Contractors and subcontractors who enter into at least one government contract "expected to exceed" $5 million dollars with a performance period of 120 days or more are now subject to a new Federal Acquisition Regulation (FAR) clause, the Contractor Code of Business Ethics and Conduct.

FAR clauses contain policies and procedures for acquisitions by the federal government. The newest FAR clauses require certain contractors to meet specific ethics and compliance-oriented requirements (including a formal code of business ethics and conduct) and to display the Office of the Inspector General (OIG) Fraud Hotline Poster. Failure to comply with the new requirements may result in the withholding of contract payments and the loss of contract award fees.

The code of business ethics and conduct must be in writing and issued within 30 days of the contract award. It must be provided to each employee working on the contract. Each contractor must als promote compliance with its code of business ethics and conduct; establish, within 90 days after the contract award, an awareness program and an internal control system which facilitates timely discovery of improper conduct; and, ensure that corrective measures are promptly instituted and carried out. In addition, contractors must display agency fraud hotline posters as required by contracting officers.

The new FAR clauses are included in solicitations and contracts issued after December 24, 2007. Certain contractors are exempt from some requirements, however. Small businesses whose contracts meet the threshold dollar amounts and performance periods need not implement an employee awareness program or internal control system. Commercial item contracts are exempt from the new requirements, as are contracts performed entirely outside the United States. Finally, the new rules do not apply to existing contracts.

While the new FAR clauses appear to impose burdensome requirements on covered contractors and subcontractors, many companies already have various ethics and conduct codes and internal controls in place. Note, however, that a Proposed Rule is pending that contains additional compliance-based requirements, including notification requirements for contractors upon becoming aware of violations of federal law. State and local governments can also be expected to issue similar ethics program mandates.