Private Suppliers in a Public Role
Helping the U.S. military in Iraq and elsewhere
By Robert Nichols and Steve Phillips
There's a market out there. But it may be on a
battlefield.
From copy machines to guard services to computer
support, the U.S. Department of Defense (DoD) spends $75
billion each year buying goods and services from the
private sector. A significant portion of this budget
flows to companies that support U.S. military operations
worldwide, from Iraq and Afghanistan to Germany and the
United Kingdom. Indeed, many commercial companies are
looking to the DoD as a potential new customer for a
variety of reasons, such as the military's willingness
to make substantial buys in an otherwise soft economy
and, for some, a sense of patriotism.
Private firms also have taken note of the current
administration's push to "privatize" and
allocate more work to commercial contractors. The
administration and the DoD have significantly increased
the role of the private sector in providing a broad area
of noncombat-related services. The administration has
sought to accomplish this goal through the
implementation of several policy initiatives.
First, the DoD and other agencies have sought to use
expedited procurement policies that allow for rapid
acquisition of services or equipment. This can often
make it easier for companies to secure government
contracts. Second, Congress and the administration have
approved billions of dollars to help with reconstruction
efforts in places like Iraq and Afghanistan. The
government has turned to the private sector to provide
expertise and services in numerous reconstruction areas.
Third, the Bush administration has been aggressive about
using privatization to promote competition within the
various agencies of the government. This policy is
embodied in an Office of Management and Budget (OMB)
policy paper called Circular A-76. It states that
"competition enhances quality, economy and
productivity." Through the A-76 program, private-
sector companies compete for services provided by the
federal government and often compete against groups of
existing federal employees who are providing the
service.
In a report dated Jan. 25, 2005, the OMB summarized some
of the recent successes of its competitive sourcing
initiative. The report concludes that the various
departments completed 217 competitions in fiscal year
2004, generating approximately $1.4 billion in savings
over a three-to-five-year timeframe. The OMB report
claims that this competitive process has produced
substantial savings and has increased the efficiency of
many government operations.
These policies have become increasingly important as the
military finds its troops stretched across several
continents and in multiple combat zones. The DoD seeks
to increase its effectiveness by outsourcing to the
private sector some of the more mundane services that
have been provided by military personnel. This, in turn,
frees up military personnel for combat. Another
important factor is that the U.S. military is smaller in
size compared to the numbers at the end of the Cold War.
This has increased the need for private contractors and
their services as a way to supplement the regular armed
services.
The outsourcing and contracting policies of the DoD have
fomented debate as the lines between the functions of
private contractors and military personnel become more
blurred. Critics of the efforts to outsource certain
government needs argue that the government is unwisely
increasing its reliance on the private sector.
One recent report conducted by the public watchdog group
"Center for Public Integrity" concluded that
60 percent of DoD contracts were awarded without full
and open competition. Furthermore, members of Congress
have offered legislation to curtail the reliance on the
private sector. Thus far, the more severe proposals have
not been enacted into law; however, it is possible there
may be more such efforts in Congress.
These concerns have come to the forefront in Iraq, where
reconstruction efforts have involved tens of billions of
dollars flowing to thousands of private contractors. By
some estimates, approximately 15,000 prime contracts and
subcontracts soon will be in place, allowing widespread
participation. Despite the sharp focus on problems with
the reconstruction process — and the selective
controversial contracts that tend to grab headlines
— most companies have found financial success by
engaging in business in a combat zone where there really
is no front line. The wide range of activities
includes:
feeding, housing and supplying the forces that are occupying Iraq; maintaining and operating complex systems vital to the war-making capability; building civil works projects (such aswater and power projects); rebuilding the financial structures of Iraq; upgrading the education and health systems; training and equipping the new Iraqi military; and developing democratic institutions.
This increase in business opportunity is happening also
in many other countries where the United States has
operations. If done correctly with the appropriate
safeguards and risk mitigation techniques discussed
below, a company can earn a reasonable return for
providing these types of services.
The legal framework for government procurement is
important to understand. While the federal government
market for products and services is substantial and
growing each year, these procurements are highly
regulated. Unlike commercial contracts governed by
common law principles and the Uniform Commercial Code,
government contracts — from formation through
administration — are subject to statutes and
regulations.
Every government contract includes not only the scope of
work and compensation provisions, but also a list of
regulatory clauses that are incorporated by reference.
The result is a contract that generally imposes more
requirements than a comparable commercial sale.
These differences have left many companies reluctant to
do business with the DoD, especially for overseas
contracts where the challenges can be even greater. For
most companies, the benefits of this lucrative market
far outweigh the burdens of learning these
"foreign" rules. Companies can sell to the
DoD, but they must understand and comply with the rules
of the game.
