INTRODUCTION

Risk.1) possibility of loss or injury: PERIL 2) a dangerous element or factor.

Webster's New Collegiate Dictionary (1976)

Types of risk may include schedule risk, risk of technical obsolescence, cost risk, risk implicit in a particular contract type, technical feasibility, dependencies between a new project and other projects or systems, the number of simultaneous high risk projects to be monitored, funding availability, and program management risk.

FAR 39.102 (b) Management of Risk (Acquisition of Information Technology)

Take calculated risks. That is something quite different from being rash.

General George S. Patton

Government contracting bibliographies are full of treatises and articles that tell us how contractors can reduce their risks in contracting with the federal government. As most contractors with any experience know, the risks are many. It is not the purpose of this paper to attempt to address the myriad of risks that companies face in contracting with the federal government. Rather, the paper addresses a number of fairly new and discrete issues that contractors now face as they perform their government contracts.


POTHOLE NO. 1: Government Outsourcing and the Federal Acquisition Workforce

One of the most fashionable yet controversial terms in the contracting lexicon today is "outsourcing." In the government contracting community, the term is used in two ways. First, the term is used to refer to the federal government's practice of contracting with non-government entities to fulfill functions that have been or might be performed by government employees. Second, the term is used to refer to the essentially identical practice in which non-government entities contract with outside providers to perform functions that the entities' own employees normally might perform. With the second usage, different issues arise when domestic outsourcing and foreign (or global) outsourcing are considered. Pothole No. 1 deals with a major issue implicated by government outsourcing.

Controversy rages with regard to government outsourcing. Much administrative and legislative effort has been expended in the last several years, with more to follow, to ensure that the outsourcing the federal government is pursuing is both productive and fair. 1/ The present administration has signaled that it intends to continue the recent trend of increased outsourcing. In contrast, many Democrats oppose this trend. An increasing number of observers and members of the government contracting community believe that the most significant ramifications of the outsourcing phenomenon are those associated with the quality and magnitude of the government's acquisition workforce. Sirens have sounded from all corners that the government shortly will experience a significant exodus of its most experienced workforce. Even proponents of strong defense spending concede that as federal defense budgets dramatically decreased in the mid- to late 1990s, there was a need to reduce the size of the government's acquisition workforce. But now, many think the tide of exiting acquisition professionals has become an irresistible tsunami that threatens to damage the quality of all federal procurement. 2/

Even the seemingly unrelated misfortunes of Air Force procurements that were tainted by Darleen Druyun's missteps are being viewed as a manifestation of an aging and receding acquisition workforce that lacked expertise and the imprimatur of a transient front office sufficient to question the edicts of the "Dragon Lady." And, of course, these fundamental deficiencies are not unique to defense agencies. One of the most experienced staffers on Capitol Hill highlights the lack of experience and training of an alarmingly high number of GSA contracting officers, specialists and user agency personnel.

As disturbing as all of this may be, the prospects for the future may be even more bleak. With Vice President Gore's National Performance Review (Reinventing Government) and many of the FASA/FARA acquisition reforms of the 1990s, shapers of the federal procurement system pushed commercialization initiatives that were designed to invest acquisition personnel with enhanced discretion. 3/ Acquisition professionals were suddenly confronted with a beguiling smorgasbord of options: Performance-Based Contracting, Other Transactions, FAR Part 12 Commercial Item Contracting, Share in Savings (and Revenue) contracting and the ever-expanding world of Multiple Award, Government Wide, Blanket Purchase Agreement, Task and Delivery Order Contracting. At the same time, the bid protest, one of industry's tools to self-police the process, was pared back. 4/ This has left some in Congress to concede that what was once a good and necessary idea - to exempt task and delivery orders from the nuisance of bid protests - may warrant revisiting. 5/

While the will to address these problems may or may not be strong, the means are lacking:

		The need to shrink the bulging federal deficit has led even a hawkish administration to propose a significantly reduced defense budget. Even the most endeared of pet projects are feeling the scalpel - the F-22, C-130J and fleets of ships. Under these circumstances, nearly all procurement funding is vulnerable to cuts, and acquisition training often is viewed as being far down the list of priorities.
		While some meaningful attempts to stimulate comprehensive acquisition training have been advanced, training lags far behind the workforce attrition rate.
		Absent considerable (and unlikely) congressional resolve to devote money to hire and train a new acquisition workforce, there simply are not sufficient numbers of young graduates who can be drawn to the profession so that the damage can be abated, much less reversed. 6/

If this is correct, increased outsourcing likely will be the only option for the foreseeable future. And, as one observer notes, the unfortunate result of all of this may be that the poorly trained or inexperienced federal acquisition workforce will not even be in a position to know whether the outsource contractors are performing the work they have contracted to perform. Again, we are not suggesting that federal outsourcing is undesirable or unwarranted per se; the problem lies with the lack of a focused plan to replace the shrinking acquisition workforce with a (likely smaller) well-trained group of professionals.

Many highly-credentialed and credible experts in the area have characterized the phenomenon in terms of the buzzword de jure: "network-centric." Stephen Goldsmith, former mayor of Indianapolis and professor at Harvard's John F. Kennedy School of Government, and William Eggers, global director of Deloitte Research, Public Sector and senior fellow at the Manhattan Institute for Policy Research, have authored what most consider to be the leading book on the topic, "Governing by Network: The New Shape of the Public Sector." 7/ Messrs. Goldsmith and Eggers contend that the question is not whether or not the federal government should outsource - they contend that we are way beyond that situation; the government already is a complex series of outsourcing networks that work in horizontal fashion. The problem, as Professor Donald Kettl of the University of Pennsylvania notes in the book's Forward, is government managers have not realized that the network exists and that it will become larger and more complex. Therefore, government managers have done nothing to prepare the government workforce to manage the network:

[G]overnment has come to rely far more on a vast complex of nongovernmental partners, but it has not yet figured out how to manage them well. There are huge advantages to the government's reliance on these networks of private contractors.. Moreover, even if we wanted to retreat from government's reliance on these systems, they have become so deeply entrenched - politically and administratively - that there is no going back. 8/

POTHOLE NO. 2: Potential Unintended Consequences From Contractor Outsourcing

A.

