[Federal Register Volume 75, Number 249 (Wednesday, December 29, 2010)]
[Rules and Regulations]
[Pages 81908-81915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-32713]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 209 and 252

[DFARS Case 2009-D015]
RIN 0750-AG63


Defense Federal Acquisition Regulation Supplement; Organizational 
Conflicts of Interest in Major Defense Acquisition Programs

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

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SUMMARY: DoD is issuing a final rule to amend the Defense Federal 
Acquisition Regulation Supplement (DFARS) to implement section 207 of 
the Weapon Systems Acquisition Reform Act of 2009. Section 207 
addresses organizational conflicts of interest in major defense 
acquisition programs.

DATES: Effective Date: December 29, 2010.

FOR FURTHER INFORMATION CONTACT: Ms. Amy Williams, Defense Acquisition 
Regulations System, OUSD(AT&L)(DPAP)(DARS), Room 3B855, 3062 Defense 
Pentagon, Washington, DC 20301-3060. Telephone 703-602-0328; facsimile 
703-602-7887. Please cite DFARS Case 2009-D015.

SUPPLEMENTARY INFORMATION: 

I. Background

    DoD is issuing a final rule to amend the DFARS to implement section 
207 of the Weapon Systems Acquisition Reform Act of 2009 (WSARA) (Pub. 
L. 111-23). Section 207 requires DoD to revise the DFARS to provide 
uniform guidance and tighten existing requirements relating to 
organizational conflicts of interest (OCIs) of contractors in major 
defense acquisition programs (MDAPs). The law sets out situations that 
must be addressed and allows DoD to establish such limited exceptions 
as are necessary to ensure that DoD has continued access to advice on 
systems architecture and systems engineering matters from highly 
qualified contractors, while also ensuring that such advice comes from 
sources that are objective and unbiased.
    In developing regulatory language, section 207 directed DoD to 
consider the recommendation presented by the Panel on Contracting 
Integrity and further directed DoD to consider any findings and 
recommendations of the Administrator of the Office of Federal 
Procurement Policy (OFPP) and the Director of the Office of Government 
Ethics (OGE) pursuant to section 841(b) of the Duncan Hunter National 
Defense Authorization Act (NDAA) for Fiscal Year (FY) 2009 (Pub. L. 
110-417). Section 841(b) of the NDAA for FY 2009 required review by 
OFPP, in consultation with OGE, of FAR coverage of OCIs. Neither OFPP 
nor OGE has issued recommendations to date pursuant to section 841(b), 
but both have worked with the FAR Acquisition Law Team, which includes 
representatives from DoD and the civilian agencies, to draft a proposed 
rule on OCIs under FAR Case 2007-018. As part of this process, OFPP, 
OGE, and the FAR Acquisition Law Team reviewed comments received in 
response to an Advance Notice of Proposed Rulemaking, published in the 
Federal Register at 73 FR 15962 on March 26, 2008, and are also 
considering pertinent comments that were submitted in response to this 
DFARS Case 2009-D015 in formulation of the proposed FAR rule.
    A public meeting was held on December 8, 2009 (see 74 FR 57666) to 
provide opportunity for dialogue on the possible impact on DoD 
contracting of the section 207 requirements relating to OCIs.
    DoD published a proposed rule in the Federal Register on April 22, 
2010 (75 FR 20954). The comment period was initially scheduled to close 
on June 21, 2010. On June 15, 2010, the comment

[[Page 81909]]

period was extended to July 21, 2010 (75 FR 33752).

II. Discussion and Analysis

    DoD received comments from 21 respondents in response to the 
proposed rule. Some respondents expressed general support for the 
rulemaking. Others expressed concern that the rule did not achieve the 
overall objectives of section 207, either because the proposed coverage 
was too stringent or not sufficiently strong. Based on public comments, 
changes were made to the proposed rule, including the following:
     Removing from the DFARS final rule the proposed changes 
that would have provided general regulatory coverage on OCIs to 
temporarily replace that in FAR subpart 9.5.
     Locating the core of the final rule in subpart 209.5 and 
252.209.
     Making clear that this final rule takes precedence over 
FAR subpart 9.5, to the extent that there are inconsistencies.
     Adding to the policy an explanation of the basic goals to 
promote competition and preserve DoD access to the expertise of 
qualified contractors.
     Tightening the exception for ``domain experience and 
expertise'' to require a head of the contracting activity determination 
that DoD needs access to the domain experience and expertise of the 
apparently successful offeror; and that, based on the agreed-to 
resolution strategy, the apparently successful offeror will be able to 
provide objective and unbiased advice.
     Refining the definition of ``major subcontractor'' to 
include upper and lower limits on application of the percentage factor 
test for determining if the value of the subcontract in relation to the 
prime contract warrants classifying the subcontract as major; 
specifically--
    [cir] A subcontract less than the cost or pricing data threshold 
would not be considered a major subcontract; and
    [cir] A subcontract equal to or exceeding $50 million would 
automatically be considered a major subcontract.
     Addressing pre-MDAP as well as MDAP programs.
    The following is a discussion of the comments and the changes 
included in this final rule as a result of those comments. Comments on 
aspects of the proposed rule that would have provided general coverage 
on OCIs outside the context of major defense acquisition programs are 
being considered in the formulation of the FAR rule.

