What It Is Like to Be a U.S. Government Contractor – An Overview of Federal Contracting Laws and Procedures


May 31, 2004

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	Federal Contracting Laws and Regulations
	Federal Bidding Opportunities
	Federal Bidding, Contracting and Administrative Decisions

I.	Overview A. Characteristics of the U.S. Market; Domestic Agency Procurement Scheme The U. S. government has established the Federal Acquisition Regulation system to establish uniform policies and procedures for acquisition by all executive agencies. This system is intended to produce a uniform procedure for procurement within the federal government. Through legislation, judicial decisions and administrative regulations, each branch of government has played a role in creating an extremely complex regulatory environment that exposes participating contractors to hidden traps and pitfalls that may result in penalties ranging from diminution of profits to criminal sanctions. FAR procedures contain unique and complex requirements for soliciting contract bids, contract performance and contract management. Further, this procurement system employs dispute resolution procedures that are unique within the U.S. judicial system. To complicate matters, the federal system of procurement varies slightly from agency to agency depending on the specific needs and functions to be served. These procedures vary in some significant ways from what international contractors, or contractors with no federal contracting experience, are otherwise used to. B. Key Statutes and Regulations The primary documents setting forth applicable procedures are the Federal Acquisition Regulation (FAR) and individual agency regulations that implement and supplement FAR. Contractors are expected to meet performance standards that include: 1) satisfying customers in terms of cost, quality and timeliness of the delivered product or service; 2) minimizing administrative operating costs; 3) conducting business with integrity, fairness and openness; and 4) fulfilling public policy objectives of the United States. (FAR §1.102) FAR and its agency supplements serve as implementing regulations for more general laws related to procurement enacted by Congress. These laws and regulations include the following: Armed Services Procurement Act, 10 USC §§2301-2323. Federal Property and Administrative Services Act, 41 USC §§251-261. Contract Disputes Act of 1978 (CDA), 41 USC §§601-613. False Claims Act, 31 USC §§3729-3730. Competition in Contracting Act, 10 USC §2304, 41 USC §253. Buy American Act, 41 USC §§10aa, et seq. Federal Acquisition Regulation, 48 CFR Parts 1 through 53 Defense Federal Acquisition Regulation Supplement (DFARS), 48 CFR Parts 201- 253 C. U.S. Government Contracting in Iraq 1. U.S. Government Contracts and Opportunities in Iraq The Coalition Provisional Authority was established by the United Nations as the controlling entity in Iraq until restoration of sovereignty. With the cessation of major hostilities declared on May 1, 2003, the provisional authority began establishing goals for the short term that it hoped would produce a vastly improved economic and political environment within the entire Middle East region. a. The Coalition Provisional Authority's goals were: Security; re-establish operations of basic industries (oil); infrastructure maintenance, repair and development; re-establishing civil institutions. b. U.S. government contracting agencies active in Iraq: i. United States Agency for International Development (USAID): USAID oversees the large majority of reconstruction efforts in Iraq. Efforts include repair of electric power systems, water and sanitation facilities, hospitals, schools, roads, bridges, railroads, airports and seaports. ii. Department of Defense (USDOD) and Army Corps of Engineers (USACE): USACE awarded contracts to Kellogg Brown & Root (KBR), a division of Halliburton, for control of anticipated oil well fires, repair and redevelopment of Iraqi oil facilities, and basic services to the armed services. 2. Applicable Law Is U.S. Law Contracts are with U.S. government agencies or are subcontracts of U.S. government contracts. Coalition Provisional Authority Order No. 17: Non-Iraqi, non-resident contractor employees are immune from Iraqi law. D. Competition for Work and Awards 1. Solicitations and Invitations to Bid a. Solicitations: FAR Part 5, Publicizing Contract Actions sets out the policies and procedures for publicizing contracting opportunities and award information. Agencies are required to publicize proposed contract actions through publication of synopses in Federal Business Opportunities, which can be found at www.fedbizopps.gov. FAR §5-201 (d) (1). b. Invitations to Bid: FAR §14.101 (a), Preparations of Invitations to Bid initiates the process of