Government Contracts Legal Forum : Government Contracts Lawyers & Attorneys for Litigation & Counseling

While the administrative tools of suspension and debarment allow the government to prohibit entities from receiving contracts or grants directly, the procurement regulations also contain restrictions on prime contractors’ ability to subcontract with suspended or debarred entities. Historically, these restrictions, found at section 52.209-6 of the Federal Acquisition Regulation, have:

• Prohibited government contractors from entering into subcontracts over $30,000 with any entity that is excluded from government contracting (there is a “compelling reason” exception). This restriction has been limited to “first-tier subcontracts,” meaning suspended or debarred entities could work as government subcontractors at the 2nd tier or below.
  
• Required government contractors to collect written certifications from first-tier subcontractors with subcontracts over $30,000 stating whether the subcontractor or any of its principals were suspended, debarred, or proposed for debarment.

In response to a legislative expansion of the definition of “procurement activities” to include, with certain commercial exceptions, subcontracts at any tier, these requirements were revised by an interim rule issued in December 2010. The interim rule includes two key changes: it exempts certain subcontracts from coverage regardless of whether they are over $30,000 and, for the first time, applies the restriction and certification requirements to lower tier subcontractors. Where the revised version of the clause applies, a contractor’s obligations now depend on whether (1) the items being acquired qualify as “commercial-off-the-shelf” (COTS) items, defined as commercial items sold in substantial quantities in the commercial marketplace and offered to the Government without modification (excluding bulk cargo such as agricultural or petroleum products) and (2) the prime contract is for non-commercial or commercial items:

• If the prime contract is for a non-commercial item, the prime contractor must apply the prohibition and certification provisions to all lower-tier non-COTS subcontracts over $30,000.
  
• If the prime contract is for a commercial item, the prime contractor must apply the prohibition and certification to only first-tier non-COTS subcontracts.
  
• If the subcontract is for COTS items:
  
  • there is no restriction on subcontracting with suspended or debarred parties regardless of the amount of the subcontract
    
  • no suspension/debarment certification is required from the subcontractor
    
  • there is no requirement to flow down the requirement

Because we are now beginning to see the revised provision in contracts, we suggest that contactors, both primes and subs, review the new clause to ensure your policies and procedures take the revisions into account. While the changes present an opportunity to limit certifications required from COTS subcontractors, unless a prime contractor can be certain that a subcontractor is providing only COTS items a certification regarding suspension and debarment is still recommended. More important is the new requirement to flow down the provision to non-COTS lower tier subcontracts over $30,000 where the prime contract is not for a commercial item.

We note that the expansion of the definition of procurement activities to include subcontracts at any tier is a further indication of the reach of government procurement regulations. While the exceptions for certain commercial or COTS items contracts are helpful, government contracting has become more onerous, yet again, for non-commercial item contractors and subcontractors.

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A recent settlement by a construction company highlights the need for government contractors to ensure compliance with small business subcontracting requirements. Federal contractors with contracts over a certain size have long been required to put in place and implement a plan to subcontract a certain percentage of work to small and disadvantaged businesses. While the procurement regulations provide for liquidated damages where a company fails to make a good-faith effort to comply with its approved plan at FAR 19.705-7, the government has, until now, not focused its enforcement efforts on small business subcontracting compliance. This recent settlement (see press release), which has not yet been filed with the court, suggests that may change (the U.S. Attorney’s Office for the Eastern District of New York has said a civil complaint that mirrors the non-prosecution agreement will be filed next week) .

According to public reports, between 2002 and 2007 former employees of Schiavone Construction Company falsely certified they were using minority subcontractors on major public works projects in New York City. Those federally-funded public works contracts required Schiavone to use good-faith efforts to retain a certain percentage of disadvantaged and women or minority-owned subcontractors. Some former employees reportedly filed false reports with the Metropolitan Transit Authority and New York City’s Department of Environmental Protection claiming a certain percentage of that work had been performed by qualified subcontractors.

The government launched both criminal and civil probes. The investigations were resolved by a nonprosecution agreement, which reportedly requires Schiavone to pay $20 million, hire an ethics and compliance officer, designate a dedicated minority contractor compliance employee, assist the government in its continuing investigation, and discharge employees involved in the false reporting. The contractor was also required to reimburse the MTA’s Inspector General and the New York City Department of Investigation for investigation costs of $2.4 million.

Combined with the federal Small Business Administration’s increased scrutiny of prime contractor compliance with limitations on subcontracting requirements and willingness to suspend or debar non-compliant contractors, matters previously discussed on this blog, the investigation into Schiavone’s small business subcontracting practices provides further confirmation that government entities, both state and federal, are paying increased attention to compliance with small business contracting requirements. We will continue to monitor and report on these developments in the coming weeks.
 

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On July 8 the Department of Defense Standards of Conduct Office (SOCO) issued an update to the Encyclopedia of Ethical Failures (EEF), its listing of violations of federal ethics law by government and contractor personnel. The encyclopedia, which is organized by type of violations, including conflicts of interest, misuse of Government equipment, violations of post-employment restrictions, and travel, is a valuable resource for contractors' ethics/compliance officers as it provides insight into the types of violations on which DoD is currently focused. Further, the violations can serve as a reference for employee training and written policies and procedures for companies that sell to the government.

Further, the update announced that the new 2010 Ethics Counselor's Deskbook is available on the SOCO website. The Deskbook includes outlines and instructor presentations for all subjects covered at the annual Ethics Counselor's Course held at the Army JAG School in Charlottesville, VA, as well as valuable reference material. Like the EEF, the Deskbook is a valuable reference tool for contractors' ethics/compliance officers. In other words, if government ethics attorneys think a topic is important, chances are that government contractors should be paying attention.

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This post was written by Richard Arnholt and Christopher Gagne.

Contractors, regardless of size and no matter how "indispensable" they think they are to their Government customers, should be prepared for a possible up tick in suspension and debarment (S/D) activity in the next year. Congress has taken an increased interest in S/D, requiring in the FY 2009 DoD Authorization Act that the Interagency Committee on Debarment and Suspension submit an annual report to Congress on each agency's "activities and accomplishments in the Government wide debarment system." And the House Committee on Oversight and Government Reform recently took three agencies to task for the slow pace and low number of S/D actions (the Department of Homeland Security has had only ten debarment cases in four years).

In addition, an attorney from the Army Procurement Fraud Branch stated publicly at a recent ABA conference that no company is "too big to fail," echoing the sentiment of the Commission on Wartime Contracting during a hearing a few weeks ago. The Commission rejected a suggestion by Special Inspector General for Iraq Reconstruction that the Government's dependence on a small number of large prime contractors in Iraq and Afghanistan is a legitimate consideration that might counsel against debarment in some cases for practical reasons. As Commissioner Dov Zackheim put it:

"Well, let me just point out that too-big-to-fail practically wrecked this economy of ours, and I think if we worry about too big to fail, particularly as there are more than one contractor always bidding, we worry about too big to fail, we're going to fail anyway."

The Commissioners made it abundantly clear that they wanted to see more suspensions and debarments all around, including for "willful bad performance." And they want to see primes suspended or debarred for the malfeasance of their subs.

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