A. General

1. Incorporation in DFARS of OCI Regulations Beyond WSARA Requirements
    Comment: A number of respondents took exception to coverage in the 
proposed rule that would have extended beyond MDAP to cover all DoD 
procurements, noting that the broader OCI changes should be considered 
for inclusion in the FAR rather than the DFARS for the following 
reasons:
     Congress did not mandate, or even suggest, that DoD adopt 
new regulations to completely rewrite the OCI rules applicable to all 
DoD procurements.
     The manner in which DoD is proceeding in relation to the 
FAR rule is an inversion of the way we normally proceed, is 
inefficient, and will be confusing and disruptive to DoD and industry.
    One respondent said the rule goes beyond agency-specific 
acquisition regulations as contemplated and authorized by FAR 1.301 et 
seq., both in form and in substance.
    Two respondents endorsed the proposed rule's approach of extending 
the OCI coverage beyond MDAPs, with one respondent noting that the same 
OCI policy concerns that Congress addressed in connection with MDAPs 
apply across the board. This respondent also pointed out that the 
General Accountability Office bid protest case law that the proposed 
rule cites applies to all procurements, not only MDAPs. Also, the 
respondent said, application of the new OCI coverage to this broad 
spectrum of contracts provides a greater level of consistency across 
procurements.
    Response: DoD does not agree that the proposed rule violated FAR 
subpart 1.3 by addressing OCI issues that go beyond those that are 
specifically applicable in the context of MDAPs, but has decided to 
remove coverage from the rule that is not required to comply with 
section 207 of WSARA. DoD's intent was to provide coverage that would 
improve all aspects of OCI policy affecting the covered contract types, 
not just those aspects unique to MDAPs and systems engineering and 
technical assistance (SETA) contracting, since some OCI issues involved 
are no different from those raised on any other procurement. In doing 
so, DoD also sought to temporarily apply those provisions that are 
common to both those contracts covered by section 207 and other 
contracts, so that all would benefit from the improved coverage until 
the FAR is modified. However, 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. Therefore, DoD has concluded 
that the final DRAFS rule will address only MDAP and SETA OCI coverage 
as required by section 207. As noted above, comments related to the 
general coverage have been provided to the team developing changes to 
FAR coverage on OCIs.
    Comment: Another respondent suggested that DoD and the FAR Council 
could use the WSARA-mandated changes as a pilot program and evaluate 
the results of the changes when developing the DoD-wide and Government-
wide regulations. This respondent further stated that a powerful reason 
to restrict application of this rule to MDAP procurements as a pilot 
program is that OCI policy could drive significant changes to the 
industrial base.
    Response: This comment is now moot, since DoD decided to remove the 
comprehensive coverage from the DFARS rule.
    Comment: Another respondent stated that, by extending the scope of 
this rule beyond MDAPs, it appeared that DoD might have been trying to 
address the difficult issue of what rules to follow for programs and 
technology development efforts that start as a non-MDAP and then 
transition to an MDAP. If so, the respondent stated, this rule could 
have addressed that issue by limiting its applicability to MDAPs and 
then requiring that all potential OCI in non-MDAP programs be exempted 
or be ``required to be easily mitigated'' once they cross into the MDAP 
threshold.
    Response: The issue of addressing programs that may become MDAP 
programs has been resolved by revising the final rule to cover both 
pre-MDAP and MDAP programs. SETA contracts are often required in the 
early pre-MDAP phase of a program.
2. Move From Subpart 9.5 to Subpart 3.12
    Comment: Various respondents recommended that the rule on OCIs 
should remain in DFARS part 209 for the following reasons:
     Four respondents stated their opinions that the OCI rules 
should not be moved to DFARS part 203 to avoid the perception that OCI 
is in the same category as improper business practices, which pertains 
to conduct that is criminal in nature. Two of these respondents stated 
that putting OCI coverage in part 209 is inconsistent with the notion 
that mitigation is the preferred method of addressing OCI. One 
respondent said it was

[[Page 81910]]

unreasonable even to imply that an OCI inherently constitutes 
misconduct, since OCIs are routine in typical businesss settings and a 
byproduct of defense industry consolidation.
     On the positive side, one respondent said that the OCI 
rules should remain in DFARS part 209 because of their relationship to 
a company's responsibility. Another respondent stated the opinion that 
a contracting officer's determination of whether to accept or reject a 
mitigation plan has the same weight as a determination of affirmative 
responsibility.
     One respondent pointed out that while the Government has 
the discretion under both FAR 9.503 and the proposed rule to waive 
OCIs, it cannot waive improper business practices, such as unlawful 
gratuities and kickbacks.
     One respondent thought that the regulations should remain 
within DFARS part 9 simply for continuity.
    Response: DoD does not agree that placing the OCI rules in part 203 
vs. part 209 lends credence to the perception that OCI is in the same 
category as conduct that is criminal in nature. We note that part 209 
also covers criminal activity by way of its association with suspension 
and debarment. Furthermore, the scope of part 203 has been evolving 
over time, an example being the recent FAR rule proposing inclusion of 
a new FAR subpart 3.11 to include policy addressing personal conflicts 
of interest by contractor employees performing acquisition functions 
closely associated with inherently governmental functions--see FAR Case 
2008-025. And while acceptance or rejection of a mitigation plan might 
affect a contractor's responsibility, it is not, in and of itself, a 
determination relating to responsibility.
    However, because the FAR proposed rule has not yet been published, 
and because the decision has been made to limit this rule to 
implementation of OCIs in MDAPs (see section II.A.1.), this final rule 
has been located primarily in subpart 209.5, until such time as the FAR 
coverage on OCIs may be relocated.