Management and Legal Issues

Outsourcing by government contractors is merely a function of the outsourcing wave that now is attending nearly all segments of American business. American businesses in general are focused on shedding the costs and inefficiencies associated with workforces that are larger and less flexible than competitive positions will allow. Shed workers - shed costs; become lean and mean. The practice has met with much success thus far.

However, the practice may become more complicated when it is exercised in a government contracting environment. Unintended consequences may follow outsourcing, and many think the industry has yet to experience or identify many of these potential consequences. It may be that, like the government, contractors must add workers with special skills to administer the outsourcing. Outsourcing partners that are not apprised of a prime contractor's critical milestones and requirements often are unable to, or are disinterested in, working with the prime contractor to meet unusual customer needs or surges in requirements. Further, if the outsourcing involves provision of a product designated as a deliverable under the prime contract, rather than the more typical overhead or administrative service, the provider may have little interest in or ability to control supply of the product - either in a way that can meet surges or in a way that limits supply to increase demand. 9/

B.

Global Outsourcing: Export Control Issues?

Some in the government contracting community have begun to wonder aloud about the potential implications of global outsourcing by government contractors. The topic has been the battleground of political jousters and saw considerable air time during the presidential debates. The loss of American jobs is pitted against the need for American companies to tighten their cost belts to propel the domestic economy upward through enhanced worker productivity. Some impressively educated champions of American business argue forcefully that global outsourcing of the "right kind" of work in fact enhances overall productivity by allowing manufacturing companies to devote more resources to producing products and fewer resources to performing administrative tasks.

Perhaps the quintessential global outsourcing (or off-shoring) job is the telebank employee. Relatively (or often extremely) well-educated rows of foreigners - often sitting in India, China or Ireland - use company-provided databases to answer employee inquiries about all kinds of matters. They may have access to employee medical and financial records, raising questions about the applicability of HIPAA or even Sarbanes-Oxley and other laws for U.S. prime contractors. 10/

As the work of the provider becomes more integral to the prime contractor's performance of its U.S. government contracts, issues arise regarding the prime contractor's compliance with export control restrictions. Obviously, thorny problems present themselves if the foreign workers find their way into company databases that contain information controlled by the ITARS or Munitions List, possibly creating unintended and unauthorized transfers of controlled data. The government contracting community and U.S. business community generally have been working for some time to secure relaxation and redefinition of export control requirements, with marginal success given the events of 9/11 and additional threats. While efforts continue in this regard, the problem of potential violations of export control laws through global outsourcing remains a largely unaddressed issue. 11/


POTHOLE NO. 3: "No Remedy" Risks Associated with Certain Types of Contracting Vehicles that Are Presently Popular

A.

Vehicles With Limited or No Protest Rights

1.

Other Transactions

The Homeland Security Act of 2002 authorized the Secretary of the Department of Homeland Security to employ the same type of "Other Transaction" (OT) authority that the Department of Defense has used for years. 12/ In October 2004, DHS issued policy guidance governing its OT contracting activities, which in many ways but not all, reflected guidance that DOD issued to govern its use of OTs. The unusual nature of the OT contracting vehicle is well-documented and highly examined in the government contracting community. Congress authorized use of the OT vehicle with the hope that DOD and DHS could entice companies that do not contract with the government in meaningful volume to employ innovative technologies that will help the government meet its defense and homeland security challenges. 13/ Much of the enticement for commercial companies comes from wholesale exemption from standard government contracting regulations and procedures. For example, DHS asserts that the following procurement-related laws are inapplicable to its OTs: 14/

Law	Description
§§202-204 of the Bayh-Dole Act (35 USC §§200 to 212).	Prescribes the government's rights in patentable inventions made with government funds.
Competition in Contracting Act, Pub. L. No. 98-369 (1984), as amended.	Promotes the use of competitive procurement procedures and prescribes uniform, governmentwide policies and procedures regarding contract formation, award, publication, and cost or pricing data.
Contract Disputes Act, Pub. L. No. 95-563 (1978), as amended, 41 USC §§601, et seq.	Provides for the resolution of claims and disputes relating to government contracts.
Procurement Protest Systems, Subtitle D of Competition in Contracting Act, Pub. L. No. 98-369 (1984), 31 USC §§3551, et seq.	Provides statutory basis for procurement protests by interested parties to the Comptroller General.
31 USC §1352, limitation on the use of appropriated funds to influence certain federal contracting and financial transactions.	Prohibits the use of funds to influence or attempt to influence government officials or members of Congress in connection with the award of contracts, grants, loans or cooperative agreements.
Anti-Kickback Act of 1986, 41 USC §§51 to 58.	Prohibits kickbacks in connection with government contracts and provides civil and criminal penalties.
Procurement Integrity Provisions, §27 of the Office of Federal Procurement Policy Act, 41 USC §423.	Imposes civil, criminal and administrative sanctions against persons who inappropriately disclose or obtain source selection information or contractor bid and proposal information.
Service Contract Act, 41 USC §§351, et seq.; Walsh Healey Act, 41 USC §§35 to 45; Fair Labor Standards Act of 1938, 29 USC §§201 to 219.	Provide protections for contractor employees.
Drug-Free Workplace Act of 1988, 41 USC §§701 to 707.	Eliminates any connection between drug use or distribution and federal contracts, cooperative agreements or grants.
Buy American Act, 41 USC §§10-a to 10-d.	Provides preferences for domestic end products.

