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Published: 2008-03-26

Federal Government Contract Overview



From formation through administration, contracting with the federal government is a highly regulated process with many traps for the unsuspecting. Unlike commercial contracting, which is governed generally by the Uniform Commercial Code and the common law, federal government contracting is governed by a maze of statutes and regulations. These statutory and regulatory provisions dictate, for example, what method or process an agency must use to solicit a contract; how the agency is to negotiate or award a contract; and under certain circumstances, what costs the Government will reimburse and how a contractor must account for those costs. In addition, a government contractor must remain aware that it is subject to the policy dictates of the sovereign. The U.S. Government imposes a host of socio-economic obligations through its contracts, including requirements related to affirmative action, drug-free work place, subcontracting, and minimum employee wages. Although Congress has streamlined the contracting process to reduce the burdens on contractors offering commercial products and services, any entity considering entering into a government contract must tread carefully. This overview is intended to provide you a general insight into the federal government’s contracting process.

BASIC STATUTORY AND REGULATORY PROVISIONS

The Armed Services Procurement Act of 1947 (ASPA), codified at 10 U.S.C. §§ 2301-2314, the Federal Property and Administrative Services Act of 1949 (FPASA), codified at 40 U.S.C. §§ 471-514 and 41 U.S.C. §§ 251-260, and the Competition in Contracting Act (CICA), codified in scattered sections of 10, 31, 40, and 41 U.S.C., represent the three statutory foundations of government contract law and the federal acquisition process. The ASPA governs the acquisition of all property (except land), construction, and services by defense agencies; the FPASA governs similar civilian agency acquisitions. The CICA, applicable to both defense and civilian acquisitions, requires federal agencies to seek and obtain "full and open competition" wherever possible in the contract award process. Only in seven circumstances may a federal agency award a contract using a sole source contractor or "other than full and open competition."

The Federal Acquisition Regulation (FAR) -- codified at Title 48 of the Code of Federal Regulations -- contains the uniform policies and procedures for acquisitions by all federal agencies. It implements or addresses nearly every procurement-related statute or executive policy. In doing so, the FAR reaches every stage of the acquisition process. The FAR's promulgation in 1984 reflected the Congress' efforts to create a uniform structure for Executive Branch federal contracting. Prior to the FAR, the defense services and civilian agencies each had their own set of regulations, dating back to the late 1940s. This goal of uniformity has been undermined, to a degree, by the numerous agency-specific supplements implemented after promulgation of the FAR. These supplements, however, may not conflict with or supersede relevant FAR provisions.

II. ACQUISITION METHODS

The ASPA, FPASA, and CICA established two basic methods of obtaining "full and open competition" -- (a) sealed bidding and (b) competitive negotiation. Sealed bidding is characterized by a rigid adherence to formal procedures. Those procedures aim to provide all bidders an opportunity to compete for the contract on an equal footing. In a sealed bidding acquisition, the agency must award to the responsible bidder who submits the lowest responsive bid (price). In contrast, competitive negotiation is a more flexible process that enables the agency to conduct discussions, evaluate offers, and award the contract using price and other factors.

Sealed Bidding

Once a federal agency identifies a need, and decides to proceed with an acquisition, it must solicit sealed bids if (1) time permits the solicitation, submission and evaluation of sealed bids; (2) the award will be made on the basis of price and other price-related factors; (3) it is not necessary to conduct discussions with the responding offerors about their bids; and (4) there is a reasonable expectation of receiving more than one sealed bid. FAR 6.401(a). The agency's Contracting Officer (CO) initiates a sealed bidding acquisition by issuance of an Invitation for Bids (IFB). The IFB must describe the Government's requirements clearly, accurately and completely. The FAR and case law prohibit the use of unnecessarily restrictive specifications that might unduly limit the number of bidders.

The agency publicizes the IFB through display in a public place, announcement in newspapers or trade journals, publication in the federal government's Commerce Business Daily (CBD), and by mailing the IFB to those commercial organizations (contractors) on the agency's solicitation mailing list. FAR 14.204; FAR 14.205.

It is critical that contractors submit their bids by the deadline stated in the IFB. A late bid will not be considered for award except where: (1) the bid was sent to the CO by registered or certified mail at least five days before the bid receipt date; (2) the Government mishandled the bid after receipt; (3) the bid was sent to the CO by "Postal Service Next Day Service" two days prior to the bid receipt date; or (4) the bid was transmitted electronically and received by 5:00 p.m. one working day prior to the bid receipt date. FAR 14.304-1 (a).

All bids received by the time and at the place set for opening are publicly opened and read aloud by the CO. The bids are then recorded on an "Abstract of Offers" (Standard Form 1049) and examined for mistakes. If no mistakes are found, after certain other administrative steps, the CO awards the contract to that responsible bidder who submitted the lowest responsive bid. A responsive bid is one that contains a definite, unqualified offer to meet the material terms of the IFB. FAR 14.301(a). Conditions, informalities, or defects in the bid that affect the price, quantity, quality, or delivery of the items being acquired by the agency will result in rejection of the bid.

