Classified contracting

Army Lawyer, Jan-Feb, 2003

Who Pays the Tab?

Department of Defense (DOD) readers who support classified programs face more complicated contracting issues because of security concerns. Contractors working in the secure contracting environment subject their employees to an extensive Defense Security Service (DSS) background investigation before they can receive the appropriate clearance to work on classified contracts. The DSS investigative process is lengthy and expensive, and the DOD has historically paid the cost of vetting contractor employees. The DOD Comptroller examined these costs and proposed that such costs were a potential fee-for-service candidate in Program Budget Decision (PBD) 434. Under PBD 434, the DSS would directly charge contractors for their personnel security clearance investigations. (1)

The Under Secretary of Defense for Acquisition, Technology and Logistics conducted a study analyzing PBD 434 and non-concurred in the proposed fee-for-service proposal. (2) In surveying its five largest defense contractors, the Under Secretary determined that the proposal would "simply shift the current costs of performing contractor security clearances, including overhead, general and administrative ..., and profit/ fee to DOD weapons systems, thereby increasing the costs of those weapons systems and increasing the Department's costs in total." (3) The projected costs of implementing PBD 434 would result in the DOD paying an additional thirty-four percent over the current costs for such clearances. Contractors would be able to charge the clearance costs directly to DOD customers as a cost of doing business. The DOD would draw such additional costs from program funds, thus eating into program budgets which may already be tight. (4)

The study also determined that charging contractors for security clearances would not reduce the number of contractor clearance requests. The study noted that competitive market pressures already provide an incentive to limit personnel costs, including clearance costs, to only those employees necessary to perform the contract. Moreover, because the DSS is the mandatory source for DOD contractor security clearances, contractors questioned the remedies available to them against the DSS "in the event of quality or timeliness problems under the proposed fee-for-service arrangement." (5)

As an alternative to PBD 434, the Comptroller proposed that the DSS "direct charge" the military departments for costs of security clearances for contractor personnel working on their contracts. (6) The military departments rejected this proposal for several reasons. First, the proposal would result in increased personnel costs "required to manage the submission and adjudication of contractor security clearances, with no accompanying expectation that it would lead to future reductions in the number of contractor security clearance requests." (7) Second, it would be "impossible for Government contract managers to determine which Military Department should bear fiscal responsibility for processing a particular security clearance in a situation where multiple DOD contracts are being performed simultaneously by the same contractor." (8)

FAR Changes

A new amendment to the Federal Acquisition Regulation (FAR) consolidates and clarifies definitions concerning classified contracting and provides guidance on disclosure of classified sealed bids. (9) The first change moved the definitions of "classified acquisition," "classified contract," and "classified information" from FAR section 4.401, dealing with safeguarding classified information within industry, to FAR section 2.101, the general definitions section. This change clarifies that the definitions applied to more than one FAR part. The second change involved rewriting FAR section 14.402-2. The new amendment revised the language stating that only properly cleared bidders or their representatives may attend classified Bid openings, and added language allowing the contracting officer to make classified bids available to such properly cleared bidders or representatives at a time after bid opening. (10) Colonel Kosarin.

(1.) Memorandum, Under Secretary of Defense (Acquisition, Technology and Logistics), to Deputy Secretary of Defense, subject: Study for Program Budget Decision (PBD) 434, Defense Security Service (30 May 2002). The costs for contractor personnel security clearances are currently charged against a DOD-wide Operation and Maintenance (O&M) appropriation. Id.

(2.) Under Secretary of Defense (Acquisition, Technology & Logistics) Study for PBD 434, Defense Security Service (undated) (on file with author).

(3.) Id. at 1.

(4.) Id. In fiscal year 2002, the DOD projected costs of $91.2 million in Operation and Maintenance funds if the DOD paid directly for the clearances, and $122.2 million if the DOD used the proposed fee-for-service system. Id.

(5.) Id. Among the questions contractors asked were whether contractors could legitimately refuse to pay the DSS or take any legal action against it in such situations. Id.