Federal Procurement Policy

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The requirement found at FAR 52.203-13 was implemented on December 24, 2007 and requires any contractor who is awarded a contract in excess of $5 million to have a written Code of Business Ethics and Conduct within thirty days after award.  Large business firms must also implement a training and compliance program within ninety days…

We published an article on March 5, 2007, reporting a proposed amendment to the FAR that would require government contractors to prepare a Code of Business Ethics and Conduct.  On November 23, 2007, a final rule was published in the Federal Register and two new FAR clauses became effective on December 24, 2007. These new clauses are very important to all federal government contractors and they mandate the preparation of a Contractor Code of Business Ethics and Conduct (FAR 52.203-13) and the Display of Hotline Poster(s) (FAR 52.203-14) if a contractor receives an award in excess of $5 million with a period of performance of at least 120 days.  This is yet another example of the unending criminalization of the federal procurement process that makes it very risky for any contractor to do business with the federal government unless the contractor keeps up-to-date on the rules.  It is anticipated that suspension and debarment will be among the potential consequences of a failure to comply with these new rules, and a contractor’s record of integrity and business ethics may now become part of the contractor’s performance record that is evaluated as part of the contract award process.

FAR 9.104-1(d) provides that contractors must have “a satisfactory record of integrity and business ethics.” In furtherance of that requirement, the new policy explained in FAR 3.10, provides that “Government contractors must conduct themselves with the highest degree of integrity and honesty” and that “Contractors should have a written code of business ethics and conduct.”  To promote compliance with the code of business ethics and conduct, contractors should have an employee business ethics and compliance training program and an internal control system that—

(1) Are suitable to the size of the company and extent of its involvement in Government contracting;

(2) Facilitate timely discovery and disclosure of improper conduct in connection with Government contracts; and

(3) Ensure corrective measures are promptly instituted and carried out. (See FAR 3.1002).

Specifically, the bew FAR requirements for the code of business ethics and conduct require that it be:

1. in writing;

2. issued within 30 days of the contract award (unless the contracting officer allows a longer time period);

3. furnished to each employee engaged in performance of the contract; and

4. that the contractor "promote" compliance with its code of business ethics and conduct.

Although the policy expressed in FAR 3.1002 applies as guidance to all government contractors, the mandatory requirements are explained in the new clauses found at FAR 52.203-13 and FAR 52.203-14.  All contractors receiving awards in excess of $5 million where the period of performance is 120 days or more must have a code of business ethics and conduct, but the requirements for a training program, awareness and compliance program, and internal controls, do not apply to small business concerns.  All contractors who expect to receive awards, or subcontracts, in excess of $5 million, with periods of performance of 120 days, would be well advised to consult with legal counsel to obtain advice as to what must be done to comply.  There is nothing to be gained by waiting for a contract to be awarded, given the thirty day time period to prepare the code of business ethics and conduct (unless extended by the contracting officer), and the document should be prepared and distributed as soon as possible.

It is important to understand that these new rules are being implemented because the Federal Government has found that voluntary disclosure has not worked and has concluded that mandatory requirements are needed.  We will be advising our clients to provide ethics training, even if they are small business concerns, to make it clear that they take these new requirements seriously.  If a company principal or an employee commits a criminal act in the performance of a government contract, the company will be viewed in a more favorable light if it demonstrates that it has already implemented the requirements of the new regulation.  Just as it does little good to repair a cracked sidewalk after someone has tripped and broken a leg, it does little good to implement ethics requirements and training after a violation has occurred.

A summary of the mandatory requirements are as follows:

A contractor must have a written code of business ethics and conduct in place within thirty days of the award of any contract in excess of $5 million.  The time may be extended by the contacting officer and the requirement does not apply to existing contracts that were awarded before December 24, 2007, or to task orders awarded under those contracts.

A copy of the code of business ethics and conduct must be furnished to each employee involved in the performance of the contract. In addition, the contractor is required to promote compliance with its code.

Unless the company is a small business concern, and has so certified in the bid or offer submitted in response to the solicitation, the contractor must establish an ongoing business ethics and business conduct awareness program, and an internal control system, within ninety days after award of the contract.  This time period may also be extended by the contracting officer.