B. MDAP Definitions

1. Major Subcontractor
    Comment: Two respondents expressed concerns that the definition of 
``major subcontractor'' was arbitrary. The proposed clause at 252.203-
70WW (now 252.209-7009) defined a major subcontractor as a 
subcontractor awardee with a subcontract totaling 10 percent or more of 
the value of the contract. One of the respondents was concerned that a 
subcontractor with millions of dollars in subcontracts may not be 
covered, but others with less than $1 million would be covered.
    Response: As the clause relates to subcontractors for major defense 
acquisition programs which, generally, are programs that exceed $1.8 
billion (Fiscal Year 1990 constant dollars) in eventual total 
expenditure (10 U.S.C. 2430), a prime contract would not likely be 
issued with a value of only $10 million, which would be the prime 
contract threshold for a $1 million subcontract to meet the 10 percent 
subcontract threshold to be a major subcontract. However, DoD agrees 
with the need to enhance the definition. The final rule 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 equals or 
exceeds $50 million will be considered a major subcontract, regardless 
of whether it meets the 10 percent criterion.
    This is modeled after--
     15.404-3(c)(1), which specifies thresholds for requiring 
cost or pricing data on subcontracts; and
     DODI 5000.02 Table 4, which addresses major contracts and 
subcontracts.
2. Systems Engineering and Technical Assistance
    Comment: Two respondents observed that there is no definition of 
``Systems Engineering and Technical Assistance'' in statute or 
regulation and noted that the FAR defines ``systems engineering'' and 
``technical direction,'' which may not necessarily be exactly the same 
as ``systems engineering and technical assistance.''
    One of the respondents expressed concerns that the definition of 
``Systems Engineering and Technical Assistance'' is vague and that the 
rule should add ``to support requirements definition, source selection, 
or evaluation of contractor performance in a Major Defense Acquisition 
Program.''
    Several respondents proposed that the ``systems engineering and 
technical assistance'' definition be restricted to activities and 
functions that relate to supporting source selection and testing 
activities that might trigger bias and impaired objectivity OCIs. 
According to these respondents, all other support should be classified 
as engineering or program support; and the related OCIs should be 
addressed through standard mitigation techniques. ``Systems Engineering 
and Technical Assistance'' needs to be better defined and only address 
those circumstances when the contractor has ``authority'' and is in a 
position to unduly influence a program, event, or outcome.
    Response: DoD decided to provide a unified definition for ``systems 
engineering and technical assistance'' as a single term, as well as the 
individual definitions of ``systems engineering'' and ``technical 
assistance'', because ``systems engineering and technical assistance'' 
is the statutory term and is the recognized term for a particular type 
of contract. DoD sought advice from systems engineering and technical 
assistance subject matter experts within DoD to arrive at a more 
comprehensive definition of the term. In response to public comments, 
DoD changed the requirement from ``substantially all'' to ``any'' and 
clarified that ``directing other contractors' operations'' does not 
apply to the operations of subcontractors. It is not necessary to 
include in the definition of SETA that it is only for MDAPs. SETA 
contracts could be for other types of programs as well. The limitation 
to MDAPs is accomplished through the policy statements and the clause 
prescriptions.
    The definition should not restrict the meaning to select activities 
based on the presumption of the likelihood of the occurrence of an OCI. 
While potential OCIs can be significant concerns in source selection 
and testing activities, potential OCIs can exist in other activities, 
with harmful repercussions to DoD. The determination of the existence 
of potential for an OCI is situational and based on the facts and 
conditions. It is up to the contracting officer to determine the 
potential for an OCI. The definition should not be based on the 
presumption that an OCI will occur for SETA contracts and will not 
occur in the range of other activities.
    Comment: One respondent made several comments about the definitions 
of a number of activities cited within the definition of ``systems 
engineering'' and ``technical assistance'' and suggested further 
definitional clarity of the activities. The respondent asked what 
``determining specifications'' means and what ``determining interface 
requirements'' means. The respondent cited a number of specific actions 
a contractor may be asked to perform and asked if the work would fall 
under the DFARS definition of SETA.
    Response: Further definition of the activity elements is not 
required. These terms are in common use. It is up to the contracting 
officer, exercising common sense, good judgment, sound discretion, and 
the advice of technical experts to determine if the activities in a

[[Page 81911]]

solicitation would be covered by the definition of SETA.
    Comment: One respondent recommended that the SETA definition should 
include a statement that the contractor performs the services, but will 
not be delivering the system. The respondent cites Section 203.1270-6 
(now 209.571-7) as the basis for this change.
    Response: The consequence of being a SETA contractor is outside of, 
and unnecessary for, inclusion within the definition of what a SETA 
contractor is. While 209.571-7 prohibits a SETA contractor from 
participating as a contractor or major subcontractor on the related 
program, there are certain instances listed in 209.571-7 where the 
paragraph does not apply. Changing the definition of SETA is 
unnecessary and could lead to erroneous application of the rule.