sealed bidding procedures. Invitations must clearly state the government's requirements, and such requirements may not unduly limit the number of qualified bidders for the contract. The invitations to bid then are publicized by distribution to a qualified bidder's list, posting in public places and such other means as might be "appropriate." The invitation to bid will state the date and time of the public opening of bids. 2. Competition Requirements, Method of Contract Award The Competition in Contracting Act, 10 USC §2304 (armed services) and 41 USC §253 (other agencies), requires full and open competition for all government contracts. These requirements are implemented in FAR Part 6, Competition Requirements and DFARS Subchapter B, Competition and Acquisition Planning. These regulations set out the policies and procedures that promote the basic goal: All contracts should be awarded using full and open competition in the acquisition process. a. Sealed Bid Contracts: FAR Part 14, Sealed Bidding sets out the details for this bidding process. It requires that sealed bids be submitted, opened in public and evaluated without discussions before award of the contract. The contract will be awarded to the party whose bid conforms to the invitation and will be the most advantageous to the government, considering only price and price-related factors. b. Competitive Proposal Contracts: When appropriate, Contracting Officers may require that contractor candidates submit to a competitive proposal process rather than submitting sealed bids. FAR §6.401. This process is initiated by an Request for Proposal (RFP). FAR §15.203. The RFP sets forth the government's requirements for the contract. c. Best Value: FAR §2.101 defines this as "the expected outcome of an acquisition that, in the Government's estimation, provides the greatest overall benefit in response to the requirement." This system allows the government to secure the best value for goods and services even if it does not procure these items at the lowest initial price. d. Exemptions from Competition Requirements: 48 CFR §6.302-1 Single Source of Supply: Only one source of the product or services exists. 48 CFR §6-302-2: Unusual or Compelling Urgency, as in time of war. 48 CFR §6-302-3: Industrial mobilization in time of national emergency; establishing engineering or development services for federal educational or research facilities; acquisition of expert witness testimony. 48 CFR §6.302-4: International agreements may supersede the requirement for full and open competition. 48 CFR §6.302-5: When otherwise authorized or required by statute. 48 CFR §6-302.6: When in the interest of national security. 48 CFR §6-302-7: When doing so serves the public interest. 3. Subcontracting Procedures Prime contractors with contracts for more than $100,000 may submit notices of subcontracting opportunities to FedBizOpps. FAR §5.206. 4. Who Qualifies for Contracts a. Qualifications to be a federal contractors apply outside the United States to the extent they do not conflict with local laws. FAR §9.102. b. Prospective contractors must be included in the Qualified Bidders or Qualified Manufacturers Lists relevant to the proposed contract and must be deemed "responsible" (able to perform at the stated bid price) by the Contracting Officer. FAR §9.103. c. Prime contractors are responsible for vetting all subcontractors, but the Contracting Officer also may take on this task when it is in the government's interest to do so. FAR §9.104-4. d. No contractor may be awarded a contract or subcontract if it appears on any U.S. agency's debarment or suspension list unless the head of the procuring agency states compelling reasons justifying continued business dealings between the agency and the contractor. FAR §9.406. E. What Does a Government Contract Look Like 1. Contract Types The type of contract utilized can drastically alter the risks to the contractor. The contract "type" can refer to how the contract is awarded, the type or method of payment associated with the contract, what the government is buying, the method of bidding, or the size of the contract. a. Fixed Price Contracts: Utilized when contract specifications and requirements are sufficiently definite and precise to fairly enforce a bid. b. Cost-Reimbursable Contracts: Utilized when the contract specifications are uncertain or the need is urgent. Cost-plus percentage contracts are forbidden. Cost sharing, straight costs or cost-plus fee contracts are permissible and used. c. Incentive Fee Contracts: Can include guaranteed maximum price contracts under which the government and contractor share in cost savings achieved by the contractor. d. Indefinite Delivery Contracts: Utilized when the quantity of the product or services being purchased is unknown. e. Task Orders: Can be fixed price or cost reimbursable. f. Time and Materials: Rarely used; utilizes a set rate to pay for labor and reimbursement for actual material costs. 