Administration prepares for new era of procurement rules

Contractors need to stay on top of procurement policies and reforms

Contractors had better dust off their federal rules books.

Trends in executive pay compensation

The Office of Federal Procurement Policy increased the amount the government will reimburse a contractor's overhead contract costs that are directed to executives' salaries.

The amount is based on data from commercially available surveys of executive compensation and made available by the Securities and Exchange Commission. Officials then average the amount of compensation accrued over a recent 12-month period for the top five highest-paid executives of publicly traded companies with more than $50 million in annual sales.

Since 2004, the compensation has continually increased by an average of $50,265.60.

Year Compensation
2009: $684,181
2008: $612,196
2007: $597,912
2006: $546,689
2005: $473,318
2004: $432,851

With the Obama administration concentrating on increasing transparency and reducing contracting costs through procurement reforms and tougher checks on vendors, contractors have plenty to keep track of.

The tone from the administration is often negative, and in some of his statements, President Barack Obama has described contractors as abusers, intent on lining their pockets with federal money.

But some experts say companies aren’t as alert as they should be about changing rules environment.

“Contractors have to be much more vigilant,” said Robert Burton, former deputy administrator of the Office of Federal Procurement Policy and now partner at Venable law firm. “But lots of people are slow to get the message.”

In late May, federal officials took steps to more closely regulate contractors. On May 22, Obama signed the Weapons System Acquisition Reform Act (S. 454), which includes tighter regulations on contractor conflicts of interest.

Under existing rules, the Defense Department and its subsidiary agencies must determine on a case-by-case basis how they can reduce conflicts of interest. However, Congress said DOD must strengthen those requirements. For instance, the department needs to make sure contractors give objective and unbiased plans to guard against any possible conflict, according to the congressional conference report on the legislation.

At the bill signing ceremony, the president reiterated his view on contractors and why DOD needs to augment its conflict-of-interest restrictions.

“When it comes to purchasing weapons systems and developing defense projects, the choice we face is between investments that are designed to keep the American people safe and those that are simply designed to make a defense company or a contractor rich,” Obama said.

Target: Conflicts of interest

The conflict-of-interest provision in the new law highlights Congress’ push to close the lid on any contractors’ fingers before they reach into the federal cookie jar. But the Federal Acquisition Regulation has few details about conflicts of interest, and last year, Congress ordered OFPP officials to review the FAR to see if it needs more guidance. The subtle undertone in the order, which is in the fiscal 2009 National Defense Authorization Act, reveals that lawmakers believe in tougher regulations on conflicts of interest, but they aren’t sure how to apply them.

Although unsure about those changes, lawmakers and the new administration still advocate mandatory rules, as has been the trend in recent years. For example, DOD used to be the only agency that required contractors to post fraud hotline numbers. Now, though, regulations require all contractors to provide that information. Additional mandatory FAR rules direct contractors to have internal ethics and conduct programs. They also must report significant overpayments and possible fraud. Not doing so could result in suspension or debarment.

FAR mandates for contractors

New requirements for contractors include:

  • Setting up contractor business ethics compliance programs and disclosure requirements: finalized November 2008.
  • Reporting contractor’s use of recovery act funds: interim rule issued March 31.
  • Preventing contractor employee personal conflicts of interest: regulation being drafted.
  • Assessing whether organizational conflicts of interest address current acquisition needs: OFPP reviewing draft proposal.
  • Studying whether service contractor employee personal conflicts of interest require tougher rules: on hold until OFPP reviews other personal conflicts of interest rule.

The complications of mandatory reporting rules stretch beyond actions on a single contract. Even if there is no clause mentioning ethics guidelines or reporting of overpayment or potential fraud, allegations of wrongdoing in this area can result in damage to a company's reputation that might be hard to shake. For one, there’s a government database that lists companies that have been accused of failing to act or adhere to contracting rules.

It’s a new era of mandates, Burton said. “That’s what’s changing acquisition now.”

However, some contractors are lax because they don’t think this affects them, especially if their contract has no specific clause, Burton said.

These days, with transparency and scrutiny in tandem, contractors need to be aware even of standard rules.

Exec pay draws attention

Beyond requiring a company to have an ethics program, officials are skeptical of excessive executive pay. In March, Obama said the government shouldn’t line the pockets of contractors. But agencies, particularly DOD, must direct tax dollars to fulfill the nation’s priorities.

On May 21, a day before the president signed the acquisition reform act, OFPP updated the maximum amount the government will reimburse companies’ overhead costs included in fiscal 2009 contracts to compensate an executive. In fiscal 2009, a company can charge the government up to $684,181 per contract in those costs to pay their top employees. That’s $72,000 more than in fiscal 2008.

Although it’s a standard annual update, one government contracting expert said companies need to be more aware of the dollar figure and similar requirements.

“I will say that this figure is taking on added importance with the Obama administration taking a hard look at what government contractor executives make,” said Larry Allen, president of the Coalition for Government Procurement.

“Coupled with the transparency mandate and the [stimulus]-related pay disclosures, I think a lot more companies need to be aware of what the government ‘limit’ is,” he said.

The American Recovery and Reinvestment Act, which Obama signed in February, also requires greater disclosure of how a contractor spends the stimulus money. It also forces contractors to offer access to the government overseers, such as inspectors general, while protecting whistle-blowers.

If a contractor doesn’t follow the rules, it will be exposed under the new regulations, said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources, a market research firm.

“The contractor is taking the brunt” of the new rules, he said. “That’s just the way it is.”

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