On December 15, 2004, the Government Accountability Office (GAO) issued a report analyzing DHS's progress and relative success in using its OT authority. As with many other DHS activities, the OT contracting activities received a marginal grade from GAO. 15/ GAO focused particular attention on two perceived shortcomings:

		DHS's failure to specify in its policy guidance when acquisition personnel should use independent audits to ensure that payments to contractors are correct.
		DHS's failure to establish OT training requirements for acquisition personnel. 16/

GAO also observed:

The S&T Directorate plans an increasing number of mission programs that could use its other transactions authority, but DHS's current contracting workforce may not be sufficient to manage this workload. DHS has relied on a small number of key S&T program personnel, who are experienced other transactions practitioners, to develop or approve solicitations. In fiscal year 2004, two of the S&T Directorate's programs resulted in other transactions awards - Counter-MANPADS and Chem-Bio. In fiscal year 2005, the S&T Directorate could award other transaction agreements for at least eight additional programs, which could significantly increase its contracting workload because some programs could include multiple other transactions awards..

DHS is currently developing a plan to address contracting workforce issues. Senior DHS officials told us that their strategy is to generally have in-house contracting staff award and administer all of the S&T Directorate's other transactions and R&D projects by fiscal year 2006. 17/

DHS considers the procurement law authorizing bid protests to GAO to be inapplicable to OT contracts. 18/ Even so, DHS included in its OTs a clause that envisions a protest of sorts, which DHS calls an "objection":

5.5.6 Regulations Governing Objections to Solicitation and Award

Any objections to the terms of this solicitation, once released in final form, or to the conduct of receipt, evaluation, or award of Agreements must be presented in writing within ten calendar days of (1) the release of this solicitation, or (2) the date the objector knows or should have known the basis for its objection. Objections shall be provided in letter format, clearly stating that it is an objection to this solicitation or to the conduct of evaluation or award of an Agreement, and providing a clearly detailed factual statement of the basis for objection. Failure to comply with these directions is a basis for summary dismissal of the objection. Mail objections to the address listed in the proposal delivery information. 19/

As GAO notes in its report, DHS has begun to address its OT procedures and practices in many areas but has done little beyond initial activity in other areas. For example, when the first "Objection" was filed in connection with the Counter-MANPADS program in October 2004, DHS had not prepared procedures to govern how the Objection process was to proceed or how it would be handled internally. The procedure remains largely a mystery, not only to external participants but also to DHS personnel.

2.

Task and Delivery Orders Under Multiple-Award ID/IQ Contracts

The year 1994 saw a wave of procurement-related legislation that has shaped the government contracting landscape since. Chief among the statutes was FASA or the Federal Acquisition Streamlining Act of 1994. 20/ The legislation included provisions designed to encourage the federal government's use of multiple award task and delivery order contracts. The thought was, and largely remains, that increased use of this type of contracting vehicle would maximize competition for work that previously had been bundled into single source, omnibus contracts. Critics of the omnibus contract argued that the winner-take-all approach deprived unsuccessful bidders and offerors from the opportunity to compete for large quantities of work once the award was made and, most important, deprived the government of the opportunity to enjoy the benefits that competition can bring to the fulfillment of on-going agency needs. Thus, FASA provides:

	(b)	Multiple award contracts
	When multiple contracts are awarded under section 253h(d)(1)(B) or 253i(e) of this title, all contractors awarded such contracts shall be provided a fair opportunity to be considered, pursuant to procedures set forth in the contracts, for each task or delivery order in excess of $2,500 that is to be issued under any of the contracts unless --
	(1)	the executive agency's need for the services or property ordered is of such unusual urgency that providing such opportunity to all such contractors would result in unacceptable delays in fulfilling that need;
	(2)	only one such contractor is capable of providing the services or property required at the level of quality required because the services or property ordered are unique or highly specialized;
	(3)	the task or delivery order should be issued on a sole-source basis in the interest of economy and efficiency because it is a logical follow-up to a task or delivery order already issued on a competitive basis; or
	(4)	it is necessary to place the order with a particular contractor in order to satisfy a minimum guarantee. 21/

FASA drafters (with the input of federal acquisition personnel) recognized, however, the disruption to contracting that would follow if disappointed bidders and offerors were permitted to protest each task and delivery order issued pursuant to the legislation's provisions. Accordingly, they exempted the award of task and delivery orders under multiple award contracts from protest jurisdiction as follows:

A protest is not authorized in connection with the issuance or proposed issuance of a task or delivery order except for a protest on the ground that the order increases the scope, period, or maximum value of the contract under which the order is issued. 22/

Like so many procurement-related statutes, FASA proscriptions regarding the filing of protests appeared to be relatively straightforward on the surface but proved to be anything but. MAS contractors quickly figured out that award of a task/delivery order contract could be a hollow victory if the awarding agency structured the award in such a way that it effectively eliminated them from competing for any further orders. And, GAO agreed. It issued a decision that clarified FASA's bid protest proscription:

In light of this context, where an agency issues a task- or delivery-order solicitation that essentially abandons the multiple-award, fair-consideration scheme envisioned under FASA in favor of selecting a single contractor for future task or delivery orders under the ID/IQ contract, we will find that there has been a downselection and review a challenge to the resulting award. 23/