The two primary statutes that establish the DoD
procurement system are: the Armed Services Procurement
Act of 1947 (ASPA), codified at 10 U.S.C. §§
2301-2314; and the Competition in Contracting Act
(CICA), codified in various sections of 10, 31, 40 and
41 U.S.C. The ASPA establishes the transparent process
by which the DoD acquires goods and services. The CICA
requires that such acquisitions be based on "full
and open competition" whenever possible.
These statutes are implemented in the Federal
Acquisition Regulation (FAR), found in Title 48 of the
Code of Federal Regulations. The FAR also codifies
numerous policies and procedures governing federal
agency procurements, addressing every stage of the
acquisition process. These regulations are intended to
provide a uniform structure for federal procurement
contracting. Each agency also has its own implementing
regulations that supplement the FAR.
The procurement statutes and the FAR have general
applicability to all federal procurements. Beyond this
standard legal landscape, additional legal questions
arise for companies wishing to sell products and
services to support military operations in Iraq and
elsewhere overseas. These include risk assessment and
mitigation, "contractor on the battlefield"
issues, and export-control matters.
In determining the costs and benefits of entering this
market, companies should conduct a risk assessment and
consider mitigation techniques. Most overseas government
contracts involve routine work in nonhostile
environments. The risks to employees in those
environments are similar to those faced in the domestic
context, such as workplace accidents. Where a contractor
agrees to perform services or supply products in a
hostile environment, however, the risks increase
dramatically.
In Iraq, for example, reconstruction contractors have to
deal with such added threats as enemy attacks —
stories that have dominated the news for the past year.
Irrespective of the overseas location, the contractor
must assess all potential risks to the operation as well
as employee health and welfare, and address how those
risks can best be mitigated given the mission and the
environment.
Some risk-mitigation techniques are mandated by law. For
example, the Defense Base Act (DBA), 42 U.S.C.
§§ 1651-1654, requires government contractors
to provide workers' compensation benefits to most
employees working outside the United States, similar to
the benefits required for some contractor employees
working domestically. The contractor's liability under
the DBA is exclusive and generally will supersede claims
for tort liability such as negligence or wrongful death.
Furthermore, DBA coverage is mandatory for most
subcontractors, requiring the prime contractor to ensure
compliance by its subcontractor.
Contractors must also communicate the risks to all
affected personnel, and inform them of the measures
taken to address those risks. Most overseas assignments
by contractor personnel are voluntary, making it
essential for the employer to fully disclose the risks.
The contractor and employee should have a meeting of the
minds as to the terms and conditions of the assignment,
so each party understands the other's expectations. Best
practices are that the disclosure and the employee's
voluntary acceptance of the assignment should be
documented in an "Overseas Assignment
Agreement" addressing such items as deployment pay,
insurance coverage, available health-care facilities,
travel arrangements as well as lodging and
subsistence.
For example, the manufacturer of certain radar equipment
recently was asked to send personnel into Iraq to train
soldiers on the equipment and perform maintenance and
repairs, as necessary. Rather than have the contractor
personnel arrange their own lodging, subsistence, travel
and security, the contractor negotiated to have its
personnel "attached" to the military unit that
would be using the equipment. This allowed the civilian
personnel to travel with the military unit, eat at
government dining facilities, and sleep in military-
guarded housing. This arrangement was appreciated by the
volunteers who accepted the assignment.
Companies should also be aware of certain
"contractors on the battlefield" issues. This
term is commonly used to describe businesses that move
with and directly support the military during its
overseas operations. This presence in hostile
environments raises a range of legal and practical
topics, such as: the legal status of contractor
personnel; applicable criminal and civil jurisdiction;
and required training on the Geneva Conventions, health
concerns and security.
These topics may be covered by a "Status of Forces
Agreement" (SOFA), an international agreement
between the United States and the host country. Also,
contractor personnel may be subject to the Uniform Code
of Military Justice (UCMJ), 10 U.S.C. §801 et
seq. and the Military Extraterritorial Jurisdiction
Act of 2000 (MEJA), 18 U.S.C. § 3261. The MEJA
extends Department of Justice jurisdiction for felonies
committed by deployed contractor employees, where local
courts are not prosecuting the employees.
Government contracts and published guidance address some
of these "contractor on the battlefield"
issues. For example, special contract clauses govern
compliance with combatant command orders, contractor
personnel administration, clothing and equipment,
vehicle and equipment operation, passports, visas and
customs. Other rules address the contractor's
responsibility for such matters as security and medical
treatment. The Defense Department's most recent
regulations on this evolving subject become effective
June 6, 2005.