C. MDAP OCI Policy

1. Mitigation Preference Is Not Appropriate
    Comments: A number of respondents objected to the rule's 
designation of mitigation as the ``preferred method'' for resolving 
OCIs.
    Two respondents suggested that a preference for mitigation would 
reduce, rather than increase, competition for Government contracts. 
Specifically, they suggested that the preference appears to favor 
industry interests in the sense that it chiefly will benefit large, 
integrated businesses which, but for the application of a preference 
for mitigation, might otherwise be precluded from competing for certain 
requirements.
    Several respondents expressed concern that the preference for 
mitigation would impinge upon the contracting officer's duty and 
discretion to consider all appropriate factors, such as the potential 
costs associated with monitoring mitigation plans, when determining 
which method for resolving a particular OCI would best serve the 
Government's interest.
    One respondent stated that establishing an outright preference for 
mitigation would create a potential ground for bid protests by 
unsuccessful offerors. The respondent opined that DoD agencies may find 
themselves defending against claims that contracting officers did not 
take adequate affirmative steps to comply with the preference by 
finding ways to mitigate potential OCIs.
    Response: DoD carefully considered the comments on both sides of 
this issue. While finding that the policy rationale supporting the 
proposed preference for mitigation is sound, DoD agrees that 
establishing a formal preference may have the unintended effect of 
encouraging contracting officers to make OCI resolution decisions 
without considering all appropriate facts and information. Therefore, 
in order to make it clear that decisions about how best to resolve OCIs 
arising in particular procurements remain a matter within the ``common 
sense, good judgment, and sound discretion'' of DoD contracting 
officers, DoD has removed the rule's stated preference for mitigation.
    However, DoD replaced the rule's explicit mitigation preference 
with a more general statement of DoD policy interests in this area. 
Specifically, the rule now provides that it is DoD policy to promote 
competition and, to the extent possible, preserve DoD access to the 
expertise and experience of highly-qualified contractors. To this end, 
the rule now emphasizes the importance of employing OCI resolution 
strategies that do not unnecessarily restrict the pool of potential 
offerors and do not impose per se restrictions on the use of particular 
resolution methods, except as may be required under part 209.571-7.
    Comment: One respondent stated that the rule's stated policy 
preference for mitigation should be replaced with a preference for 
avoidance in order to comply with the ``statutory intent'' of WSARA. 
The respondent expressed concern that various aspects of the rule 
significantly impair the ability of contracting officers to employ 
avoidance strategies. Finally, the respondent commented that the rule 
should reflect that mitigation is the resolution method of last resort.
    Response: As discussed in the response to the preceding comment, 
DoD replaced the rule's explicit preference for mitigation with 
language more generally emphasizing that contracting officers should 
seek to employ OCI resolution strategies that promote competition and 
do not unnecessarily restrict the pool of potential offerors. DoD does 
not agree that WSARA requires an across-the-board preference for 
avoidance. Such a preference would give rise to the same issues and 
concerns voiced by other respondents relating to contracting officer 
discretion, potential bid protests, and the like. To the extent that 
WSARA creates a requirement or preference for avoidance, that 
preference is limited to SETA contracts and is appropriately addressed 
at 209.571-7.
2. Mitigation Preference Is Appropriate and Should Even Be Strengthened
    Comments: A number of respondents expressed support for the rule's 
stated preference for using mitigation to resolve OCIs. Generally, 
these respondents stated that the preference for mitigation would 
promote competition, preserve Government access to the broadest range 
of experienced contractors, and promote transparency.
    Several respondents expressed concern that the rule does not do 
enough to encourage contracting officers to use mitigation and that 
some aspects of the rule may, in fact, discourage the use of 
mitigation.
    One respondent suggested that, despite its stated preference for 
mitigation, the rule as a whole appears actually to favor avoidance and 
neutralization, principally because it provides ``no meaningful 
guidance regarding when and how mitigation should be used.''
    Another respondent stated that the preference for mitigation would 
be more compelling if the rule included more examples of acceptable 
mitigation methods.
    A third respondent made several specific recommendations for 
bolstering the preference for mitigation. The respondent suggested that 
DoD: (1) Add a statement ``summarizing the potential benefits of 
mitigation'' and (2) add language requiring contracting officers to 
``consider the status of the industrial base and the number of 
potential sources'' before determining that mitigation was 
inappropriate.
    Response: As discussed in responses to preceding comments, DoD 
decided to replace the rule's express preference for mitigation with 
language indicating that it is DoD policy that contracting officers 
should seek to employ OCI resolution strategies that promote 
competition and do not unnecessarily restrict the pool of potential 
offerors. DoD appreciates the general concern voiced by these 
respondents that some agencies and contracting officers may already be 
either implicitly or explicitly favoring avoidance-based resolution 
strategies. DoD recognizes that an explicit preference for mitigation 
may serve a useful purpose in cases where agencies or contracting 
officers are unnecessarily foreclosing competitive opportunities by 
favoring avoidance over mitigation. Therefore, although DoD has removed 
the rule's express preference for mitigation, the rule's revised policy 
language will have the appropriate effect of encouraging contracting 
officers to consider all potential OCI resolution

[[Page 81912]]

strategies, to pursue resolution outcomes that promote competition 
whenever feasible, and to implement strategies that are consistent with 
the Government's best interests, broadly speaking.
    A more detailed analysis of the methods and benefits of mitigation 
is outside the scope of the present rule and may be addressed in the 
FAR rule on OCIs.

