Background

DOD hires contractors to provide a wide range of services that may include  basic services (custodial and landscaping); administrative types of services  (travel and management support); and complex professional and  management (i.e., advisory and assistance) services that closely support  inherently governmental functions, decisions, and spending, (acquisition  support, budget preparation, developing or interpreting regulations,  engineering and technical services, and policy development). Contractor  employees often work inside DOD facilities, alongside DOD employees, to  provide these services.
DOD’s increased spending on services in recent years indicates there are a  large number of contractor employees working side-by-side with federal  employees. In fiscal year 2006, DOD obligated more than $151 billion on  services contracts, a 78 percent real increase since fiscal year 1996.  Overall, according to DOD, the amount obligated on services contracts in  fiscal year 2005 exceeded the amount the department spent on supplies  and equipment, including major weapon systems. Some categories of  spending on services have grown significantly in recent years. For  example, obligations for professional, management, and administrative  support has grown about 161 percent from 1996 to 2005; obligations for  medical services grew by more than 400 percent during the same time  period.
Several reasons are behind DOD’s increased reliance on contractors for  services. In addition to the belief that it is more cost-effective to hire  contractor employees instead of government employees, reasons include  the need for skills and expertise not currently found in DOD; the flexibility  and the relative ease in obtaining necessary support from contractor  employees instead of hiring more government employees; and ceilings on  the authorized number of government employees.

	Contractor Employees Outnumber DOD Employees at Many Offices That GAO Reviewed

DOD has not compiled departmentwide data on the numbers of contractor  employees working at its facilities. Indications are, however, that  significant numbers of contractor employees are working side-by-side with  government employees in certain segments of the department, based in  part on information we obtained from 21 DOD offices we reviewed. As  shown in table 1, at 15 of these offices, contractor employees outnumber  DOD employees and the percentage of contractor employees in the  remaining offices ranges from 19 to 46 percent.
For the offices we reviewed, contractors are supporting key mission-critical  tasks that have the potential to influence DOD decisions. Some of these tasks  are similar to functions performed by federal employees. For example, at the  front end of the acquisition process, contractor employees who work in  various DOD program offices study alternative ways to acquire desired  capabilities, help develop requirements, and help design and evaluate  requests for proposals as well as responses to those proposals and provide  advice on the past performance of external contractors competing for that  work. In the course of an acquisition, contractor employees recommend  actions to program offices to correct other contractors’ performance  problems, they analyze other contractors’ cost, schedule and performance  data, and they assist in award-fee determinations for other contractors. In  addition, contractor employees help DOD program offices develop long-range  financial plans as well as yearly budgets. They also assist in administrative  tasks to support program offices by tracking travel budgets and researching  and reconciling payment discrepancies.
Although we view the types of roles being played by contractor employees as  closely supporting inherently governmental functions, some DOD officials  had a different perspective. That is, when discussing contractor employees’  roles in the decision-making process, program managers we spoke with  characterize contractor employee involvement as “technical” input into the  decision-making process versus direct involvement in the decisions  themselves. It should be noted, the Federal Acquisition Regulation (FAR)  defines contractor participation in the evaluation of contract proposals as one  of those functions that may approach being in the inherently governmental  function category.
Appendix IV provides more details on the key services contractor employees  are performing in the DOD offices we reviewed.

	Few Laws or DOD- Wide Policies Address Personal Conflicts of Interests among Contractor Employees

Contractor employees are not subject to the same laws and regulations  that are designed to prevent conflicts of interests among federal  employees. While the DFARS and the FAR require that the companies that  provide contractor employees to DOD have written ethics policies, no  departmentwide or FAR policy obliges DOD offices using contractor  employees to require that they be free from personal conflicts of interest.   On the other hand, some program managers, realizing the risk from  potential personal conflicts of interest, have established their own  safeguards for particularly sensitive areas where contractor employees  provide support to decision processes. For example, all DOD offices we  reviewed that used contractor employees in the source selection process  use additional safeguard controls such as contract clauses designed to  prevent personal conflicts of interests. The same offices, however,  assessed risk differently when it came to other types of activities that  contractors perform--with only 6 of 21 offices using similar conflict of  interest contract clauses for activities such as requirements development,  cost estimating, and test and evaluation.
Most of the firms we visited have ethics policies that address personal  conflicts of interests, but only three directly require their employees to  identify potential personal conflicts of interest with respect to their work  at DOD so they can be screened and mitigated by the firms.  Lastly,  because of recent public scrutiny regarding a conflict of interest issue with  a high-level FFRDC official, in January 2007 DOD revised its policy for  employees of FFRDCs.

		Most Laws and Regulations Designed to Prevent Conflicts for Federal Employees Do Not Apply to Contractor Employees

Several laws and regulations exist that address situations where  individuals performing service to the government are, or might appear to  be, unduly influenced by a personal financial interest. These include  prohibition on bribery and kickbacks; bans on participating in matters  affecting personal financial interest; and requirements relating to private  employment contacts between certain procurement officials and potential  bidders on government contracts. For federal employees, misconduct in  some of these areas also violates criminal statutes with potentially serious  consequences, including dismissal, prosecution, fines, and incarceration.  As shown in table 2, there are very limited prohibitions—relating to public  corruption involving criminal bribery activity—that apply to both DOD and  defense contractor employees.
The type of public corruption addressed by laws for both federal and  contractor employees concern bribes, kickbacks, or other forms of graft.  The anti-bribery law seeks to prevent the type of “quid pro quo” where an  official action was taken in return for money, favors, travel, gifts, or other  things of value. Examples of this law being applied to bribery cases  involving contractor employees working on government contracting  matters are as follows:
A Navy contractor employee at the Space and Naval Warfare  Systems Center pled guilty in 2006 to accepting bribes from a  freight forwarding company. In exchange for awarding freight  transportation contracts to the company, this contractor employee  received items valued at more than $10,000, including extravagant  dinners, concert and NASCAR tickets, weekends at a bed-and- breakfast inn, jewelry, and “spa days” at a department store.  Investigators discovered that coincidentally, the freight company’s  business was virtually nonexistent before this contractor employee  began awarding the company contracts that eventually totaled over  $700,000. The contractor employee was sentenced to a year in  prison and ordered to help repay the government $84,000.
An Army contractor employee working for the Coalition  Provisional Authority in Iraq was put in charge of over $82 million  in funding for an area south of Baghdad. The contractor employee  quickly began accepting bribes in the form of cash, cars, jewelry,  and sexual favors provided by a U.S. citizen who owned and  operated several companies in Iraq and Romania in exchange for  steering lucrative contracts in the business owner’s direction.  Investigators recovered incriminating e-mail traffic, including one  e-mail from the contractor employee to the business owner  exclaiming, “I love to give you money!” The contractor employee  pled guilty in 2006 to bribery, conspiracy, and money-laundering  and was sentenced to 9 years in prison, 3 years of supervised  release, and ordered to forfeit $3.6 million.

