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American Bar Association

ABA Section of Business Law


Volume 14, Number 6 July/August 2005

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.


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