New Rules For Federal Contracts 

4  2,008 

By Dorn C. McGrath & Sean M. Connolly 

The Defense Department expects contractors to adhere to the highest degree of integrity and honesty. Effective Dec. 24, 2007, the government-wide federal acquisition regulation (FAR) mandates a written code of ethics for almost all government contractors.

Specifically, for contracts projected to exceed $5 million and 120 days or more of performance, a new standard contract clause, “Contractor Code of Business Ethics and Conduct,” mandates a code within 30 days of contract award. The FAR requires contractors to provide a copy of the company’s code to each employee, and the contractor must promote overall compliance as part of its ethics program.

This includes timely discovery of government contract-related improper conduct, and effective corrective measures. Other suggestions for internal controls include periodic reviews, internal reporting mechanisms, audits, and disciplinary action for improper conduct. Unless a contractor qualifies as a small business, an “awareness program” and an “internal control system” are both required within 90 days of contract award. Only contracts performed entirely outside the United States or for commercial items are exempted from the new ethics program requirements.

The FAR adds a second new standard contract clause, “Display of Hotline Poster(s),” requiring contractors to prominently display government fraud hotline posters at contract performance sites and on any website maintained for employees. The clause requires government contracting officers to identify the posters that must be displayed. However, the requirement is eliminated if the contractor “has implemented a business ethics and conduct awareness program, including a reporting mechanism,” such as a company hotline.

The new codes also apply to subcontractors. Unless a subcontract is for commercial items or is performed outside the United States, the ethics program and the hotline poster clauses must be flowed down to subcontracts exceeding $5 million with a performance period of more than 120 days.

The new ethics program regulations provide little guidance on what constitutes a suitable code or system of internal controls, but many models are available, and contractors have flexibility to custom fit a workable ethics program adapted to any industry or type of business. Contracting officers may want to confirm that the now required ethics programs are in place, but the government should not be in a position to “micromanage” specific program contents for contractors that enjoy a history of good performance.

The contract clauses apply to Federal Supply Schedule contracts awarded after Dec. 24, 2007, even though schedule contracts cover primarily commercial items. Therefore, notwithstanding the stated exception for commercial items, commercial item supply sources are subject to the ethics program regulations.

Sorting out coverage for the ethics program regulations will require some effort, including a review of contract size, location, duration, whether small businesses are involved and potential commercial items requirements. However, contractors would do well now to review and update their codes of business ethics and conduct, instead of rushing to produce a code to fulfill a contract requirement.

Although the ethics provisions require attention and implementation, they are largely unobjectionable.

By contrast, additional changes to the same ethics program rules were proposed in 2007 that focus on highly controversial self-reporting requirements. The FAR’s new ethics regulations would be further amended to mandate self-reporting of federal criminal law violations as to the award or performance of each contract or any subcontract.

The proposed contract clause would oblige contractors to notify contracting officers and agency inspector generals whenever the contractor has “reasonable grounds” to believe a federal criminal law has been violated in connection with a contract. The government then would expect “full cooperation with any government agencies responsible for audit, investigation, or corrective action.” Moreover, the causes for debarment or suspension would be modified to include a contractor’s “knowing failure to timely disclose” a violation of federal criminal law connected to a government contract, or even an overpayment.

This proposed rule will trigger much discussion in 2008. Contractors over the years have incorporated a high degree of regulation and reporting, while still maintaining an ability to meet the many significant challenges in wartime and disaster contracting. But as comments on the proposed rule and a Government Accountability Office report are considered in the months to come, contractors must maintain current ethics programs to help demonstrate the need for a more balanced and well thought-out approach to ethics and compliance, rather than an automatic “self-reporting” of all problems that might or might not constitute a criminal violation.

Dorn C. McGrath is a shareholder (mcgrathd@gtlaw.com) and Sean M. Connolly (connollys@gtlaw.com) is a senior associate with Greenberg Traurig LLP, as members of the government contracts practice group. The views expressed are solely those of the authors.

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