2. Form of Government Contracts Government contracts follow a defined format and use many similar or standard clauses. The Uniform Contract Format (UCF) is used for most contracts and solicitations. However, construction contracts are unique and do not necessarily utilize this standard format. Most contracts are organized into four basic sections: a. Schedule: Generally organized as Sections A through H of the contract. Addresses special contract requirements, inspection and acceptance, marking and packaging, deliveries or performance, contract administration, supplies or services, and price or costs. b. Contract Clauses: Generally found in Section I of the contract. c. List of Documents, Exhibits and Attachments: Generally found in Section J of the contract. d. Representations, Certifications and Instructions: Sections L and M of the contract. 3. Key Provisions Miller Act and other bonding requirements. Payment provisions. Differing site conditions. Dispute resolution procedures. Changes. Contract documents (plans and specs). Inspection of construction. Mandatory flowdown clauses in subcontracts. F. Socio-Economic Provisions FAR requirements incorporate numerous policies that are not directly related to performing the work but instead further some other goal of the federal government. These goals generally relate to economic and social political agendas. Such political and socioeconomic regulations include environmental impacts, labor practices, preferences for use of small businesses, occupational safety, drug-use in the workplace, free flow of information, preferences toward American-made products and protection of individual rights, including anti-discrimination policies involving disabled persons and racial and religious minorities. In many cases, the regulations recognize that in other countries with significant economic, cultural and political differences, U.S. social and economic agendas may not be enforceable and may in fact conflict with the greater goal of national security. Many of these policies are not applied to contracts conducted exclusively outside the United States. 1. Non-Applicable Provisions a. FAR Part 19, Small Business Programs: Implements the Small Business Act (15 USC §631, et seq.) and similar statutes relating to promotion of government contracting with small businesses. FAR §19.0 b. exempts foreign contracts completely. b. Labor-related requirements that do not apply outside the United States: Contract Work Hours and Work Safety Standards Act (40 USC §327-333). FAR §22.305 (d). Davis-Bacon Act. FAR §22.403-1. Copeland Anti-Kickback Act. FAR §22.305 (d). Walsh-Healey Public Contracts Act. FAR §22.603. Equal Employment Opportunity. FAR §22.807 (b) (2). Service Contract Act of 1965. FAR §22.1003-2. Special Disabled Veterans. FAR §22.1303 (c) and FAR §22.1310 (a) (1) (i). Workers with Disabilities. FAR §22.1408 (a) (1). 2. FAR Part 23, Environment, Conservation, Occupational Safety and Drug-Free Workplace a. These regulations acknowledge that such adherence may be impossible outside the United States. Aside from international treaties and agreements, Contracting Officers are not required to strictly adhere to some of these regulations when overseeing contracts and projects executed entirely outside the United States. Instead, in some cases they are instructed to use best efforts to ensure that the United States does not abandon the principals of these regulations despite significant differences in cultures and economies around the world. b. FAR §23.2 limits the Contracting Officer's responsibilities to best efforts regarding environmental and conservation regulations otherwise enforced within the United States. "This subpart applies to acquisitions in the United States, its possessions and territories, Puerto Rico, and the Northern Mariana Islands. Agencies conducting acquisitions outside of these areas must use their best efforts to comply with this subpart." 3. Socioeconomic Provisions that Apply to Foreign Acquisitions and Contracts a. FAR Part 24, Freedom of Information Act: Because the records referenced by the act are those held by U.S. government agencies, no exemption is made for contracts or projects undertaken entirely outside the United States. b. Provisions of U.S. law regarding forced or indentured child labor apply to all U.S. contracts, wherever they are located and or performed. 4. FAR Part 25, Foreign Acquisition; Buy American Act (41 USC §§10a et seq.) FAR Subpart 25 implements the Buy American Act and its related provisions. Generally, this provision does not apply to contracts for supplies, construction or services rendered or for use outside the United States.