		DOD Lacks a Departmentwide Policy Requiring Safeguards for Personal Conflicts of Interest with Contractor Employees

DOD lacks a departmentwide policy requiring safeguards against personal  conflicts of interest for contractor employees. For example, although DOD  contracting policy in DFARS encourages companies providing contractor  employees to DOD to have written ethics policies, it fails to require that  contractor employees be free from conflicts of interest or to deploy other  safeguards to help assure that the advice and assistance received from  contractor employees is not tainted by personal conflicts of interest.  This  policy also fails to address procurement integrity-related issues involving  contractor employees contacting prospective bidders to DOD contracts  about future employment.
Since December 2007, the FAR has required certain contractors to set and  follow written codes of business ethics and conduct. However as shown  in table 3, this new FAR requirement for contractors’ ethics programs— which were modeled on some of the DFARS requirements—will be  insufficient in addressing DOD’s lack of a departmentwide policy requiring  safeguards for personal conflicts of interest with contractor employees.  This is because, like DOD’s policy, the new FAR requirements also lack  specific provisions to prohibit conflicts of interest or employ other  safeguards to assure that the advice and assistance received from  contractor employees is not tainted by personal conflicts of interest.

		Some DOD Offices Have Safeguards Addressing Contractor Employees’ Conflict of Interest in Particularly Sensitive Areas

While DOD does not have a policy regarding contractor employee conflicts  of interest, many DOD offices believe there is a risk of personal conflicts  of interest when contractor employees participate in source selection  activities. All of the 19 DOD offices we reviewed had established safeguard  procedures such as contract clauses or self-certifications to prevent  conflict of interests for contractor employees for the source selection  process, as shown in table 4. By contrast, program offices assessed risk  differently when it came to other types of contractor employees’  participation in decision making. Only 6 of the 21 offices had personal  conflict of interest safeguards, such as contract clauses for other types of  contractor employee services that involve advice and assistance on  governmental decisions—which, for example, could include services  related to requirements development, test and evaluation, and cost  estimation.
The Air Force’s Electronic Systems Center uses a contract clause as a  safeguard to prevent conflicts of interest for contractors involved in  source selection and other activities critical to mission-support and  government decision making. According to an Air Force contracting  official, this contract clause, highlighted in greater detail in table 5, affects  38 prime contractor companies, with an estimated value of $280,000,000 in  task orders in 2007. An Air Force official told us that this clause has been  used for at least 10 years in recognition of the close relationship between  decision makers and federal employee advisors—who are both required to  identify and avoid financial conflicts—and contractor employees directly  advising them in these roles. Thus, the clause provides a mechanism to  address potential and actual contractor financial conflicts that could affect  the integrity of the procurement system.
Also, the Army’s Communications Electronics Lifecycle Management  Command developed a personal conflict of interest policy and contractual  procedural safeguards for its contractor employees after our June 2007  visit to three of its offices where Army officials told us they had not  previously considered the need to do so. According to a policy alert sent  out in August 2007 to the command’s contracting activities, an underlying  principle behind the policy is preventing the existence of conflicting roles  that might bias a contractor employee’s judgment. According to the new  policy, conflicts of interest are more likely to occur in support services  contracts, such as management support; consultants; preparing statements  of work; and performance of technical evaluations. Table 5 also highlights  the command’s new safeguards in greater detail.
Appendix V includes the full text of both contract clauses.
We obtained information from one defense contractor about how this  company—a large business—has implemented the clause required under  the company’s subcontract with an Electronic Systems Center prime  contractor. According to the contractor’s senior vice president, the  company developed policy and procedure for annual financial conflict of  interest employee certifications. According to the senior vice president,  this conflict of interest safeguard applies to every employee working on  this subcontract. The company’s safeguard is similar to the financial  disclosure process used for DOD employees covered by federal conflict of  interest safeguards. For example, the company’s instructions to employees  state that the annual financial disclosure and certification process is done  to assure that each employee is “free from any actual, potential, or  apparent financial conflicts of interest with work he or she may perform  on this contract.”
In 2006, a conflict of interest for one of this company’s employees was  disclosed on the annual certification. According to the company’s senior  vice president, after the employee disclosed that his wife had taken a job  with one of the center’s prime contractors, the company removed him  from performing service under the subcontract. That was because the  company’s annual review revealed not only that the employee might have  a financial conflict of interest that could not reasonably be mitigated with  the subcontracted work he was performing at the Electronic Systems  Center, but he had not complied with the company’s ongoing requirement  for employees to avoid prohibited financial interests and to immediately  notify the company when financial interests change from what was  certified in an employee’s last disclosure.

