The Federal Acquisition Regulation (FAR) drafters are proposing a rule requiring offerors on purchases exceeding $3,000 (less for construction and services contracts) to provide the government pre-award a Commercial and Government Entity (CAGE) code – a five-digit identifier assigned by the Defense Logistics Agency. Foreign offerors would be required to provide a North Atlantic Treaty Organization Cage (NCAGE) code. Contracting officers will be tasked with verifying the codes prior to award. Contractors also will be required to maintain accurate code filings and to notify contracting officers of any changes.
While the rule appears merely administrative in nature, it also contains a significant new disclosure requirement regarding corporate structure.
Disclosure under expanded definitions of ownership
The rule includes three new ownership-related definitions designed to identify for the government “hierarchical relationship(s)” between a government contractor and third-party entities that own or control the contractor:
“Owner”: [T]the entity, other than the offeror that is affiliated with the offeror through control of the offeror as described in in this definition or, in the case of a small business, as provided in” the existing small business regulations. Further, “[i]ndicators of control include, but are not limited to, interlocking management or ownership, identify of interests among family members, shared facilities and equipment, and the common use of employees.”
“Highest-level owner”: “[T]he business entity that owns or controls one or more business entities that own or control the offeror.”
“Immediate owner”: “[T]he business entity that has the most direct and proximate ownership or control of the offeror.”
An offeror will be required pre-award to represent whether it is “owned or controlled” by an “Owner.” If yes, the offeror must identify that company’s legal name and CAGE code. If that company is not the “highest-level owner,” then the offeror must identify the legal name and CAGE code of the highest-level owner.
These requirements, which are to be implemented through new or amended solicitation provisions and contract clauses (and will become part of contractors’ annual representations and certifications), will apply to commercial item and non-commercial item contractors alike.
The rule’s stated goals – all worthy ends – are increased “transparency and reliability of data” to support “rigorous accountability” . . .” and to strengthen the government’s ability to prevent or mitigate “fraud, waste, and abuse . . ..”
However, the rule increases contractor risk and raises policy questions and concerns, including:
Is this approach effective? The logical connection between the required corporate information and rule’s stated goals is not readily apparent. It is unclear how the information to be required will combat fraud, waste and abuse issues. The rule’s rationale does not address this head on.
What is the basis for the rule and does it overreach? The drafters cite the Federal Funding Accountability and Transparency Act of 2006 (Public Law 109-282) (FFATA) as an example of legislation increasing contractor transparency, but it is unclear if the rule is intended to implement the FFATA. If so, the FFATA arguably does not require information beyond one-tier above the contractor. Further, while the FFATA addresses third-party “ownership” of a contractor, it does require any disclosures involving the murkier concept of third party “control” of a contractor.
Is application to commercial item contracts proper? There is no analysis on how the rule reconciles with the Federal Acquisition Streamlining Act of 1994 (Public Law 103-355) (FASA) and its implementation in FAR Part 12. FASA specifically provides that commercial item contracts shall “to the maximum extent practicable” only include those clauses that “are required to implement provisions of law or executive orders applicable to acquisitions of commercial items or commercial components” or that are “consistent with consistent with standard commercial practice.”
Small business concerns. Small business self-certifications regarding size typically are reviewed by the Small Business Administration (SBA) through size protests. An adverse SBA decision typically results in a finding of ineligibility for set-asides. Under the rule, a separate representation regarding the existence of upper-tier “affiliates” is required, which on audit likely will be reviewed by non-SBA personnel without institutional experience regarding what is often a nuanced and fact-sensitive analysis.
Certification concerns. For small and large businesses alike, given the potential civil, criminal and administrative penalties that attach to inaccurate certifications, the rule carries increased risk. It requires a written representation regarding upper-tier ownership or control, and, while the representation required by the rule effectively is a simple yes or no (coupled with company names and CAGE codes), the underlying analysis is often complex and requires good faith – but inevitably subjective – business judgments.
Competitive intelligence issues. Disclosure of this information has the potential to impact companies’ competiveness, especially that of privately held ones. By searching the System for Award Management (SAM) and elsewhere, competitors will be afforded unprecedented insight into the corporate family trees of contractors. This could create a disincentive for new players in the federal market. For those already participating, it represents an increase in the overall compliance burden and a forced released of otherwise non-public information.
The rule was published on April 18, 2013 (Federal Register Vol. 78, No. 75, page 23194). Public comments are due on or before June 17, 2013.