So You Want To Be A Government Contractor?
So you have been in business for a while, selling your products or services to the general public, and now you’ve heard that the U.S. federal Government, or a state or local government, might be in need of, or could use, what you sell. Well, that’s wonderful, and one thing can be said for dealing with governments at all levels in the U.S. — generally, they pay their bills (this is especially true of the federal Government). On the other hand, contracting with government entities comes with a slew of rules, restrictions, and potential pitfalls. In this article, we’ll briefly discuss some of the basic legal considerations that you’ll need to address before entering into doing business within the federal procurement system.
A company doing business with the U.S. Government, whether as a prime contractor or a subcontractor, is subject to a potentially broad range of obligations and specialized contract terms unique to contracts with the Government. These obligations and terms flow primarily from federal statutes and an extensive set of regulations known as the Federal Acquisition Regulation (“FAR”). The FAR contains the acquisition policies and procedures used by nearly all Government agencies. The typical prime Government contract contains fifty or more FAR clauses, many of them mandatory. Many of these statutory requirements and mandatory FAR clauses “flowdown” to subcontracts. This means that if you are a subcontractor to a higher-tier contractor, although your subcontract may not contain a certain FAR clause, you may be obligated under that clause because the ultimate contract is with the Government. Additionally, contractors must follow numerous statutory and regulatory provisions outlining certain standards of business conduct.
FAR Part 15 contains the policies and procedures the Government uses when contracting by negotiation. In this acquisition method, the Government issues Requests for Proposals (“RFP”) stating its requirements, anticipated terms and conditions, information the offering company must include in its proposal, and the factors and subfactors the Government will consider when evaluating proposals. The Government may engage in discussions with you and may consider non-cost factors such as your company’s managerial experience, technical approaches, and past performance. The Government may also choose to award a negotiated contract without discussions. In evaluating proposals, the Government compares the proposals against the criteria in the RFP and selects the proposal that is most advantageous to the Government (not necessarily the lowest-priced proposal).
In addition to contracting by negotiation under FAR Part 15, the Government may use the special rules contained in FAR Part 13 for acquisitions below a “simplified acquisitions” threshold. The simplified acquisitions threshold changes from time to time, and currently can be generally understood to mean any acquisition under $150,000 in value (with exceptions for certain contracts). There also exist special rules in FAR Part 12 for acquisitions of “commercial items.” The FAR’s definition of a “commercial item” is (as usual) complicated, but generally can be understood to be any item or service “customarily used by the general public or by non-governmental entities for purposes other than governmental purpose” that either has been sold or offered for sale to the general public. For acquisitions under the “commercial item” rules in FAR Part 12, there are a fewer number of required FAR “flowdown” clauses.
In pricing contracts with the Government, many of the Government’s rules place a substantially greater burden on a contractor’s accounting system than do rules for non-Government contracts. For example, the Truth in Negotiating Act (“TINA”), if it were to apply to a particular procurement, would require that during negotiations for certain contracts and contract modifications, a contractor must provide the Government with “cost or pricing data,” which is broadly defined to include “all facts that . . . prudent buyers and sellers would reasonably expect to affect price negotiations significantly.” The contractor must certify that these data are “current, accurate and complete” as of the date on which you and the Government agree upon a price. Should the Government later determine that your data were not current, accurate, or complete, it may bring a defective pricing claim against your company demanding a reduction in the contract price to compensate for the effect of the undisclosed or inaccurate data.
Key exceptions to TINA requirements exist when, among other things, the acquisition is for a “commercial item.” Therefore, a key element of your marketing strategy may be to classify your products and services as “commercial items” as defined in the FAR.
Many, and possibly most, “commercial item” sales are made through “Schedule” contracts (discussed more fully below), which usually are administered by the General Services Administration (“GSA”). Some have described these as “hunting licenses,” because the “Schedule” contract itself drives no revenue unless and until a government entity orders items or services through that contract. Even when using the “commercial item” exception to TINA under a GSA “schedule” contract, contractors must be aware of “Price Reduction” clauses in such contracts. These clauses generally provide that the contractor shall (i) give its best pricing (and discounts) to the Government, (ii) report any deviations from those prices and discounts to the Government, and (iii) lower its pricing to the Government in such cases.
FAR Part 16 describes the various types of contracts used by the Government, divided into two broad categories — fixed-price and cost-reimbursement.
Fixed-price contracts generally provide for specific quantities at specified prices. They may contain economic price adjustments for inflation or other circumstances, and place the maximum cost risk on the contractor. On the other hand, fixed-price contracts generally provide the greatest potential for profit to the contractor.
The Government generally uses cost-reimbursement contracts when the actual cost of performance can’t be accurately estimated. In dealing with cost-reimbursement contracts, a contractor’s accounting system must be adequate to determine allowable costs and allocate them properly in accordance with the FAR’s extensive contract cost principles (at FAR Part 31) and, for some contracts, the Cost Accounting Standards Board’s cost accounting standards (“CAS”) (at 48 C.F.R. § 9900 et seq.). The contract cost principles outline allowable and unallowable costs under Government contracts, while the CAS detail how to allocate different costs to Government contracts. Cost-reimbursement contracting requires a contractor to be very open and transparent to the Government personnel who will monitor contract performance and costs, but places the minimum cost risk on the contractor.
