Background:

The Civilian Agency Acquisition Council and the Defense Acquisition Regulation Council recently proposed to amend the Federal Acquisition Regulation (“FAR”) to address Contractor Code of Ethics and Business Conduct and the display of Federal agency Office of the Inspector General (“OIG”) Fraud Hotline Posters (FAR Case 2006-007, 72 Fed. Reg. 7588-90 (February 16, 2007)). This update summarizes the proposed FAR changes and offers some practitioners’ tips to consider when deciding whether to submit comments.

Summary of Proposed FAR Changes:

This proposal would amend FAR Parts 2, 3, and 52 to establish a consistent policy regarding contractor code of ethics and business conduct, responsibility to avoid improper business practices, procedures for displaying an agency OIG Fraud Hotline poster, and the need for agencies to cooperate with the Dept. of Homeland Security (“DHS”) to ensure that contracts funded with disaster assistance funds require display of any event-specific fraud hotline posters. The proposed amendments impose significantly greater requirements than are contained in several current agency FAR Supplements (see, DFARS Subpart 203.70, VAAR Subpart 803.70, and EPAAR Subpart 1503.5) which provide that contractors with contracts over certain dollar thresholds should have codes of conduct and must display agency IG hotline posters. The proposed amendments will, if adopted, require that contractors with substantial contracts adopt written codes of conduct and internal controls to ensure that violations are reported and investigated.

  • Under the proposed changes, contractors performing contracts1 valued in excess of $5,000,0002 are required to display the agency OIG fraud hotline poster and any applicable DHS event-specific fraud hotline poster. These posters must be posted in common work areas within the business segments performing work under this contract and at contract work sites. Contractors maintaining a company website to provide information to its employees must also display an electronic version of the posters at this website.
  • Contractors performing contracts in excess of $5,000,000 and with a period of performance of 120 days or more must also have a written code of ethics and business conduct within thirty (30) days after contract award and shall establish an employee ethics and compliance training program and an internal control system within ninety (90) days after contract award. The training program and control system must be suitable to the size of the company and its involvement in Government contracting. The internal control system must (i) facilitate timely discovery and disclosure of improper conduct in connection with Government contracts and (ii) ensure corrective measures are promptly instituted and carried out. The proposed new FAR 52.203-XX clause provides the following examples of aspects of an appropriate internal control system:
    • 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 employee may report suspected instances of improper conduct, and instructions that encourage employees to make such reports;
    • Internal and/or external audits, as appropriate;
    • 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 corrective action.
  • The proposed new clause provides the Government with additional remedies for noncompliance – the withholding of contract payments and the loss of award fee for the award period in which the Government determines the contract was noncompliant – and also requires that the clause be flowed down in all subcontracts valued in excess of $5,000,000.

Practitioner Tips:

Allegations of fraud and abuse in the course of the DHS disaster-related procurements and DoD contracts supporting Iraq reconstruction have resulted in an increased focus on contractor standards of conduct and the adequacy of contractor policies to prevent, identify, and report potential noncompliances. This focus will undoubtedly continue, even if the proposed FAR amendments are not adopted or are modified significantly in their final form. Accordingly, government contractors should consider placing added emphasis on compliance with government ethics and similar compliance requirements.

  • All government contractors should consider reviewing their current code of ethics and internal controls for consistency with the proposed FAR amendments.
  • Any comments concerning the proposed FAR amendments must be submitted on or before April 17, 2007 by mail to General Services Administration, Regulatory Secretariat (VIR), 1800 F Street NW, Room 4035, Attn: Laurieann Duarte, Washington, DC 20405; by fax to 202-501-4067; or by the Federal eRulemaking Portal at www.regulations.gov.