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New DFARS Rule Threatens Defense Contracts for Multinational Consulting Firms

The landscape of defense contracting is about to undergo a significant shift. A new amendment to the Defense Federal Acquisition Regulation Supplement (DFARS) is tightening restrictions on which firms can secure Department of Defense (DoD) consulting contracts, imposing a high bar for conflict mitigation on companies with foreign ties. This rule is expected to take effect at the end of October.

Understanding the New Conflict of Interest Mandate

The primary concern driving this rule is the potential for conflicts of interest when consulting firms, or their subsidiaries and affiliates, conduct business with certain foreign countries and entities.

This amendment implements Section 812 of the National Defense Authorization Act (NDAA). It specifically targets advisory and assistance services and explicitly applies to the broad sector covered by NAICS code 5416, which encompasses management, scientific, and technical consulting services. This massive umbrella ensures that many large, multinational consulting firms will be impacted.

The Challenge of Carve Outs and Corporate Structure

While the rule appears broad in scope, it does include several notable carve-out exceptions. These exceptions relate to firms providing assistance dealing with:

• Legal consulting
• Audit consulting
• Tax accounting
• Participation in certain judicial and other types of proceedings

However, there is significant ambiguity about how contracting officers are supposed to interpret and apply these exclusions. Because many large organizations have complex corporate structures with affiliates and subsidiaries providing services all around the world, even if a carve-out limits application to specific activities, it may not completely cover all the activities the firms and their affiliates engage in.

Navigating the Mitigation Plan Requirement

Crucially, the new DFARS rule is not a complete bar to receiving defense contracts. If a firm has these affiliated foreign relationships, the contracting officer can require a rigorous conflict of interest mitigation plan.

Preparing and submitting these plans presents several practical challenges for contractors:

1. Identifying Covered Entities: Firms must identify contracts with foreign entities, which can be difficult when dealing with state-run entities in certain countries where it is not always clear whether the entity is controlled by the foreign government.
2. Defining Mitigation: There is ambiguity regarding what the DoD expects in the written analysis for mitigating the conflict. Contractors must determine what procedures, such as firewalls or separate IT systems, are needed to prevent cross-pollination of information.
3. Inconsistent Expectations: Because different contracting officers may have different “temperatures” or expectations for reviewing and approving these mitigation plans, firms submitting the same plan for two different contracts might find that it is acceptable to one contracting officer but not the other.
4. Ongoing Compliance: The plan must factor in ongoing compliance maintenance, as corporate structures, contracts, and resource-sharing arrangements can change over time.

Guidance for Contractors

Given the inevitable inconsistency and the likelihood that these provisions will be challenged in the “protest world,” contractors must prepare now. Companies without these foreign ties may seek to exploit this rule by positioning themselves as a safer, more secure bet for the government.

Firms that do have ties should take immediate steps:

• Assess the Situation: Take a hard look at the rule and guidance, and thoroughly understand what far-flung activities of subsidiaries and affiliates might be implicated.
• Design Practical Mitigation: Start thinking about mitigation measures that are not only effective today but are easy to execute for a prolonged period.

This preparation is critical to ensure continued success in the competitive defense contracting market.

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