		Firms Policies and Practices Vary

We analyzed the ethics program documents available for 22 of the 23  contractors we reviewed and found that 18 have written policies and  procedures that address avoidance of personal conflicts of interest by  their employees. However, the policies require their employees to avoid a  range of interests—such as owning substantial stock in competitors or  suppliers—that conflict with the firms’ interests. Except in three cases,  the policies did not require written disclosure forms identifying potential  conflicts of interest with the employees’ work at DOD.
More specifically, our review of the documents showed that:    policies for 4 of the contractor firms did not address avoidance of  personal conflicts of interests at all;    policies for 18 of the firms did address avoidance of personal conflicts  of interest, but just 3 specifically required written disclosures  identifying potential conflicts of interest with respect to their work for  customers, including DOD, so they can be screened and mitigated by  the firms; and     16 of the firms extended their conflicts policies to the employees’  family members.
Our analysis of contractors’ ethics documents found variation in how the  contractors’ policy and procedural safeguards address how employees’  financial interests that could conflict or create the appearance of a conflict  in the work they do for clients such as DOD. For example, several  companies have conflict of interest policies addressing business ethics and  standards of conduct requiring all employees to avoid having a range of  financial or personal interests that would interfere in any way with their  work for the company and could make others question the company’s  integrity, or give the appearance of impropriety. These contractors’  conflicts of interest policies generally describe a range of potential  activities that include employees’ financial or other interests,  arrangements, and outside business interests and personal relationships  that could pose an actual or the appearance of a conflict to be avoided.
In three cases, however, the policies required written disclosure forms  identifying potential conflicts of interest related to work carried out for  DOD. That is, three contractor firms we reviewed require their employees  to disclose potential conflicts related to their work at DOD and have  employees working at the Air Force, Navy, and Army advising and  assisting on engineering development and operation of aircraft and missile  programs and acquisition management support on a communications  program.  For example as presented below, two firms have measures for  ensuring that their employees do not have personal interests that would  conflict with their work at DOD. According to the firms’ ethics  documentation, these measures are part of the corporate mission and  values statements so that all levels of their employees are aware that their  services to clients as well as individual and company decisions are based  on core business values such as honesty and the highest standards of  ethics and integrity. For example:     One small business contractor has employees who work on a range of  aeronautical systems programs of the Air Force Materiel Command.  Their responsibilities for one of the offices we visited in the area of  acquisition management include tasks in various phases of the  acquisition cycle, such as development, award, management, and  contract closeout. The company has a 3-page Financial Conflict of  Interest Reporting Form—and according to company officials, it is  modeled on the federal financial disclosure form—that each of its  professional employees must submit when initially hired and annually  thereafter. The contractor’s reporting form asks each employee if there  are any personal or household financial interests in the matters dealt  with under the Air Force contract, such as stock ownership in any of  the contractors who are involved in the aeronautical systems programs  that the employee works on as part of his or her tasks. The company’s  vice-president stated that, as the employee’s supervisor, he evaluates  reported interests on the financial conflict of interest form and reviews  the circumstances in light of present and prospective duties of the  individual to ensure that both actual and apparent conflicts of interest  are avoided. According to the vice-president, he also decides on how  any conflict or apparent conflict will be resolved, such as  reassignment, divestiture, or disqualification.
A large business defense contractor has employees who work on  missile programs under the Naval Sea Systems Command. Their  responsibilities for the Navy include systems engineering and program  office support, including contract management input for award fee  deliberations and contract modifications.  The company has a 1-page  Certificate on Conflict of Interest, Relationships with Suppliers, and  Standards of Business Conduct that, according to contractor officials,  employees are required to submit annually by e-mail, fax, or on-line.  The certification form requires yes or no answers to seven questions  that serve to prompt each employee to disclose certain interests in the  company’s suppliers or prospective suppliers, such as whether they or  a member of their family has a substantial financial interest. The form  also asks each employee if they or their family members have any  other interest or agreement which may violate the Standards of  Business Conduct or may otherwise result in an actual or perceived  conflict of interest.  According to the company’s ethics and Navy  contracting managers, the annual conflict-of-interest certification  process receives a fair amount of supervisory review and screening by  corporate business ethics offices in order to prevent or mitigate actual  or even the appearance of an employee being in a position with a  personal conflict of interest.

		Stricter Conflict of Interest Safeguards Recently Developed for DOD FFRDC Employees

DOD’s FFRDCs are private nonprofit organizations established to meet  specialized or long-term research or development needs that cannot be  met by existing government or contractor resources. For example,  employees from FFRDCs may provide design and systems engineering  expertise to major space or weapon acquisition programs, and even work  along side DOD employees. They may be involved with conducting  independent assessments of technical risk, management, cost, and  schedule for particular programs or in broader research on international  security and defense strategy, acquisition and technology policy, force  management, and logistics.
In 2006, prompted by the aftermath of public and congressional scrutiny  regarding a conflict of interest with the president of one DOD-sponsored  FFRDC, DOD’s Deputy General Counsel (Acquisition and Logistics)  reviewed the conflict of interest policies and procedures in place at each  of DOD’s 10 FFRDCs. DOD’s review addressed FFRDC sponsoring  agreements, contracts, and internal policies and procedures. DOD  concluded that some of these documents failed to meet minimum FAR  requirements and others needed revision to better protect DOD from  conflicts of interest by FFRDC employees.
As a result, in January 2007, the Undersecretary of Defense (Acquisition,  Technology, and Logistics) revised DOD’s policy adding stricter  contracting safeguards for FFRDC contractors requiring them to have  procedures that address personal conflicts of interest for FFRDC  employees. DOD revised the policy to ensure that FFRDC employees  operate in the public interest with objectivity and independence. DOD’s  revised policy requires in part that each administrator of its FFRDCs do  the following:    maintain written, corporatewide conflict of interest policies for their  employees; report any personal conflicts of interest to contracting  officers or their representatives; provide annual compilations of  personal conflicts of interest and their dispositions; maintain audit  programs to verify compliance;    establish policies for their employees that address all major areas of  personal conflicts of interest including, but not necessarily limited to  gifts, outside activities, and financial interest;    set procedures to screen for potential conflicts of interest for all  employees in a position to make or materially influence research  findings and/or recommendations to DOD;    provide initial and annual training to address ethics and conflicts of  interest for affected employees; and    designate an office responsible for ethics compliance and training.
All four FFRDC administrators that we contacted for this report had  written corporatewide ethics policies and training for their employees  prior to DOD’s new policy. According to FFRDC administrator officials,  three of the FFRDCs have updated their ethics compliance program and  policies, which include their training programs, and are in compliance  with the new requirements. As of October 2007, a fourth FFRDC we  contacted has yet to reach agreement with its Air Force sponsor  organization on whether additional safeguards are necessary. Of the three  FFRDCs that have already changed practices to implement the revised  DOD-wide policy, there were some differences in how they changed their  procedures to screen for potential conflicts of interest for all employees in  a position to make or materially influence research findings and/or  recommendations to DOD. For example, according to FFRDC  administrator officials:
New requirements are being implemented by two of the FFRDCs  for their employees to complete an on-line personal conflict-of- interest screening questionnaire as part of their initial assignment  to a DOD-sponsored task. The on-line screening tool will prompt  these FFRDC employees, on a task-by-task basis, to disclose and  list any financial interests they, their spouse, or family members  have in specific DOD prime and subcontractors pre-loaded in the  FFRDC database for each defense weapon system or DOD  program being researched or advised on under the FFRDC project.  According to ethics officials for these two FFRDCs, any disclosure  of financial interests from the on-line tool is reviewed by the  employee’s project manager or supervisor as well as the ethics  office to identity actual or potential conflicts of interest, which  would then be mitigated in ways similar to practices for federal  employees.
Instead of task-by-task screening, a third FFRDC’s procedures  require all employees (except project directors) working on DOD  tasks to submit annual disclosures identifying personal and family  financial interests for review by supervisors and ethics offices to  screen for actual or potential conflicts of interest in the employees’  tasks for DOD.  Project directors are now required to submit  financial disclosures task-by-task.

