The Dreaded OCI Clause – Organizational Conflict of Interest

In federal contracting, the government has regulations in place that try to prohibit unfair advantages between companies competing for the same bid. This is a good thing, but can reduce your opportunities as a subcontractor if you don’t know your customer (the prime contractor) well enough.

If you find yourself missing out on contracts because your prime won’t bid on them, there might be an OCI problem at play.

When it comes to doing business with the federal government, there are several types of work. The first is “building stuff,” anything from a computer system to a tank to a ship. At the end of these contracts, the government is procuring something physical. Large businesses (your typical prime contractors) will often have their eye on contracts like these.

Another type of work is operations and maintenance, to keep those physical items functioning. For example, the Pentagon has probably more than 100,000 computers, so there’s somebody who is employed by the Washington Headquarters Service (an arm of the Secretary of Defense), who makes sure those computers are running, connected and secure. Sure, if a computer breaks, you have to go and buy a replacement, but you’re not actually building anything.

Then there are services, which are probably more up your alley as a small business. There are many kinds of services, such as janitorial/sanitation (Jan/San), electrical, building maintenance, driving trucks, etc. Let’s look now at three particular services that are most likely to get into OCI issues:

  1. Acquisitions/Support work, which includes helping with bids, RFPs and evaluation. If you’re involved with creating and collecting bids and RFPs, you would have an unfair advantage so you’re not allowed to put in a bid yourself.
  2. A & AS (Advisory and Assistance Services), where you work with the government customer to define the policy and processes they’re using throughout the organization. In A & AS, you can see right away how you would have privileged information (unavailable to the public) about how big an opportunity for a “building things” contract will be, which you could use to beat out your competition. You have an OCI – organizational conflict of interest – and so does your prime contractor if you’re a sub in this type of work.
  3. SETA (Systems Engineering Technical Assistance) work also creates an OCI, because as the engineer you could design something that only your staff know how to build. That’s why you’re prohibited to bid on building or even maintaining something that your company designed. Another type of SETA work is PMO (Project Management Office) support – after all the upfront design work is done, the Government still needs someone to help them run the contract. Are the contractors making the right tanks (inspection), are they doing it for the right cost (cost build-up issues), are they on schedule? Some of these PMO contracts can get quite substantial, but still not as big as the building contracts.

If you’re subcontracted to someone with designs in their business strategy about actually building the stuff, they’re not going to want to bid on the PMO work and risk an OCI. So if you’re a PMO contractor, this kind of prime isn’t going to bid on anything you want to do. They’re also probably not going to give you their own PMO work or you’ll know too much about their stuff as well.

In some cases companies can set up “firewalls,” designed to ensure that the people doing the SETA work never talk to the people doing the building work. However, that’s not always enough to satisfy the government. The current administration has been very harsh on the OCI issue and as a result there have been some major divestitures, where companies have actually sold off their services groups so they can focus only on the building-type contracts. (Northrop Grumman is one well-known example, as explained in this article by the Civitas Group.)

We ran into an OCI obstacle at TAPE, with an MA-IDIQ contract at a large civilian agency. TAPE had subbed to a large business on that contract, but the large business only wanted to do the building stuff on that contract – the big business items. We were looking for the project management jobs, but they didn’t want to bid on any of those. They knew that would destroy their opportunity of winning the bigger, more lucrative bids.

Today we’re on a different team that’s bidding on a lot of the stuff that we want to work on. Now we have an opportunity for revenue, where we really didn’t have an opportunity for revenue when we were subcontracting to the large company.

This is why as a subcontractor you really have to know your customer – the prime contractor. It doesn’t mean there isn’t work for the small business to do in building a tank, but if your core capabilities are going to be in OCI conflict with the work your prime contractor is going after, things aren’t going to work out well for you.


How to Operate as a Prime in a Multiple Award Contract

Congratulations, you’ve won a big IDIQ, where you’re the prime. You got together with a bunch of subcontractors, and now as a group you have won the right to bid on task orders for a given scope or collection of individual agencies.

So here you are, probably with visions of dollar signs, because IDIQ contracts usually have big ceilings. You’re probably thinking, “Send me the revenue!”

Not so fast. Here are seven components you need to understand about operating as a prime in a multiple award contract:

1. Know the customer

As we’ve talked about many, many times, the fish aren’t going to jump in the boat. If you don’t have a relationship with the customer, chances are you won’t get the job.

The exception to this would be contract orders that are based on LPTA or “least price, technically acceptable.”

