Infotech and the Law: DOD to scrutinize subcontractor choices by primes

Richard Rector

The Defense Department has issued guidance on choosing subcontractors for subsystems and components of major programs, seeking to ensure that systems integrators are not biased when deciding whether to work with a sister division or an unaffiliated company.

Issued July 12, the guidance notes that competition at both the prime contractor and subcontractor levels is a cornerstone of the defense acquisition process. It states that, given the industry's consolidation, "large defense conglomerates are faced more often with the choice of selecting either one of their own divisions or an unaffiliated company" to furnish subsystems and components.

Because of the "potential for bias" in these decisions, the memorandum advises that greater insight into subcontractor selection may be needed to ensure fairness and best value for the Defense Department. The memorandum directs that, when developing acquisition strategies, program managers and contracting officers should establish methods for getting this insight.

The memorandum suggests several ways of doing this:

First, when establishing a contract fee structure, an agency should consider giving credit -- that is, allowing greater profit on the contract -- to a company that has used competition to assemble its team.

Second, when an offerer proposes to use its own capability to meet requirements, it should be required to demonstrate why the proposed "make or buy" decision is in the Defense Department's best interests. Agencies should consider challenging designs that restrict subcontracting choices, as well as investing in other capabilities to increase supplier choices for the system design.

Third, when an affiliate of a potential offerer might be chosen for a subsystem, the agency should require that offerers submit a subcontractor competition plan with their proposals. The agency would review the plan to ensure fair competition at the subsystem level, but would not select or approve subcontractors.

A subcontract competition plan would address issues such as how the selection process and evaluation criteria would result in best value for the Defense Department and how the offerer will protect intellectual property rights of unaffiliated companies.

It also would address whether independent advisers will be used, whether firewalls will insulate the selection process from bias, and whether a cost and benefit assessment supports dual sourcing.

The guidance notes that for certain contracts, agencies have the right to review and consent to a company's selection of subcontractors after award. Indeed, Federal Acquisition Regulation 44.202-2, which lists 13 issues an agency must consider in consenting to subcontracts, already addresses bias in subcontractor selection.

Thus, the risk of bias addressed in the Defense Department guidance is not new, nor is the guidance as comprehensive as the FAR coverage in terms of factors to consider in approving a subcontract. What is new, however, is the emphasis on considering the potential bias issue prior to contract award.

The guidance concludes that if a contractor's bias for one of its affiliates cannot be mitigated adequately, the agency should consider acquiring the subsystem as Government Furnished Equipment. This is a last-resort approach, given the impact on total system responsibility, but even its mention suggests how serious the Defense Department may be about this issue.

For systems integrators, the guidance could be a double-edged sword. In some cases, it may prevent subcontracting with an affiliate. In others, it may open up a major subcontracting opportunity with a competitor. Time will tell.

In the meantime, contractors should pay extra attention to the issue both in forming teams and in describing the benefits and rationale for that team in their proposals.

Richard Rector is a partner in the Government Contracts Group of Piper
Rudnick LLP in Washington. His e-mail address is richard.rector@piperrudnick.com.

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