	Range of Views Indicate Additional Conflict of Interest Safeguards Are Necessary for Contractor Employees

A majority of government officials we spoke with indicated support for  changes in contracting policy to address risks from contractor employees  having personal conflicts of interest when participating in matters affecting  DOD’s decisions. Those closest to the situation—DOD program managers— all agreed that safeguards are needed for contractor employees participating  in the source selection process. Moreover, some of these managers had also  put in safeguards for contractor employees involved in other types of advisory  and assistance tasks.  However, a number of program managers as well as  defense contractor company officials expressed concern that adding new  safeguards will increase costs for the government and are unnecessary since  government officials—not contractors—are the ones ultimately making the  decisions. DOD oversight officials as well as OGE officials, however, believed  additional safeguards are necessary to maintain public confidence,  particularly since contractors are increasingly being involved in spending  decisions, though this could be achieved through changes in policy and  practice and changes in regulations rather than changes in the law. A  congressionally mandated Acquisition Advisory Panel recently concluded that  there is a need to assure that the increase in contractor employees’  involvement in agency activities does not undermine the integrity of the  government’s decision-making process and that changes in the FAR should be  considered to establish additional conflict of interest safeguards across  agencies through contract clauses.

		Program Managers’ Viewpoints

All of the 19 offices we reviewed established safeguard procedures such as  contract clause or self-certifications to prevent conflict of interest for  contractor employees when involved in the source selection process. At  the same time, six offices had safeguards for contractors performing other  types of advisory and assistance tasks. For example, the Army’s  Communications Electronics Lifecycle Management Command and the Air  Force’s Electronics Systems Center have recognized the need to prevent  the existence of conflicting interests that might bias a contractor  employee’s judgment and have developed contract clauses for other types  of contractor employees who directly advise and assist federal decision- makers in those organizations. In addition, some of DOD’s program  managers said they should require certain contractor employees to file  financial disclosures with their companies so that they can screen for  potential personal conflicts of interest in the work they do at DOD.
However, when it comes to using contractor employees to perform tasks  other than source selection, some program managers believed that  additional safeguards are unnecessary.  In fact, some believed it could  create a cost and oversight burden. For example, these managers also  stressed that government officials are ultimately responsible for decision- making, not contractor employees. When we asked DOD officials to tell us  about cases of improper conduct involving contractor employees, some  officials also pointed out that very few cases of actual conflicts of interest  or other ethics problems involving contractor employees have been  publicly identified and in most of these cases, the situations were handled  informally. They were also concerned that requiring contractor employees  to abide by certain safeguards, such as submitting financial disclosure  forms for government or contractor ethics review processes, could chase  away qualified contractors from federal work.

		Contractor Officials’ Viewpoints

We spoke to various company representatives responsible for managing  their companies contracting business and/or employee ethics matters at  the 21 DOD offices where we conducted our review.  Some of the  contractor company officials told us that they believed additional  safeguards are not needed because their employees were aware that  personal conflicts of interest are prohibited under their corporate ethics  programs. Moreover, they pointed out that their employees would know to  advise their supervisors of any potential conflicts, consistent with the  companies’ ethics program procedures. Contractor officials also  contended that the creation of new safeguards could drive up costs for the  government because of contractor administrative costs for collecting and  maintaining employee financial conflict of interest paperwork.
Company officials cited other reasons for not establishing additional  conflict of interest safeguards for contractor employees, but we found  evidence that contradicted these positions. For example, one reason was  that defense contractor companies’ business ethics and standards of  conduct for their employees are already consistent with the government’s  ethics requirements for federal employees. Our review of 22 contractors’  ethics program documents found that they did not address the same issues  that the government ethics programs are required to address. Also, in  some cases, they were designed to protect the contractor’s interests, not  the government’s.
Another reason was that the risk of conflicts of interest for contractor  employees was low because it would be obvious if these employees tried  to steer decision making to favor a personal interest or bias. Some  contractor officials also stressed that the role that their employees were  playing in decisions was minimal. Some government officials we spoke  with, however, indicated that these types of inputs into decisions are not  trivial and that it may not always be obvious when employees are  providing biased information.
On the other hand, many company officials told us that if the federal  government were to require contractor employees to submit financial  conflict of interest certifications or disclosures, then the companies would  comply in the interest of maintaining the public’s confidence in the  integrity of government operations supported by contractor employees. In  addition, a manager of one small business defense contractor said that the  company’s personal conflicts of interest and ethical conduct policy already  requires all employees to submit annual financial conflict of interest  reporting forms when assigned to perform government work. He added  that most support contractor employees are retired military and have been  accustomed to abiding by government rules for 30 years.

