Organizational conflicts of interest (OCIs) should be front of mind for any federal government contractor. The mere presence of an OCI may cause contractors to reconsider which contracting opportunities to pursue, reshape teaming and subcontracting arrangements, and revise mitigation policies, procedures, and plans in ways that impact company-wide systems and processes. Most significantly, an OCI may be enough for the government to strip a contractor of an award it just won.
Recently, the government published a proposed rule (Proposed Rule), which, if finalized, will significantly change how the government and contractors analyze OCIs and potentially avoid their draconian effects. This blog highlights some of the changes in the Proposed Rule, discusses the impacts those revisions will have on government contractors facing potential OCIs, and offers suggestions for ensuring compliance with the new OCI regime.
Background
Historically, the Federal Acquisition Regulation (FAR) addressed OCIs in Subpart 9.5, which covers topics related to contractor qualifications. On December 27, 2022, the government enacted the Preventing Organizational Conflicts of Interest in Federal Acquisition Act[1] (Statute). That statute directed the FAR Council to revise the FAR to update definitions and guidance related to OCIs, provide illustrative examples of potential OCIs, and provide agencies with solicitation provisions and contract clauses to avoid or mitigate OCIs, among other things.
Based on this new statutory directive, the FAR Council published the Proposed Rule on January 15, 2025. The Proposed Rule contemplates the elimination of FAR Subpart 9.5 and the creation of a new FAR Subpart 3.12, Organizational Conflicts of Interest, which will house the material changes and additions to the regulations surrounding OCIs. The FAR Council requested that interested parties submit any comments on the proposed rule by March 17, 2025, so that they may be considered in formulating the final rule to be published potentially later this year.
New Definitions to Bear in Mind
The Proposed Rule contemplates revisions to the definitions of certain key terms relative to OCIs as well as the creation of “several new definitions,” each of which contractors should familiarize themselves with to ensure compliance with the new OCI regime.
Beginning with the term “OCI” itself, the Proposed Rule contemplates a more comprehensive definition than previously provided in the FAR, defining the term to mean “that an entity or its affiliate(s) has impaired objectivity or an unfair competitive advantage as a result of other activities or relationships with other entities or their affiliates, including with public, private, domestic, and foreign entities.” The Proposed Rule further defines certain terms within that definition, including “entity,” “biased ground rules,” “impaired objectivity,” and “unequal access to information.” Significantly, however, the Proposed Rule does not define the term “affiliates,” leaving one to guess whether the definition of that term in FAR 2.101—“associated business concerns or individuals if, directly or indirectly either one controls or can control the other”—or the definition developed through preexisting case law applies.
Further, the Proposed Rule contemplates the creation of a new term, “firewall,” which is defined as “a barrier against the unauthorized flow of information” and which “may consist of a variety of elements, including organizational and physical separation; facility and workspace access restrictions; information system access restrictions; independent compensation systems; and individual and organizational nondisclosure agreements.” Previously, the FAR had not included or defined the term “firewall,” but the FAR Council proposed to create and define this new term because it reflects an important mitigation strategy for unequal access to information OCIs.
Which Procurements are Impacted
The requirements of the Proposed Rule are applicable to most procurements but, notably, do not apply to (1) acquisitions below the simplified acquisition threshold, (2) contracts for commercial products, and (3) subcontracts for commercial products or services.
Examples May Be Dispositive
The Proposed Rules include 16 examples of potential OCIs in three categories: (1) impaired objectivity, (2) biased ground rules, and (3) unequal access to information. Contractors should familiarize themselves with each of these examples to better identify OCIs.
New Guidance for Addressing OCIs
The Proposed Rule provides guidance on methods for addressing OCIs, including “avoidance,” “limitations on future contracting,” “mitigation,” and government “assessments that the risk inherent in the conflict is acceptable.”
While those methods are primarily focused on actions the government can take, contractors should pay particular attention to the new guidance on mitigation, which is defined as “an action taken to reduce the risk from an” OCI. Significantly, with respect to mitigation, the Proposed Rule explains that when this method “is utilized, contracting officers shall incorporate into the contract a Government-approved mitigation plan, that reflects the actions an offeror has agreed to take to mitigate an organizational conflict of interest.” Put differently, a contractor’s mitigation plan now must become contractually binding and may result in future claims or other types of action against the contractor if not followed.
New Solicitation Provisions and Contract Clauses to Monitor
As directed by the Statute, the Proposed Rule also includes several new solicitation provisions and clauses contractors should monitor if the rule is finalized.
FAR 52.203-XX, Disclosure and Representation, is required in solicitations if the Contracting Officer (CO) identifies the likelihood of OCIs with respect to the procurement and mandates that offerors disclose any relevant information and represent that they have done so.
FAR 52.203-DD, Postaward Disclosure, is required if the solicitation includes FAR 52.203-XX and requires awardees to disclose any OCIs identified during the performance of the contract and newly discovered OCIs that existed before the award. The clause further permits the government to terminate a contract if a reported OCI cannot be acceptably addressed and requires contractors to flow the clause down to their subcontractors.
FAR 52.203-MM, Mitigation, is required in solicitations if the resulting contract may involve an OCI that can be addressed by an OCI mitigation plan prior to award and makes the government-approved mitigation plan contractually binding.
FAR 52.203-AA, Unequal Access to Information—Representation, requires an offeror to determine if it has any unequal access to information and to inform the CO prior to offer submission. The provision also requires an offeror to represent either that no firewall is necessary or that an implemented firewall was not breached during offer preparation.
Takeaways:
- Educate Yourself: The Proposed Rule is lengthy and contains significant changes and additional details regarding many aspects of the government’s OCI regime. Once the Rule becomes final, contractors need to familiarize themselves and comply with the new requirements to ensure that they are not negatively affected.
- Disclosure and Representation Requirements Demand Diligence: There are new disclosure, updated disclosure, and representation requirements that must be strictly followed should the Rule become final. Contractors should consider the requirements for determining possible OCIs and the possibility of working with COs to identify and address them. Misrepresentations may lead to significant liability under the False Claims Act or other actions against contractors.
- Identify and Mitigate Early: The Proposed Rule focuses on identifying OCIs early so that they may be addressed and contemplates significant opportunities for determining acceptable risk, where available, and mitigating OCIs with an emphasis on firewalls. Contractors should plan ahead to make sure they have identified and mitigated any potential OCIs before pursuing opportunities.
- Stay Up to Date: Comments on the Proposed Rule are due by March 17, 2025, and the FAR Council may make substantial changes in any final rule it issues. Additionally, Section 881 of the National Defense Authorization Act for FY 2025, which became law just before the Proposed Rule was issued, places tighter restrictions on the ability to waive OCIs than those currently included in the Proposed Rule. The final rule may well incorporate those restrictions and will be one we continue to track closely in the coming months.
If you have any questions regarding the implications of the Proposed Rule or are looking to gain a better understanding of the current OCI regime, please contact Jackie Unger, Katie Burrows, Eric Valle, Chris Jannace, or another member of PilieroMazza’s Government Contracts practice group.
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[1] Pub. L. 117-324, 41 U.S.C. § 2303 note (Dec. 27, 2022).