The internal control system is intended to facilitate timely discovery of improper conduct in connection with Government contracts, and to ensure that corrective measures are promptly instituted and carried out.  Although the regulation is not very explicit about the structure of the required internal control system, examples of what is required include (1) Periodic reviews of company business practices, procedures, policies, and internal controls for compliance with the Contractor’s code of business ethics and conduct and the special requirements of Government contracting; (2) An internal reporting mechanism, such as a hotline, by which employees may report suspected instances of improper conduct, and instructions that encourage employees to make such reports; (3) Internal and/or external audits, as appropriate; and (4) Disciplinary action for improper conduct.

The contractor is required to include the substance of the clause found at FAR 52-203-13 in subcontracts that have a value in excess of $5 million and a performance period of more than 120 days, unless the subcontract is for a commercial item or is for work entirely performed outside of the United States. (
Author’s Note: Contractors should be aware that a “purchase order” qualifies as a “subcontract” for purposes of this clause, subject the exceptions noted in the preceding sentence).

The second clause, found at FAR 52.203-14, requires the Contractor to prominently display hotline posters in common work areas within business segments performing work under this contract and at contract work sites, (i) any agency fraud hotline poster or Department of Homeland Security (DHS) fraud hotline poster identified in paragraph (b)(3) of this clause; and (ii) any DHS fraud hotline poster subsequently identified by the Contracting Officer. In addition, if the Contractor maintains a company website as a method of providing information to employees, the Contractor is required display an electronic version of the poster(s) at the website. As in the case of FAR 52.203-13 discussed above, the substance of this clause must be included in subcontracts that have a value in excess of $5 million and a performance period of more than 120 days, unless the subcontract is for a commercial item or is for work entirely performed outside of the United States. (Author’s Note: If the Contractor has implemented a business ethics and conduct awareness program, including a reporting mechanism, such as a hotline, then the Contractor need not display any agency fraud hotline posters as required in paragraph (b) of this clause, other than any required DHS posters).

A supplement to the new requirement for a Code of Business Ethics and Conduct is also under consideration at the request of the Department of Justice. The proposed additional rule was published on November 14, 2007 and comments must be submitted by January 14, 2008. This Proposed Rule imposes additional requirements regarding codes of business ethics and conduct, including notification requirements for contractors upon becoming aware of violations of federal law.  The following additional requirements will be imposed on those contractors subject to the requirements of FAR 3.10, as implemented by FAR 52.203-13 and FAR 52-203-14, if the proposed rule becomes effective:Continue Reading Contractors Now Required to Prepare a Code of Business Ethics and Conduct and to Implement Internal Controls and Ethics Training

In a recent prebid protest presented by our firm, Payne Hackenbracht & Sullivan, the United States Court of Federal Claims considered the protest of Weeks Marine, Inc. v. The United States (“Weeks”) challenging the decision of the United States Army Corps of Engineers, South Atlantic Division (“SAD”), to solicit proposals for maintenance dredging and shore protection projects using negotiated indefinite delivery indefinite quantity (“IDIQ”) multiple-award task order contracts (“MATOC”).  The Court noted that the contemplated change to negotiated IDIQ task order contracting represented a significant departure from SAD’s prior practice of using sealed bidding, and further noted that the policy change had caused widespread industry criticism. 

As grounds for its protest, Weeks asserted that SAD’s proposed change to negotiated IDIQ/MATOC task order contracting was contrary to law, and was without any rational basis.  Weeks relied upon 10 U.S.C. § 2304(a) and Federal Acquisition Regulation (“FAR”) ¶ 6.401(a), mandating that an agency shall use sealed bidding procedures when (1) time permits, (2) awards will be made solely based on price, (3) discussions are not necessary, and (4) the agency reasonably expects to receive more than one bid. Weeks contended that each of these four conditions was met for SAD’s dredging contracts, and that no legal basis existed to use negotiation procedures.