The FAR also requires an affirmative finding of responsibility prior to awarding the contract to the lowest bidder. FAR 14.408-2. To be determined responsible, the prospective awardee must have the ability and capacity to perform the contract. More specifically, the FAR requires a prospective contractor to (1) have adequate financial resources to perform the contract; (2) be able to comply with the required or proposed delivery or performance schedule; (3) have a satisfactory performance record; (4) have a satisfactory record of integrity and business ethics; (5) have the necessary organization, experience, accounting and operational controls, and technical skills; (6) have the necessary production, construction and technical equipment and facilities; and (7) be otherwise qualified and eligible to receive an award under applicable laws and regulations. FAR 9.104-1.

Beyond responsiveness and responsibility, the CO may only consider price and price related factors during evaluation of the bids. FAR 14.201-8; FAR 14.408-1. Price-related factors include costs or delays to the Government resulting from differences in inspection, locations of supplies, and transportation; taxes; and changes made or requested by a bidder in any provision of the IFB. After evaluating price and price-related factors, the CO awards the contract to the responsible bidder whose bid is most advantageous to the Government -- i.e ., lowest price. FAR 14.408-1. Award is made by furnishing a properly executed award document to the successful bidder. Under sealed bidding procedures, only two types of contract price methods may be used: (a) firm-fixed-price or (b) fixed price with economic price adjustment.

B. Negotiation

If one of the four conditions for use of sealed bidding is not present, the CO will award the contract using competitive negotiation. Contracting by negotiation allows more flexibility in awarding the contract. Unlike sealed bidding, the CO may engage in discussions with offerors and, in evaluating proposals, he or she may also consider non-cost factors (such as managerial experience, technical approach, and/or past performance).

The negotiating process begins when the CO issues a Request for Proposals (RFP). As in sealed bidding, if the procurement is over $25,000, the CO will synopsize a notice of the proposed contract action in the CBD. An RFP must, at a minimum, state the agency's need, anticipated terms and conditions of the contract, information the contractor must include in the proposal, and factors and significant subfactors that the agency will consider in evaluating the proposals and awarding the contract. All interested parties may then submit proposals.

Evaluation of the proposals includes an assessment of the proposals' relative qualities, based upon the factors and subfactors specified in the solicitation. Typically, the CO will evaluate (a) the offeror's cost or price proposal; (b) the offeror's past performance on government and commercial contracts; (c) the offeror's technical approach; and (d) any other identified factors for award. FAR 15.305. During the evaluation period, the CO and source selection team may communicate with the offerors to clarify ambiguous proposed terms. FAR 15.306.

The CO may award a negotiated contract without any further negotiations, called "discussions." However, if the CO intends to conduct discussions, he or she will preliminarily identify the offerors that fall within the "competitive range." The competitive range is comprised of all the most highly rated proposals. FAR 15.306 (c). To assist in determining the competitive range, the CO may engage in limited communications with all offerors. After establishing the competitive range, the CO will notify each excluded offeror and proceed to conduct "discussions" with the remaining offerors.

According to the FAR, the "primary objective" of discussions is to maximize the agency's ability "to obtain best value, based on the requirement and the evaluation factors set forth in the evaluation." FAR 15.306(d)(2). During the discussions, the CO must indicate to each offeror the significant weaknesses, deficiencies or other aspects of the proposal that could be altered to enhance the proposal's potential for award. FAR 15.306(d)(3). However, the CO must not (1) engage in conduct that favors one offeror over another; (2) reveal an offeror's technical solution; (3) reveal an offeror's price without permission; (4) disclose the names of persons providing information about the offeror's past performance; or (5) furnish sensitive source selection information. FAR 15.306(e)

After discussions begin, the CO may eliminate from consideration any offeror originally in the competitive range but no longer considered among the most highly rated offerors. Further, the CO may request that offerors revise their proposals to clarify any compromises reached during negotiation. At the conclusion of the discussions, the CO will request a final proposal revision from each offeror still in the competitive range.

Finally, the CO will undertake a comparative analysis of the final offers in accordance with the evaluation procedures set forth in the RFP, and select the offeror whose proposal is most advantageous to the Government. The documented award decision should contain an analysis of the trade-offs accomplished by negotiations and the reasons why the awardee's proposal represents the best value to the agency. The CO always has the discretion not to award any contract if he or she deems that course to be in the Government's best interests. If requested by an unsuccessful offeror, the CO will conduct a post-award debriefing during which the bases for the selection decision will be explained.

III. STANDARD TERMS AND CONDITIONS -- UNIQUE TO GOVERNMENT CONTRACTS

Government contracts contain a host of standard terms and conditions, called "clauses". Many of the clauses are by regulation non-negotiable. In fact, Federal procurement case law provides that a mandatory contract clause that affects fundamental acquisition policy will be read into the contract even where the Government inadvertently omitted it.