II.	Fixed-Price Contracts, Subcontracts and Task Orders A. Monthly Progress Payments Are the Norm (FAR §52.323.5) 1. Progress Payment Application Progress is measured by estimated percentage completed. Request is itemized. Work contracted, completed and paid to each subcontractor is reconciled and reported in three steps. Additional supporting data as required by the Contracting Officer is provided. 2. Contractor Certifications The contractor (or subcontractor) must certify that the request is: Only for work performed pursuant to the specifications, terms and conditions of the contract; Payments to subcontractors and suppliers have been made from previous payments received from the government and that timely payment will be made for work covered by the current request; The request does not include amounts intended to be withheld from subcontractors; Certification does not imply final acceptance of the subcontractor's performance. If it is discovered that contractor has over-paid a subcontractor, the contractor must inform the Contracting Officer and pay the government interest on that overpayment. 3. Government's Obligation to Pay Payment normally is made within 14 days after receipt by designated billing office. FAR §52.232-27. Contracting Officers are authorized to withhold payment whenever they do not agree with a payment application or believe the claimed percent completed is overstated. Retainage: 10 percent is the maximum allowed. 4. Final Payment It is paid after: Final acceptance of all work under the contract. Presentation of properly executed voucher. Presentation of release of all claims. B. Compliance with Plans and Specifications 1. If plans and specifications are provided, the contractor must follow plans and specs even when they do not follow industry custom. The contractor is held to strict compliance with all plans and specifications. 2. FAR §52.246-12 provides that the presence or absence of a government inspector does not relieve the contractor of the duty to strictly comply with all terms and conditions of the contract. 3. If plans and specifications are not clear, then the government's interpretation of them is measured against industry standards. C. Direction from Properly Authorized Persons 1. FAR §1.602-1 gives Contracting Officers the sole authority to speak for the U.S. government regarding entering into, administering and terminating contracts and in making related determinations and findings. COs may bind the government only to the extent of the authority delegated to them (usually project- or contract-specific). 2. Other persons may be appointed to oversee and manage the contract on behalf of the U.S. government. However, these people do not have the authority to approve changes to the contract. Unauthorized directives are not binding on the U.S. government. The Contracting Officer may ratify the decisions and directives of unauthorized government officials. D. Grounds for Termination 1. Termination for Convenience Government has very broad rights to terminate for convenience. Rights of parties are established by the clause. Right to exercise is provided by FAR §§49.101 and 49.201. Clause for fixed price contracts is at FAR §52.249-2. 2. Default Termination (FAR Part 49) a. Basis of termination is contractor's failure to perform or failure to proceed with the work. In reaching the decision, the Contracting Officer must review the following factors: Contract terms, laws and regulations. Specific failures and possible excuses. Availability of other sources. Urgency of completion. Effect on other contracts. Impact of termination on advance payments or loans. Other relevant factors. b. Procedures: Government must confer with counsel and technical personnel. Government must issue show cause or cure notice. Government must give notification to surety supplying performance bond. c. Improper termination is converted to termination for convenience. 3. Termination for Fraud or Criminal Conduct FAR §52.222-12, Contract Termination - Debarment provides that any breach of enumerated statutes can be cause for termination and/or debarment. E. Inspection, Acceptance and Warranties 1. Inspection of Work (FAR §52.246-12) a. Purpose is to ensure strict compliance with contract's plans and specifications. b. Government's right to inspect is not a duty. c. Government may inspect at all reasonable times and places before acceptance of the work. d. Inspections or corrective changes directed by inspectors do not constitute either an acceptance of work or an authorized change order or change directive. e. Nonconforming work: Contractor must receive timely notice of rejection. Contractor has right to cure deficiencies. Economic waste is a consideration. 2. Acceptance of Work (FAR 52.246-12 (i)) a. Authority to accept work rests with Contracting Officer. b. Acceptance must be as prompt as possible after completion and inspection. Contracting Officer can accept partially completed work separately from entirety of the contract. c. Acceptance does not require a pre-acceptance inspection. Acceptance can be constructive if inspection is delayed for an unreasonable time. Acceptance of work precludes recovery for patent defects that could have been discovered in a pre-acceptance inspection. d. Exceptions to the finality of acceptance: Latent defects. Fraud and gross mistake amounting to fraud. 3. Warranties a. Protect government from defects for stated period of time. b. Are strictly construed against the government - protection extends only to those defects specifically enumerated in the contract. c. Defects covered by these warranties are the contractor's responsibility to correct.