		Viewpoints of Ethics Officials and Senior Leaders

Senior officials within DOD responsible for ensuring integrity in employee  conduct and in the contracting function as well as the OGE told us that  they believed that there are risks associated with personal conflicts of  interests not just in program offices that involve contractors in source  selection, but those that use contractors in other ways to support spending  decisions. In fact, during our review, DOD undertook steps to begin  assessing the need for departmentwide policies for preventing personal  conflicts of interests for its contractor employees.
OGE: OGE, which promulgates ethics guidance for the executive branch,  has expressed concerns that current federal requirements and policies are  inadequate to prevent certain kinds of ethical violations on the part of  contractor employees. The office is specifically concerned with potential  financial conflicts of interest, impaired impartiality, and misuse of  information and authority.  As such, additional conflict of interest  safeguards should be targeted at contractor employees engaged in the  types of services that influence governmental spending, contracting, and  mission delivery decisions and concern the type of processes and  operations upon which considerations of management and delegation  must turn. OGE has also observed that federal and contractor employees  work so closely on a day-to-day basis, it is difficult to distinguish whether  employees are government or contracted and they see greater risks to the  integrity of decisions given the growing influence that contractors appear  to be having on government operations and expenditure of funds.
OGE has advocated policy changes to apply conflicts of interest  requirements to contractors. In considering additional contract-based  safeguards to ensure that the government’s interests are not  compromised by contractor employees’ conflicts of interest, OGE’s  acting director has expressed concerns in several areas, such as:    advisory and assistance services support, especially those where  contractor personnel regularly perform in the government workplace  and participate in deliberative and decision-making processes along  with government employees;    management and operations contracts involving large research  facilities and laboratories, military bases, and other major programs;  and  large indefinite delivery or umbrella contracts that involve  decentralized ordering and delivery of services at multiple agencies or  offices.
DOD ethics and general counsel officials: Defense ethics and other general  counsel officials we spoke to from several DOD offices responsible for  DOD-wide standards of conduct and ethics compliance had generally the  same concerns raised by OGE. For example, according to the director of  DOD’s Standards of Conduct Office in 2006, as DOD increases its  integration of contractor employees into the actual administration of its  organizations and offices, the larger the gap between employees in its  blended workforce in terms of the conflict of interest requirements that  apply only to federal employees, and the more difficult it becomes to  ensure the integrity of government decision making. DOD ethics and  general counsel officials also expressed concerns about risks associated  with reliance on contractor employees, particularly when they perform  many of the same advisory and management functions as federal  employees. An Army general counsel official observed that contractor  employees are exerting greater influence over Army operations given that  the Army has lost expertise and leadership over the years.
Further, DOD ethics and general counsel officials stated that those  contractor employees participating in and supporting the government’s  decision-making processes should be subject to stricter conflict of interest  rules so that agencies can better judge the objectivity of their advice to the  government. An Air Force ethics official said his office has come across  situations in which contractor employees would have been in violation of  the government ethics rules had they been government employees. An  Army general counsel official told us that not requiring financial disclosure  statements from contractor employees poses the greatest risk to the  integrity and impartiality of the work they perform under contract for the  government. Unlike for federal employees who are prohibited under  conflict of interest law from participating in a particular matter involving  specific parties in which they have a financial interest, there is no way to  know whether contractor employees are doing so.
In 2006, an approach to apply conflict of interest laws to contractor  employees was identified by DOD’s Standards of Conduct Office director,  who offered his personal views at one public policy discussion on the  issue of contractor ethics that the FAR Council should consider some  model language, or instruction to government agencies to include conflict  of interest provisions within contracts.
DOD’s Directorate of Defense Procurement and Acquisition Policy (DPAP):  The DPAP director concurred with the views of ethics officials across the  department and recently directed a DOD panel examining various aspects of  contracting integrity to specifically examine the need for departmentwide  policies to prevent conflicts of interest with its contractor employees. The  Panel on Contracting Integrity is comprised of senior leaders representing a  cross section of DOD. The director told us that existing policy may be  inadequate given the growing reliance on contractor employees across DOD  program offices. He was specifically concerned with contractors who are  involved in source selection and contract management.
Acquisition Advisory Panel: This panel, comprised of recognized experts in  government acquisition law and policy, was established by a congressional  mandate to examine and report on ways to improve federal acquisition  practices. According to the panel, the trend toward more reliance on  contractors in the federal workplace raises the possibility that the  government’s decision making could be undermined as a result of personal  conflicts of interest on the part of contractor employees. The panel  concluded that, in view of the tremendous amount of federal contracting  for services, and particularly in the context of the blended workforce,  additional safeguards to protect against personal conflicts of interest by  contractor employees are needed. The panel believed that conflict of  interest safeguards are more critical for certain types of contracts  (primarily services contracts) and that further study was needed to  identify those types of contracts where the potential for contractor  employee conflicts of interest raises a concern.
The panel believed that achieving greater governmentwide consistency in  safeguarding against contractor employees conflicts of interest would be  beneficial, in that it would allow agencies to implement best practices and  it would also help to assure that all bidders on federal contracts—whether  successful or not—are aware of their responsibilities and that they  structure their operations knowing what was expected of them. The panel  concluded that it was not necessary to adopt any new federal statutes to  impose additional conflict of interest safeguards on contractors or their  employees. Rather, the additional safeguard requirements should be  imposed—where appropriate—through contract clauses.
As a result, the panel recommended to the Office of Federal Procurement  Policy (OFPP) that the FAR Council should determine when contractor  employee personal conflicts of interest need to be addressed, and whether  greater disclosures, specific prohibitions, or reliance on specified  principles are needed to maintain public confidence in the integrity of  government operations reliant on contractors. The panel recommended  that the FAR Council’s efforts should consider whether development of a  standard ethics clause or a set of standard clauses that establish the  contractor’s responsibility to perform the contract with a high level of  integrity needs to be included in solicitations and contracts.
According to OFPP officials, the FAR council was asked to initiate a  case review process to consider changes to the FAR to include new  conflict of interest safeguards for contractor employees. This  anticipated action would be separate from the November 2007  amendment to the FAR requiring certain contractors to have written  codes of ethics and business conduct, employee ethics and compliance  training programs, and internal control systems to guard against  violation of these codes. The final rule does not speak to development  of a standard ethics clause concerning when contractor employee  personal conflicts of interest need to be addressed.