The Corps of Engineers argued in opposition that SAD’s proposed IDIQ task order contracting was lawful, that the agency had wide discretion in selecting an appropriate procurement method, and that SAD’s justification for the change was reasonable under current circumstances.  The Court disagreed and ruled that an agency’s discretion “does not empower an agency to employ a procurement method in violation of applicable law.”  The Court ruled that SAD had not pointed to any significant changes in its procurement environment that would warrant a change to IDIQ task order contracting.  The Acquisition Plan confirmed that SAD had “excelled in program execution” during the last two years and “the Court does not see any reasons or developments for moving away from the sealed bid process.  Without any analysis of the applicable statutes and regulations, and without citing any significant reasons or developments, the Court held that SAD would violate 10 U.S.C. § 2304(a), FAR ¶ 6.401(a), FAR ¶ 14.103-1(a), and FAR ¶ 36.103(a) by employing IDIQ task order contracting methods.“

This is an important judicial opinion that will hopefully cause government agencies to revisit decisions to utilize contracting by negotiation in either single procurements or IDIQ contracting.  When the sole justification for negotiated contracting boils down to nothing more than a desire to introduce unnecessary subjectivity into the source selection process, RFPs should not be used and sealed bidding should continue to be the preferred method.  In dredging, as in many other areas of construction contracting, sealed bidding has been a successful procurement method for many years.  It is a system that provides the greatest risk coupled with the greatest opportunity for reward and it is an integral part of the free enterprise system.

Of great concern to the Court was the fact that under SAD’s “new” procurement method approximately $2 billion in task order awards during the next five years would become virtually immune from any judicial or administrative bid protest review.  The Federal Acquisition Streamlining Act of 1994 (“FASA”) provides that “[a] protest is not authorized in connection with the issuance of a task order or delivery order except for a protest on the ground that the order increases the scope, period, or maximum value of the contract under which the order is issued.”  While SAD’s current sealed bid awards routinely are subject to bid protest review by the Government Accountability Office (“GAO”) or the Court, SAD’s task order awards would be insulated from review except in very limited circumstances.  Thus, while purporting to use highly discretionary “best value” evaluation procedures in awarding task orders, SAD effectively would remove itself from any bid protest oversight.   Although the Corps argued that the Court must apply the FASA provision that Congress created, the Court ruled that this provision did not authorize SAD to convert all of its procurements into task orders.

In asserting a need for a change from sealed bidding to contracting by negotiation, the Corps contradicted its own position by stating that its sealed bid approach had “excelled in program execution” during the last two years.  As a result, the Court concluded that “The agency has provided no evidence that the current system is failing or in need of revision.  In fact, the Court would be hard-pressed to identify any contracts better suited to sealed bid procurement than dredging.  If not appropriate for dredging work, it is difficult to imagine when sealed bidding ought to be used.” (Emphasis added).Continue Reading Federal Court Rules that Negotiated IDIQ/MATOC Contracting Cannot be Used Instead of Sealed Bidding Without a Lawful and Rational Basis

A new federal rule allows federal contractors to count subcontracts given to companies owned by American Indian tribes and Alaskan communities toward small business contracting goals. The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council have agreed on a final rule amending the Federal Acquisition Regulation (FAR) to implement section 702 of the…

“Competition is the cornerstone of our acquisition system.” This opening statement, from the Administrator of the Office of Management and Budget (OMB) in his May 31, 2007 policy directive, Enhancing Competition in Federal Acquisition, formed the basis for requesting that all government agencies take advantage of full and open competition, particularly on task orders issued…

A proposed amendment to the FAR was published in the Federal Register on February 16, 2007 to address Contractor Code of Ethics and Business Conduct.   FAR 3.101, Standards of Conduct, provides that “Government business shall be conducted in a manner above reproach and, except as authorized by statute or regulation, with complete impartiality and…

One of the byproducts of the recent use of negotiated procurements under FAR, Part 15, has been the concern, on the part of contractors, that the submission of claims will be a negative factor during the evaluation process on a Request for Proposals.  While we can certainly understand that a contractor who has a history of filing frivolous claims might deserve to be downgraded, we see no valid reason for the government to assign a lower rating to a contractor who has filed meritorious, or good faith, claims in the past.

On February 12, 2006, a provision was added to the Defense Federal Acquisition Regulation Supplement (DFARS) dealing with the review of claims that we find very disturbing.  Under DFARS Subpart 233.2, Disputes and Appeals, Paragraph 233.10, “Contracting Officer’s Authority,” there is a reference to a new “PGI” (Procedures. Guidance and Information). The new guidance states that “When it would be helpful in reviewing the current claim, the contracting officer should get information on claims previously filed by the contractor.  Such information may provide a historical perspective of the nature and accuracy of the claims submitted by the contractor and how they were settled.  Potential sources for the information include the contracting activity’s office of legal counsel, other contracting activities, and the Defense Contract Audit Agency.”

