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With the consumer and commercial markets in a slump, and the federal government's renewed determination after the September
11, 2001 terrorist attacks to swiftly develop homeland security capabilities, new government business opportunities can provide
commercial companies with stable revenues. New entrants in the government market should be aware, however, of the risks that
unique government requirements can present. As a starting point, potential government contractors should be familiar with
the differences between Commercial Item Acquisitions under Part 12 of the Federal Acquisition Regulation ("FAR") and the traditional
non-commercial FAR contract. 1
In summary, the advantage of Commercial Item Acquisitions is that the FAR Part 12 terms and conditions -- while still government-unique
in many ways -- are much closer to standard commercial terms and conditions. FAR Part 12 requires that the Contracting Officer
only include two FAR provisions in solicitations and two FAR clauses in prime contracts for the acquisition of Commercial
Items. The provisions and clauses in FAR Part 12, Commercial Item Acquisitions, subject government contractors to obligations
and rights that are significantly less burdensome than the standard FAR clauses for other than Commercial Item Acquisitions.
For example, the mandatory terms and conditions clause for Commercial Items includes different (lesser) requirements and obligations
for, among others, inspection/acceptance, changes, disputes, data rights, terminations for convenience and for cause, and
warranty. In addition, Commercial Item Acquisitions generally relieve the contractor -- and subcontractors -- from some of
the most troublesome and highest risk requirements, such as the Cost Accounting Standards ("CAS") and the Truth in Negotiations
Act ("TINA").
Commercial Item Acquisitions
Commercial companies entering into FAR Part 12 Commercial Item contracts with the federal government are subject to the requirements
identified below. Compliance with each of these requirements involves training, periodic internal audits, and the establishment,
maintenance, and adherence to government contract-unique systems and procedures.
- Bribery and Illegal Gratuities. Contractors are prohibited by criminal statutes and regulations, with limited exceptions, from providing gifts or gratuities
to federal employees. This prohibition encompasses many activities that are common in the commercial arena (e.g., providing meals to customers). Employees must be trained to avoid providing illegal gratuities.
- Conflicts of Interest. Contractors are prohibited by criminal statutes and regulations from discussing employment with certain federal employees.
Similarly, former federal employees are limited in the types of services they may perform if later retained by a contractor.
Compliance with these requirements involves the establishment and use of comprehensive screening procedures, typically by
human resources personnel.
- Anti-kickback. Contractors are prohibited from receiving a kickback, the purpose of which is to improperly obtain or reward favorable treatment
in connection with a federal prime contract or subcontract. Materials management or purchasing personnel must be trained to
identify and refuse kickbacks.
- Lobbying Restrictions. Contractors are prohibited from using federal appropriated funds to lobby for the award of government contract.
- Procurement Integrity. Contractors are prohibited from obtaining contractor bid or proposal information, or sensitive agency procurement information,
prior to the award of a federal contract. Employees must be trained to refrain from soliciting or obtaining this type of information.
- Service Contract Act. Service contractors must pay their service employees not less than the wages set forth in the applicable Department of Labor
wage determination. Contractors must implement procedures to ensure that all service employees who perform services under
the contract are paid as required by the wage determination.
- Equal Opportunity and Affirmative Action. Contractors must not discriminate against minorities, women, disabled individuals, disabled veterans and Vietnam era veterans.
Contractors must establish written affirmative action programs and comply with the extensive regulations promulgated by the
Department of Labor (including reporting requirements).
- Subcontracting. Contractors must establish a written subcontracting plan which details the efforts the contractor will make to assure that
small business, small disadvantaged business, and women-owned business concerns will have an opportunity to compete for subcontracts.
The contractor must strive to meet the total and percentage dollar goals for subcontracting to these entities identified in
the subcontracting plan.
- Record Retention. Contractors must retain all directly pertinent records involving transactions related to particular contracts for specified
periods of time (two to three years depending upon the requirement).
FAR Non-Commercial Contract Requirements
In contrast, non-commercial item government contractors may be required, depending on the type and value of the contract,
to comply with substantially more burdensome requirements than a FAR Part 12 Commercial Item contract. The following additional
requirements generally are imposed on contractors performing traditional non-commercial federal government contracts.
- Cost Principles. Government contractors may only charge to a government contract those costs that are (a) allowable, (b) allocable, and (c)
reasonable. Notably, many costs typically allocated to commercial contracts by companies may not be charged to government
contracts (e.g., interest expenses and selling costs). The contractor must structure an accounting system that can prevent
these costs from being charged to the government. Federal contracting agencies can recover from contractors any costs that
were paid but otherwise were not allowable, allocable, and reasonable.
- Cost Accounting Standards ("CAS"). The CAS dictate the way in which a contractor must maintain its accounting system and how the contractor must account for
certain types of cost. Depending on the type of CAS coverage, the contractor may be required to (a) comply with all nineteen
cost accounting standards; (b) prepare a "Disclosure Statement" that describes the contractor's accounting practices and practices;
(c) adhere to the disclosed accounting practices consistently in estimating, accumulating, and reporting costs; and (d) agree
to a contract modification if the contractor fails to comply with the CAS or its disclosed practices. These requirements are
complex and burdensome and require the establishment and maintenance of government contracts-unique systems and procedures.
Failure to adhere to the Cost Accounting Standards or the Cost Principles can lead to false claims liability, as well as substantial
unilateral reductions to the contract price.
- Truth In Negotiation Act ("TINA"). TINA requires that, for covered contracts, companies submit certified cost or pricing data. Cost or pricing data is any
information that prudent buyers and sellers would reasonably expect to affect price negotiations significantly. The government
uses the offeror's cost or pricing data to determine the reasonableness of the offered price. If the contractor fails to provide
"current, accurate, and complete" data, the government is entitled to a contract modification to reduce the contract price
to reflect the defective pricing impact. Under certain circumstances, violations of TINA can lead to false claims liability.
- Audit Requirements. The government enforces the cost principles, the CAS regulations, and TINA's requirements through its right to audit a contractor's
books and records. This right generally may be exercised within three years after final payment under the contract. The government
may conduct an audit at any reasonable time.
- Enhanced Anti-kickback Requirements. Contractors must develop and implement internal policies and procedures to prevent and detect kickback violations.
- Drug-Free Workplace Requirements. Contractors must undertake various actions, including establishing a drug-free awareness program, to keep the workplace
free of illegal drugs.
Under a traditional FAR non-commercial contract, government contractors are subject to a full spectrum of federal procurement
regulations. These regulations and other requirements of doing business with the government will potentially impact how and
from whom commercial companies acquire goods and services, how they protect intellectual property, how they keep their records
and what records they will need to disclose, how they account for costs and when they must respond to audits, as well as creating
potential risks and liabilities unique to doing business with the federal government (e.g., potential liability under the False Claims Act, price reductions to contracts, unusual government termination rights, and
others).
1: The FAR is the primary governing document that applies to any procurement contract awarded by a federal agency; and it
contains the various standard clauses that are included in federal contracts. Numerous statutes on a wide range of topics
relating to federal acquisitions of products and services are implemented through the regulations contained in the FAR.
See 48 C.F.R. Chapter 1.