D. Identification of MDAP OCIs

    Comment: One respondent requested a clarification in 203.1270-
5(a)(2) (now 209.571-6(a)(2)) of the proposed rule to provide that 
there should not be a second OCI evaluation after award when the 
contractor establishes a team arrangement and its accepted proposal 
explains the work the prime will do and what other team members will 
do. The respondent was concerned that the proposed rule implies that 
there will be a reevaluation, although WSARA does not require a second 
evaluation. The respondent recommended adding before the semicolon in 
subparagraph (a)(2) the following: ``either as part of the initial 
award determination or, if the prime contractor makes this disclosure 
after award, then before beginning the relevant work''.
    Response: There is nothing in the statement in the proposed rule 
that implies that the timing of the evaluation would be after award. In 
the proposed rule, the policy in 203.703 made clear that OCIs are to be 
resolved early in the acquisition process. Since this rule is limited 
strictly to MDAP, the requirement in current FAR 9.504(a) still 
applies, i.e., the contracting officer is required to analyze planned 
acquisitions in order to identify and evaluate potential OCIs as early 
in the acquisition process as possible, and to avoid, neutralize, or 
mitigate significant potential conflicts before contract award. Further 
details about early resolution of OCIs will be addressed in the FAR OCI 
rule.
    Comment: The same respondent also commented that the regulation 
should not be silent on how the contracting officer is to consider 
awards to affiliates.
    Response: The policy section on identification of OCIs at 209.571-
6(a)(2) states that the contracting officer ``shall consider'' the 
proposed award of a major subsystem by a prime contractor to business 
units or other affiliates of the same corporate entity. Since OCIs are 
very specific to individual situations, the regulation cannot provide a 
precise prescription for how the contracting officer should consider 
this, except to alert the contracting officer to potential conflicts in 
such situations.

E. SETA Contracts

    Comment: Four respondents expressed concern that the rule's 
exception for all highly-qualified SETA contractors (where the OCI can 
be adequately resolved) is overly broad, beyond the limited exception 
contemplated by WSARA, and unnecessary in view of the numbers of 
conflict-free SETA contractors.
    One respondent stated that there is clear congressional preference 
for a rule prohibiting any systems engineering firm from participating 
in the development or construction of a system in an MDAP. The 
respondent quoted various sources, including the references by the 
Senate Armed Services Committee during debate on SR 111-201.
    One respondent recommended that the rule should include a 
requirement that the contracting officer also determine that there is 
no other source with the requisite domain experience and expertise 
before approving OCI mitigation.
    However, another respondent expressed concern about whether the 
rule will adequately ensure DoD access to advice on systems 
architecture and engineering matters.
    Response: WSARA permits the SETA exception contained in the 
proposed rule. A SETA exception is necessary to meet DoD needs and the 
proposed exception contained the requirement that the OCI must be 
adequately resolved. In the absence of an exception, many or all 
prospective SETA contractors may have OCIs and could be excluded. As a 
result, the best-qualified or best-priced contractors might be 
unavailable unless future restrictions are lifted. However, in response 
to concern that the exception was overly broad and would not meet the 
objective of WSARA to ``tighten'' application of OCI policy, DoD 
revised the exception to require a determination by the head of the 
contracting activity that ``an exemption is necessary because DoD needs 
the domain experience and expertise of the highly qualified, apparently 
successful offeror.'' The head of the contracting activity must further 
determine that, based on the agreed-to resolution strategy, the 
apparently successful offeror will be able to provide objective and 
unbiased advice.
    Comment: Another respondent objected that the rule did not include 
an exception for performance of SETA functions by any affiliate of the 
contractor performing production or development work as a prime or 
major contractor, as was referenced in the statutory language and the 
accompanying conference report. Further, the respondent objected that 
the only acceptable mitigation approach for impaired objectivity OCIs 
for MDAPS seemed to be splitting work away from a contractor and 
affiliates, as the waiver option is not authorized.
    Response: The SETA exception is not unduly restrictive with regard 
to affiliates. It is not true that affiliates of the contractor 
performing the production contract could not qualify for performance of 
SETA functions.
    Further, although the waiver option was deliberately omitted from 
the exception because the statute requires that the contractor must be 
able to provide objective and unbiased advice, the rule does not 
address what mitigation approaches would be acceptable.

F. Training and Implementation

    Comment: One respondent stated that it is necessary for the rule to 
address training and implementation. The respondent stated that 
contracting officers should not be allowed to make decisions on OCIs 
until training is completed.
    Response: This is not an entirely new requirement. The FAR already 
requires that OCIs be addressed, and there are existing training 
courses that cover OCIs. The Government will make changes to standard 
contracting course curriculum to implement these changes.
    Comment: The same respondent requested more guidance on the use of 
particular data sources to inform their decisions, and any required 
processes to implement the rule effectively. For example, the 
respondent suggests that contracting officers should separate SETA-type 
work from design- and development-type work, and not include both types 
in the same task order or other contract vehicle.
    Response: FAR 9.506 procedures provide current guidance on sources 
of information to identify and evaluate potential organizational 
conflicts of interest. DoD has also added to DFARS Procedures, 
Guidance, and Information the guidance about separating SETA-type work 
from other types of design- and development-type work.

