On December 29, 2010, the Department of Defense (DoD) published a pared-down final rule on organizational conflicts of interest (OCIs), implementing section 207 of the Weapons System Acquisition Reform Act of 2009. The final rule’s application is limited to major defense acquisition programs and technical assistance contracting, and no longer includes the general provisions not required by the Weapons System Acquisition Reform Act that outlined the type of OCI and potential mitigation strategies that applied to commercial procurements. This change reflects comments, including those of Jenner & Block, that persuaded DoD to rethink establishing general OCI policy within the Defense FAR Supplement rather than the Federal Acquisition Regulation, which is currently in the midst of revising its own OCI rules. DoD agreed that “coordinating and reconciling the many comments received on the proposed general coverage with the team developing FAR coverage would delay the finalization of this rulemaking and could create unnecessary confusion.” 75 Fed. Reg. 81909. DoD noted that the comments related to the “general coverage” will be provided to the team developing changes to FAR coverage of OCIs, the publication date for which is still indefinite.

DoD was also persuaded to keep OCI coverage in DFARS Part 209, rather than establish a new subpart in DFARS Part 203 as proposed. Industry objected to including OCI rules in Part 203 because OCIs are routine in business settings and can be mitigated, unlike the serious misconduct identified in Part 203.

Importantly, DoD’s proposed preference for mitigation as an OCI solution was eliminated because of its “unintended effect of encouraging contracting officers to make OCI resolution decisions without considering all appropriate facts and information” (such as potential costs of mitigation plans). DoD replaced the rule’s explicit mitigation preference with a more general statement that contracting officers “should seek to resolve [OCIs] in a manner that will promote competition and preserve DoD access to the expertise and experience of qualified contractors.” 75 Fed Reg. 81914. This is important because the new rule further explains that contracting officers should “employ OCI resolution strategies that do not unnecessarily restrict the pool of potential offerors in current or future acquisitions” and should not impose “across the board restrictions or limitations on the use of particular resolution methods” except as required or appropriate. Id.

Other important changes in the final rule include changes to the definition of “major subcontractor” and to “systems engineering and technical assistance.” The final rule now contains a lower end exclusion of any subcontract that is less than the cost or pricing data threshold, and an upper bound, such that any subcontract that is $50 million or greater will be considered a major subcontract, regardless of whether it totals 10% or more of the value of the contract. DoD also decided to provide a unified definition for “systems engineering and technical assistance” as a single term, as well as individual definitions for “systems engineering” and “technical assistance” because the combined “systems engineering and technical assistance” is a term used by the statute and is recognized as being a contract type.

To the extent the new rule is inconsistent with FAR Subpart 9.5, the new rule takes precedence for the major defense programs to which it applies.