The rub for both the contracting community and GAO has proven to be determining when a "downselection" has occurred, and their joint attempt to follow this path has been somewhat twisted and difficult to predict. Many GAO decisions have found, pursuant to the Electro-Voice rule, that GAO is vested with jurisdiction to hear a protest relating to an agency's award of a task/delivery order, and many GAO decisions have found that GAO lacked jurisdiction in such circumstances. In each instance, GAO has attempted to determine if:

		Both the protester and awardee hold contracts under the MAS program under which the relevant agency is awarding the protested task/delivery order.
		The award of the protested task/delivery order does in fact amount to a "downselection" that will eliminate the protester from the fair opportunity afforded it by FASA to compete for future orders under the MAS program at issue. 24/

The latest (as of mid-January 2005) in the "downselection" protest saga is L-3 Communications Co., in which GAO found that it lacked jurisdiction to hear L-3's protest alleging that the Naval Air Systems Command, purchasing on behalf of the Army's Program Executive Office for Simulation, Training and Instrumentation, had issued a delivery order that constituted a "downselection." 25/ GAO, however, dismissed the protest. The Navy's solicitation requested offers "for the design, integration and production of [various] common driver trainers" and stated that the Navy "may" award the contractor receiving the initial delivery order additional orders for trainers and other vehicle variants. Both SAIC and L-3 held contracts that allowed them to compete for the orders to be awarded pursuant to the solicitation. The Navy awarded the initial delivery order to SAIC, and L-3 protested to GAO.

GAO's decision that it lacked jurisdiction over L-3's protest was not particularly surprising in one regard but seems confusing in another. GAO accepted the Navy's reasoning that the agency's award of the initial order to SAIC did not eliminate L-3 from competition for subsequent deliver orders. GAO highlighted a solicitation provision stating that the Navy "may" award subsequent orders to the initial awardee, which cited a provision in FASA that allows an agency to award a sole-source task/delivery order (without "fair opportunity" for other contractors to compete) when a subsequent order is a "logical follow-on to a task or delivery order already issued on a competitive basis." 26/ Curiously, GAO noted that the Navy had informed offerors in the solicitation that it might award subsequent delivery orders to the awardee of the initial order as a reason that it lacked jurisdiction over L-3's protest of the initial order:

First, the solicitation did not definitely provide that the selected contractor would be awarded delivery orders for additional trainers, or that other multiple award contractors would not be given fair consideration before any future delivery orders were awarded; rather, the solicitation stated only that the selected contractor "may" be awarded future delivery orders. Further, there is some indication in the record that the current and any future driver trainer requirements could be sufficiently related such that the future requirements could be determined by the agency to constitute a "follow-on" requirement, one of the FASA exceptions under which the agency would not be required to give fair consideration to other contractors. 10 U.S.C. 2304(c)(b)(3) (2000). Under these circumstances, we cannot say that there has been a downselection. 27/

Question: Isn't GAO effectively stating the Navy did expressly acknowledge in the solicitation that there is a reasonable and foreseeable likelihood the unsuccessful offeror for the first delivery order will have no opportunity to compete for future orders? GAO is correct in pointing out that L-3 certainly will have no standing to challenge a future Navy award of a delivery order to the awardee if the order is in fact a "follow-on" delivery award.

B.

Vehicles With Special Disputes Provisions

The government contracting community's attempt to have its cake and eat it too - 1) have cake: ensure that both parties to a government contract have a meaningful avenue through which to pursue disputes; and 2) eat cake: the desire to encourage companies that have not traditionally contracted with the federal government to offer innovative technology to the government in a streamlined manner - has yielded, among other things, the Disputes clause included in OT transactions by DOD and DHS. The clause sets out a "business committee" type of disputes resolution process that is the sole avenue for redress available to either party ("to the extent permitted by law"). The clause penalizes an aggrieved party through forfeiture if the party fails to file its notification of dispute within three months from the date the dispute, disagreement or misunderstanding arose:

	ARTICLE VII DISPUTES
	A.	General Parties shall communicate with one another in good faith and in a timely and cooperative manner when raising issues under this Article.
	B.	Dispute Resolution Procedures
		1.	Any disagreement, claim or dispute between DHS (S&T) and the [contractor] concerning questions of fact or law arising from or in connection with this Agreement, and, whether or not involving an alleged breach of this Agreement, may be raised only under this Article.
		2.	Whenever disputes, disagreements, or misunderstandings arise, the Parties shall attempt to resolve the issue(s) involved by discussion and mutual agreement as soon as practicable. In no event shall a dispute, disagreement or misunderstanding which arose more than three (3) months prior to the notification made under subparagraph B.3 of this [A]rticle constitute the basis for relief under this [A]rticle unless the Undersecretary of Department of Homeland Security for Science and Technology, in the interests of justice, waives this requirement.
		3.	Failing resolution by mutual agreement, the aggrieved Party shall document the dispute, disagreement, or misunderstanding by notifying the other Party (through the DHS(S&T) Agreements Officer or Consortium Administrator, as the case may be) in writing of the relevant facts, identify unresolved issues, and specify the clarification or remedy sought. Within five (5) working days after providing notice to the other Party, the aggrieved Party may, in writing, request a joint decision by the DHS Senior Procurement Executive and senior executive (no lower than (INSERT A LEVEL OF EXECUTIVE FAR ENOUGH REMOVED FROM THE PROGRAM TO MAINTAIN A GREATER LEVEL OF IMPARTIALITY) level) appointed by the Consortium. The other Party shall submit a written position on the matter(s) in dispute within thirty (30) calendar days after being notified that a decision has been requested. The DHS (S&T) Senior Procurement Executive and the senior executive shall conduct a review of the matter(s) in dispute and render a decision in writing within thirty (30) calendar days of receipt of such written position. Any such joint decision is final and binding.
		4.	In the absence of a joint decision, upon written request to the Undersecretary of Department of Homeland Security for Science and Technology, made within thirty (30) calendar days of the expiration of the time for a decision under subparagraph B.3 above, the dispute shall be further reviewed. The Undersecretary of Department of Homeland Security for Science and Technology may elect to conduct this review personally or through a designee or jointly with a senior executive (no lower than (INSERT A LEVEL OF EXECUTIVE FAR ENOUGH REMOVED FROM THE PROGRAM TO MAINTAIN A GREATER LEVEL OF IMPARTIALITY) level) appointed by the Consortium. Following the review, the Undersecretary of Department of Homeland Security for Science and Technology or designee will resolve the issue(s) and notify the Parties in writing. Such resolution is not subject to further administrative review and, to the extent permitted by law, shall be final and binding. 28/