It's not uncommon for a typical Government contract to contain 50-75 standard FAR clauses. The prospective government contractor should carefully review all clauses contained in any government solicitation. Although some resemble counterparts found in the commercial arena, many government contract clauses have no commercial equivalents. Three of the more prominent clauses unique to standard government contracts are: (1) the "Termination for Convenience" clause; (2) the "Changes" clause; and (3) the "Default" clause.

A. Termination for Convenience of the Government

Almost every government contract will contain some type of "Termination for Convenience" clause. This clause permits the Government to terminate the contract, at any time, without cause, when in "the Government's best interest". The right to terminate without cause arose from the Government's need to adapt acquisition needs -- and hence, the taxpayer's dollars -- to changes in situations and technologies. For example, a contract for continued production of a certain military weapon may be rendered unnecessary by the abrupt conclusion of a war. Or, Congress may refuse to fund an expensive new fighter aircraft because of the end of the Cold War.

The standard FAR clause inserted in fixed-price supply contracts is the clause found in FAR 52.249-2. It provides, inter alia , that "the Government may terminate performance of work under this contract in whole or, from time to time, in part if the Contracting Officer determines that a termination is in the Government's interest." Although this right is quite broad, the Government may not terminate a contract in bad faith or otherwise abuse its discretion.

A contract is terminated for convenience by Government issuance of a written notice of termination. FAR 52.249-2(a). This notice must contain: (1) a statement that the contract is being terminated for the convenience of the Government; (2) the effective date of termination; (3) the extent of termination; (4) any special instructions; and (5) the steps the contractor is to take to minimize the impact on personnel. FAR 49.102(a).

Thereafter, as set forth in the standard "Termination for Convenience" clause -- the contractor is to: (1) stop work immediately on the terminated portion of the contract; (2) terminate all subcontracts related to the terminated portion of the prime contract; (3) advise the Government of any special circumstances precluding stoppage of work; (4) perform the continued portion of the contract if the termination is partial; (5) take any action necessary to protect property in the contractor's possession in which the Government has an interest; (6) notify the Government of any legal proceedings growing out of any subcontract; (7) settle any subcontractor claims arising out of the termination; and (8) dispose of termination inventory as directed by the Government.

In return for the Government's right to unilaterally terminate, the contractor is entitled by the regulations and clauses to recover certain costs. See , e.g. , FAR Subpart 49.2. More specifically, the contractor may recover (a) its performance costs incurred up to the date of termination; (b) certain costs that continue after the date of termination ( e.g., idle facilities or idle capacity costs); (c) so-called "termination settlement expenses" (i.e. , the costs to terminate the contract and submit a termination claim to the Government); and (d) profit or fee for work performed. These amounts are requested in the termination settlement proposal (or claim) that is to be submitted by the Contractor within one year of the termination's effective date.

B. " Changes" Clause

The "Changes" clause is probably the most powerful clause in the Government's arsenal of standard terms and conditions. It enables the Government to make unilateral changes to the contract during performance, so long as those changes fall within the contract's scope. Under the standard "Changes" clause used in fixed price supply contracts, the CO may make changes, in writing, to: (1) the drawings, designs, or specifications when the item is being specifically manufactured for the Government; (2) the method of shipment or packing; or (3) the place of delivery. FAR 52.243-1. The change doesn't necessarily work to the disadvantage of the contractor, however, because the contractor is entitled to an "equitable adjustment" to the contract if the change results in increased contract costs or time of performance.

Under the "constructive change" doctrine, informal government actions or inactions not initially identified or admitted to be changes -- but which require extra work -- by the CO may nonetheless constitute changes. Typical categories of constructive changes that have been recognized by the administrative boards of contract appeals and the courts are: (1) informal extra work directives; (2) defective government specifications or impossibility of performance; (3) incorrect contract interpretations taken by the Government causing extra work; and (4) failure of the government to cooperate during performance.

If the formal or constructive change causes an increase or decrease in contract price, the CO must equitably adjust the contract in writing. The contractor must assert its right to this equitable adjustment in writing within a specified time period (usually 30 days) of the CO's written formal change order, or before final payment if it is constructive change. Failure to agree on the equitable adjustment to which the Contractor is entitled constitutes a dispute under the "Disputes" clause. Regardless of any dispute, however, the contractor must continue performing under the contract, including any changes the CO may have made. FAR 52.243-1(e).

C. " Default" Clause

The standard "Default" clause resembles the "termination for cause" term often used in the commercial marketplace. It permits the Government to terminate a contract for default where the contractor breaches the contract -- i.e. , fails to (1) deliver the supplies or perform the services within the time specified in the contract; (2) make progress, thereby endangering performance of the contract; or (3) perform any other material provision in the contract. FAR 52.249-8(a)(1). If the Government intends to exercise its right to terminate under the second or third referenced circumstances, it must first notify the contractor in writing and allow the contractor to "cure" its deficient performance within ten days. FAR 52.249-8(a)(2). The standard "Default" clause, however, excuses the failure to perform where such failure arises from causes beyond the control and without the fault or negligence of the contractor (e.g., acts of God, fires, floods, strikes, and unusually severe weather). FAR 52.249-8(c).

