Keep Your Nose Clean       7

The rules on ethics are extensive and vary somewhat depending on business size. Most of this chapter is dedicated to laying them out. But before we get into the specifics of what constitutes unethical behavior, let’s tackle the cheery subject of consequences.

Suspension and Debarment

Unethical or irresponsible behavior can get you personally, or your company, or both, banned from doing federal business—either temporarily (suspension) or for a fixed period up to permanent exclusion (debarment).

Each agency has a suspension and debarment official within the office of general counsel or the office of the chief acquisition officer. Offenses that grab debarment officials’ attention are criminal convictions or civil judgments for bad behavior connected to obtaining a contract or subcontract or during performance, serious violations of the terms of a government contract or subcontract (including a history of failure to perform, or of unsatisfactory performance), or indeed anything at all, provided that it’s of a “serious and compelling” nature.¹

Any individual or company suspended, proposed for debarment, or debarred is added to a publicly accessible excluded parties list in the System for Award Management (SAM) website, which we first mentioned in Chapter 3. Contracting officers check companies for excluded party status when evaluating proposals and cannot award contracts to any entity on the excluded parties list. Excluded parties also can’t receive new orders under indefinite-delivery contract vehicles or General Services Administration (GSA) schedules. Neither can prime contractors give subcontracts worth more than $30,000 to excluded parties.² In practice, an excluded party can forget about any subcontracting work at all, since prime contractors won’t risk being tainted by association. All divisions and subsidiaries of a company are excluded when a debarment official acts, unless he says otherwise.

A suspension is temporary, pending the completion of a federal investigation, legal proceedings, or agreement to lift it. Suspension can’t last more than 18 months unless legal proceedings have been initiated during that time, in which case the suspension will continue.³ Suspension is usually the first step toward debarment, though plenty of companies have rallied to prevent that outcome.

Debarments can be permanent, although company debarments generally don’t last longer than three years.⁴ Ironically, because the period of suspension can be extended for the duration of legal proceedings, a company’s suspension can last longer than debarment.

The debarment process officially begins with a misleadingly named “notification of proposed debarment.” Misleading, because a notification of proposed debarment has the same effect as a suspension: companies proposed for debarment are prevented from receiving new federal business the moment that debarment is proposed.⁵

Suspension or debarment by one agency has a governmentwide effect. If one agency decides to suspend or debar a company, the rest of the government must follow suit. Agencies can override governmentwide exclusions through a waiver, but they almost never do so.

Whether an individual or a company is debarred as a result of unethical behavior depends on facts and circumstance. There are some violations of federal law that give debarment officials no choice but to act—such as when a company violates the Drug Free Workplace Act or the Service Contract Act (SCA) or doesn’t comply with equal employment opportunity and affirmative action requirements (matters we discuss later in this chapter). But for matters in which debarment officials have discretion, large federal contractors are almost never debarred and are rarely suspended. Should the government ever invoke a suspension over an established large contractor, company executives scramble like crazy to fire people, institute new control measures, bend over backward to meet government demands, and generally contrive to show that the unethical behavior was the work of bad apples and that it’ll never happen again. Smaller and less established companies that aren’t quite as lawyered up or don’t have as many layers of cushioning between the operations and executive sides find it harder to take this course.

Although this looks unfair, it’s wrong only if you confuse suspension or debarment with justice or punishment, neither of which they are. Justice is the purview of the judicial branch, not debarment officials, a point overlooked by those who say suspension and debarment are used too infrequently or too often. Federal officials exclude a company or a person when doing so is in the public interest, for the government’s protection.⁶ That indeed means that large companies with extensive federal business are less likely to be debarred than smaller companies or firms new to the market.

The government interest requirement also means the government can suspend or debar before the government is fully aware of the facts surrounding a case or before a company has received a contract. “You don’t wait until you’ve been victimized. You simply make a judgment that there is a reasonable likelihood that you could be a victim,” said a former debarment official.

When submitting or updating representations and certifications (an annual requirement), companies must disclose whether any company principal has ever been suspended or debarred. A principal is an officer, director, owner, partner, or a person having primary management or supervisory responsibilities within a business entity (e.g., general manager, plant manager, head of a division or business segment, and similar positions).⁷ Any company answering yes would find itself pressed for explanation. “I can’t imagine there is one,” another former debarment official told us. The effect of being individually debarred is being forced to find a new career outside the federal market.