	Conclusions

The environment in which DOD makes its most significant spending  decisions is changing. As programs grow more complex and costly, DOD  has increasingly become reliant on technical, business, and procurement  expertise supplied by contractors—sometimes to a point where the  foundation on which decisions are based may be largely crafted by  individuals who are not employed by the government, who are not bound  by the same rules governing their conduct, and who are not required to  disclose whether they have financial or other personal interests that  conflict with the responsibilities they have performing contract tasks for  DOD. To its credit, DOD has recognized that this condition and its risks  needs to be studied and addressed by adding personal conflicts of interest  among contractor employees as a tasking for its Panel on Contracting  Integrity and adopting stricter safeguards for FFRDC employees early in  2007. Such attention is important.
While few cases of improper conduct have been publicly identified, there  are also few safeguards in place to identify whether personal conflicts of  interest even exist. The new FAR requirements making it mandatory for  certain contractors to set and follow written codes of business ethics and  conduct will not assure that the advice and assistance received from  contractor employees is not tainted by personal conflicts of interest. The  officials in most offices we reviewed that operate within this environment  believe that the risk to the government is considerable enough to warrant  safeguards when contractors are involved in source selection; at least  some believe that risk extends to contractors that are involved in other  activities that feed into spending decisions. Arguments that no change is  needed focus on costs, which may be calculable. Yet, costs of contractor  employees constructing options for their personal gain—an outcome  increasingly likely based on sheer numbers—would likely never be known,  let alone calculable as long as there is no transparency. Changes to current  policy and practices that are targeted, tailored and implemented at the  lowest practicable level are a way to minimize the cost of addressing  personal conflicts of interest among contractor employees and to  maximize the value of any additional safeguards. Several program offices  have already demonstrated this is possible through the use of contract  clauses and processes to identify potential conflicts and at least one small  company has adopted similar safeguards on its own.

	Recommendations

We recommend that the Secretary of Defense direct the Under Secretary  of Defense (Acquisitions, Technology, and Logistics), to develop and  implement policy that requires personal conflict of interest contract clause  safeguards for defense contractor employees that are similar to those  required of DOD’s federal employees. In developing its policy, DOD should  include requirements for contractor companies to identify and prevent  personal conflicts of interest for certain of their contractor employees who  are performing contracted services that provide inputs to DOD’s decision- making in such mission-critical areas as the development, award, and  administration of government contracts and other advisory and assistance  functions.
In developing its policy, DOD should include the following requirements  for defense contractor companies:   require a written code of business ethics and conduct applicable to  contractor personnel working on certain DOD mission-critical advisory  and assistance type services to:     prohibit contractor personnel from participating in a government  contract in which they have a personal conflict of interest;   require contractor personnel to avoid the appearance of loss of  impartiality in performing contracted duties for DOD;   require contractor personnel to disclose personal conflicts of interest  to their employer prior to beginning work on these contracts;  require the contractor to review and address any personal conflicts of  interest its employees might have before assigning them to deliver  contracted services;    prohibit contractor personnel from using non-public government  information obtained while performing work under the contract for  personal gain;     prohibit contractor employees providing procurement support services  from having future employment contact involving a bidder in an  ongoing procurement;   impose limits on the ability of contractors and their employees on  accepting gifts (defined as almost anything of monetary value, such as  cash, meals, trips, or services) in connection with contracted duties;  and     prohibit misuse of DOD contract duties to provide preferential  treatment to a private interest.
In developing its policy, DOD should include requirements for contractor  companies to:    Report any contractor personnel conflict of interest violations to the  applicable contracting officer or contracting officer’s representative as  soon they are identified.
Maintain effective oversight to verify compliance with personal  conflict of interest safeguards, and have procedures in place to screen  for potential conflicts of interest for all employees in a position to  make or materially influence findings, recommendations, and  decisions regarding DOD contracts and other advisory and assistance  functions. This screening can be done on a task-by-task basis or on an  annual basis, such as a financial disclosure statement.

	Agency Comments

We provided a draft of this report to DOD and OGE for comment.  The  DPAP director wrote that DOD partially concurred with the  recommendations.  Specifically, he wrote that he agrees with their intent  and that each of our recommendations will be carefully reviewed by the  Panel on Contracting Integrity’s subcommittee, Contractor Employee  Conflicts of Interest.  According to the DPAP director, this subcommittee  was established in order to respond to the concerns and recommendations  voiced in the exit conference for our work.  DOD’s comments are  reproduced in appendix II.
In providing comments, OGE’s Director commended the draft report for  breaking important new ground by providing data regarding the ethical  implications of contractors in the federal workplace.  OGE offered a few  comments on our recommendations that should help DOD as it begins its  efforts to address how best to implement them.  Also, OGE offered its  expertise to assist DOD in developing its policy in response to our  recommendations regarding the scope of personal conflicts of interest and  other ethics requirements that would be appropriate for contractor  employees in comparison to federal employees.  OGE’s comments are  reproduced in appendix III.
We are sending copies of this report to the Secretary of Defense, the  Director of the Office of Management and Budget, the Director of the  OGE, and other interested parties. We will make this report available to  the public on the GAO Web site at http://www.gao.gov.
If you have any questions about this report or need additional information,  please contact me at (202) 512-4841 or chaplainc@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. Key contributors to this report were  Carolyn Kirby, Assistant Director; Russ Reiter; Martene Bryan; Lily Chin;  John Krump; Meredith Moore; Lillian Slodkowski; and Suzanne Sterling.