Similar to the "cover" right provided the non-defaulting party under the U.C.C., the standard "Default" clause entitles the Government to reprocure the supplies or services required under the terminated contract, and charge the excess costs to the terminated contractor
FAR 52.249.8(b). This right is in addition to any other rights the Government may have under the contract or at law.

IV. THE TREATMENT OF COSTS/PRICING OF CONTRACTS

Three of the most complicated and burdensome requirements under non-commercial item government contracts mandate compliance with (a) the FAR's so-called "cost principles"; (b) the Cost Accounting Standards; and (c) the Truth in Negotiations Act. These requirements necessitate the development of relatively complex, government contract-unique accounting and data collection systems prior to entering into the contract. Even if a contractor enters into only one non-commercial item contract, if the contract is large enough, the contractor may be subject to these obligations, as noted below.

A. FAR "Cost Principles" And The Cost Accounting Standards

1. The FAR Cost Principles
The cost principles set forth in FAR Part 31 define when and to what extent costs can be recovered under a government contract. If these principles apply, before the contractor may recover a particular cost it must be (a) allowable, (b) allocable, and (c) reasonable. These cost principles establish basic guidelines for the allowability of some fifty specific types of contract costs. Notably, the cost principles preclude or severely limit the recovery of certain ordinary business expenses which a company might typically allocate to commercial operations (e.g., interest expenses, selling costs, entertainment costs, bad debts, lobbying costs, and executive compensation above a certain threshold). If awarded a negotiated non-commercial item contract valued at more than $500,000, a contractor would need to modify its accounting system to ensure that such unallowable costs are not charged to the Government.

Part 31 also establishes general guidelines for determining the reasonableness and the allocability of costs. A cost is reasonable if "in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business." FAR 31.201-3. A cost is "allocable" if "it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship." FAR 31.201-4. Pursuant to a standard FAR clause, the Government can recover from the contractor any costs initially paid but ultimately found not allowable, reasonable, or allocable to the contract.

Three of the most complicated and burdensome requirements under non-commercial item government contracts mandate compliance with (a) the FAR's so-called "cost principles"; (b) the Cost Accounting Standards; and (c) the Truth in Negotiations Act. These requirements necessitate the development of relatively complex, government contract-unique accounting and data collection systems prior to entering into the contract. Even if a contractor enters into only one non-commercial item contract, if the contract is large enough, the contractor may be subject to these obligations, as noted below.

A. FAR "Cost Principles" And The Cost Accounting Standards (Cont'd)

2. The Cost Accounting Standards
The Cost Accounting Standards ("CAS") (a) dictate the way in which a contractor must maintain its accounting system and (b) instruct contractors how to account for certain types of costs. The CAS generally apply to any negotiated contract over $500,000 (a "covered contract"). Sealed bid contracts are not subject to the CAS.

There are two types of CAS coverage: (a) "modified" coverage and (b) "full" coverage. CAS, 9903.201-2. Modified coverage requires only that the contractor comply with four of the nineteen CAS:

  1. CAS 401 - Consistency in Estimating, Accumulating, and Reporting Costs (CAS, 9904.401);
  2. CAS 402 - Consistency in Allocating Costs Incurred for the Same Purpose (CAS, 9904.402);
  3. CAS 405 - Accounting for Unallowable Costs (CAS, 9904.405);
  4. CAS 406 - Cost Accounting Periods (CAS, 9904.406).

These four CAS may not dramatically differ from what many commercial entities presently follow under Generally Accepted Accounting Principles ("GAAP"). Thus, they may not require substantial modifications to a contractor's accounting system.

Modified -- rather than full -- CAS coverage may be applied to a contractor in either one of two situations: (1) it has a "covered contract" ( i.e. , a negotiated contract over $500,000) that is less than $25 million awarded to one or more business units that, in the preceding accounting period, received less than $25 million in net CAS-covered awards; or (2) the "covered contracts" of its business units receive more than $25 million in net CAS-covered awards, but no single contract is in excess of $1 million. CAS Regs., 9903.201-2 (b); 9903.301.

In contrast, full CAS coverage applies to any contractor business unit that:

  1. received a single CAS-covered contract award of $25 million or more; or
  2. received $25 million or more in net CAS-covered awards during its preceding cost accounting period, provided that at least one award exceeded $1 million. CAS Regs., 9903.201-2.

Full CAS coverage is much more burdensome. If it applies, the contractor must (a) comply with all of the CAS; (b) prepare a "Disclosure Statement" that describes the Company's cost accounting system and practices; (c) adhere to the disclosed accounting practices consistently in estimating, accumulating, and reporting costs; and (d) agree to a contract price adjustment (per a standard FAR clause) if the Company fails to comply with the CAS or its disclosed practices. CAS Regs., 9903.201-2 (a); 9903.202-1. Currently, there are nineteen CAS. See CAS Regs., Part 9904.

