Interview transcript:
Terry Gerton There’s a big new rule that’s about to hit the DFARS. It’s going to go into effect at the end of October and it has to do with consulting services and conflicts of interest. Can you tell us more about the particulars of the rule?
Diz Locaria Sure. So this new rule, it’s going in the DFAR, so it’s going to be applicable to DoD contractors. And essentially it’s implementing section 812 of the National Defense Authorization Act, concerned about conflicts of interest that consulting firms might have if they, their subsidiaries or affiliates are also doing business with certain foreign countries and foreign entities.
Terry Gerton It seems like this is going to apply to lots of the big consulting firms.
Diz Locaria It could. The rule focuses on advisory and assistance services and it has some fairly large carve out exceptions that relate to assistance dealing with legal and audit, tax, and then also participating in certain judicial and other types of proceedings. So there are, while it does seem fairly broad in in scope, there are some pretty notable carve outs that could allow, particularly tax services and things like that, to be excluded from applications.
Terry Gerton The rule explicitly applies to NAICS code 5416, which is a pretty broad space. So given that big umbrella to start with, talk us through some of those carve outs.
Diz Locaria Yeah, so that NAICS code 5416 deals with management, scientific and technical consulting services. So that obviously is very broad and and would cover many of these kind of multinational consulting firms that you’re probably thinking of. But as I mentioned, while they’re focused on the services they provide as it relates to advisory and assistance services, those exceptions deal with assisting in legal consulting, audit consulting, tax accounting. And so there are, how that gets interpreted, I think, is still a little bit ambiguous in how contracting officers might view that. I mean, the rule provides for this carve out, but it doesn’t really provide for how contracting officers are supposed to interpret and apply that. Certainly you could think of many consulting firms that do those things, but they do things beyond that. And their subsidiaries and their affiliates do things beyond those carve outs. And so even though those carve outs might limit application to specific activities that the firms do, it may not completely cover all the activities the firms do.
Terry Gerton So you mentioned that the coverage there is a bit ambiguous and you also talked about the need to track the activities of subsidiaries and affiliates. Given the ambiguity, what are some of the practical challenges about making sure that a consulting contractor’s entire sort of supply chain aligns with this new rule?
Diz Locaria That’s a great question. So as you can imagine, again, many of these multinational accounting firms or consulting firms, they have very complex structures and corporate structures for any number of reasons, tax, liability. And so while the DoD is generally doing business with U.S.-based companies, those U.S.-based companies, probably by and large, are not doing much direct business with these entities of interest. However, many of those organizations, as they grow, have branched out and they may have offices all around the world and they have different legal entities that are providing similar services all around the world, whether that be to commercial entities or public entities all around the world. And so they all roll up under the same hat, or possibly, and if that’s the case, then they are probably affiliated with one another. And so you could probably think of any number of kind of consulting company names, and I’m going to guess that they have many offices around the world. And some of those offices may be doing business with some of these governments around the world that could create some challenges. Now the type of work they’re doing, that’s something that would have to be looked at. But it’s certainly going to have an impact, I think, on many of those firms.
Terry Gerton I’m speaking with Diz Locaria, he’s a partner at Venable. So in addition to those practical challenges, the rule offers a conflict of interest mitigation plan strategy. Talk us through the practicalities of that approach.
Diz Locaria Sure. So yeah, it’s not a complete bar. It just simply says that if your firm has these affiliated relationships with foreign entities, that the contracting officer can require you to have a conflict of interest mitigation plan. Similarly to kind of some of the ambiguity in the rule about what’s covered, the mitigation plan has some ambiguity as well. You’re supposed to identify covered contracts with these foreign entities. That should be fairly straightforward, but sometimes not. There are any number of state-run entities in some of these countries. And it’s not always clear whether those entities are in fact run by a foreign government. So sometimes knowing their customer may be challenging. It requires a written analysis for mitigating the conflict. Well, what does that actually mean? Like, what is the DoD going to want to mitigate? Does that mean there’s not going to be any cross-pollination of information? That’s probably the case as it is, given that these entities are probably so far removed from one another. But what specifically, though, do they want? Do they need or want firewalls? Do they want different IT systems so a person in one country can’t access consulting information in the United States? A lot of these organizations may run on the same IT system. Maybe they don’t, but what exactly are they looking for when they say an analysis of the mitigating mitigation of the conflict of interest? They talk about including a description of procedures for how the offeror and its affiliate interrelate to each other with respect to the contracted issue. That should be fairly straightforward, but again, there may be things that the day you submit that plan and two months later could change. Depends probably a lot on how the organization might share resources across the organization. So there’s a lot of different factors that need to be considered. And then, certainly, there’s going to be an ongoing compliance maintenance. Because like I said, the day you write the plan and three weeks later or three years later, that might change. And you have to factor that in as well.
Terry Gerton Is there a possibility that different contracting officers are going to have different expectations here? And so if you’ve got contracts across a variety of federal agencies, your submission of this mitigation plan may be different, depending on who you’re contracting with?
Diz Locaria Oh, that’s a fabulous question. Yes, I mean, humans are different, so absolutely, contracting officers are very likely to have different kind of temperatures in terms of how they look at this. Some of them may simply say, I don’t want to deal with this situation and I don’t want to award a contract to you because I don’t want to deal with this, it’s easier if I award it to that company, it doesn’t have a problem. Is that going to be permissible? The protest world, that’ll get fleshed out. But then to your point, contractor A, contracting officer A and contracting officer B, and I’m the same entity, I submit a plan here and I submit a plan there, and it’s not acceptable to this other contracting officer, even though all other factors being equal. That’s very possible. And we see that unfortunately from time to time. It’s likely that DoD will have some guidance for the contracting officers in terms of how they look and review and what they expect in these mitigation plans, and perhaps they’ll roll up to some centralized reviews body, but all of that kind of remains to be seen. And so I think that inconsistency is absolutely something that contractors will have to deal with.
Terry Gerton You mentioned the protest world. It sounds like you’re assuming that because of these ambiguities, these contracts and these provisions are likely to be protested at some point. What will you be watching for as implementation of this new rule rolls out?
Diz Locaria Yeah, I mean this is definitely going to be something that I think awardees will need to address in their submission, or offerors will need to address in their submissions, and that some companies that don’t have these ties will look to perhaps exploit that, to say, look, we don’t have this problem. We are a safer, more secure bet for you, government, and so consider us. Now, on the flip side, the organizations that do have these issues are going to say that you shouldn’t consider them more secure, we have a mitigation plan, this is tried and true, and we should be on equal footing. That will be remain to be seen how that gets looked at. And I imagine there’ll be some inconsistency in how contracting offices view that. And so I would suspect that to come out in the protest world at some point.
Terry Gerton And what’s your best guidance for contractors at this point to prepare to be successful under this new rule?
Diz Locaria I would certainly take a hard look at the rule, at the guidance, the preamble, the comments and things. There’s some information there that I think folks can glean. And then I would try to start putting together, first of all, understanding what activities you have that are far flung that might be implicated. So first assessing your situation and then thinking about those mitigation measures. What do you already do? And what can you relatively easily and things you can do easily into the future, not only today, but things that are easy to execute for a prolonged period. Think about those things and think about whether or not that’s something you could put into a mitigation plan that would address the concerns that the government has with these arrangements.
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