New Rules Governing Business Conduct and Ethics for Federal Government Contractors

By Joseph Dirik, Esq

Successful contractors usually have programs that govern the company's business conduct and ethics. If you haven't adopted a plan, you should consider doing so.

Several years ago in this space I recommended that contractors adopt corporate compliance policies. Because this month’s issue of Texas Construction features Top Texas Contractors, it is a fitting time to offer further incentive to do so. Most contractors doing business with the federal government must adopt a business conduct and ethics program in connection with future contracts. Failure to implement a suitable program could result in serious consequences.

Virtually all government contracts are governed by the Federal Acquisition Regulations, known as FAR. In December 2007, the FAR Council (the combined federal civilian and defense acquisition councils) issued a final rule (FAR Case 2006-007), effective December 24, 2007, requiring federal contractors awarded contracts expected to exceed $5 million and that are to be performed in 120 days or more to establish and maintain a code of business conduct and compliance program. A covered contract will include the new rule, FAR clause 52.203-13, under the mandatory solicitation and contract clauses. Contractors who obtain a covered contract with the federal government will have only 30 days to issue the required written code of conduct or policy unless the contracting officer establishes a longer period of time. Simply issuing the required code of conduct or policy, however, is not enough.

Within 90 days after award of a covered contract, the contractor must also establish an “ongoing business ethics and business conduct awareness program.” An effective, and compliant, program must (1) facilitate timely discovery of improper conduct in connection with government contracts, and (2) ensure corrective measures are promptly instituted and carried out. As with most rules, the contractor is left to decide how to comply. At a minimum, the contractor’s program must also include periodic reviews, internal reporting, and internal and/or external audits. The rule also requires covered contractors to display fraud hotline posters furnished by the contracting agency’s inspector general at its worksites. Contractor’s who work for many agencies can avoid displaying multiple posters if the contractor’s awareness program incorporates a reporting mechanism.

The rule also requires that contracting officers review contractor compliance with the rule, ostensibly as a part of the government’s normal contract administration.

The new rule contains some exceptions. Small businesses are subject to the requirement of a written code of business ethics and conduct, but they need not implement an employee awareness and internal control system. Contracts for commercial items are generally exempt. And finally, contracts performed entirely outside the United States are exempt from the requirements of the new rule.

In addition to the changes implemented by FAR 52.203-13, more may be coming. The FAR Council has proposed a rule (FAR Case 2007-006) in response to a Department of Justice request for additional requirements regarding business conduct and ethics. For example, under the proposed rule, whenever a contractor has reasonable grounds to believe that a violation of federal criminal law has been committed, it must notify the contracting agency’s Inspector General. Failure to do so could result in suspension and debarment, among other penalties.

Unfortunately, the proposed rule leaves many questions unanswered. The proposed rule does not define what constitutes “reasonable grounds” to suspect that criminal conduct has occurred. Who within the contractor’s organization can be charged with the knowledge that might lead a person to suspect criminal conduct? If a field superintendent has reasonable grounds to suspect criminal activity, is this knowledge imputed to the superintendent’s employer? What about an hourly employee?

The proposed rule also requires that contractors align their compliance programs with the U.S. Sentencing Commission Guidelines Manual. The Sentencing Guidelines are very rigorous and represent the “gold standard” in developing corporate governance policies.

The public’s comments to FAR Case 2007-006 were due by January 14, 2008. Government contractors, however, should not wait for the FAR Council to issue its final rule on FAR Case 2007-006. Consider establishing compliance programs at the project level as well as at the corporate level right away. Also, tailor the overall program to address the unique challenges involving individual employees and their responsibilities. A well-crafted program can easily be amended, if necessary, to comply with future FAR changes.

Establishing and maintaining a good reputation should be enough to convince a contractor to conduct its business with the highest integrity. It is also a good idea because federal and state agencies are cracking down hard on fraud and false claims. If you haven’t done so already, seek an attorney’s help in developing a suitable compliance program.

Editor’s note: The information in this article is not intended as legal advice but to provide a general understanding of the law.