In addition to the sealed bid contract exception, there are a number of other exemptions to the CAS. Among these are: (1) negotiated contracts and subcontracts less than $500,000; (2) contracts and subcontracts in which the price is set by law or regulation; (3) firm-fixed-price contracts for the acquisition of commercial items; (4) contracts and subcontracts to be executed and performed outside the United States, its territories, and possessions; and (5) firm-fixed-price contracts awarded without submission of any "cost or pricing" data. CAS Regs., 9903.201-1(b).

B. Truth In Negotiations Act Requirements

Under the Truth In Negotiations Act (TINA), 10 U.S.C. § 2306a, 41 U.S.C. § 254b, a government contractor or subcontractor is required to submit so-called "cost or pricing data" if any negotiated contract, subcontract, or modification is expected to exceed $500,000. As defined by the FAR, "cost or pricing data" comprise all facts that prudent buyers and sellers would reasonably expect to affect price negotiations significantly. FAR 15.401. The submission of such data allows the CO to ascertain the reasonableness of the offered prices. In addition, the contractor and subcontractor must certify that the data are accurate, current, and complete. Id. ; FAR 15.406-2. Pursuant to TINA, if it is found after award that the contractor submitted data which were not accurate, current, and complete, as certified, the contract price may be reduced accordingly (again, pursuant to a standard FAR clause).

As implemented by the FAR, TINA exempts from its coverage a contract of any dollar amount where (1) the price agreed upon is based on adequate price competition, (2) the price is set by law or regulation, (3) the agency is acquiring a "commercial item" as defined in FAR 2.101, or (4) the agency grants a waiver. FAR 15.403-1(b). The FAR provides guidance for determining when these exceptions apply. FAR 15.403-1(c).

C. Government Audit Rights

Under certain circumstances, the Government has the right to audit a contractor's price proposal prior to negotiations, as well as to audit directly pertinent records, books, and other data of the contractor at any time up to three years after final contract payment. See, e.g. , FAR 52.215-2, "Audit and Records -- Negotiation" clause. The Government's broad audit rights provide it with the means to monitor and enforce a contractor's obligations under the cost principles, the CAS, and TINA, described above.

V. UNIQUE BUSINESS PRACTICES AND ETHICAL RESPONSBILITIES

The federal Government has long imposed unique business practices and ethical responsibilities on its contractors. Congress and the Executive Branch, however, multiplied considerably the number and types of ethical considerations governing federal contracts after the defense procurement scandals of the 1980s (e.g., " Operation Ill Wind"). As a result, contractors and prospective contractors must ensure that their employees comply with these ethics-related statutes and regulations, or face civil, administrative, or criminal sanctions.

A. Prevention of Bribery and Illegal Gratuities/Compliance Training

With limited exceptions, contractors are restricted by criminal statutes and contracting regulations from providing goods and services to the personal benefit of federal employees. These restrictions apply to anything of monetary value -- including gifts, entertainment, loans, travel, favors, hospitality, lodging, discounts, and meals. The restrictions are set forth in certain Office of Government Ethics (OGE) regulations. As a result, many of the activities a contractor may undertake with respect to its commercial customers (e.g., taking a prospective client to dinner) are prohibited when interacting with federal government employees. Some exceptions to the gratuities rules do exist, however. For example, contractors may provide federal employees (a) modest items of food and refreshments offered other than as part of a meal; (b) favorable rates/discounts available to the public or all Government employees; and (c) greeting cards and items with little intrinsic value (e.g. , plaques, trophies). Federal employees may also accept non-cash gifts of $20 or less, not to exceed $50 annually from any one person or company.

Because of these stringent rules, contractors must train employees who deal with the federal government. It is essential that contractors' employees understand these restrictions. As a result, it is quite common for government contractors to conduct regular employee training.

B. False Claims and False Statements

Contractors must ensure that no false, fictitious, or fraudulent statements are made to a federal agency. 18 U.S.C. § 1001. A false representation with respect to a company's ability to comply with government contract requirements may subject the company and its management and employees to criminal liability. False statements can also arise in the submission of required reports during contract administration or in the submission of affirmative action reports.

Depending upon the circumstances, a contractor that makes a false statement to the Government may face civil or criminal liability for such a statement. The civil and criminal False Claims Acts impose sanctions for the submission of false or fraudulent claims. 31 U.S.C. §§ 3729-3733; 18 U.S.C. § 287. When the Government relies upon a false statement in awarding a contract, and subsequently makes payments under that contract, the invoices may be considered a false claim. Lax billing oversight and failure to bill strictly in accordance with the contract can also lead to a false claim. In addition, non-compliance with TINA, the CAS, and the cost principles (see above) can give rise to false claim liability.