Suspension and debarment can greatly damage your private-sector business and prospects with state and local governments, too. In some state and local jurisdictions, federal action is grounds for automatic debarment at that level of government, too. Where it isn’t, suspension or debarment will still cause local officials to have serious second thoughts about doing business with you. Same with the private sector. Even foreign governments pay attention to which companies the federal government excludes from its marketplace. When debarment officials act, reputations suffer.

An excluded party can challenge suspension or debarment in federal district court, but only on the grounds that the debarment official’s actions were arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.⁸

Government Accountability Office (GAO) and inspector general reports have shown that some excluded companies continue to receive government contracts even after being suspended or debarred. This should be no comfort to a company facing exclusion; counting on falling through the enforcement cracks is no business plan. It’s also in itself grounds for debarment. More than one company, after having resolved the original grounds for its suspension, then got debarred for accepting business when it shouldn’t have.

Basic Ethics Requirements

So now that you’ve seen the consequences of being bad (or being perceived to be bad, which amounts to the same thing), let’s get on to the actual stuff of good and bad behavior and how to avoid crossing into the latter. Unfortunately, thanks to beefed-up regulations, it’s possible to inadvertently fall into an ethics quandary despite having nothing but the law at heart.

A basic example of good behavior the government expects from all its contractors is proactive disclosure of employee behavior involving fraud, a false claim, conflict of interest, or payment of a bribe or gratuity.⁹

Evidence of such behavior must be disclosed in a “timely” manner—basically as soon as the company has an understanding of the facts. The disclosure requirement remains in force for three years after final payment. In other words, the federal government requires you, on pain of possible debarment, to inform on your company and to be prepared to do so retroactively.

Companies with a contract—or a subcontract to a federal prime—worth more than $5 million and that lasts 120 days or more must have a written code of business ethics and conduct in place within 30 days after the contract award.¹⁰ All holders of a GSA schedule contract—which lasts five years until renewal time—would do best to comply up front, as would any company with an indefinite-delivery contract that lets the government place orders over a 120-day or more period. For contracts below the $5 million/120-day threshold, the ethics code is optional, but highly encouraged.

Companies with contracts or subcontracts worth more than $5 million that last more than 120 days—except for small businesses or companies that possess exclusively commercial-item contracts—must also conduct regular ethics training for staff and set up an internal control system.¹¹ The regulations don’t say what constitutes regular training, so companies must make a decision. Should something indeed go awry and a serious ethics problem emerge, the government will be less inclined to come after you with the heavy guns if you can show them a robust ethics program. If your training consists of distributing a binder containing company policy with the proviso that each employee should read it annually, government lawyers will be far less sympathetic.

Companies—contractors or subcontractors—that meet the thresholds for a mandatory ethics training and control system probably also meet the requirement to display posters with an agency hotline number to report waste, fraud, and abuse. Like ethics training, the hotline poster requirement doesn’t apply to commercial-item acquisitions nor to contracts for work outside the United States, but it does apply to small businesses. But if a company has already implemented a business ethics and conduct awareness program that includes a reporting mechanism, then agency posters aren’t necessary—unless, in an exception to the exception, the contracting agency is the Department of Homeland Security (DHS) or the Department of Defense (DoD), in which case contractors must display a DHS or DoD inspector general fraud hotline poster, regardless.¹²

So far we’ve talked about ethics fairly abstractly. Now’s the time to get into the details about what constitutes ethical behavior. We’ve divided it up into interactions with federal employees, with the government as an institution, with your own employees, and between companies.

Interactions with Individual Federal Employees

As long as public administration has existed, there have been attempts to coax favorable treatment from the people that run it and that, of course, is wrong. Still, it can be difficult to hide away human impulses and treat civil servants as mere incarnations of the commonweal and not as individuals. So there is some soft middle ground between corruption and amiability, albeit not much.

Bribes, gratuities, and gifts

The fact that bribes and gratuities are illegal should be obvious. It’s a criminal offense, and possibly a civil one, to give or offer anything of value to public officials in connection with their official capacity.¹³ That includes direct exchanges or indirect exchanges via a spouse or other connected persons. The line between a bribe and a gratuity is a fine one. When there’s an upfront quid pro quo between the giver and the public official, the exchange is considered a bribe.¹⁴ A gratuity is an exchange made to thank a public official for an act. There need not have been a quid pro quo, but it’s still illegal because the giver nonetheless is rewarding a public official for an official act.¹⁵

It is possible to offer a civil servant a tchotchke or a meal without it being construed as a bribe or gratuity, provided you’re very careful. Private-sector readers of this book are likely to be someone the government, for purposes of ethics regulations, defines as a prohibited source—that is, a person who is (1) seeking official action from a federal agency; (2) does business or seeks to do business with an agency; (3) conducts activities regulated by an agency; (4) has interests that may be substantially affected by performance or nonperformance of the employee’s official duties; or (5) is an organization, a majority of whose members are prohibited sources.¹⁶

