The FAR Councils have proposed an amendment to the FAR that would address contractor code of ethics policies and impose new mandatory compliance procedures on contractors receiving awards in excess of $5,000,000. See 72 Fed. Reg. 7588-90 (Feb. 16, 2007).

While FAR Part 3 provides guidance on improper business practices and personal conflicts of interest, it does not currently discuss the contractor's responsibilities with respect to codes of ethics and business conduct or the avoidance of improper business practices. The proposed rule would add a new FAR Subpart 3.10 and establish a new general policy that "Contractors should have a written code of ethics and business conduct." This policy would promote consistency between the FAR and the DoD's existing DFARS provisions regarding contractor standards of conduct, which already include similar policy and procedure recommendations. See DFARS Subpart 203.70.

The proposed FAR provision would also add a new requirement for contractors that receive awards in excess of the $5,000,000 threshold that have more than 120-day performance periods. The provision would go one step further than merely stating that contractors "should" have certain policies and compliance procedures in place, and instead require those contractors to:

  • Within 30 days of contract award, have a written code of ethics and business conduct in place; and
  • Within 90 days of contract award, have in place an employee ethics and compliance training program and an internal control system to promote compliance with the code of ethics and business conduct.

Although the proposed rule states that the employee training program and internal control system "shall be suitable to the size of the company and its involvement in Government contracting," the proposed rule provides no guidance with respect to such "suitability" concerns. The FAR Councils have suggested that "contractors have the ability to determine the simplicity or complexity and cost of their programs," but there is no reference to such flexibility in the proposed FAR provisions themselves.

Instead, the proposed FAR provisions establish requirements for the contractor's "internal control system" to monitor compliance with the code of ethics and business conduct. For example, at a minimum, the proposed rule would require the system to enable the contractor to:

  • Facilitate timely discovery and disclosure of improper conduct and ensure corrective measures, including disciplinary action, are promptly implemented;
  • Conduct periodic reviews of company business practices, procedures, policies, and internal controls for compliance with the contractor's code of ethics and business conduct and the special requirements of government contracting;
  • Establish an internal reporting mechanism, such as a hotline, for employees to report suspected instances of improper conduct; and
  • Conduct internal and/or external audits as appropriate.

While most well-established contractors may already have programs in place incorporating the general requirements set forth in the regulations, this new rule may cause some hardship for companies entering the federal marketplace.

The proposed rule would also harmonize requirements for when a contractor must display an Office of Inspector General fraud hotline poster, using the $5,000,000 contract award as the threshold. The DoD, General Services Administration and National Aeronautics and Space Administration previously had different threshold requirements. The proposed rule would also exclude commercial item contracts awarded pursuant to FAR Part 12 and contracts to be performed outside the United States from its coverage. Comments on the proposed rule may be submitted to the FAR Secretariat on or before April 17, 2007.

In light of the proposed rule, it would be prudent for government contractors to take a new look at their compliance programs to ensure that they are consistent with its guidance.