C. Conflicts of Interest

Federal statutes and regulations prohibit contractors from discussing employment with certain federal officers and employees. 41 U.S.C. § 423(c); 18 U.S.C. § 208(a). In addition, former federal employees are restricted from performing certain services once they depart the Government. 41 U.S.C. § 423(d); 18 U.S.C. § 207(a)(1). These latter restrictions vary in length and scope depending upon the status of the former federal employee and the work performed while in Government service.

Contractors must implement procedures designed to (a) prevent improper employment discussions with current federal employees and (b) ensure that former federal personnel hired by the company do not illegally work on matters that create a conflict of interest. Failure to comply with such procedures may result in harsh sanctions being imposed by the Government

D. Kickbacks

Statutory and contractual provisions prohibit the giving or receiving of a kickback for the purpose of improperly obtaining or rewarding favorable treatment in connection with a federal contract or subcontract. 41 U.S.C. §§ 51-58; FAR 3.502. In addition, contractors are prohibited from including the amount of a kickback in a contract price. Kickbacks include money, fees, commissions, credits, or any type of compensation. Favorable treatment includes obtaining unwarranted waivers of deadlines, and obtaining acceptance of non-conforming goods. Contractors must ensure that employees are properly trained not to offer or accept kickbacks.

E. Lobbying Restrictions

Government contractors are prohibited from using appropriated funds to attempt to influence the award or modification of a contract. 31 U.S.C. § 1352; FAR Subpart 3.8. This prohibition is implemented in a government contract by a standard FAR clause. "Appropriated funds" include all amounts generated by a federal contract other than profit. This prohibition is implemented in a government contract by a standard FAR clause. Contractors must either (a) establish a policy against hiring government contract lobbyists or (b) adjust their accounting systems to prevent costs associated with such lobbyists from being charged to a government contract.

F. Procurement Integrity

Government contractors are prohibited from obtaining contractor "bid or proposal information" or "agency source selection information" prior to the award of a federal contract. 41 U.S.C. § 423; FAR 3.104-4 and -5. Contractor bid or proposal information includes cost or pricing data, proprietary information about operations or techniques, and indirect costs. Source selection information includes proposed costs or prices, source selection plans, cost or price evaluations, and other sensitive procurement information. Contractors must train their employees not to solicit or obtain this type of information from federal employees.

VI. SOCIO-ECONOMIC OBLIGATIONS

The Government imposes a wide range of socio-economic obligations on its contractors as part of long-standing federal efforts to further these policy objectives through federal contracting. Many of these requirements were strengthened as a result of the civil rights movement in the 1960s.

A. Equal Opportunity and Affirmative Action

A government contractor or subcontractor (regardless of tier) with a contract or subcontract over $10,000 must not discriminate against any employee or applicant because of race, color, religion, sex, or national origin. Such a contractor or subcontractor must also take affirmative action to ensure that applicants and employees are treated without regard to race, color, religion, sex or national origin. Executive Order 11246, as amended; FAR 52.222-26. More notably, if the contractor or subcontractor (a) has fifty or more employees and (b) has a contract of $50,000 or more, it must also develop and keep on file at each "business establishment" a written so-called Affirmative Action Plan (AAP). The AAP details specific measures the contractor must take to guarantee equal employment opportunity by addressing the problems and needs of members of minorities groups and women.

Additional affirmative action regulations apply to handicapped individuals, special disabled veterans, and veterans of the Vietnam era. FAR 52.22-35 and -36. Under the equal opportunity and affirmative action regulations, contractors must also (1) submit annual compliance reports (EEO-1, "Employer Information Report"; and the VETS 100 Form); (2) post in conspicuous places the hiring and employment notices provided by the Government; (3) agree to grant the Government access to its records to determine contractor compliance with EEO requirements; (4) list job openings at state agencies for qualified veterans; and (5) flow down the FAR "Equal Opportunity" and other affirmative action clauses to covered subcontractors. The failure to remain compliant with respect to the submission of such required reports can result in disqualification from receiving award of a contract. See , e.g. , Pub. L. No. 105-339, § 1354 (prohibiting agencies from entering into contracts with firms that have not submitted their VETS 100 Report for the preceding fiscal year).

B. Subcontracting Plan

If a government contractor receives a contract worth $500,000 ($1 million for construction) or more and there are subcontracting opportunities, the contractor is required to submit a written subcontracting plan to the Government. The subcontracting plan outlines in detail the efforts the contractor will make to assure that small businesses, small disadvantaged businesses, women-owned small businesses, and businesses located in historically underutilized business zones, will have an equal opportunity to compete for subcontracts. FAR 52.219-9. The plan must also contain total dollar and percentage dollar goals for subcontracting to these entities. The contractor's material management or purchasing division must also develop procedures to implement the subcontracting plan.