In addition, from April 2003 through June 28, 2004, the
United Nations designated the Coalition Provisional
Authority (CPA) as the lawful government of Iraq. From
its inception, the UN intended for the CPA to function
temporarily, until Iraq was sufficiently stable —
politically and socially — to assume its
sovereignty.
The CPA never negotiated any SOFA's, but rather issued
an administrative order providing the legal framework
for the presence of reconstruction contractors in Iraq.
The CPA order addressed such items as immunity from
criminal prosecution in Iraqi courts. With the
transition of government from the CPA to an Interim
Iraqi government, however, the CPA administrative order
was subject to change. Lawyers, therefore, were required
to follow the Iraqi government's evolving status in
order to determine which laws apply to client personnel
in-country.
Needless to say, these types of "contractor on the
battlefield" issues often dominate a company's
decision whether to pursue this type of business.
Businesses must also be aware of U.S. export controls.
While these rules apply to all U.S. companies, they
naturally come into play for contractors supporting
military operations overseas. These labyrinthine rules
are especially important because violations —
intentional or otherwise — may result in civil
and criminal fines for the company, denial of export
privileges, and debarment from contracting with the U.S.
government. Individuals who engage in unlawful export
transactions may also be subject to fines and
imprisonment.
The term "export" is broadly defined. It
includes not only the shipment of a commodity to a
foreign country, but also the supply of services,
technical information, and software outside the United
States or to a non-U.S. entity or a non-U.S. citizen or
permanent resident. Indeed, technical information may be
exported when it is disclosed orally or visually
(regardless of the means of transmission, such as mail,
courier, fax, electronic mail or hand delivery) to any
non-U.S. person. Learning the nuances of what qualifies
as an "export" is one of the first challenges
for a company working overseas.
Not all exports require a license, however. In
determining licensing requirements, the contractor must
first identify which U.S. agency maintains jurisdiction
over the export of the item, then identify the country
of ultimate destination (as well as any intermediate
destination countries), and finally decipher the agency
rules applicable to that type of export to that country.
Most exports from the United States are governed by one
of two U.S. agencies: the Bureau of Industry and
Security (BIS) of the Department of Commerce and the
Directorate of Defense Trade Controls (DDTC) of the
Department of State. Each agency's jurisdiction over the
export of an item is exclusive; that is, an export may
be subject to the rules of either BIS or DDTC, but not
both.
Depending on the nature of the item to be exported, U.S.
export control laws may require a license when exporting
an item to one destination country but not to another.
Moreover, the Department of the Treasury's Office of
Foreign Assets Control (OFAC) maintains comprehensive
sanctions against certain countries (such as Cuba, Iran
and Sudan), and exports to Syria are prohibited. The
Department of Commerce also has special restrictions on
exporting to or through other countries (including
Libya, North Korea and Iraq).
Other restrictions apply to certain prohibited parties
or prohibited end-uses, such as the export of items that
may enhance the proliferation of nuclear, chemical and
biological weapons. The contractor cannot assume that
the government buyer is aware of these export-control
rules. Rather, a prudent business takes extra
precautions to avoid any violation.
In the context of Iraq, for example, the government has
hired consulting firms to assist in developing the
health-care system of the country. Those consultants
usually travel with laptop computers in order to
function efficiently. When taking a laptop out of the
United States, however, the presence of certain high-end
software on the computer may require an export license.
Companies wishing to sell to DoD and other agencies can
find out about opportunities by visiting FedBizOpps.
gov, the single government point-of-entry for federal
procurement opportunities of more than $25,000.
Government buyers are able to publicize their business
opportunities by posting information directly to
FedBizOpps on the Internet. Through one portal,
commercial vendors seeking federal markets for their
products and services can search, monitor and retrieve
opportunities solicited by the entire federal
contracting community.
Finally, contractors can and should monitor and track
DoD budgets and procurement initiatives, as well as the
actions by Congress. In light of the pressures to reduce
the federal budget deficit and the conflicting pressure
to fund growing numbers of military conflicts around the
world, Congress and the administration will undoubtedly
be looking for ways to find budget savings. Therefore,
interest in cost-efficient services provided by the
private sector may well remain high.
This article only scratches the surface of the legal and
policy issues that contractors face when selling their
products and services to the DoD. While the rules may
seem daunting at first, companies large and small have
seized the opportunity to serve our country abroad by
providing American goods and services for American
service men and women.
Nichols is of counsel and Phillips a partner at DLA
Piper Rudnick Gray Cary, in Washington. Their e-mails
are robert.nichols@dlapiper.com and
steven.phillips@dlapiper.com.
|