The construction industry has employed similar clauses to allow parties to expeditiously resolve disputes that could disrupt performance of the contract and even bring projects to a halt if the parties were left to stew while awaiting the multi-year resolution of their disputes through the traditional judicial or arbitration vehicles. However, most construction contracts that employ this type of business committee disputes process do not make it the sole process available to the parties but make the process mandatory only for those disputes that affect real time issues that can impact the continued performance of the underlying contract. A history regarding dispute resolution under OT contracts has yet to be written, as it is still in its infancy, but many in the contracting community are wary of the mandatory, exclusive remedy aspect of the truncated OT Disputes process.


POTHOLE NO. 4: Conflicts of Interest

A.

Organizational Conflicts of Interest

The outsourcing phenomenon is creating serious issues besides those associated with the sufficiency of the government's acquisition workforce and its work product. Not the least of these is Organizational Conflicts of Interest (OCI) as contractors increasingly:

		Assist the government with procurement-related activities and the on-going business of running agencies; and
		Compete to perform additional work for these agencies.

It takes little imagination to see why increased government outsourcing of procurement-related tasks leads to a rise in the number of potential OCIs. However, the contracting community is quickly realizing the possibility of procurements tainted by OCIs accompanies outsourcing of tasks and activities that would not appear on the surface to be related to specific procurements. The contracting community is beginning to understand the potential for an OCI increases at an alarming rate when a contractor is engaged by an agency to prepare data and reports, to perform survey work or to analyze the efficiency of agency operations if that contractor then prepares to compete to perform a different contract for the same agency. An article in the December 28, 2004, Wall Street Journal highlighted some of the problems that can arise when contractors find themselves assisting the government in assessing the performance of competitors. 29/

Similarly, GAO has entertained a rash of protests compelling the uneasy acknowledgement that both government procurement agencies and contractors must be significantly more diligent in monitoring the potential for OCIs. Contractors now require systems that can monitor both the potential for their own OCIs and those of their competitors, with mechanisms that can be quickly activated to mitigate their own perceived OCIs while surfacing those of their competitors.

B.

Revolving Door Issues

No government contracting issue took front and center in 2004 and early 2005 like the Darleen Druyun scandal. All indications are that the fallout and follow-up from the incident could stimulate the most vigorous scrutiny of the federal contracting system since the Ill Wind scandals of the 1980s gave birth to the Reagan era of fraud, waste and abuse and its progeny, the Defense Industry Initiative, the Procurement Integrity Act and a horde of other ethics-related programs.

On October 25, 2004, Deputy Defense Secretary Paul Wolfowitz issued the following guidance memorandum:

This directive-type memorandum establishes additional procedures to ensure that DoD personnel are aware of and comply with statutes and regulations that apply to their transition from Federal service to private employment.

Annual Certification: Starting immediately, DoD personnel who file Public Financial Disclosure Reports (SF 278) shall certify annually that they are aware of the disqualification and employment restrictions of 18 U.S.C. 207 and 208, and 41 U.S.C. 423, and that they have not violated those restrictions.

Annual Ethics Briefing: DoD Components shall include training on relevant Federal and DoD disqualification and employment restrictions in Annual Ethics Briefings.

Guidance for All Departing DoD Personnel: DoD Components shall provide guidance on relevant Federal and DoD post-Government service employment restrictions, as part of out-processing procedures, to all DoD personnel who are leaving Federal service.

This memorandum is effective immediately. Changes to DoD 5500.7-R, Joint Ethics Regulation (JER), incorporating the substance of this memorandum, shall be issued within 180 days. Terms used in this memorandum are defined in the JER.

Scott Arney, general counsel for the Project on Government Oversight, responded to Wolfowitz's memorandum as follows:

It's not enough to nibble around the edges - we need to close basic loopholes. Specifically, senior policy makers must be prevented from immediately going to work for a company that significantly benefited from their policy decisions while in the government. Additionally, a person should not be able to skirt the intent of conflict of interest laws by going to work for a different division of the same company over which they had direct oversight. 30/

Meanwhile, contractors are feverishly re-examining their own practices governing the hiring of government officials - and not only the front-end, hiring, but also what those officials do once with the company (e.g., have these former government employees, unknown to company officials, in fact communicated with representatives of their former agencies in ways that might implicate conflict of interest laws?). One senior ethics officer of a major defense contractor said:

It is no longer enough to merely require that the government official provide you with a copy of the agency ethics opinion prepared for that official - too often these opinions prove useless and incomplete, usually through no fault of the ethics official who prepares the opinion with insufficient information. Now companies are well advised to conduct their own analysis of the potential conflicts that might arise if the official is hired. This can, of course, create significant tension with the business folks who are chomping at the bit to hire this most valuable soon-to-be former government official. They reason - "why should we create problems for ourselves by chasing every fantasy possibility when we have an ethics opinion from the government itself that states that the hire is clean?"