C. Labor Standards/Service Contract Act

Compliance with certain labor standards have long been a mandate for Government Contractors. Such requirements are essentially reflected in four labor statutes: (1) The Walsh-Healey Act, governing supply contracts, 41 U.S.C. § 43; (2) the Davis-Bacon Act, governing construction contracts 40 U.S.C. 276a -- 276a-7; (3) the Service Contract Act (SCA) of 1965, governing service contracts, 41 U.S.C. § 351, et seq. ; and (4) the Contract Work Hours and Safety Standards Act, 40 U.S.C. § 327-333, requiring payment at 1 1/2 times the basic rate of pay for all hours worked by laborers or mechanics, in excess of 40 hours per week. The SCA seems to be the statute that involves the most controversy.

The SCA applies to every government contract over $2,500, when the principal purpose of the contract is to furnish services in the United States through the use of service employees . A service employee is any person engaged in the performance of a contract other than a person employed in a bona fide executive, administrative, or professional capacity. 29 C.F.R. Part 541.

The SCA requires contractors to pay service employees who are performing on the contract not less than the rates required by the Secretary of Labor. Such rates are contained in wage determinations, which the agency usually appends to the solicitation and the resulting contract. Failure to comply with the SCA can result in withholding of payments under a government contract or debarment of the contractor from further contracting for a set period of time.

D. Drug-Free Workplace Requirements

The Drug-Free Workplace Act of 1988, Pub. L. No. 200-690, obligates a non-commercial item Government contractor, who has a contract over $100,000, to meet certain requirements designed to keep the work place free of illegal drugs. In particular, a Government contractor must agree to (1) publish a statement and notify employees in writing that illegal drugs are prohibited in the work place; (2) publish and notify employees of the action the contractor will take against violators of the drug prohibition policy; (3) establish a drug-free awareness program for employees; (4) notify employees that compliance with the drug prohibition is a condition of employment, and that employees must notify the contractor of any violation of Federal or state drug abuse statutes occurring in the work place within 5 days of conviction; (5) notify the Government contracting agency within 10 days of receipt of an employee conviction notice; (6) take appropriate personnel action within 30 days of receipt of an employee conviction notice; (7) require that the convicted employee participate in an approved drug abuse assistance or rehabilitation program; and (8) make a good faith effort to maintain a drug-free work place through the implementation of these requirements. The Drug-Free Workplace Act does not, however, require drug testing of employees.

VII. COMMERCIAL ITEM ACQUISITIONS

The ever-expanding list of unique government contract statutes and regulations have contributed significantly to acquisition costs for the federal government. Indeed, a Congressionally-mandated study found that the Defense Department sometimes paid a premium of 30-50% more, and in some cases 100% more, for its products compared to the same or similar ones sold to commercial companies. Acquisition Law Advisory Panel, "Streamlining Defense Acquisition Laws: Report of the Acquisition Law Advisory Panel to the United States Congress," at 8-13 (Jan. 1993). As a result, Congress passed the Federal Acquisition Streamlining Act of 1994, Pub. L. No. 103-355, in part to capture for the federal government some of the benefits and efficiencies of commercial contracting.

FASA established a preference -- applicable to both military and civilian agencies -- for the acquisition of "commercial items." 10 U.S.C. § 2377; 41 U.S.C. § 314b. In particular, it requires that, to the maximum extent practicable, agencies acquire commercial items to meet their particular needs. Id. The FAR contains a detailed definition of "commercial item." The term includes (a) items, other than real property, that have been sold, leased, or licensed to the general public; or offered for sale, lease or license to the general public; and (b) services of a type offered and sold in the commercial marketplace based on established catalog or market prices for specific tasks performed under standard commercial terms and conditions.

Congress also sought to streamline the terms and conditions applicable to commercial item contracts in an effort to make federal contracting more attractive to commercial suppliers. Accordingly, FASA mandated that the FAR contain a list of clauses that are consistent with "standard commercial practice," and that such clauses be included in contracts for the acquisition of commercial products and services. To preclude agencies from unnecessarily including various unique government contract clauses in commercial item contracts, the Act provides that "to the maximum extent practicable, only the contract clauses [mandated by law and executive order, or consistent with commercial practice] may be used in a contract . . . for the acquisition of commercial items . . . ." Pub. L. No. 103-355, § 8002(b)(3).

As required by the FASA, the FAR now contains standard terms and conditions applicable to commercial item acquisitions. FAR 52.212-4. These clauses were intended to mirror the terms and conditions found in the commercial marketplace. The CO may tailor the FAR's commercial item contract clauses to adapt to market conditions for each acquisition, but may do so only in a manner that is consistent with standard or customary commercial practices (unless a waiver is obtained). In addition, each commercial item contract is to contain a list of laws and executive orders that apply to the commercial item being acquired.

Commercial item contracting significantly reduces the burden associated with government contracting. TINA, CAS, the FAR cost principles, and many socio-economic requirements are inapplicable to commercial item contracts. As a result, commercial entities that previously avoided government contracting because of the unique costs, risks, and obligations imposed by federal contracts have begun responding to government solicitations. Unfortunately, some agencies have been slow to utilize the new, streamlined commercial item acquisition procedures.