A civil servant can accept a gift from a prohibited source without violating the gratuity statute by cleaving to a basic rule known as the $20/$50 exception (and legally known as the de minimis exception).¹⁷ Civil servants may accept unsolicited gifts, but not cash, worth up to $20 at any one occasion, provided that they don’t accept more than $50 worth of gifts during a calendar year from any one source. A company counts as one source. If the gift is worth more than $20, the fed can’t pay the difference and accept it anyway on the grounds that he received only $20 in value. The rules are strict: the fed must reject anything worth more than $20. Following an executive order President Barack Obama signed in January 2009, political appointees must pledge not to accept even de minimis gifts from registered lobbyists or lobbying organizations.¹⁸ In September 2011, the Obama administration proposed extending the lobbyist gift ban to all government employees, but as of this writing in mid-2012 has yet to definitively say whether it’ll do so.

The moment the appearance of a quid pro quo enters under any circumstance, however, the $20/$50 exception is off. All bribes, even cheap ones, are illegal.

“Modest refreshments” offered independently by a prohibited source don’t count toward the $20 or $50 limit.¹⁹ Feel free to ply civil servants with all the soda, coffee, and donuts you think they can consume in a single setting. Items with almost no intrinsic value, such as a cheap plaque or a certificate, also do not count toward the limit.²⁰

The rules about accepting gifts place the burden mainly on feds to refuse. But a company caught systematically handing out too many gifts, even if the gifts aren’t illegal, could have its responsibility called into question and draw attention from debarment officials.

As for how to determine the value of a gift, go by the market value, by which the government means the retail value. How much you paid for an item is not the correct test; it’s how much the fed would have had to pay for an item.

One easy way to get in trouble with the gift limit is to offer free training. If training is bundled with whatever product or service you’ve sold to the government, no problem. However, if you simply want to train feds so they’ll become more familiar with your offerings, that training could be considered a gift, ludicrous as that sounds.²¹

Creative attempts to circumvent the gift-dollar threshold should be out of the question, although companies still sometimes try. One vendor came up with the trick of offering $19 baseball tickets to a standing-room-only stadium section with fine print that if ticket holders felt like watching the game from the company sky box, they could. That sort of bullshit can get you banned from doing federal business.

Things get hazy when inviting feds to events. Civil servants may be able to attend for free widely attended gatherings open to diverse interests.²² The purpose of a widely attended gatherings must be the interchange of ideas with a variety of individuals. An event attended mostly by your company’s employees does not qualify, not even if there are a few token representatives from diverse interests. However, if food and entertainment is furnished to all attendees as an integral part of a widely attended gathering, feds are allowed to partake.²³ The meal need not be restricted to $20 in value, and the value of the meal and the widely attended gathering itself doesn’t count toward the annual de minimis gift limit. If you invite a fed to somebody else’s widely attended gathering, the fed can’t accept if more than 100 people will likely attend it and a ticket has a market value of more than $350.²⁴ The Obama administration gift ban proposal also prevents political appointees from attending lobbyist-sponsored events, even if they are widely attended gatherings, except for the day on which they’re a speaker or a presenter.²⁵ The administration’s September 2011 proposed extension of the lobbyist gift ban would extend that prohibition to all federal employees—although, again, as of mid-2012, the proposal remains unenacted.

If you happen to be friends with a fed, you are allowed to give him gifts bought with personal funds so long as you’re not attempting to influence him in his official capacity or thank him for an official act.²⁶ But the friendship must be deeper than a connection made through work. All of us have “work friends,” and few of them are actual friends. If an auditor would have even a tentative cause for casting doubt on the authenticity of your friendship, or could find even a loose correlation between the exchange of gifts and favorable treatment, then it’s best not to get you or your friend in the trouble that’s sure to come. Friendship is its own reward.

