On March 4, 2009, the White House called for significant changes in federal contracting practices. "President Obama signed a memorandum Wednesday designed to save the federal government $40 billion a year by overhauling what Obama calls the 'broken system of government contracting,'" trumpeted one article.¹ However, upon closer review, it is unclear what specific changes, if any, will be made to the laws and regulations that govern federal contracting as a result of the policy announcement. The following bulletin summarizes the problems that the memorandum identifies, the proposed solutions, and how the administration's next steps will affect contractors.

Problems Identified

The memorandum complained of "[e]xcessive reliance on sole-source contracts or contracts with a limited number of sources and cost-reimbursement contracts...," and posited that the government has moved away from "full and open competition." The memorandum further opined that "the line between inherently governmental activities that should not be outsourced and commercial activities that may be subject to private sector competition has been blurred and inadequately defined."

The memorandum calls for clear rules to distinguish between functions that are inherently governmental and functions that may amenable to outsourcing. Further, the memorandum declares that noncompetitive contracts should be used only when they "can be fully justified," and expresses a "preference for fixed-price type contracts."

Proposed Solution

In the memorandum, the President directed the Director of the Office of Management and Budget ("OMB"), along with agency heads, "to develop and issue by July 1, 2009, Government-wide guidance to assist agencies in reviewing, and creating processes for ongoing review of, existing contracts in order to identify contracts that are wasteful, inefficient, or not otherwise likely to meet the agency's needs, and to formulate appropriate corrective action in a timely manner." The memorandum listed corrective actions such as modifying and cancelling such contracts, but qualified that any such procedures should be consistent with applicable laws, regulations, and policy.

The President further directed the Director of OMB to issue government-wide guidance regarding: (1) the use of sole-source and other types of noncompetitive contracts; (2) the use and oversight of all contract types²; (3) how agencies assess the capability and ability of the federal acquisition workforce to develop, manage, and oversee acquisitions appropriately; and (4) clarifying when government outsourcing for services is and is not appropriate.³

Implications for Contractors

The memorandum shows an intent to reduce federal outsourcing and the use of cost-reimbursement contracts. However, federal acquisition policy already embraces the values set forth in the memorandum. For example, the Federal Acquisition Regulation ("FAR") requires agencies to issue written findings to support the use of "other than full and open competition" (i.e. sole source contracts) in awarding contracts. 48 C.F.R. § 6.300 et seq. Similarly, cost-reimbursement contracts are to be used only where, for example, "the work to be performed is such that it is neither feasible nor effective to devise predetermined objective incentive targets applicable to cost, technical performance, or schedule...." 48 C.F.R. § 16.405-2(b)(1)(i). Thus, the FAR already implements the policy objectives expressed in President Obama's memorandum.

Ultimately, we suspect that the FAR itself, or other acquisition statutes or regulations, will not change in significant ways. Rather, the memorandum signals that the Obama administration has determined, consistent with reports in the popular media, that contractors have become so "embedded" in certain agencies, or have gained such a monopoly on certain products or services, that the market forces presumed to result in a "good price" to the government have broken down. Thus, we expect that while the administration may promulgate some changes to the FAR or other acquisition laws, as a practical matter, the largest concerns for contractors will be: (1) making their cases for why their particular goods and services are amenable to outsourcing and do not involve "inherently governmental functions"; and (2) protecting their rights by asserting claims and protests if agencies attempt to terminate or modify contracts.

Attorneys in Reed Smith's Global Regulatory Enforcement Group are actively monitoring developments in procurement law, including OMB directives and modifications to the FAR. We are available to help in understanding new developments in the law governing contractors, and devising advocacy and compliance strategies for affected companies.

1. Obama Pledges to Turn Tide on 'Era of Fiscal Irresponsibility,' CNN.COM (Mar. 4, 2009) (last visited Mar. 4, 2009).
2. The memorandum stated that such guidance should be consistent with regulations promulgated pursuant to section 864 of Public Law 110-417. Public Law 110-417 is the 2009 Financial Services and General Government Appropriations Bill. Section 864 requires that the Federal Acquisition Regulation be amended to add guidance regarding when and under what circumstances cost-reimbursement contracts are appropriate; (2) the acquisition plan findings necessary to support a decision to use cost-reimbursement contracts; and (3) the acquisition workforce necessary to award and manage cost-reimbursement contracts.
3. The memorandum states that this guidance should be consistent with section 321 of Public Law 110-417. Section 321 directs OMB and agency procurement officials to define "inherently governmental functions" and identify whether services agencies' outsource fall within this definition.