecting contractor products or services)
• Terminating contracts
• Determining whether contract costs are reasonable, allocable, and allowable

According to the Rule, a “personal conflict of interest” means a situation in which an 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 definition does not include small, insignificant interests that would not “impair the employee’s ability to act impartially and in the best interest of the Government.” The Rule sets out a non-exclusive list of possible sources for personal conflicts of interest.

If a contractor has employees who are providing any of the above-listed acquisition functions, they are referred to as “covered employees.”  Contractors providing these acquisition services must do the following:

1. Have procedures in place to screen covered employees for potential conflicts of interest.  The Rule affords contractors some flexibility in establishing the procedures but specifies that the contractor should obtain and maintain from each covered employee a disclosure of interests that might be affected by the task to which the employee is assigned.  The contractor must also require that the employee update the disclosure statement whenever the employee’s circumstances change.  One acceptable procedure described in the comments accompanying the Rule was for the contractor to make a list of entities affected by the upcoming work and have the employees review the list and disclose any potential conflicts with those entities.
2. Prevent personal conflicts of interest by not assigning an employee to a task for which the employee has identified a personal conflict of interest.
3. Prohibit the use of non-public information for personal gain and have each covered employee sign a non-disclosure agreement prohibiting disclosure of the non-public information that the employee has access to by working under the contract.     
4. Inform employees of their obligations to disclose and prevent personal conflicts of interest and to not use non-public information for personal gain.  Additionally, contractors should inform their employees that they should avoid even the appearance of a personal conflict of interest.
5. Maintain effective oversight to verify compliance.
6. Take appropriate disciplinary action if an employee fails to comply with the procedures.
7. Report to the Contracting Officer any violations of a covered employee as soon as identified.  The report should include a description of the violation and the Contractor’s proposed actions taken in response of the violation. 

Flow-Down Requirements

The contractor must flow down these requirements to subcontractors whose subcontract valued in excess of $150,000 whose employees qualify as covered employees.  If a subcontractor is self-employed and is performing acquisition functions, then the individual subcontractor is treated as a covered employee of the prime contractor and must comply with the prime contractor’s screening procedures.  However, other than self-employed subcontractors, prime contractors are not responsible for compliance of subcontractor employees.   

Action Items

Companies who offer acquisition services should begin establishing procedures to comply with this Rule as soon as possible in order to be fully prepared when the Rule becomes effective on December 2, 2011.  Key steps include:

1. Determine what type of screening procedures you will use to identify your covered employees’ potential conflicts of interest.  Decide how you will ensure full disclosure from employees and how will you maintain and update their disclosures. 
2. Have your employees sign a new or modified non-disclosure agreement that addresses the Rule’s requirements.
3. Determine how you will notify employees of their obligations.  The Rule does not specify how this must be done, but consider including informing your employees both orally and in writing and obtaining a signed acknowledgment that they have been informed of their obligations.
4. Decide what form of disciplinary procedures you will use if a covered employee violates the rules.  You should include this information in the notification to your employees and modify existing employee policies and handbooks to reflect the new procedures.       
5. Create a system of oversight and procedures for notifying the contracting officer in the event of a violation.

Katie Calogero is the attorney responsible for the content of this article.