Proposed amendments to the Federal Acquisition Regulations (“FAR”), if adopted, will impose additional ethical burdens on companies wishing to do business with the federal government. This past February, the General Services Administration (“GSA”), the Department of Defense (“DoD”), and the National Aeronautical and Space Administration (“NASA”) issued proposed rules that amend the FAR by adding a new section to the Improper Business Practices and Personal Conflicts of Interest rules contained in FAR Part 3. See 72 Fed. Reg. 7588 (Feb. 16, 2007).

The proposed rules require contractors receiving contract awards in excess of $5 million to display the Office of Inspector General’s (“OIG”) “fraud hotline poster” at company work locations in the United States and on Web sites maintained by the company to provide information to its employees. For contracts less than $5 million, awarding agencies may, but are not required to, mandate the contractor’s posting of the OIG fraud hotline poster.

In addition, the proposed new rules would require contractors who receive contracts in excess of $5 million and with a performance period of 120 days or more, to:

  • Within 30 days after contract award, prepare a written code of ethics and business conduct; and
  • Within 90 days after contact award, establish an employee ethics and compliance training program and internal control system proportionate to the size of the company and extent of its business with the federal government.

To satisfy the proposed rules’ requirements, the internal control system should provide for:

  • 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;
  • An internal reporting mechanism, such as a hotline, by which employees may report suspected instances of improper conduct, and instructions that encourage employees to make such reports;
  • Internal and/or external audits;
  • Disciplinary action for improper conduct;
  • Timely reporting to appropriate government officials of any suspected violations of law in connection with government contracts or any other irregularities in connection with such contracts; and
  • Full cooperation with any government agencies responsible for either investigation or correction actions.

Regardless of value, the proposed rules would not apply to contracts let for the acquisition of commercial items under FAR Part 12, or contracts performed outside of the United States.40 Noncompliance with these new requirements, if passed, could subject the contractor to: (1) withholding of contract payments; or (2) loss of award fee, consistent with the award fee plan, for the performance period in which the government determined the contractor to be non-compliant, in addition to other traditional remedies for contractor default and noncompliance.

Notably, the new proposed FAR rules makes no mention of the U.S. Sentencing Guidelines that, since 1991, have prescribed what the Sentencing Commission believes constitutes an effective ethics and compliance program. In its comments on the proposed rules, the Department of Justice has said that the Sentencing Guidelines “should serve as the baseline standard for a contractor’s code of ethics and business conduct,” and also recommended that any new FAR provisions dictating standard of business conduct should reference the guidelines to ensure that “the federal government speaks with one voice on corporate compliance.” Given the Justice Department’s prominent role in the investigation and prosecution of corporate malfeasance, it is likely that any final FAR rule will refer to the Sentencing Guidelines as the appropriate standard for business ethics programs.

The new FAR rule appears to be the latest evidence of a continuing trend toward common standards — dictated by congressional legislation or government regulations — for prudent corporate governance. Comments on the proposed rules were originally due April 17, 2007, but were subsequently extended to May 23, 2007. Several organizations submitting comments have expressed concern that the requirements will be excessive and overly burdensome for certain entities.41 A final edition of the rules has not been published, but is expected shortly.

State and local governments, which typically mirror the federal procurement model and often follow suit with their own brand of acquisition reform, can also be expected to now issue similar mandates for contractor ethics programs. All told, any company that relies on government contracts should be making plans to get its compliance house in order or risk losing an important customer. On the up side, a company that establishes a sound business ethics program, whether its business is dedicated to government or commercial enterprises, is likely to reap the benefits of this prudent investment in corporate governance.