Job offers

We recommend having a former fed, or many former feds, on the payroll if you’re serious about doing federal business. However, there are good and bad times for approaching them with a job offer. An offer of employment to an actively-employed fed can be construed as a thing of value and so potentially a bribe or gratuity. Making a concerted effort to hire a civil servant whose responsibilities affect your company’s financial interests in exchange for favorable treatment will likely land you in a penitentiary. Former Boeing executive Michael Sears found this out for himself when a federal judge sentenced him to four months in prison and a $250,000 fine in 2005 after he pled guilty to a felony charge for his role in hiring former Air Force official Darleen Druyun. Pushing forward with job talks or actually employing a former fed under unethical circumstances can also lead to civil and administrative actions as well as to debarment.²⁷

Even a casual, noncommittal statement to a fed that someday he should come work for you is treated as a red-alarm event if the fed in question participates “personally and substantially” in a procurement involving your company.²⁸ That fed must immediately decline even the wispiest of job offers without expressing current, or future, or even possible interest.²⁹ Or, if flying in the face of federal mores, he does express interest, he must remove himself from the procurement. Whatever the outcome, the fed must report the job offer to the agency ethics officer.³⁰

When is the right time to approach a fed? It very much depends on the individual and his level of seniority. A way to finesse your approach might be to ask a fed about his general post-government plans—without crossing over into employment-offer territory. Frankly, if you’re simply in the general market for a former civil servant who understands government, you’ll probably find that many are as eager to find you as you are them.

Employing former feds

Once you’ve hired former feds without landing them in an ethics quandary or yourself in prison, you should be aware that there are certain things they can and cannot do. Former feds who willfully break these restrictions court felony conviction—and, by extension, so do company officials who knowingly encourage feds to break post-employment restrictions.

Former feds are banned for life from communicating with their former agency on behalf of another person or organization on matters in which they participated “personally and substantially,” if their intention is to influence events.³¹

The ban extends to any matter in which the former fed had direct and significant involvement, but not anything that the former fed merely knew about or had perfunctory involvement with.

As for what constitutes intent to influence, it’s pretty much any communication outside of routine or factual queries that has as much as a whiff of potential controversy attached to it. The mere physical presence of a former fed at a meeting can constitute intent to influence, even if he stays completely silent. “Sitting in silent judgment” is not a cliché for naught.

The lifetime ban doesn’t apply to behind-the-scenes assistance to a company that seeks to influence the government—with emphasis on behind-the-scenes.³² If the assistance is done in a way that makes the former fed’s involvement common knowledge, it’s no longer behind-the-scenes.

In addition to lifetime bans, there are temporary cooling-off periods. A former fed who was a supervisor can’t communicate with the government with intent to influence on behalf of another person for a period of two years about any matter that fell under his official responsibility during his last year of government service.³³ This is different from the lifetime ban, which requires personal and substantial participation in a matter. In this case, the mere fact that a subordinate was involved with a matter is enough to require the supervisor to stay outwardly silent on the issue for two years.

If a fed had anything substantial to do with source selection for a contract worth more than $10 million, he can’t accept a job with the awardee for a one-year period starting from the award date.³⁴ The restriction applies to any former fed who, at the time of selection of the contractor or the award of a contract to that contractor, served as the procuring contracting officer, the source selection authority, a member of a source selection evaluation board, or the chief of a financial or technical evaluation team. He can accept a job with the awardee if he’s in a division or affiliated company that does not produce the same or similar products or services as contracted for—an exception applicable only to the behemoths of this world.

Similarly, the program manager, the deputy program manager, and the administrative contracting officer overseeing the postaward phase of a contract worth more than $10 million are prohibited for one year from working for the awardee (separate divisions excluded), starting from when they last served in that position.³⁵

Former senior civil servants are subject to a one-year prohibition on communication with their former agency on behalf of another person concerning any matter at all.³⁶ To be senior, a federal employee must have been paid, as of this writing, at least $155,440.50 a year, have held the military rank of brigadier general or real admiral, or have been a presidential appointee.³⁷ Most feds who are a part of the Senior Executive Service (SES) are considered senior; a civilian SESer has the status equivalent of a general or an admiral in the military.

Former “very senior” feds have an even stricter cooling-off period preventing them from communicating not just with employees of their former federal agency for two years, but also with other very senior feds who served during the last year of their employment.³⁸ Very senior feds are almost all political appointees and earn at least $199,700.

Former feds are entitled to an opinion from their agency ethics officer about the applicability of post-federal employment restrictions to a particular job. It’s a good idea for all involved to get such an opinion in advance on the record, just in case any complications should arise. Many former DoD officials, in fact, must get an ethics opinion during the first two years after leaving the department before taking a new job with a defense contractor and must request it at least 30 days before accepting pay from such a company.³⁹ And, again, although it’s the former Defense official’s responsibility to get the letter, a contractor can still suffer for knowingly paying a former official who hasn’t sought the letter, in this case through contract recession, or suspension and debarment.⁴⁰

As for how strictly these rules are observed, the answer is pretty strictly. A 2008 GAO study of former DoD officials’ employment with defense contractors estimated that less than half of 1 percent of former DoD officials “could have been” breaking ethics restrictions.⁴¹

So that’s it for dealing with individuals. We now turn to dealing with the government as an institution.