We believe that each claim should stand on its own merits.  Each claim is different and is the result of a different contract, a different set of facts, and is ultimately decided by a different set of legal principles.  In addition, the Contract Disputes Act of 1978 gives contractors the right to file claims.  It seems to us that “guidance” that could potentially penalize contractors for filing claims is most inappropriate.Continue Reading New DFARS Provision Has a "Chilling Effect" on Claims

As we have mentioned previously, the growing use of multiple award task order contracts in federal construction contracting, as can be seen in much of the disaster recovery work in New Orleans, is limiting the competitive opportunities for small and mid-sized construction contractors.  Unless a contractor is the recipient of one of the major task order contract awards, there is no opportunity for a contractor to compete for upcoming individual task orders and the contractor is effectively precluded from competing for potentially millions of dollars of work to be awarded over a period of years. In the past, when there were more single award contracts, if a contractor lost out to a competitor, there was always another solicitation on the horizon.  If a contractor fails to become one of those selected to compete under a multiple award task order contract, there may be no, or very little, work “waiting in the wings.”

It follows that it is important to monitor the decisions of the GAO and the courts to see what is being done to protect the rights of contractors, and we will continue to do so.  In a newly issued GAO decision, Palmetto GBA, LLC, B-299154, December 19, 2006, the Comptroller General stated that according to the legislative history of the Federal Acquisition Streamlining Act (FASA), task and delivery-order contracts were intended to encourage the use of multiple-award, rather than single-award contracts, in order to promote an ongoing competitive environment in which each awardee would be fairly considered for each order issued.  H.R. Conf. Rep. No. 103-712, at 178 (1994), reprinted in 1994 U.S.C.C.A.N. 2607, 2608; S. Rep. No.103258, at 15-16 (1994), reprinted in 1994 U.S.C.C.A.N. 2561, 2575-76. In this regard, the Federal Acquisition Regulation (FAR) requires agencies to provide all awardees “fair opportunity to be considered for each order exceeding $3,000 issued under multiple delivery-order contracts or multiple task-order contracts.”  FAR sect. 16.505(b)(1)(i).

An interesting aspect of the Palmetto case is that the GAO reiterated that a task or delivery order that precludes competition for future task or delivery orders for the duration of the contract performance period may constitute a “downselection.”  The GAO has recognized downselections in circumstances not only where all work under a contract will be foreclosed from future competition, but also where specific categories of work will be similarly foreclosed for the duration of the contract.  While the GAO did not find that “downselection” occurred in the Palmetto case, it is important for contractors to recognize that a task order award that eliminates competition for future work can be successfully protested.
Continue Reading Task Order Contractors Must be Given a Fair Opportunity to Compete for Individual Task Orders

The cover story, “New Marching Orders,” in the most recent edition of Constructor, published by McGraw-Hill Construction, highlights a trend in military construction that should concern small to mid-size general contractors.  In the past, many projects for construction of military housing and other facilities were procured as individual contracts through sealed bid solicitations issued by the U.S. Army Corps of Engineers.  Small and mid-size contractors, familiar with the local market conditions, were well positioned to compete for, win, and perform these contracts.  E. Michael Powers reports that today, however, the Corps is focusing its procurement efforts on multiple-award construction contracts and indefinite delivery/indefinite quantity contracts with task orders.  These contracts tend to be for greater volumes of work, resulting in contracts that exceed the bonding capacity of many small to mid-size firms.

Powers also notes that a contract to build fifty buildings at a cost of $10 million per building, spread across a large geographic area, might not even appeal to firms that have the bonding capacity to bid on such a large contract.  In addition, where so much work is included in one contract, there is only one prime contractor, whereas before there could have been as many as fifty contractors performing fifty separate projects.

These large procurements are often the subject of negotiated procedures under FAR, Part 15, where price is no longer the controlling factor in determining who receives the contract.  In these “best value” procurements, the experience and past performance of a larger contractor may be decisive in the Corps’ award decision.Continue Reading Declining Opportunities for Small and Mid-Sized Federal Construction Contractors