The Government may also award what are known as indefinite delivery/indefinite quantity (“IDIQ”) contracts, under which the Government places separate orders for supplies (using delivery orders) or services (using task orders). Widely used variants of the IDIQ contract, generally awarded through the GSA, include GSA Multiple Award Schedule (“MAS”) contracts and Government-Wide Acquisition Contracts (“GWAC”). Under the GSA MAS, GSA awards Federal Supply Schedule (“FSS”) contracts to multiple companies supplying comparable goods and services. GSA negotiates “fair and reasonable” schedule prices, and, of course, always looks to get the lowest pricing it can based on its Government-wide buying power.
Almost every company serious about selling to the Government should have the appropriate GSA Schedule contracts (examples include the Information Technology (“IT”) Schedule 70 and the Mission Oriented Business Integrated Services (“MOBIS”) Schedule 874) because they are so commonly required by Government customers. You need to be aware, however, of your responsibilities to submit accurate pricing data to GSA during the negotiation process and to monitor commercial sales so as not to trigger the “Price Reduction” clause under the Schedule.
Contract Clauses Unique to Government Contracts
There are certain contract clauses that are unique to Government contracts, including the FAR’s “Changes” clauses, “Termination for Convenience” clauses, and “Termination for Default” clauses, as well as special “Representations and Certifications.”
The FAR’s “Changes” clause allows the Government to make changes to the contract, so long as the changes are within the scope of the original contract. You must comply with the changes, but can request an adjustment to the contract price based on the increased costs you’ve incurred because of the changes.
The FAR’s “Termination for Convenience” clause allows the Government to terminate a contract for any reason at any time if it is in the best interests of the Government. This provision, generally never found in commercial contracts, often befuddles the new government contractor. Fear not — at least not too much. Generally, if terminated for convenience, you have the right (albeit limited) to seek compensation for your costs resulting from the termination.
The FAR’s “Termination for Default” (“TFD”) clause allows the Government to terminate a contract based on a contractor’s unsatisfactory performance. You never want to face this situation, but if it happens, the Government often allows a contractor an opportunity to remedy the situation before terminating the contract. If not remedied and the contract is terminated for default, the terminated contractor may be liable for damages and the Government’s cost of securing a new contractor. This can be a sort of death sentence for companies, because the stain of a “TFD” follows the contractor for several years and negatively affects its chances of winning new Government contracts.
“Representations and Certifications” (“Reps and Certs”) are usually found in a Government contract’s Section K. This is where a contractor provides information about itself and certifies that it complies with all applicable laws and regulations. The subjects of these laws and regulations include Affirmative Action, Equal Employment Opportunity, Contingent Fees, and many more. If a contractor does not complete all of these “Reps and Certs” fully and truthfully the Government may be able to eliminate the company from the competition. Worse, misrepresentations or false certifications in this section may be cause for a TFD and the Government may refer the matter to the Department of Justice for civil or criminal legal action.
Standards of Conduct
Finally, there are numerous statutory and regulatory provisions that outline a government contractor’s mandatory standards of conduct, many of which require that a company ensure its employees comply with the standards. Some of the more important standards, and where the Government’s rules differ considerably from normal commercial practice, are in the areas of gift giving, claims and statements, and the hiring of Government employees.
Statutes and regulations prohibit contractors, including their employees, from giving anything of monetary value to Government employees, including gifts, meals and discounts. While the standards of conduct do allow certain small exceptions, the contractor would be wise to avoid even the appearance of impropriety.
In addition, making false claims and representations to the Government could subject the company or an individual employee involved to civil or criminal liability. The reports, invoices, and supporting documentation that a contractor presents to the Government must be accurate. If not, the basis for a false claim allegation may exist.
Statutes and regulations also govern the employment of Government officers and employees after they have departed Government service. The complex series of restrictions vary based on the Government employee’s position and work while with the Government.
Possibly most important and often overlooked by new government contractors, most if not all government contractors now are required to have in place a Code of Ethics and Business Conduct and an ethics compliance program that includes periodic training for the contractor’s employees and a procedure for reporting suspected violations.
Although government contracting can be a steady and reliable source of income, it is heavily regulated, and those rules are complex. The FAR and its associated agency supplements contain the basic rules, but others are scattered through other laws and regulations. State and local government procurement systems, while often modeled on the federal procurement system, differ from the federal system and each other in many ways, and are worthy of a fuller discussion in another article. Companies seeking to enter the government contracting market space, at any level, should engage competent counsel to prepare for that entry and to help ensure smooth sailing through the often-turbulent waters of government contracting.
© Ravenhearth Law
Ravenhearth Law is your “equalizer” in the worlds of government contracting and general business law. Orest (“OJ”) Jowyk combines his decades of experience within the U.S. Government and his legal experience, both in private practice with a top national firm and in-house as General Counsel with the full range of legal responsibilities for the company, to provide clients with practical, efficient, and effective counseling in helping their businesses succeed.