Interactions with the Government

There’s a lot of confusion about when and under what circumstance the government can talk to companies about its requirements and upcoming procurements. But the law is clear: up until release of a request for proposals, program managers, contracting officers, and other feds are free to talk with industry about their agencies’ needs and future acquisitions. Nothing need be off the table during such talks. By nothing, we mean that acquisition strategy, including proposed contract type, terms and conditions, and acquisition planning schedules; the feasibility of the requirement, including performance requirements, statements of work, and data requirements; and the suitability of the proposal instructions and evaluation criteria are all legitimate topics of conversation. The FAR itself says so.⁴²

In fact, agencies must conduct market research before releasing a solicitation for anything worth more than the simplified acquisition threshold.⁴³ Legitimate market research includes one-on-one discussions with contractors, and the government need not meet with all possible offerors in order to meet with one—which is a common myth inside the government. Nowhere is there a rule requiring the government to schedule meetings with your competitors in order to meet with you in the time leading up to a solicitation.⁴⁴

Only when the solicitation is released do things change. Exchanges of information don’t stop, but they become more formal and regulated. Communication must go through the contracting officer and generally must be conducted in writing.⁴⁵ It’s at this point that the law known as the Procurement Integrity Act swings into action.⁴⁶

The law’s intent is what it sounds like—to ensure that government acquisition is unmarred by corruption. It came into being in the wake of a major late-1980s fraud scandal called Operation Ill Wind, the name of the FBI investigation that uncovered it. In the end, about 70 people were convicted of various crimes, including an assistant secretary of the Navy, a deputy assistant secretary of the Navy, and a deputy assistant secretary of the Air Force. Don’t add your name to that list; the act prohibits knowingly obtaining the bid or proposal information of a competitor—even if the source of that information was a federal employee.

In fact, a rare case of a major company being suspended from federal business was based on allegations that executives at IBM used a competitor’s sensitive procurement information after it was provided to them by officials at the Environmental Protection Agency. The EPA debarment official suspended all divisions of IBM for a week in 2008, lifting the suspension only after IBM withdrew from the competition and made hefty promises of better ethical behavior from that point onward.

Should someone in your company receive a competitor’s bid data—whether willingly or unwillingly—the key is to minimize its spread. The recipient should, by policy, not show the data to anyone else. This can be counterintuitive, since in a typically hierarchical company, corporate policy probably mandates that evidence be forwarded up the corporate chain until it reaches someone with sufficient authority to deal with it on behalf of the entire company. But by sending, say, an email containing competitors’ source selection data up a reporting chain, you make it seem more likely, at least in the minds of contracting officers, that the data has been improperly used, even if your company’s ultimate response is a wholly ethical “We accidently received this and don’t want it.” Competitor data during source evaluation is like plutonium—if someone happens across it, isolate the contamination.

The Procurement Integrity Act also requires that anything necessary for the preparation of a solicitation response that a contracting officer tells one offeror must be told to all potential offerors, so all communication during the source selection period tends to occur via website. This is the likely source of the persistent myth that if the government talks to one company, it must also talk to its competitors—which is not the case when the government is conducting market research or writing requirements. The government is not constantly in source-selection mode.

Interactions with Your Employees

The federal government wants to be assured that its contractors follow two basic human resources practices: that they don’t discriminate, and that they pay nonprofessional service contractors doing work for the government as if they were actual government employees.

Equal opportunity and affirmative action

By law, federal contractors and first-tier subcontractors doing federal business over varying (but low) dollar thresholds must promise to extend equal opportunity (EEO) to and implement affirmative action programs for three groups: minorities and women, veterans, and people with disabilities. Contractors must flow down the EEO and affirmative action clauses in subcontracting agreements and onto purchase orders at the same thresholds that apply to the prime.

Affirmative action plans are not quotas, nor do they require preferential hiring or promotion. In the context of practices required for doing business with the federal government, affirmative action means employment opportunity outreach and reasonable accommodation—but not at the expense of hiring a more qualified individual.

The government requires, when applicable, written affirmative action plans for each company “establishment,” meaning each physically separate office, store, or factory, or a “functional” plan that covers multiple establishments, provided they all pertain to a single autonomous business unit that employs at least 50 people. Functional plans are good for three years at a time. The Office of Federal Contract Compliance Programs (OFCCP), a part of the Labor Department, enforces EEO and affirmative action requirements, mostly through inspections done for contractors who meet the size and contract value thresholds. OFCCP will bother with companies below the threshold values only when there’s a complaint (we’ll get to thresholds momentarily, in sections dedicated to each covered group).