This issue might more properly be characterized as a Sinkhole rather than a Pothole, capable of swallowing an entire automobile or even a major defense contractor or federal agency.


POTHOLE NO. 5: Conflicts and Coordination with Agency Procedures and Rights

A.

Cognizance of Agency Internal Procedures (Guidance and Policy Statements)

Conflict has developed between the federal government's desire and need to limit the amount and nature of information available to the public following 9/11 and its desire to ensure that contractors have access to relevant procurement policy and procedures. The Department of Defense telephone book is no longer readily available to the public, as it was for so many years. The contracting community and bar associations have expressed concerns that procuring agencies are using "policy" statements and "guidance" (PGI - procedures, guidance and information) as guideposts for their procurements that have not been vetted through the cleansing process of public scrutiny and comment. A concerned group of practitioners in the American Bar Association's Section of Public Contract Law prepared a thoughtful whitepaper that highlights the practical and legal issues frustrating many contractors and their counsel. 31/

In response, agency officials assert that they are attempting to make all relevant information available to the contracting community. 32/

B.

Consent to Subcontract (and Make or Buy Decisions)

The Defense and Energy departments may be moving in opposite directions on how they approach contractor subcontracting decisions. In a July 12, 2004, memorandum, Acting Undersecretary of Defense for Acquisition, Technology and Logistics Michael Wynne issued guidance to military agencies cautioning them to increase their diligence in requiring prime contractors to be competitive in their major subcontracting requirements and to protect the intellectual property of prospective and actual subcontractors that might compete with affiliated units of the prime contractor. Citing a period of protracted consolidation in the defense industry and a correspondingly reduced industrial base, Wynne directed procurement officials to increase their scrutiny of both pre- and post-award decisions by prime contractors to use specific subcontractors.

Some of Wynne's directives met with objections from the ABA Section of Public Contract Law, which wrote to Wynne on October 27, 2004. ABA section asked Wynne to modify his guidance to reflect realities of the marketplace that account for subjective and intangible factors prime contractors consider when fashioning make-or-buy decisions and selecting subcontractors. The ABA section noted that the open-and-shut nature of Wynne's guidance is somewhat at odds with the government's own initiative to develop partnering relationships with specific contractors with superior past performance records. Contractors are well-advised to factor the DOD guidance and potential new scrutiny into their procurement planning.

In the meantime, DOE has issued a proposed rule that would eliminate the requirement established in 1997 that all M&O contractors maintain detailed make-or-buy plans under their prime contacts. 33/ DOE has determined that the cost of implementing and maintaining the make-or-buy plans and systems outweighs the benefit that can be derived from the plans.


POTHOLE NO. 6: Second-Guessing - Post-Contracting and, in Many Cases, Post-Performance

A.

Battlefield and Other Emergency Contracting

With the need for accelerated procurement responses to the war in Iraq and other areas of conflict comes the inevitable opportunity for second-guessing. Much has started, and no doubt there will be more. Constituents in equal numbers clamor for:

		Relaxation of time-consuming procurement rules to allow acquisition personnel to meet the military's and responders' urgent needs; and
		Accountability for the substantial sums being invested in the Iraq war and in rebuilding and humanitarian efforts in Iraq and elsewhere.

Some contractors involved in Iraq might echo the warnings of investment advisers: If it sounds too good to be true, it probably is. Thus, while a contractor may enjoy relief from many of the burdensome procurement regulations and requirements that govern standard FAR procurements, the contractor may find itself and its seemingly favorable war-time contract under blistering scrutiny later. Just ask contracting personnel from KBR, a subsidiary of Halliburton Co., or Contrack International, Inc.

KBR received a multi-billion dollar contract under the Logistics Civil Augmentation Program III (LOGCAP). The federal government issued several task orders under KBR's contract, including TO 0044, under which KBR provided housing, meals and other services. Government personnel authorized KBR to proceed with performance and to receive payment under the task orders, in some cases before the task orders were made definite. Some in the government thought the payments were too high, and a series of Inspector General and DCAA audits were initiated.

In December, the Special Inspector General for Iraq Reconstruction (SIGIR) issued its report on the matter, agreeing with the findings of the Army Audit Agency and DCAA that KBR "did not provide the ACO [Administrative Contracting Officer] with sufficiently detailed cost data to evaluate overall project costs or to determine whether specific costs for services performed were reasonable." The SIGIR also agreed that the government should exercise its right under FAR 52.216-26 to withhold 15 percent of the task order payments until the task orders are must definite. What appears to be missing from many of the stories is the fact that neither the LOGCAP contract nor the task orders required KBR to submit detailed cost data and that the federal government awarded the contract to KBR with knowledge that KBR did not have certified billing or cost and schedule reporting systems that could produce the detailed level of cost data that observers now criticize the government for not obtaining.

Some contractors are even second-guessing themselves. Contrack International, Inc. recently decided to drop out of a multi-billion dollar program to rebuild Iraq because of skyrocketing security costs. Contrack's work involved rebuilding bridges and transportation terminals, all areas unprotected or very difficult to protect. Contrack's officers stated that it simply did not seem to make sense to spend so much money in the performance of rather simple work - which makes sense - except it leaves one wondering how the work actually will be done and how the federal government views this dropping out. News reports suggest that the parting was amicable. In most situations, neither the government nor the contractor can expect a termination of battlefield work to be this amicable.