You also have to understand that you can’t count on your relationship with the contracting officer who issued your contract, because that may or may not be who issues your task orders. In many cases the contracting officers will be in the actual sites that are using this contract to get their work out.

2. Meet with your team regularly

Go over prospective task orders and make an honest assessment of whether you can win. This may be a task order you’ve never seen before, but one of your subcontractors may have a relationship with the customer.

3. Keep up with deal flow and make sure you’re in front of all the potential customers in some fashion

Let’s take a big obvious example like the Navy’s SeaPort-e, an electronic portal where 1,800+ IDIQ multiple award contract holders compete for task orders – 5-25 of which are issued every single day.

SeaPort-e also publish an advanced planning matrix every week, and a source’s sought list (asking for people who might be able to bid) – both of these notices are opportunities to identify a customer you can visit before the task order comes out.

What if you’re a typical small business, without the people available to be at all these agencies at once? This is where your team of subcontractors comes in. If you’ve built it carefully, you’ll have people who can touch all the different organizations that are eligible to use the contract.

As soon as you get one of these notices, find out which of your teammates might know this customer or do this work, and figure out how you can work together. Then you’ll be ready as soon as that task order is issued.

4. Bid when you can win, or when you want to meet the customer

In those cases where you don’t actually know the customer, and so your PWin (“probability of winning”) might be low, you might still want to send in a credible response. Not necessarily because you expect to win, although you always hope you will, but because when you get the debriefing, you have an opportunity to talk to the actual customer and build a relationship for the next task order.

5. Help your partners succeed, or get rid of them

Make sure you’re doing everything you can to work with your partners or teammates to help them succeed. If any of your partners are not responding, participating, or adding value, you need to get those people off your team. As an example, my company TAPE just got added to a contract that’s been in existence for a year, and we’ve been added because we can help that prime win more work (replacing former partners who weren’t helping).

6. Be a good prime, don’t steal the sub’s work

Let’s say you’re in the fortunate position where a sub has a piece of work they’ve been doing and they want to bring it to this contract vehicle. Work that out profitably, but do not take over your sub’s work. I’ve heard countless horror stories from small businesses who were on IDIQ contracts and had their work stolen by a big prime who suddenly took over their customers. It may seem tempting, but don’t do it. Those kinds of hits to your reputation do not go away.

7. Make sure you understand the subcontractor’s financing deal, so they can work profitably

There are many performance risks, but the worst performance risk of all is that the sub cannot pay their own people. Since most small companies aren’t in a position to pay the sub before the customer pays, there’s a further delay to the sub than they would normally experience. Can they wait that long?

Stay tuned for the third post in this three-part series (we started with Prime Versus Sub – A Critical Decision), this time focusing on how to operate as a subcontractor in a multiple award contract. Government contracting has shifted over the last 20-25 years. Today I’d say that probably 70% of service-based business from the federal government goes out via IDIQ or GSA schedules, so you’d better learn how to be a prime and you’d better learn how to be a sub.


Business Valuation Issues for Small Businesses

When you are looking to sell your business, you need to know how much it will be worth to the new owner – that process is called business valuation.

Small businesses in the federal sector are often puzzled when they find out that their business’s valuation is very low. The big issue is when most or all of your revenue is coming from set-aside contracts that are specifically for small businesses.

When a big business buys a small business with set-aside contracts, the contracts get “novated” (changed over to the big business’s name). You keep the contract, but the government agency (your client) no longer gets small business credit for tasks awarded to you.

It’s even more restrictive for 8(a) (minority) small businesses; their contracts can be cancelled by the CO (contracting officer) when a novation is requested. And some multiple award IDIQs have provisions that when novated (transferred to the new ownership), the business’s size is re-certified at its new level (presumably large).

The big business can keep the revenue from these set-aside contracts for the length of the contract, but can’t re-compete for the work because they are too big, unless they can move the contract to another vehicle where their Full and Open status is allowed.

That’s why your small business may not be very appealing for a big business to buy. In the valuation of your business, your set-aside revenue is heavily discounted (by as much as 80%) versus work won full-and-open.

So if you can’t sell, you’ll have to grow. The challenge there is that you might get too big to qualify for small business set-asides. That’s why it’s important to follow the work of the Mid-Tier Advocacy Group at https://www.businessgrowthforall.org/. They’re committed to creating a mid-tier where larger small businesses can compete with each other, instead of being forced into competing with the giants of the industry.


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