Appendix I: Scope and Methodology

Our overall objective was to review existing safeguards to prevent  contractor employees from having personal conflicts of interest that could  affect the integrity of their service while performing tasks to their employer  under contract with DOD. Because DOD does not maintain  departmentwide data on the numbers of contractor employees working  side-by-side with federal employees, a specific objective was to (1) assess  the roles being played by certain contractor employees by identifying how  many of them were working at DOD offices included in this review as well  as what responsibilities they were undertaking. Other specific objectives  were to assess (2) what safeguards there are to prevent conflict of interests  for contractor employees and (3) whether government and contractor  officials believe additional safeguards are necessary.
We reviewed federal statutes and government ethics and federal  acquisition regulations concerning personal conflicts of interest to assess  their scope and applicability, focusing our analysis on conflict of interest  laws and regulations that safeguard or promote the integrity of the  government’s decisions, approvals, disapprovals, and recommendations.  In addition, we reviewed information on personal conflict of interest  requirements for federal employees versus contractor employees and  interviewed officials from the Office of Government Ethics (OGE); several  offices that administer the defense ethics program including the Standards  of Conduct Office in DOD’s General Counsel (Office of the Secretary of  Defense) and the Army, Navy, and Air Force general counsels for ethics.
To determine what conflict of interest safeguards for contractor  employees that DOD has of its own for contractor employees, we reviewed  DOD offices who used contractor employees to perform the type of tasks  closely associated with inherently governmental functions and that  influence government decision making. To obtain an understanding on the  scope of DOD-wide safeguards, we reviewed the Defense Federal  Acquisition Regulation Supplement (DFARS) to identify relevant  contracting policies or contract clauses restricting contractor employees  participation in DOD matters regarding personal conflicts of interest. To  gain an understanding of the extent to which DOD offices use any DFARS  policies or have augmented DFARS to establish local conflict of interest  safeguards for contractor employees supporting their mission and  operations, we visited and/or obtained information from 21 DOD offices in  the Air Force, Army, Navy, Missile Defense Agency, and Tricare  Management Activity. We judgmentally selected these DOD organizations  and offices for review because they were cited by various DOD officials as  having large contractor workforces and representing a cross-section of  DOD organizations growing trend of reliance on support contractors.  Table 6 lists the specific DOD offices selected for our review.
Terminal High-Altitude Area Defense  Program Office
Contracting Center of Excellence
Agency Operations Office
Aegis Ballistic Missile Defense Program
Deterrence and Strike Division (A5MF)
Surveillance, Reconnaissance and  Spacelift Division (A5F)
Joint Medical Information Systems Office
Aeronautical Systems Center (303rd  Air Wing)
Aeronautical Systems Center (516th  Air Wing)
Within these DOD organizations and 21 offices, we obtained information  from and interviewed contracting officials, program managers, and other  management officials. We also met with officials from DOD sponsoring  organizations for federally funded research and development centers  (FFRDC) within the office of the Undersecretary of Defense (Acquisition,  Technology, and Logistics), Army, Air Force, and Navy. To obtain similar  information from each of the 21 DOD offices, we interviewed these  officials to obtain their views and supporting documentation using a  structured set of questions covering several topics including (1) the types  of services being provided by contractor employees, (2) their concerns  about the integrity of the information and advice being provided by the  contractor employees with regard to personal conflicts of interest, and (3)  what safeguards such as contract clauses the offices are using to ensure  that the assistance and advice provided is not impaired due to contractor  employees conflicts of interest. (See table 7, which summarizes the  structured topics discussed with the DOD offices selected for this review.)
In that regard we also obtained and reviewed available contract clauses or  other documented safeguards to prevent, identify, and mitigate contractor  employees’ personal conflicts problems. We also interviewed defense  procurement and acquisition policy and general counsel and contractor  oversight officials from the Office of the Undersecretary of Defense  (Acquisitions, Technology, and Logistics), Army, Navy, Air Force, and  Missile Defense Agency, DOD Procurement Fraud Working Group,  Defense Contract Management Agency, and Defense Contract Audit  Agency to obtain information and views on their oversight and monitoring  of defense contractor ethics programs and contractor employees conflict  of interest issues.
To identify safeguards that DOD contractors have implemented for their  employees to avoid conflicts of interest, we met with and obtained  documentation on ethics programs from 23 defense contractors and four  FFRDC administrator organizations. We judgmentally selected these  contractors and FFRDCs for review because they were cited by program  managers in the 21 DOD offices we reviewed as having contractor  employees who are performing contracted services for them. According to  fiscal year 2006 contract award data, DOD obligated $8.0 billion for  professional, administrative, and management support services contracts  with the 23 contractors, which accounted for 25 percent of total dollars  obligated that year for this category of services contracts.  The contractors  and FFRDCs we selected for review are listed in table 8.
We reviewed examples of the contractors’ statements of work or other  documentation to identify the types of advice and assistance services  being provided by their employees to the 21 DOD offices reviewed. To  obtain similar information for each of the contractors and FFRDCs, we  interviewed their officials to obtain their views and supporting  documentation using a structured set of questions covering several topics  including (1) DOD’s reliance on contractor employees in terms of their  numbers and responsibilities, (2) steps the contractors take to identify and  mitigate their employees’ conflicts of interest, and (3) views or concerns  about the need for additional safeguards to ensure that the assistance and  advice provided is not impaired by contractor employees conflicts of  interest. (See table 9, which summarizes the structured topics discussed  with the contractors and FFRDCs selected for this review.) We also  discussed and obtained documentation from the FFRDC administrators on  changes in their ethics policies and procedures to address safeguards for  employee conflict of interest problems in response to DOD’s January 2007  revised policy for FFRDCs.
To determine if government and contractor officials believe additional  safeguards are necessary for contractor employees, we used the results of  the above discussions with officials from DOD organizations, including  program managers and ethics and contracting officials. In addition, we  used the results from the above discussions with officials at the 23 defense  contractors and four FFRDCs included in our review. We also reviewed  the report of the Acquisition Advisory Panel and met with OGE and OFPP  officials to obtain information on actions being considered in response to  Panel recommendations related to personal conflict of interest safeguards  for contractor employees. We also met with representatives of industry  and other groups, including the Defense Industry Initiative on Business  Ethics and Conduct, Professional Service Council, Ethics Resource  Center, and members of the American Bar Association’s Public Contract  Law Section on Professional Responsibility and Contracting Ethics.

