The government contracts market is an attractive prospect for many companies. Providing goods or services to the federal government comes with a lot of benefits: chiefly, a stable flow of demand and funding.
According to the U.S. Government Accountability Office, the federal government spent around $637 billion on contracts in fiscal year 2022, including those covering professional support services, medical and surgical equipment, and aircraft.
Government contracts are also open to a range of business types and sizes, with Congress having mandated that the federal government award 23% of prime government contract money to small businesses on an annual basis.
At the same time, entering the government contracts space can be daunting, particularly for those companies unfamiliar with the terrain, as bidding for the government’s business comes with a myriad of rules, requirements, and procedures. For those whose new year’s resolutions include exploring the government contracting space in 2023, you’ll be more prepared if you’re aware of the following considerations.
Know the Rules of the Road
Proper registration is important. Those doing business with the federal government need to have a Unique Entity Identifier created in the System for Award Management at SAM.gov. The U.S. Government assigns a Commercial and Government Entity code as an additional unique identifier that represents a contractor’s physical address for mailings, payments, and records.
Each SAM registrant will complete a representations and certifications report, which contains common federal government-wide representations related to things like small business size and compliance with federal policies. It is critical that contractors take the time to ensure that they have systems in place to ensure ongoing compliance with these representations.
Registrants also match the goods and services they will offer to the government to a North American Industry Classification System code, which the Small Business Administration uses to determine size standards for purposes of government contracting. As mentioned above, the federal government sets aside certain contracts for small businesses.
The SBA determines how big a business and its affiliates can be, using both employee headcount and an average of annual receipts (defined by NAICS code), to be considered a “small business concern” to qualify for a small business set-aside contract. In determining size, the SBA also takes into account the employees and receipts of the business concern’s affiliates.
The affiliation rule is important as it is not uncommon for a company to consider itself a small business, but the government does not because it is affiliated with a large business. The SBA provides guidance to small businesses to help determine affiliation.
Be Aware of Contract Intricacies
The set of regulations that underlies most procurement by executive agencies is called the Federal Acquisition Regulation, or FAR. A number of agencies have supplemental regulations, most prominent of which is the Defense Federal Acquisition Regulation Supplement, or DFARS, which applies to contracts with defense agencies such as the Army Contracting Command, the Office of Naval Research, or the Defense Logistics Agency.
There are some aspects of the FAR (and DFARS or other applicable agency supplement) that will apply contractually, and other provisions that apply regardless of whether they are in the contract. These clauses that are so deeply ingrained in federal procurement that they are incorporated by operation of law known as the Christian doctrine. There is no list of Christian doctrine clauses, though governing bodies consistently find termination clauses, changes and payment clauses, domestic content clauses (Buy American Act), and certified cost or pricing data clauses (Truthful Cost or Pricing Data Act) to be so significant that they are “read” into a contract, even if they aren’t included in the contract documents.
It is also important to keep in mind the existence of the Defense Priorities & Allocation System, or DPAS, under which the government may issue a rated order to accelerate procurement in support of a national defense, emergency preparedness, critical infrastructure, or energy program. It authorizes the U.S. government to prioritize performance and allocate materials to meet national security requirements or to support rapid response in cases of emergency. Consider, for instance, the need for procurement of personal protective equipment during the height of the COVID-19 pandemic.
Through the DPAS, a contractor may need to fulfill the government’s order before its other customers’ orders and, depending on the order rating, before even its other government customers. Companies should be aware of this system so as not to be caught off guard if the government seeks priority order fulfillment. Best practice is to review a contract to determine if it is rated, identify the key elements of the rating, and confirm that the contractor can accept the rated order.
Companies should also understand the various clauses that may affect cost and pricing of a government contract, including the Price Reduction Clause, which applies to General Services Administration Federal Supply Schedule contracts. This clause obligates a contractor to adjust prices charged to the government based on the customer who receives the best discounts and concessions.
The preferred method of solicitation is through full and open competition, but government contracts may also be sole source, limited competition, or set aside based on size or socioeconomic status. There are also different types of contract vehicles and considerations that go into seeking and fulfilling those contracts. A fixed price contract could put more risk on the contractor, while an indefinite delivery contract involves a specific timeframe for supply of a good or service but lacks a set amount for those goods or services.
Conduct a Gap Analysis
When considering bidding on a government contract, it is imperative that a contractor identify the risks applicable to any current or anticipated contracts. These risks may arise through the primary requirements discussed above related to deliverables, security, and financial terms, though they may also arise through collateral compliance requirements.
These may include additional FAR or DFARS clauses as well as laws and regulations governing, for example, Truthful Cost or Pricing Data (41 USC 35), Cost Accounting Standards (41 USC 422), Foreign Corrupt Practices (15 USC 78dd-1), export controls and national security concerns (22 CFR 120 and 15 CFR 730), and Defense Contract Audit Agency (DCAA) audits.
It is best practice to review internal policies and procedures to ensure compliance with provisions in most contracts. These generally include:
— a code of business ethics conduct that relates to personal conflicts of interest and communications with current government employees, as well restrictions on the provision of kickbacks and gratuities;
— employment-related procedures, including affirmative action and equal opportunity;
—a prohibition on child and convict labor and anti-human trafficking policies; and
— contractor safety measures, like a ban on texting while driving and prohibition on illegal drug use.
It may be a company already has these policies on the books. But doing a gap analysis to see what government contracts require is a good first step to determine if any existing policies need revising or updating or if a new policy should be established to participate in this space.
You Could Win, Then Lose (or Lose, then Win)
Award disputes are not uncommon. If the government awards a contract for the procurement of goods or services, another bidder can protest that selection with the GAO. If the GAO does not dismiss the protest on procedural grounds, the agency that awarded the contract is given time to respond to the complaint, and the protester then has a chance to reply to the agency’s response.
In the end, the GAO decides whether to dismiss, deny, or sustain the protest. In the latter case, the GAO recommends the agency in question take corrective action to address a violation in procurement law or regulation. During the process, a protester can also decide to withdraw the protest, and an agency can work to address the protest, both of which would end the matter.
Avoid the ‘Parade of Horribles’
Keep in mind that information submitted to the government in any contractual document (including, for instance, a bid, proposal, or invoice) is subject to the False Claims Act (FCA), a federal law used to address instances of companies and individuals defrauding the government. If a company or individual is found to have falsified a representation or certification made to the government, that company or individual is subject to termination of the contract, limitation of future contracting opportunities, and even suspension or debarment, which would restrict or prohibit the ability to enter into future contracts.
Consequences could extend beyond a federal prohibition, as some states also may not let a federally debarred company or individual take part in contract opportunities or may use a federal exclusion record as a basis to initiate their own inquiries. Further, there is reputation risk from being debarred by the federal government as well as the potential for criminal prosecution or the imposition of monetary penalties for violations of the FCA.
Given the federal government’s robust and consistent demand for goods and services, the government contracts market is an attractive target. As with most complex commercial undertakings, an experienced legal team can help advise companies considering a move into a new market, like the government contracts space, on issues ranging from understanding important compliance matters to negotiating precarious award disputes that might crop up when pulling together a proposal for the government’s business or after winning a contract.
Barron Avery leads the Morgan Lewis’s government contracts practice. Casey Weaver, an associate in the firm’s Houston office, focuses her practice on regulatory compliance matters. Katelyn Hilferty is an associate in Morgan Lewis’s Washington, D.C., office.
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