G. Regulatory Flexibility Analysis

    Comment: Three respondents commented on the potential impact of the 
regulation on small businesses. However, several of the comments 
related to aspects of the rule that have been eliminated from this more 
focused final rule.
    One respondent recommended adding language into the regulation that 
would exempt from OCI restrictions small

[[Page 81913]]

businesses that are not involved in hardware or major software 
developments. In addition, the same respondent recommended imposing the 
OCI restrictions on prime contractors and large subcontractors, and 
allowing small subcontractors (those with less than 10 percent of total 
award) and small businesses to continue to provide both development and 
contract efforts with approved OCI plans.
    Response: DoD notes that the rule, per the statute, requires that a 
SETA contract for a major defense acquisition program contain a 
provision prohibiting the contractor or any affiliate of the contractor 
from participating as a prime contractor or a major subcontractor in 
the development or construction of a weapon system under the program. 
Therefore, ``small,'' i.e., other than major, subcontractors are 
exempted. The statute, however, does not provide for a specific 
exemption for small businesses. In addition, the rule does allow 
offerors, whether large or small, to continue to provide both 
development and contract efforts with approved OCI plans and an 
appropriate determination by the head of the contracting activity in 
accordance with 209.571-7(b).

H. Paperwork Reduction Act

    Comments: Although no respondents specifically commented on the 
estimated burden hours published with the proposed rule, several 
respondents commented on the burden imposed by the disclosure 
requirement of 252.203-XX(e)(1)(ii).
    Response: This requirement is no longer included in the rule. The 
only requirement now is for submission of a mitigation plan under a 
SETA contract if the offeror is requesting an exception to the 
limitation on future contracting.

III. Executive Order 12866

    This is a significant regulatory action and, therefore, is subject 
to Office of Management and Budget review under section 6(b) of 
Executive Order 12866, Regulatory Planning and Review, dated September 
30, 1993. This rule is not a major rule under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

    DoD certifies that this final rule will not result in a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., 
because the requirements of subpart 209.572 do not differ substantially 
from the burden currently imposed on offerors and contractors by FAR 
subpart 9.5.
    With regard to major defense acquisition programs, the prohibition 
against a SETA contractor participating in the development or 
production contract applies only to the prime contract or a major 
subcontract. Therefore, small businesses are less likely to be 
affected. Further, the rule allows for avoidance, neutralization, or 
mitigation of organizational conflicts of interest. A final regulatory 
flexibility analysis has, therefore, not been performed.

V. Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. chapter 35) applies because 
the final rule contains information collection requirements.
    Title: Defense Federal Acquisition Regulation Supplement (DFARS); 
Organizational Conflicts of Interest in Major Defense Acquisition 
Programs.
    Number of Respondents: 150.
    Responses per Respondent: 3.
    Annual Responses: 750.
    Average Burden per Response: 20.
    Annual Burden Hours: 15,000.
    Needs and Uses: DoD needs the information required by 252.209-7008 
to identify and resolve organizational conflicts of interest, as 
required by section 207 of the Weapon Systems Acquisition Reform Act of 
2009.
    The burden hours are substantially reduced in comparison to the 
proposed rule because the final rule only addresses organizational 
conflicts of interest in major defense acquisition programs.
    The information collection requirements for this final rule have 
been approved under OMB Clearance Number 0704-0477, Organizational 
Conflicts of Interest in Major Defense Acquisition Programs ICR.

List of Subjects in 48 CFR Parts 209 and 252

    Government procurement.

Amy G. Williams,
Editor, Defense Acquisition Regulations System.

0
Therefore, 48 CFR parts 209 and 252 are amended as follows:
0
1. The authority citation for 48 CFR parts 209 and 252 continues to 
read as follows:

    Authority: 41 U.S.C. 421 and 48 CFR chapter 1.

PART 209--CONTRACTOR QUALIFICATIONS

0
2. Sections 209.571, 209.571-0, 209.571-1, 209.571-2, 209.571-3, 
209.571-4, 209.571-5, 209.571-6, and 209.571-7, and 209.571-8 are added 
to read as follows:
* * * * *
209.571 Organizational conflicts of interest in major defense 
acquisition programs.
209.571-0 Scope of subpart.
209.571-1 Definitions.
209.571-2 Applicability.
209.571-4 Mitigation.
209.571-5 Lead system integrators.
209.571-6 Identification of organizational conflicts of interest.
209.571-7 Systems engineering and technical assistance contracts.
209.571-8 Solicitation provision and contract clause.
* * * * *


209.571  Organizational conflicts of interest in major defense 
acquisition programs.


209.571-0  Scope of subpart.

    This subpart implements section 207 of the Weapons System 
Acquisition Reform Act of 2009 (Pub. L. 111-23).


209.571-1  Definitions.