Even the second-guessers are being second-guessed to some degree: The auditors are auditing the auditors. This will delight some contractors - but maybe only temporarily. On December 14, 2004, the International Advisory Monitoring Board (IAMB), a United Nations group tasked with monitoring use of the Development Fund for Iraq, criticized the quality of DCAA audits of KBR contracts under the Restore Iraqi Oil program. 34/ IAMB found that DCAA's audits of sole-source contracts revealed many shortcomings, including non-completion of required technical evaluations, unsupported costs and overstated costs. The auditing of the auditors will only ensure that the first set of auditors second-guesses battlefield contracting transactions with increased vigor.

B.

Non-Battlefield Second-Guessing

As revenue from federal purchasing of information technology products and services continues to rise, so does scrutiny of contractor costs. A recent survey of IT contractors in the Washington (D.C.) area revealed that executive compensation costs of 37 percent of contractors had been questioned by government auditors and that 59 percent considered the auditors' methodologies invalid. 35/ Another issue appears to be the inability of IT companies to identify out-of-scope work. The survey concluded that 87 percent of respondents maintained procedures that required program management to identify out-of-scope work but that only 21 percent believed their companies had been effective in doing so.

Another potential pothole that is not new (although it was a case of first impression for the Court of Appeals for the Federal Circuit) deals with requirements imposed on government contractors if they wish to preserve their rights to patent inventions developed under government contracts. In Campbell Plastics v. Brownlee, 389 F.3d 1243 (Fed. Cir. 2004), the court affirmed the decision of the Court of Federal Claims upholding an Administrative Contracting Officer's right to find a contractor had forfeited its right to pursue a patent related to aircrew protective masks that the contractor was developing under a government contract because the contractor failed to comply with the applicable contract clause, FAR 52.227-11 (d). Under the clause, the contractor was required to submit a written report that identified the invention for which protection was sought within two months after the inventor disclosed it in writing to contractor personnel responsible for patent matters. 36/ The contractor also was required to provide details regarding the nature, purpose, operation and other details of the invention. 37/ Campbell Plastics did not comply with the requirements of the clause. Rather, over a period of many years it periodically "faxed" the Contracting Officer drawings and submissions relating to the item for which it eventually sought patent protection.

The appeals court rejected Campbell Plastics' arguments that its piecemeal submissions satisfied FAR's procedural safeguards and that the government's assertion of its right to title created an unconscionable forfeiture when the government never suffered any harm:

While it is at least debatable whether the various progress reports and drawings Campbell Plastics submitted to the Army together convey a clear understanding of the nature, purpose and operation of the invention as well as the invention's physical, chemical, biological or electrical characteristics, we think the contract requirement of a single, easily identified form on which to disclose inventions is sound and needs to be strictly enforced. If we were to find Campbell Plastic's style of disclosure sufficient, methods of disclosure could vary widely from case to case. The government never would be sure of which piece of paper, or which oral statement, might be part of an overall invention disclosure..

We hold that harm to the government is not a requirement in order for the ACO to insist on forfeiture and remains within the bounds of sound discretion. 38/

The two aspects of the decision stand out:

		The government need show no harm in order to assert its right to title when a contractor fails to comply with precise procedural requirements of the Patent Rights clause; and
		While Campbell Plastics ultimately missed compliance with the clause requirements by a long shot, there was a point in the Campbell factual scenario when it was far from clear that Campbell was dealing with a "subject invention" to which patent rights could be claimed. Campbell faxed the CO news of its progress in testing new manufacturing methods that formed the basis for patent claim, and this went on for several years.

POTHOLE NO. 7: Wildcards, e.g., POGO (Project on Government Oversight)

As in the past, with substantially increased defense spending comes increased scrutiny from many sources. The constituency of consumer-based government contracting watchdog organizations appears to be growing. The Project on Government Oversight has weighed in with several "we told you so" releases that employ the Darleen Druyun scandal as the springboard. Watch for more.