VIII. THE GOVERNMENT CONTRACT DISPUTES PROCESS

Almost since government contracting began, there has been a special process followed for disputes arising under a government contract between the Government and the contractor. Until 1978, this process was governed solely by a "Disputes" clause found in almost all government contracts. In 1978, this process was codified by the Contract Disputes Act of 1978 (CDA), 41 U.S.C. §§ 601, et seq . This process applies to all disputes arising under or relating to a government contract.

As a waiver of sovereign immunity, courts and administrative boards of contract appeals construe the CDA narrowly. Accordingly, a contractor that has a dispute with the Government must be careful to follow the CDA's mandated procedures, or it risks waiving or otherwise losing its right to proceed against the agency. Administratively, the FAR implements the CDA through the standard "Disputes" clause, which defines the rights and duties of a contractor in dispute with the Government. Notably, a contractor must continue performance pending resolution of a dispute with the Government.

A. Presentation of a "Claim"

A contractor initiates the disputes process by presenting a "claim" to the CO. The "Disputes" clause defines a claim as "a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to [the] contract." FAR 52.233-1 (c). According to the clause's definition, a claim must (1) be in writing; (2) request a "sum certain"; and (3) demand a final decision. A significant, and relatively confusing body of case law has attempted to define these elements.

If the claim is over $100,000, it must also be certified by the contractor. FAR 52.233-1(d)(2). The contractor must attest that (a) the claim is made in good faith, (b) the supporting data are accurate and complete to the best of his or her knowledge and belief, (c) the amount requested accurately reflects the contract adjustment for which the contractor believes the government is liable, and (d) the individual certifying is duly authorized to do so on behalf of the contractor.

B. Contracting Officer's Decision

If the contractor and Government are unable to negotiate a resolution to the dispute, the CO must issue a "final decision." This is a written articulation of the agency's position with respect to the claim. A contractor may not commence litigation until the CO issues such a decision. However, if, after the passage of time, the CO fails to provide the contractor a final decision, the contractor may attempt to appeal the CO's so-called "deemed denial" of the claim to an administrative board of contract appeals or the U.S. Court of Federal Claims (COFC).

C. Appeal to a Board of Contract Appeals

There are eleven agency boards of contract appeals (BCAs). The largest of these BCAs is the Armed Services Board of Contract Appeals (ASBCA), located in Falls Church, Virginia. About thirty full-time judges hear administrative disputes at the ASBCA.

A contractor initiates an appeal to the appropriate BCA by filing a "Notice of Appeal". The Notice must be filed with the BCA within ninety days of receipt of the CO's final decision. Failure to file the notice within this time defeats the board's jurisdiction to hear the case. The Notice of Appeal is usually a simple letter stating that the contractor is appealing the CO's final decision. The date of the final decision and the contract number should be included in the notice.

The recorder (i.e., the clerk) of the applicable BCA will then inform the Government and the contractor that the case has been "docketed". Under the standard BCA rules, the contractor (now, "appellant") must file a complaint within thirty days of the docketing notice. The Government then has thirty days to file its answer. Agency counsel typically represent the Government before the various BCAs.

Litigation at the BCAs is somewhat less formal than in most courts. Although the BCA's administrative judge generally follows the Federal Rules of Civil Procedure and the Federal Rules of Evidence in making procedural and evidentiary decisions, the judge need not abide by those Rules. Discovery is available in much the same fashion as before federal district courts or the COFC.

BCA judges will travel to accommodate the interests of the parties. In other words, if the circumstances of the case make it more reasonable to hold hearings away from the BCA's offices in the Washington, D.C. metropolitan area, the parties can request the judge to hold the hearings at a different locale.

After the complaint and answer have been filed, and the discovery has occurred, a hearing will be held. Thereafter, post-hearing briefs are filed. Decisions of the BCA are rendered by a three-judge panel (although usually only one judge will preside at the hearing). The BCA's decision may be appealed to the U.S. Court of Appeals for the Federal Circuit.

D. Appeal to the U.S. Court of Federal Claims

A contractor initiates a proceeding at the COFC by filing a complaint within one year after the contractor receives the CO's final decision. Failure to file the complaint within this twelve-month period will result in dismissal, since this failure defeats the COFC's jurisdiction to hear the case.

The Government has sixty days in which to file an answer to the contractor's complaint. The agency will be represented by an attorney from the Civil Division of the U.S. Department of Justice. Thereafter, discovery may be conducted by both parties. The COFC, like the BCAs, will also hold a trial away from its courthouse.

Unlike the BCAs, the COFC has promulgated procedural rules patterned after the Federal Rules of Civil Procedure. Parties before the COFC will generally encounter a more formal and judicialized procedure than would be found before a BCA. A decision of the COFC is rendered by a single judge. That judge's decision may be appealed to the U.S. Court of Appeals for the Federal Circuit.