The EEO and affirmative action plan clauses for minorities and women and veterans don’t apply to employment openings that occur outside the United States and its territories when recruiting for those openings is also done outside the United States and territories.⁴⁷

Persistent failure to conform with equal opportunity or affirmative action requirements can result in the Secretary of Labor directing agencies to cancel contracts and also to indefinitely debar a nonconformer. Labor Department–instigated debarments last a minimum of six months and aren’t lifted until the Department is satisfied with company performance.⁴⁸ Evidence of discrimination, we probably need not add, can lead the Justice Department to get involved and cause things to get unpleasant in short order.

Companies and subcontractors that are the potential winners of any federal contract estimated to be worth $10 million or more are subject to a compliance evaluation by the OFCCP.⁴⁹ Subcontractors are subject to OFCCP evaluation only if the subcontract is also worth at least $10 million. Compliance evaluations are supposed to occur before contract award, and you only need go through such a review per establishment or functional unit once every 24 months. After the OFCCP determines that you’re in compliance, it prints the name of the reviewed establishment in a publicly accessible online national registry.

For the evaluation of subcontractors, primes submit to OFCCP via the contracting officer a list of all of their known first-tier subcontractors. In reality, unless OFCPP has had a complaint about one of the companies involved, it’ll defer the evaluation to sometime within the performance period of the contract. A common requirement across programs for all three covered groups (minorities and women, veterans, and people with disabilities) is that a posting listing all employee rights and company obligations be displayed in a place conspicuous to job applicants and employees.⁵⁰ Thankfully, you can order a Federal 5-in-1 Labor Law Poster that covers all Labor Department-required notices, including ones we don’t discuss here (since they also apply to nonfederal contractors), such as those from the Occupational Safety and Health Administration (OSHA).

Another common requirement concerns document retention: personnel or employment records must be kept on file for two years after either a record’s date or the personnel action the record is evidence of, whichever is later. The retention requirement drops down to just a year for companies with fewer than 150 employees or that do not have any government contract worth more than $150,000.⁵¹ Records destroyed (or never created) for reasons other than those outside a company’s control are presumed by the government to have reflected unfavorably on the company.⁵²

A final note is that EEO and affirmative action plan guidance can be different for federal construction and shipping contractors, and we haven’t included specific information for those sectors.

Minorities and women

Government contracts worth more than $10,000 should contain seven standard equal employment opportunity clauses prohibiting the company from discriminating because of race, color, religion, sex, or national origin. (Companies located on or near Indian reservations are allowed to have a stated employment preference for Native Americans, nearness defined as a reasonable commuting distance.⁵³) Primes are required to flow these clauses down to subcontracts and onto purchase orders worth more than the same threshold.⁵⁴ If this equal employment opportunity contract language appears in contracts worth less than the threshold, the government doesn’t enforce it—although, obviously, the lack of enforcement isn’t permission to discriminate.

The clauses are published in Title 41 of the Code of Federal Regulations (CFR), Section 60-1.4(d), and in FAR 52.222-26(c); they can be incorporated by reference to the CFR rather than being physically present in each contract.⁵⁵ Companies covered by the EEO clauses must file by the end of each federal fiscal year (i.e., by September 30) an EEO report, conveniently known as an EEO-1.⁵⁶ Signing a contract with the clause permits OFCCP to conduct on-site investigations and inspect company records.

Firms with 50 or more employees that have a federal contract, subcontract, or purchase order from a prime worth $50,000 or more also must have in place a written affirmative action program for minorities and women within 120 days of getting the contract.⁵⁷ This is known as the 50/50 threshold. If you have a particular establishment with less than 50 employees, but your company falls above the 50/50 threshold, you can make a plan for that single establishment anyway, or roll up that establishment’s plan into a program of the personnel function at the location that supports the establishment or in the program that covers the company official to whom the establishment reports.⁵⁸

In the main, the affirmative action plan requires a comparison of your company’s workforce job groups with the percentage of qualified minorities or women within a reasonable recruitment area.⁵⁹ Data sources to determine the laborpool availability of qualified minorities and women include census data, state employment service data, and graduation data from applicable training institutions. The figures should include minority and women employees who could be promoted, transferred, or trained in under a year.⁶⁰

