Client Alert

Government Business & Technology in the Fight Against Terrorism -- Opportunities and Risks


After the September 11, 2001 terrorist attacks, the federal government determined that it needed to swiftly develop capabilities that would support homeland security, an area previously given little attention. In response, we expect there will be new entrants to the government market space and those organizations already doing business with the government may find new circumstances. Some examples of the new ways the federal government will acquire the research and development (R&D), supplies, and services it now needs are: reaching out to commercial sources for needed supplies, services, and R&D; placing orders for increased quantities of supplies and services currently under contract; accelerating deliveries and schedules; ordering supplies and services with a basic letter contract and leaving negotiations of a myriad of details until later; and including performance priority ratings in many contracts.

New government contracting opportunities are now available. With the consumer and commercial markets in a slump, government sales channels can provide steady revenues. In response, companies may discover the government market for the first time or expand the supplies, services, or R&D they provide to the government. For example, the Department of Defense issued a Broad Agency Announcement, seeking R&D capabilities that can be developed in 12-18 months in areas that include: information technology to identify and track terrorists; sensing and mapping capabilities for mission planning; early warning and imaging for small, remotely located forces; and capabilities to monitor, detect, and characterize purposely concealed chemical, biological radiological, nuclear, and high-explosive substances. This Announcement is open to anyone -- foreign or domestic individuals or organizations -- and seeks a Phase I response on December 23, 2001. (See the Technical Support Working Group website.)

With this Announcement and other new opportunities come additional risk. Depending upon the type and value of a grant, cooperative agreement, or government contract, additional requirements may be imposed: socio-economic requirements, accounting regulations, intellectual property provisions, and, if government requirements are not followed, potential criminal liability, among others. Contract terms and conditions initially presented by the government usually contain requirements well in excess of those required by law, out of habit or simply to be safe. Early communication and negotiation with the government can often reduce the requirements imposed to a point at or close to the minimum required by law, resulting in cost savings and efficiencies to both the contractor and the government.

The current urgent needs present additional risks to contractors. Some examples include:

  • A Defense Priority Allocation System (DPAS) rating, if included in a contract, can require a company to give government work priority over all other work, even to the point that a company cannot perform any of its commercial contracts.
  • The government can unilaterally accelerate the schedule or increase the quantity that must be delivered, and to recover the additional cost, the contractor must work through an administrative claims process and perhaps seek recovery in litigation.
  • Using a letter contract, the government may outline the basic terms of the agreement, but then "definitizing" the details of the final agreement may require difficult, protracted negotiation or even litigation.

Companies new to government contracts should be aware of many potential risks, even if they are not providing urgently needed supplies and services to respond to the terrorist threat. Among these risks are:

  • Salespersons without adequate training who may inadvertently violate compliance regulations that include ethics, gratuities, revolving door, and lobbying restrictions.
  • Complex accounting requirements that would likely require the company's basic systems to be substantially revised if the more streamlined "commercial item" provisions are not incorporated.
  • Socio-economic requirements, such as affirmative action plans and small business subcontracting plans are required on very low levels of government business.
  • The potential for the government to take "unlimited rights" in intellectual property unless the contract terms are carefully negotiated up front.
  • The need for pricing to address the peculiar risks associated with government contracting and to recognize that certain agreements may include a "most favored customer" type clause that can pose significant financial risks for contractors.
  • Submission of an invoice that improperly represents the supplies or services rendered can result in criminal and civil investigation and prosecution.
  • The contractor may be forced to finance changes in contract requirements unilaterally directed by the government until a claim for the increased costs can be resolved by negotiation, the claims process, or litigation.

The bottom line is that the government can be a good customer as long as a company understands the additional risks involved and has taken the appropriate steps to minimize those risks.




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