    As used in this section--
    ``Lead system integrator'' is defined in the clause at 252.209-
7007, Prohibited Financial Interests for Lead System Integrators.
    ``Major Defense Acquisition Program'' is defined in 10 U.S.C. 2430.
    ``Major subcontractor'' is defined in the clause at 252.209-7009, 
Organizational Conflict of Interest--Major Defense Acquisition Program.
    ``Pre-Major Defense Acquisition Program'' means a program that is 
in the Materiel Solution Analysis or Technology Development Phases 
preceding Milestone B of the Defense Acquisition System and has been 
identified to have the potential to become a major defense acquisition 
program.
    ``Systems engineering and technical assistance.''
    (1) ``Systems engineering'' means an interdisciplinary technical 
effort to evolve and verify an integrated and total life cycle balanced 
set of system, people, and process solutions that satisfy customer 
needs.
    (2) ``Technical assistance'' means the acquisition support, program 
management support, analyses, and other activities involved in the 
management and execution of an acquisition program.
    (3) ``Systems engineering and technical assistance''--
    (i) Means a combination of activities related to the development of 
technical information to support various acquisition processes. 
Examples of systems engineering and technical assistance activities 
include, but are not limited to, supporting acquisition efforts such 
as--
    (A) Deriving requirements;
    (B) Performing technology assessments;

[[Page 81914]]

    (C) Developing acquisition strategies;
    (D) Conducting risk assessments;
    (E) Developing cost estimates;
    (F) Determining specifications;
    (G) Evaluating contractor performance and conducting independent 
verification and validation;
    (H) Directing other contractors' (other than subcontractors) 
operations;
    (I) Developing test requirements and evaluating test data;
    (J) Developing work statements (but see paragraph (ii)(B) of this 
definition).
    (ii) Does not include--
    (A) Design and development work of design and development 
contractors, in accordance with FAR 9.505-2(a)(3) or FAR 9.505-2(b)(3), 
and the guidance at PGI 209.571-7; or
    (B) Preparation of work statements by contractors, acting as 
industry representatives, under the supervision and control of 
Government representatives, in accordance with FAR 9.505-2(b)(1)(ii).


209.571-2  Applicability.

    (a) This subsection applies to major defense acquisition programs.
    (b) To the extent that this section is inconsistent with FAR 
subpart 9.5, this section takes precedence.


209.571-3  Policy.

    It is DoD policy that--
    (a) Agencies shall obtain advice on major defense acquisition 
programs and pre-major defense acquisition programs from sources that 
are objective and unbiased; and
    (b) Contracting officers generally should seek to resolve 
organizational conflicts of interest in a manner that will promote 
competition and preserve DoD access to the expertise and experience of 
qualified contractors. Accordingly, contracting officers should, to the 
extent feasible, employ organizational conflict of interest resolution 
strategies that do not unnecessarily restrict the pool of potential 
offerors in current or future acquisitions. Further, contracting 
activities shall not impose across-the-board restrictions or 
limitations on the use of particular resolution methods, except as may 
be required under 209.571-7 or as may be appropriate in particular 
acquisitions.


209.571-4  Mitigation.

    (a) Mitigation is any action taken to minimize an organizational 
conflict of interest. Mitigation may require Government action, 
contractor action, or a combination of both.
    (b) If the contracting officer and the contractor have agreed to 
mitigation of an organizational conflict of interest, a Government-
approved Organizational Conflict of Interest Mitigation Plan, 
reflecting the actions a contractor has agreed to take to mitigate a 
conflict, shall be incorporated into the contract.
    (c) If the contracting officer determines, after consultation with 
agency legal counsel, that the otherwise successful offeror is unable 
to effectively mitigate an organizational conflict of interest, then 
the contracting officer, taking into account both the instant contract 
and longer term Government needs, shall use another approach to resolve 
the organizational conflict of interest, select another offeror, or 
request a waiver in accordance with FAR 9.503 (but see statutory 
prohibition in 209.571-7, which cannot be waived).
    (d) For any acquisition that exceeds $1 billion, the contracting 
officer shall brief the senior procurement executive before determining 
that an offeror's mitigation plan is unacceptable.


209.571-5  Lead system integrators.

    For limitations on contractors acting as lead systems integrators, 
see 209.570.


209.571-6  Identification of organizational conflicts of interest.

    When evaluating organizational conflicts of interest for major 
defense acquisition programs or pre-major defense acquisition programs, 
contracting officers shall consider--
    (a) The ownership of business units performing systems engineering 
and technical assistance, professional services, or management support 
services to a major defense acquisition program or a pre-major defense 
acquisition program by a contractor who simultaneously owns a business 
unit competing (or potentially competing) to perform as--
    (1) The prime contractor for the same major defense acquisition 
program; or
    (2) The supplier of a major subsystem or component for the same 
major defense acquisition program.
    (b) The proposed award of a major subsystem by a prime contractor 
to business units or other affiliates of the same parent corporate 
entity, particularly the award of a subcontract for software 
integration or the development of a proprietary software system 
architecture; and
    (c) The performance by, or assistance of, contractors in technical 
evaluation.


209.571-7  Systems engineering and technical assistance contracts.