If the percentage of minorities or women employed by your company is less than labor pool statistics suggest would be a reasonable level, your company must then establish a placement goal to measure progress in hiring, promoting, or training minorities through proactive outreach. Setting up a placement goal is not an admission of discrimination.⁶¹ There can be a placement goal for all minorities, or, if there’s a disparity in the employment of one group, for a particular minority.⁶²

Again, placement goals do not trump merit selection. The regulations specifically note that affirmative action for minorities and women does not require hiring an unqualified person or a less-qualified person.⁶³ Working under a goal does require development of an internal audit and reporting system to measure the effectiveness of the program.⁶⁴

Veterans

All contracts, subcontracts, and prime purchase orders worth $100,000 or more also should include 11 equal employment opportunity clauses regarding veterans. These clauses are published at 41 CFR 60-300.5(a) and FAR 52.222-35(b). The clauses can be incorporated by reference to the CFR rather than physically incorporated.⁶⁵

Veterans EEO requirements oblige companies to list employment openings available at the time the contract starts and that occur during its performance—whether or not they are generated by the government contract itself, and even if they’re at a different company location (but not at an independently operated affiliate)—with a state workforce agency job bank or local-level equivalent.⁶⁶ Positions for executive and senior management, those that will be filled internally, or those that will last three days or less are exempt from the listing requirement.⁶⁷

Companies affected by the veterans EEO clause must also prepare an annual report, known as VETS-100A, before the end of the federal fiscal year.⁶⁸

In addition, companies with contracts, subcontracts, or a prime purchase order worth $100,000 or more that also employ 50 or more people need to set up a written affirmative action program for veterans within 120 days of a contract award.⁶⁹ The plan requires measures including annual review of personnel policies; reasonable accommodation for the physical or mental limitations of otherwise qualified disabled veterans; recruitment outreach to veterans through organizations such as the Department of Veterans Affairs or state government Local Veterans’ Employment Representatives (LVERS); and installation of an audit and reporting system.⁷⁰

The affirmative action plan for veterans is, as of this writing, the subject of an OFCCP proposed change that would require contractors and subcontractors to establish benchmark goals for hiring covered veterans.⁷¹ Under the proposal, companies would determine their goal by consulting state labor-force participation rates for veterans published on the OFCCP website, but as of this writing it remains unenacted.

People with disabilities

All contracts, subcontracts, and prime purchase orders worth more than $10,000 should include six EEO clauses for qualified people with disabilities. Firms that have a federal contract, subcontract, or purchase order above this threshold also must take affirmative action to hire and promote qualified people with disabilities. The contract clauses are found at 41 CFR 60-741.5(a) and FAR 52.222-26; they can be incorporated by reference to the CFR.⁷²

Only companies with 50 or more employees and a contract worth $50,000 or more need to set up a written affirmative action plan (i.e., companies that meet the 50/50 threshold).⁷³ As with the other affirmative action plans discussed so far, this plan must be in place 120 days after contract award.⁷⁴

As with veterans, the OFCCP has released a proposal that would require contractors and subcontractors to establish hiring goals—in this case 7 percent.⁷⁵ Like the veterans rule, it remains just a proposal as of this writing.

Final note on EEO and affirmative action

We haven’t listed every EEO or affirmative action plan requirement the government mandates. You’ll probably need within your company a human resources professional who’s able to wade in deeper than we’ve gone here. Since the government requires document retention and an auditing system, you might have to buy some software, too. OFCCP has a telephone service for technical assistance, printed guides on its website, and sample affirmative action plans ready for download. Alternatively, you can outsource development of EEO and affirmative action plans to any number of consultancies and law firms that specialize in this. Just remember, you’ll still be the one on the hook.

Service Contract Act

The SCA is a major headache for most federal contractors, since it involves classifying your affected employees according to a “directory of occupations” maintained by the Labor Department and paying them at least a federally determined, geographically variable prevailing wage plus minimum benefits. Or if the services to be rendered were previously done at the same place by unionized employees with a collective bargaining agreement in place, then your employees must be paid under the terms of the agreement. The law applies to federal contracts worth more than $2,500 and applies to subcontracts at any tier.⁷⁶

For federal IT contractors, the Act is just a minor headache because it mostly doesn’t apply, since excluded from the SCA are executive, professional, and administrative employees and some who do computer-related work.⁷⁷ The act does not consider people thusly employed to be “service workers,” even if their function is to provide services. Nor does the SCA apply to contracts for services performed essentially by not-covered employees that involve minor use of covered service workers.⁷⁸ Even nonprofessional services provided as part of product support are exempt from coverage, provided that the principal purpose of the contract is not to furnish services.⁷⁹

But it’s a headache nonetheless, because despite its near-total irrelevance, you have to know at least enough about it to say why it’s irrelevant and to make doubly sure it is.