Appendix II: Comments from the Department of Defense

Appendix III: Comments from the Office of Government Ethics

Appendix IV: Contractor Employees Are Key in DOD Offices GAO Reviewed

For the purposes of understanding how key defense contractor employees  are used to perform mission-critical tasks that could influence DOD  decisions similar to functions carried out by federal employees, we  obtained information from 21 offices across the five DOD organizations we  reviewed. We also reviewed examples of contracting documents including  statements of work and task orders.
The contract documents described a range of services that closely support  inherently governmental functions, such as developing briefings, preparing  contracts, proposing award fee amounts for contractors, conducting  systems engineering studies, analyzing technical issues, and providing  financial management support.  Most of the documents we reviewed  described services requiring contractor employees to provide program  management oversight duties and entailed providing these contractors  with classified, business proprietary, and otherwise nonpublic information  to perform duties closely associated with inherently governmental  functions. Table 10 lists a range of professional and management services  and support that contractor employees provided to different DOD  organizations we reviewed.

Appendix V: Contract Clauses Used by DOD Organizations to Address Contractor Employees Personal Conflicts of Interest

Under Air Force Electronic Systems Center and Army Communications  Electronics Lifecycle Management Command policies affecting 4 of the 21  DOD offices we reviewed, we identified two examples of local contract  clauses establishing conflict-of-interest safeguards for contractor  employees performing advisory and assistance services tasks and other  support services. To illustrate the scope and breadth of these local  contract clauses for addressing contractor employees’ personal conflicts  of interest, the clauses are reproduced in their entirety.

	Air Force Electronic Systems Center

With its annual budget of about $3 billion, the mission of the Electronic  Systems Center is to develop, acquire, modernize, and integrate command  and control, intelligence, surveillance and reconnaissance capabilities, as  well as combat support information technology systems. According to the  center, advisory and assistance services contractor employees comprise a  substantial portion of its workforce helping to execute this mission. And,  according to the center’s law division, although these contractor  employees cannot perform inherently governmental functions, they do  provide essential technical and business advice and expertise that may be  highly influential in decision making by government employees.
Given the close relationship between Air Force decision-makers and  federal employee advisors at the center—who are both required to identify  and avoid financial conflicts—and contractor employees directly advising  them in these roles, the clause (as shown in table 11), which has been used  for advisory and assistance services contracts for at least 10 years,  provides a mechanism to address potential and actual contractor financial  conflicts that could affect the integrity of the procurement system.  According to the center, the clause places an obligation on the part of the  contractor to monitor for personal financial conflicts of interest and  maintain its own disclosure records. The center does not routinely  monitor or review these records, but relies on a self-certification model,  consistent with its treatment of similar requirements in such contracts.

	Army Communications Electronics Lifecycle Management Command

In August 2007, the chief of the command’s Acquisition Process Change  Group distributed a policy applicable to all of the command’s contracting  activities to establish personal conflict of interest safeguards to be  addressed for contractor employees as part of current contracting  procedures for identifying, evaluating, and resolving organizational  conflicts of interest. The underlying principles behind the revised policy  are preventing the existence of conflicting roles that might bias a  contractor’s judgment and unfair competitive advantage. According to the  command’s policy, conflicts of interest are more likely to occur in support  services contracts involving:    management support services;    consultant or other professional services;    contractor performance of or assistance in technical evaluations;     preparing specifications or work statements; and    systems engineering and technical direction work performed by a  contractor that does not have overall contractual responsibility for  development or production.
In the acquisition planning process for all support services, the contracting  officer is required to use local clause HS6001, Organizational Conflict of  Interest, in the solicitation and contract (see table 12). As a condition of  award, the contractor is required to have its employees and  subcontractors who will perform work on the task execute the Contractor- Employee Personal Financial Interest/Protection of Sensitive Information  Agreement, to maintain copies of those agreements, and provide them to  the contracting officer upon request.

Summary:
Why GAO Did This Study

Many defense contractor employees work side-by-side with federal employees in Department of Defense (DOD) facilities performing substantially the same tasks affecting billions in DOD spending. Given concerns with protecting the integrity of DOD operations, GAO was asked to assess (1) how many contractor employees work in DOD offices and what type of mission-critical contracted services they perform, (2) what safeguards there are to prevent personal conflicts of interest for contractor employees when performing DOD's tasks, and (3) whether government and defense contractor officials believe additional safeguards are necessary. GAO reviewed conflicts of interest laws and policies and interviewed ethics officials and senior leaders regarding applicability to DOD federal and contractor employees. GAO judgmentally selected and interviewed officials at 21 DOD offices with large contractor workforces, and 23 of their contractors.

What GAO Found

Indications are that significant numbers of defense contractor employees work alongside DOD employees in the 21 DOD offices GAO reviewed. At 15 offices, contractor employees outnumbered DOD employees and comprised up to 88 percent of the workforce. Contractor employees perform key tasks, including developing contract requirements and advising on award fees for other contractors. In contrast to federal employees, few government ethics laws and DOD-wide policies are in place to prevent personal conflicts of interest for defense contractor employees. Several laws and regulations address personal conflicts of interest, but just one applies to both federal and contractor employees. Some DOD offices and defense contractor companies are voluntarily adopting safeguards. For example, realizing the risk from personal conflicts of interest for particularly sensitive areas, the 19 DOD offices GAO reviewed that used contractor employees in the source selection process all use safeguards such as contract clauses that prohibit contractor employees' participation in a DOD procurement affecting a personal financial interest. In certain other tasks, only 3 of the 23 defense contractors GAO reviewed had safeguards requiring employees to identify potential conflicts of interest so they can be mitigated. In general, government officials believed that current requirements are inadequate to prevent conflicts from arising for certain contractor employees influencing DOD decisions, especially financial conflicts of interest and impaired impartiality. Some program managers and defense contractor officials expressed concern that adding new safeguards will increase costs. But ethics officials and senior leaders countered that, given the risk associated with personal conflicts of interest and the expanding roles that contractor employees play, such safeguards are necessary.