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ENDNOTES

1/	E.g., Proposed Rules to A-76, 69 Fed. Reg. 75,878 (proposed Dec. 20, 2004) (to be codified at 4 CFR Part 21) to implement recent legislative changes to the A-76 process.
2/	See, e.g., Federal Contracts Report, BNA, Volume 83, No. 2, p. 35, quoting Peter Levine, Senate minority counsel to the Senate Armed Services Committee.
3/	Federal Acquisition Streamlining Act of 1994, Pub. L. No. 103-355, 108 Stat. 3243; Federal Acquisition Reform Act of 1996, Pub. L. No. 104-106, 110 Stat. 679.
4/	FARA, 10 USC §2304 (d); 41 USC §253 (d).
5/	One senior Capitol Hill staff member recounts situations in which inexperienced and untrained government acquisition personnel issued vanilla contracts pursuant to congressionally-mandated directives to use performance-based techniques, with the first task being the contractor writing the performance-based specifications for the contract.
6/	See, GAO, No. 03-55, Acquisition Workforce: Status of Agency Efforts to Address Future Needs (December 18, 2002).
7/	Brookings Institution Press (2004).
8/	Stephen Goldsmith and William D. Eggers, Government By Network, viii-ix (Brookings Institution Press 2004).
9/	See, Cathy Hyatt, "Outsourcing Governance: Key Elements Often Overlooked," Contract Management Magazine, December 2004, pp. 8 to 13 and the sources cited in it.
10/	Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191, 110 Stat. 1936; Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.
11/	See, Letter from J.W. Marriott, Jr., chairman, President's Export Council, to President Bush (September 29, 2004); William M. Bulkeley, "Ruling Threatens to Expand High-Tech Licensing," Wall Street Journal, November 24, 2004, p. B-3.
12/	Pub. L. No 107-296, 116 Stat. 2135.
13/	NASA and DOT also have OT authority.
14/	GAO, No. 05-136, "Homeland Security: Further Action Needed to Promote Successful Use of Special DHS Acquisition Authority" (December 15, 2004).
15/	DHS has used OT contracting in connection with only two of its programs so far: Counter-MANPADS and Chem-Bio. On the other hand, GAO implied that DHS should be pursuing its OT authority more aggressively.
16/	Note 14, supra, at "What GAO Found."
17/	Note 14, supra, at "Acquisition Workforce Capacity May Limit DHS's Ability To Manage A Growing Future Other Transactions Workload."
18/	Note 14, supra, at p. 6.
19/	The clause is taken from the Phase II Counter-MANPADS Solicitation.
20/	Pub. L. No. 103-555, 108 Stat. 3243.
21/	10 USC §2304c (b); 41 USC §253j (b).
22/	10 USC §2304c (d); 41 USC §253j (d).
23/	L-3 Communications Co., Comp. Gen. Dec. B-295166, 2004 WL 2902353 at *2 (2004), quoting Electro-Voice, Inc., Comp. Gen. Dec. B-278319.2, 98-1 CPD ¶23 (1998).
24/	See, Professional Performance Dev. Corp., Comp. Gen. Dec. B-294054.3, 2004 CPD ¶191 (2004) [GAO dismissed for lack of jurisdiction a protest challenging agency's decision to limit eligibility to compete for task orders to small businesses only because protest was not a downselection given that protester's claim was a matter of contract interpretation and nothing barred protester from competing for future task orders]; AudioCARE Sys., Comp. Gen. Dec. B-283,985, 2000 CPD ¶24 (2000) [In protest over agency's award of a delivery order, GAO had jurisdiction because protest concerned a competition between a vendor that was a blanket purchase agreement holder (or an indefinite-delivery/indefinite-quantity contractor) and one that was not. Although protester's price was lower than awardee's and price was the predominant evaluative factor, awardee's higher technical evaluation justified award]; Corel Corp., Comp. Gen. Dec. B-283,862, 99-2 C.P.D. ¶ 90 (1999) [In protest of delivery order award issued pursuant to indefinite-delivery/indefinite-quantity contract, GAO summarily dismissed for lack of jurisdiction when protester did not argue that there had been a downselection]; The Intrados Group, Comp. Gen. Dec. B-280,130, 98-1 CPD ¶168 (1998) [In protest of task order issued pursuant to an indefinite-delivery/indefinite-quantity contract, GAO dismissed for lack of jurisdiction, rejecting protester's argument that agency's decision to consolidate multiple task orders into a single task order for work in Romania was effectively a downselection, given that protester still could compete for other task orders in other countries under the contract]; Teledyne-Commodore, LLC, Comp. Gen. Dec. B-278,408.4, 98-2 CPD ¶121 (1998) [GAO had jurisdiction over protest concerning task orders issued under multi-phased contracts when contracts were not indefinite in quantity or based on any recurring need of the agency and when, although structured to be implemented in multiple phases, the nature of the procurement actually was a single source selection, with no chance that protester could compete for the work in the future].
25/	Comp. Gen. Dec. B-295166, 2004 WL 2902353 (2004). The subject of agencies buying for other agencies probably deserves its own status as a "Pothole."
26/	10 USC §2304c (b) (3); 41 USC §253j (b) (3).
27/	L-3, Comp. Gen. Dec. B-295166, 2004 WL 2902353 at *2 (2004).
28/	DHS Counter-MANPADS Phase II Solicitation.
29/	Jonathan Karp, "Can Defense Contractors Police Their Rivals Without Conflicts?" Wall Street Journal, December 28, 2004, p. A-1.
30/	Press Release, Project on Government Oversight, "Pentagon Updates Revolving Door Rules," November 19, 2004; www.pogo.org/p/ contracts/ca-041101-revolvingdoor.html.
31/	The paper can be obtained at www.abanet.org/contract/ operations/memberinfo/home.html.
32/	See, e.g., www.acq.osd.mil/ dpap/dars/index.htm.
33/	69 Fed. Reg. 75,017-02 (Dec. 15, 2004).
34/	"Report of the International Advisory and Monitoring Board of the Development Fund for Iraq: Covering the Period from the Establishment of the DFI on May 22, 2003 Until the Dissolution of the CPA on June 28, 2004," www.iamb.info/pdf/IAMBreport.pdf.
35/	Grant Thornton, "Tenth Annual Government Contractor Industry Survey Highlights Brochure" (October 2004).
36/	FAR 52.227-11 applies to government research and development contracts with small businesses. FAR 52,227-12 applies to large contractors and includes the same requirement except that large contractors are held to an additional standard "or within 6 months after the Contractor becomes aware that a subject invention has been made, whichever is earlier." Presumably this additional requirement is to foreclose situations in which a contractor might intentionally refrain from disclosing a patentable item to "Contractor personnel responsible for patent matters."
37/	The appeals court muses in dicta how this can be reasonably expected since the applicable form (DD Form 882) neither provides additional space for such description nor requests that contractors attach a description. Campbell Plastics, 389 F.3d at 1248 n.1.
38/	Id. at 1249-1250.

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