Federal Government Contracts: Opportunities And New Obligations

The current economic situation is clearly uncertain. While it is difficult to predict all of the economic stimulus policies that the Obama Administration will adopt, it is reasonable to expect that federal government construction programs will be a major tool to infuse money into the economy and to create employment opportunities. In a period of decreasing commercial and local public construction demand and volume, federal government construction projects represent a viable option with far less financial risk (insolvency) than other owners.

Whether or not a company is now performing projects for the federal government, every firm viewing federal projects as a potential source of future work needs to appreciate that the federal government can be a tough customer. The most recent examples of that are newly adopted federal procurement regulations that will directly affect how your firm and its subcontractors manage their federal business.

These new regulations are a legacy of the Bush Administration, cannot be ignored, and will potentially require revisions to any firm's subcontract and purchase order terms and conditions. In addition, many firms will need to adopt written codes of business ethics and related ongoing training and compliance programs to address these newly imposed requirements.

Two major regulatory changes were issued in November 2008 and addressed the following topics:

• Business Ethics and Compliance. This regulation was issued on November 12, 2008, with an effective date of December 12, 2008. See 73 Fed. Reg. 67064-67093.
• Employment Eligibility and Verification. This regulation was issued on November 14, 2008, with an effective date of January 15, 2009. See 73 Fed. Reg. 67651-67705.

The new business ethics and compliance program regulation (found in FAR Subpart 3.10 and FAR 52.203-13) combines statements of policy expectations applicable to all contractors and varying mandatory requirements depending on the dollar value and duration of the contract and the size of the contractor. The key aspects of the new regulations include the following:

• All government contractors "must conduct themselves" with the "highest degree of integrity and honesty" and "should have" a written code of business ethics and conduct.
• To promote compliance with the written code, all government contractors "should have" an employee business ethics and training program suitable for the size of the company that will "facilitate discovery and disclosure of improper conduct" and "ensure corrective measures" are carried out.

Any contractor receiving a federal government contract in excess of $5 million and a duration of 120 days or more ("Covered Contract") shall do the following:

• Have a written code of business ethics and conduct and make a copy of its code "available" to each employee engaged in the performance of the Covered Contract;
• Exercise "due diligence" to prevent and detect criminal conduct;
• Promote an organizational culture that "encourages" ethical conduct and a commitment to compliance with the law; and
• Make a "timely" written disclosure to the agency Inspector General with a copy to the contracting officer, whenever the contractor has "credible evidence" of a violation of the civil False Claims Act (31 U.S.C. 3729-3722), or of federal criminal law involving fraud, conflict of interest, bribery or gratuity violations. A possible sanction for a failure to make a required disclosure is either suspension or debarment.

Except for small business concerns as defined by the Small Business Administration, every construction contractor performing a Covered Contract is required to establish an ongoing business ethics and awareness program and an internal control system within 90 days of contract award. The ethics awareness and compliance program shall include:

• Reasonable steps to communicate the contractor's compliance program standards and procedures to its employees and provide related training.
• An internal control system that includes standards and procedures to facilitate timely discovery of improper conduct, periodic risk assessments of criminal conduct, reporting mechanism such as a Hotline, and disciplinary action for improper conduct or for failing to prevent or detect improper conduct.
• Mandatory disclosure of improper conduct to the federal government (Inspector General and Contracting Officer).

Contractors are required to flow down these requirements to subcontract and purchase orders in excess of $5 million and 120 days duration, and to verify their subcontractors' compliance.

In what the FAR Councils described as a "sea change," the existing program of encouraging contractors to make voluntary disclosures to the federal government when the contractor had reason to believe that a violation of a federal law had occurred in connection with the performance of a contract was eliminated. As indicated above, the new FAR clauses on business ethics and compliance impose a mandatory disclosure obligation on a contractor when it has "credible evidence" of a violation of the civil False Claims Act or federal criminal laws related to one of its contracts with the government. The Department of Justice lobbied for this change on the basis that the 20-year-old program of voluntary disclosures was not working.

Requirements to make disclosures of wrongdoing are not new. For example, the current Anti-Kickback Procedures clause at FAR 52.203-7 (JUL 1995) mandates a written disclosure to the agency Inspector General when the contractor has "reasonable grounds to believe" that there has been a violation of the prohibition on kickbacks. This is a mandatory clause in every contract in excess of $100,000 (and the substance of the clause must be incorporated into subcontracts that exceed $100,000). However, until the new regulation was issued in November 2008, there was no expressly stated sanction if a contractor failed to make a disclosure. That has changed with the revision of the grounds for debarment or suspension in FAR Subpart 9.4, Debarment, Suspension, and Ineligibility, to expressly include a failure to make a timely written disclosure to the government whenever the contractor has "credible evidence" of a violation of federal criminal law or the civil False Claims Act related to the contract.

The new grounds for debarment or suspension are not limited to those contracts awarded on or after the effective date (12/12/2008) of the new regulations. Rather, this sanction applies to all existing contracts and retroactively to those contracts on which the contractor has received final payment within three years prior to Dec. 12, 2008.

This is a significant policy change that no contractor should ignore. The concepts of credible evidence and timely disclosure are not defined in the new regulations, as the FAR Councils viewed then as being fact dependent. There is no reason to conclude that these changes are just formalities or that these new tools in the government's arsenal will not be enforced. Contractors need to consider both the consequences of a suspension or debarment as well as the cost of simply responding to a proceeding in which suspension or debarment is threatened.

While the employment of undocumented workers remains a major political issue, the FAR Councils have amended the FAR in response to Executive Order 13465 issued on June 6, 2008, to require the use of the Electronic Employment Eligibility Verification System ("E-Verify") administered by the Department of Homeland Security, U.S. Citizenship and Immigration Services.

As a condition of receiving a contract on or after the effective date of this regulation, a new clause, FAR 52.222-54, applicable to all construction contracts in excess of $100,000 ("Covered Contract") requires a prime contractor to enroll in the E-Verify program within 30 calendar days of the award of a Covered Contract and to begin to use E-Verify within 90 calendar days of enrollment to verify the enrollment eligibility of any new employee. Employees, whether new or existing, who are assigned to the Covered Contract must be verified within 90 calendar days of enrollment or 30 calendar days of assignment to that contract, whichever date is later. There are exceptions for persons holding certain security clearances or credentials issued pursuant to Homeland Security Presidential Directive 12 (HSPD-12), Policy for a Common Identification Standard for Federal Employees and Contractors.

The new FAR clause also contains a flow down requirement to all subcontracts/purchase orders for construction and most services if the value of that subcontract exceeds $3,000. (This is not a typo.) While prime contractors are not responsible for their subcontractors' hiring decisions or to verify the eligibility of a subcontractor's employees, a prime contractor is expected to ensure that all covered subcontracts at every tier include an appropriately written clause incorporating the clause at FAR 52.222.54 and that all subcontractors use the E-Verify system.