Primes often act only in their own best interest

Stephen M. Ryan

Federal procurement of information technology is suffering from a serious problem: over-reliance on prime contract awards that put winning primes in a position to make decisions that can benefit themselves at the expense of the taxpayer.

The result is a wasting away, more often than is appropriate, of government source selection, evaluation and control. Replacing them is prime contractor self-interest.

Let's assume the following hypothetical situation: A civilian agency competitively awards a multimillion- or multibillion-dollar prime contract to a systems integrator. The systems integrator then awards subcontracts for task orders within the scope of the prime's contract, but not to companies that competed and won as part of the prime's team, and not for tasks specifically competed as part of the award.

Even though it is ultimately government money, such subcontract procurements sometimes do not fall under the Competition in Contracting Act, which has requirements for full, fair and open competition.

Instead, the prime runs the competition any way it wants. This can include making an award that will bind an agency to a particular technical architecture more or less forever. Primes can and do make such awards without even looking at the software, but only at a paper proposal.

But the most pernicious aspect of subcontract awards is the potential for primes to violate basic rules of organizational conflicts of interest. Recently, a prime made an award to a subcontractor in which it had a direct financial interest. This interest was disclosed in the subcontractor's Securities and Exchange Commission filings. As the subcontractor's revenue grows'helped by the award of federal money by the prime'the value of the prime's equity interest in the subcontractor grows as well.

As Milo Minderbinder, the supply clerk who made millions in Joseph Heller's Catch-22, said, 'Everyone owns a share,' except, of course, the taxpayers who might question such a self-serving arrangement and rightly wonder if their interests were well-served.

Or perhaps taxpayers would be interested in another, not-uncommon type of award where the prime had purchased an integration partner of a proprietary software company, giving itself a stake in propagating that company's software. The prime then chose that package to meet an agency's requirement. But the requirement was not within that software company's area of expertise. In fact, the agency was the first-ever customer to use that software for the particular application in question.

It is time for government contracting officials to reassert themselves and dust off Part 9.5 of the Federal Acquisition Regulation on organizational conflicts of interest, and perhaps even the Anti-Kickback Act, to counter such blatant self-dealing. It is time to understand that while procurement reform has accomplished a great deal of good, abuses once actually noticed must be addressed.

Prime contractors responsible for overall performance of IT projects should be able to choose their subcontractors, but not when their independent judgment is to take care of their own financial interests. If IT companies serving as primes won't take care of this, Congress and the inspectors general should.

Stephen M. Ryan is a partner at Manatt, Phelps & Phillips in Wahington. E-mail him at [email protected].


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