III.	Contract Changes and Disputes A. Rights When Work Is Added, Deleted or Changed (FAR Part 43.2) 1. Changes Clause This clause provides the basis and authority for added work, specification changes and added technical requirements. They may take the form of unilateral changes ordered by the Contracting Officer, can be express or implied, may result from a specific written directive, or may be negotiated between the contractor and the Contracting Officer. If a disagreement arises between the contractor and the Contracting Officer regarding the scope or price of the change, the contractor has an obligation to accept the change and continue work as changed. Changes may result from disagreements over the meaning of specifications or drawings, defective specs, impossibility of performance, acceleration of work or the government's failure to disclose critical information. They also may result from the RFI process or through the submittal, coordination or shop drawing process. a. The Changes Clause grants authority to the Contracting Officer to make any change in the work that is "within the general scope of the contract." This is broadly construed. b. The Changes Clause addresses different types of change orders: Specifications changes. Changes in method or manner of performance. Changes in government-furnished materials or facilities. Acceleration of the work. c. Constructive changes (actions with the effect of a change) are expressly recognized. d. The contractor has the right to an equitable adjustment - entitlement to an adjustment whenever a change order increases or decreases the cost of or the time required for performance. e. Changes outside the general contract scope constitute a cardinal change, which is a prospective breach of the contract. 2. Procedure for Changes a. Generally: Contracting Officer has authority to order changes. No one else does unless expressly delegated, but unauthorized changes may be expressly or impliedly ratified by the Contracting Officer. Changes may be issued at any time by written order but cannot be issued after final payment. Only minor changes are permitted after substantial completion. b. Initiation of the change order may be by the government or contractor. Contractors issue "Proposed Changes Orders" or PCOs for government approval. c. Once the need for a change is acknowledged, the contractor and government confer, exchange pricing and technical data to define the scope of change, and the agreed adjustment, if any, in contract pricing. d. Bilateral Changes: There is a preference for bilateral change orders (with no reservations of rights). These are fully negotiated in all respects. But, the contractor may not fully understand the total effect of the change order, to the benefit of the government. And, the government usually excludes reservations of rights related to unforeseen costs or delays. e. Unilateral Change Orders: Issued when negotiations break down and time does not allow continued discussions. Contractor merely acknowledges receipt, not agreement with the change order and must perform the work and inform the Contracting Officer that it will seek an equitable adjustment other than what is provided in the directive. f. Constructive Change Orders: When the government acts in a manner that materially changes the work without the benefit of a formal change order. To prove a constructive change, the contractor must establish four factors: The contract's minimum scope of work. The government ordered work outside this scope. The government required the work, and it was not volunteered by the contractor. The additional work increased the time and/or cost to the contractor. g. Notice Requirements: The contractor must inform the Contracting Officer that it interprets written orders or directives as a change order. This gives the Contracting Officer knowledge of the basis upon which a claim is made. The contractor has 20 days from receipt of a change to give notice that the contractor will make a claim for equitable adjustment. Notice exceptions exist but should not be relied upon. That is, notice may not be required when the government knew the basis for the claim or if the claim is considered on its merits by the Contracting Officer. B. Differing Site Conditions Unanticipated site conditions can create a substantial risk to contractors in fixed price contracts. The differing site conditions clause is intended to avoid the need for contractors to insert contingency in their bids to cover this risk. The clause allows for an equitable adjustment when the site conditions as represented by the government differ substantially from those actually encountered. 1. Types of Differing Site Conditions Type I: Subsurface or latent physical conditions at the site differ materially from those indicated in the contract documents. Type II: Unknown physical conditions at the site are of an unusual nature that differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract. 2. Other Applicable Clauses Site Investigation Clause: Provides that contractor has made a reasonable inspection of the site and understands the subsurface tests the government provided with the bid documents. The government is not responsible for contractor's interpolations and guesses based on the subsurface data furnished. Physical Data Clause: Excuses the government from responsibility for the contractor's interpretation of data furnished. 