Is “Cradle-to-Grave” Government Contracting for Major Systems an Endangered Species?

This post was also written by Steve Tibbets.

“Major systems” are the lifeblood of large defense contractors.  The long-term development and implementation of big and expensive programs – think fighter jets – are the foundation of many contractors’ business plans.  Generally, contractors that design systems, buildings, or vehicles for the Government are not supposed to compete for follow-on contracts to build those items because they could skew specifications to favor themselves.  Current regulations permit OCI “mitigation” plans where the building or implementing parts of the company are isolated from the design parts.

On July 20, 2010, the American Bar Association (“ABA”) Section of Public Contract Law (“Section”) submitted its comments on a major proposed rule on Organizational Conflicts of Interest (“OCIs”) published by the U.S. Department of Defense (“DOD”) in April 2010.  The proposed rule would significantly curtail the ability of large defense contractors to handle procurements of major defense systems in a “cradle to grave” manner.  The proposed rule would, if finalized, place stricter limits on contractors’ ability to work on both the design or development phases of a large procurements and the implementation or manufacturing phases of the same procurement.

The proposed rule would reduce the extent to which contractors can rely on mitigation plans.  The Section argues that this will reduce competition because contractors will avoid certain portions of procurements so they are not “conflicted out of” other parts of those procurements.  As a practical matter, contractors for the DOD will have to plan their business strategies with greater care and make difficult decisions regarding which contracts to chase, considering when to trade off the prospect of current work for future contracts on which they may be dependent and cannot risk a conflict.

Ultimately, the reason OCIs strike policy-makers as worthy of further regulation is the conventional wisdom in the defense contracting space that any successful contractor will be bought by the “big boys” with deleterious effects on competition.  The Section seems to indicate that certain larger defense contractors are averse to “tough choices” regarding which parts of major procurements to pursue and prefer the existing rules, which permit them to pursue entire procurements as long as OCI mitigation is in place.  Whether this aversion will lead to any large-scale balkanization of the design and implementation parts of major contractors remains to be seen.  What is clear from the comments is that the community has “sat up and taken notice” that the proposed rule is a departure from business as usual on OCIs.