    (a) Agencies shall obtain advice on systems architecture and 
systems engineering matters with respect to major defense acquisition 
programs or pre-major defense acquisition programs from Federally 
Funded Research and Development Centers or other sources independent of 
the major defense acquisition program contractor.
    (b) Limitation on Future Contracting. (1) Except as provided in 
paragraph (c) of this subsection, a contract for the performance of 
systems engineering and technical assistance for a major defense 
acquisition program or a pre-major defense acquisition program shall 
prohibit the contractor or any affiliate of the contractor from 
participating as a contractor or major subcontractor in the development 
or production of a weapon system under such program.
    (2) The requirement in paragraph (b)(1) of this subsection cannot 
be waived.
    (c) Exception. (1) The requirement in paragraph (b)(1) of this 
subsection does not apply if the head of the contracting activity 
determines that--
    (i) An exception is necessary because DoD needs the domain 
experience and expertise of the highly qualified, apparently successful 
offeror; and
    (ii) Based on the agreed-to resolution strategy, the apparently 
successful offeror will be able to provide objective and unbiased 
advice, as required by 209.571-3(a), without a limitation on future 
participation in development and production.
    (2) The authority to make this determination cannot be delegated.


209.571-8  Solicitation provision and contract clause.

    (a) Use the provision at 252.209-7008, Notice of Prohibition 
Relating to Organizational Conflict of Interest--Major Defense 
Acquisition Program, if the solicitation includes the clause at 
252.209-7009, Organizational Conflict of Interest--Major Defense 
Acquisition Program; and
    (b) Use the clause at 252.209-7009, Organizational Conflict of 
Interest--Major Defense Acquisition Program, in solicitations and 
contracts for systems engineering and technical assistance for major 
defense acquisition programs or pre-major defense acquisition programs.
* * * * *

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

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3. Sections 252.209-7008 and 252.209-7009 are added to read as follows:

[[Page 81915]]

252.209-7008  Notice of Prohibition Relating to Organizational Conflict 
of Interest--Major Defense Acquisition Program.

    As prescribed in 209.571-8(a), use the following provision:

NOTICE OF PROHIBITION RELATING TO ORGANIZATIONAL CONFLICT OF INTEREST--
MAJOR DEFENSE ACQUISITION PROGRAM (DEC 2010)

    (a) Definitions. ``Major subcontractor'' is defined in the 
clause at 252.209-7009, Organizational Conflict of Interest--Major 
Defense Acquisition Program.
    (b) This solicitation is for the performance of systems 
engineering and technical assistance for a major defense acquisition 
program or a pre-major defense acquisition program.
    (c) Prohibition. As required by paragraph (b)(3) of section 207 
of the Weapons System Acquisition Reform Act of 2009 (Pub. L. 111-
23), if awarded the contract, the contractor or any affiliate of the 
contractor is prohibited from participating as a prime contractor or 
a major subcontractor in the development or production of a weapon 
system under the major defense acquisition program or pre-major 
defense acquisition program, unless the offeror submits, and the 
Government approves, an Organizational Conflict of Interest 
Mitigation Plan.
    (d) Request for an exception. If the offeror requests an 
exception to the prohibition of paragraph (c) of this provision, 
then the offeror shall submit an Organizational Conflict of Interest 
Mitigation Plan with its offer for evaluation.
    (e) Incorporation of Organizational Conflict of Interest 
Mitigation Plan in contract. If the apparently successful offeror 
submitted an acceptable Organizational Conflict of Interest 
Mitigation Plan, and the head of the contracting activity determines 
that DoD needs the domain experience and expertise of the highly 
qualified, apparently successful offeror in accordance with FAR 
209.571-7(c), then the Contracting Officer will incorporate the 
Organizational Conflict of Interest Mitigation Plan into the 
resultant contract, and paragraph (d) of the clause at 252.209-7009 
will become applicable.

    (End of provision)


252.209-7009  Organizational Conflict of Interest--Major Defense 
Acquisition Program.

    As prescribed in 209.571-8(b), use the following clause:

ORGANIZATIONAL CONFLICT OF INTEREST--MAJOR DEFENSE ACQUISITION PROGRAM 
(DEC 2010)

    (a) Definition.
    ``Major subcontractor,'' as used in this clause, means a 
subcontractor that is awarded a subcontract that equals or exceeds
    (1) Both the cost or pricing data threshold and 10 percent of 
the value of the contract under which the subcontracts are awarded; 
or
    (2) $50 million.
    (b) This contract is for the performance of systems engineering 
and technical assistance for a major defense acquisition program or 
a pre-major defense acquisition program.
    (c) Prohibition. Except as provided in paragraph (d) of this 
clause, as required by paragraph (b)(3) of section 207 of the 
Weapons System Acquisition Reform Act of 2009 (Pub. L. 111-23), the 
Contractor or any affiliate of the Contractor is prohibited from 
participating as a prime contractor or major subcontractor in the 
development or production of a weapon system under the major defense 
acquisition program or pre-major defense acquisition program.
    (d) Organizational Conflict of Interest Mitigation Plan. If the 
Contractor submitted an acceptable Organizational Conflict of 
Interest Mitigation Plan that has been incorporated into this 
contract, then the prohibition in paragraph (c) of this clause does 
not apply. The Contractor shall comply with the Organizational 
Conflict of Interest Mitigation Plan. Compliance with the 
Organizational Conflict of Interest Mitigation Plan is a material 
requirement of the contract. Failure to comply may result in the 
Contractor or any affiliate of the Contractor being prohibited from 
participating as a contractor or major subcontractor in the 
development or production of a weapon system under the program, in 
addition to any other remedies available to the Government for 
noncompliance with a material requirement of a contract.

    (End of clause)

[FR Doc. 2010-32713 Filed 12-28-10; 8:45 am]
BILLING CODE 5001-08-P