3. Practical Concerns Notice of discovery of differing site condition must be given promptly. Condition must pre-date the contract. Condition can be natural or man-made. Condition must be at the site. 4. Proving a Differing Site Condition Claim Difference must be material. Difference must be "reasonably unforeseeable." Contractor must show its reliance on specifications was reasonable. Contractor must show it was damaged by the differing conditions. Type II requirement of "unusual" nature normally requires expert testimony. C. The Disputes Process 1. Generally: The Contract Disputes Act provides the general procedures for all disputes arising out of contracts with the U.S. government. These claims must be pursued in the Court of Federal Claims or with the Board of Contract Appeals for the contracting agency. Boards promulgate their own procedures for reviewing claims and appeals from Contracting Officer's Final Decisions (COFD). FAR provisions regarding disputes implement the procedures set out in the CDA. 2. Contractor Claims: FAR §33.201 defines claims as written demands for adjustment or money from which a COFD can be issued, coupled with a request for final decision. Claims must be certified if for more than $100,000. 3. Contracting Officer's Final Decision: a. The Contracting Officer must issue a decision on a formally submitted claim within 60 days or within a reasonable time. Failure to do so is a deemed denial of the claim. b. No suit may be brought in court or before an agency board unless and until the Contracting Officer has issued a final decision regarding the contractor's claim. 4. Appeals of COFDs to agency boards must be made within 90 days and to the Court of Federal Claims within a year of the COFD. D. Pricing Claims and Adjustments 1. General rule: Damages are limited to economic losses. 2. Proof for equitable adjustments: Costs claimed must be reasonable. Causation must be established between events giving rise to claims and costs incurred. 3. Methods of claim calculation: Actual Costs. Cost estimates. Total cost. Modified total cost. Equitable adjustment. Jury verdict. 4. Elements of construction damages: a. Labor costs: Direct labor. Cumulative and ripple effect claims. Escalation in wage rates. Inefficiency. b. Equipment costs. c. Material costs. d. Field office overhead. e. Profit. f. Interest. g. Additional bond premiums. h. Attorney fees and legal costs.
IV.	False Claims Act (31 USC §3729) A. Generally The original False Claims Act was enacted to protect the government against suppliers and contractors engaging in illegal practices such as price-gouging, fraud and supplying defective materials to the Union Army during the Civil War. The act was rewritten in 1986 and still bears many of the hallmarks of the original statute. The statute is unique in that, through its qui tam provisions, the act authorizes third parties to bring actions against a violator in the name of the U.S. government. B. What Constitutes a False Claim Any voucher or invoice seeking a payment by or negating the obligation to pay the U.S. government is considered an "actionable claim." This can include the failure to disclose information as well as false statements or claims to the government for the purpose of obtaining benefits or payments or to avoid paying an obligation. 1. Categories of False Claims: a. Mischarge: Includes claims for goods and services that were not provided in the manner set forth in the claim. For example, a contractor knowingly submits an invoice for undelivered goods or services. b. Fraud in the Inducement or False Negotiation: Includes bid rigging and collusion in the bid process, either with other contractors, subcontractors, contracting officers or other government representatives. c. False Certification: Includes falsely claiming facts as true when they are not for the purpose of qualifying for government benefits or set-aside programs. Might include falsely asserting qualification as a minority- or woman-owned business or small business. d. Products or Services: Includes providing an inferior substitute for an item required by the contract. e. Reverse False Claim: Taking actions to falsely avoid an obligation to the government. 2. Intent to Defraud Is Not Necessary: The act does not require specific intent to defraud the government for liability to attach. Rather, the act states that a person is liable if the following are true: a. The person has actual knowledge of the information. b. Acts in deliberate ignorance of the truth or falsity of the information; or c. Acts in reckless disregard of the truth or falsity of the information. 3. Corporate Intent Some court decisions relating to corporate violators hold that employees with knowledge of the information must have intended the corporation to benefit from the false claim. The government has successfully challenged this limitation in a few cases. C. Penalties and Remedies 1. Civil Penalties, Damages: For each offense, the act provides for a $5,000 to $10,000 penalty plus costs incurred by the government to bring the action plus treble damages for the actual losses suffered by the government. 2. Mitigating Factors: Penalties are reduced when the person or entity violating the act fully cooperates with the government's investigation, discloses all relevant information known within 30 days of the violation, and no criminal or civil prosecution had been initiated or "known" to the person at the time of disclosure. 3. Qui Tam Actions: Depending on the level of involvement by the plaintiff, the plaintiff (called a "relator") can receive 15 to 25 percent of the amounts recovered by the federal government.

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For more information about the issues covered in this report, please contact Andrew D. Ness in our Washington, D.C., office at 202-508-4368 or at adness@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.

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