In order for professional, executive, or administrative staff not to be considered service workers, they must be paid the princely sum of at least $455 a week (exclusive of, we kid you not, board). Professionals must be engaged in a type of work that requires learning customarily acquired through prolonged study or which requires “invention, imagination, originality or talent.”⁸⁰ Executives must supervise at least two employees, or as many part-time employees as it takes to be the equivalent of two full-timers, and must have the authority to hire or fire other employees, or authority sufficient such that their recommendations over hiring and firing are given “particular weight.”⁸¹ Administrative staff’s duties must be related to the management or general business operations of the employer or customers, and their primary duty must include the exercise of independent judgment, even on matters of significance.⁸²

Computer staff must be paid either a minimum of $455 a week or, if paid hourly, then at least $27.63 per hour. Their work must be directly related to computers; for a computer worker not to be a service worker, he must be a computer systems analyst, computer programmer, software engineer, or something of the like.⁸³

In addition, services for the maintenance, calibration, and repair of office software suites and commercial “automated data processing equipment” (ADPE) are exempt from the SCA.⁸⁴ The government defines ADPE as any equipment or interconnected system or subsystems of equipment “used in the automatic acquisition, storage, manipulation, management, movement, control, display, switching, interchange, transmission, or reception, of data or information.”⁸⁵ Also, nonprofessional services provided under contracts for the maintenance, calibration, or repair of office machines are exempt, provided that the service is performed by the manufacturer or supplier of the equipment, the equipment is sold in substantial quantities to the public, and the service staff is paid the same regardless of whether they service commercial or government customers.⁸⁶ However, many ADPE installation activities are not exempt from the act.

If it looks as if we’ve gone out of our way to be careful when we use the words not covered versus exempt, we have, mostly because you could come across solicitations—particularly for indefinite-delivery, indefinite-quantity vehicles—that include the SCA contractual clause even if the services you plan to offer are not covered.

No doubt you’re thinking that you shouldn’t have to sign a contract that binds you to enforcing SCA when by the terms of the act your employees aren’t service workers—but conversely, since your employees aren’t covered, there’s nothing wrong with promising to enforce it, since it’s unenforceable.

A standalone contract for services exempt from the SCA should have a standard clause spelling out the exemption and a certification from the contractor that the services it provides are exempt.⁸⁷

The possibility remains, of course, that you could come across a solicitation for which you actually would be providing employees who are covered by the SCA. Help desk employees, for example, could conceivably be covered by it. If that’s the case, or if there’s doubt as to whether a particular job rises to the level of a professional, your first stop for additional help might be the Labor Department’s Wage and Hour Division, which enforces the SCA. On its website is a plethora of guides and tools for determining wages under the SCA directory of occupations. At the very least, you should determine how much you’d be paying in wages for that contract against what your ordinary labor rates would be before deciding whether to respond to the solicitation.

Interactions with Third Parties

Probity, as the government defines it, in interactions between companies, whether competitors or allies, is harder to uphold now than it once was. Concerns by Congress about waste, fraud, and abuse have created more laws, more regulation, more readiness in government to view things with suspicion. We’re going to deal with each issue reasonably classified as a third-party interaction, starting with basics and moving into areas of ambiguity.

Anticompetitive behavior

The most straightforward prohibition the government places on private-sector interaction is hardly an unexpected one, since price fixing and collusion are generally illegal everywhere: companies must arrive at their prices independently. They also cannot connive on whether to bid on a particular solicitation in order to ensure that competition is limited or nonexistent.

Some contract types actually require companies to certify that their prices are independently determined. (These include firm-fixed-price contracts and firm-fixed-price contracts with economic price adjustment that are worth more than the simplified acquisition threshold.⁸⁸)

Even when a contract does not specifically require a certificate of independent price determination, evidence that one company somehow used the internal pricing data of another company, whether through collusion or espionage, almost certainly leads to suspension and probably to federal charges. The Air Force kept a 20-month suspension from 2003 to 2005 on three Boeing space units because Boeing used Lockheed Martin documents said to have been brought to it by a former employee of its rival. In 2006, Boeing paid $565 million to settle civil claims and $50 million to resolve criminal inquiries that stemmed from the same charges.

Where things grow complex is in the relationship between manufacturer and dealer. A manufacturer cannot mandate the final price a reseller charges; that’s a clear violation of antitrust law.

Even though manufacturers cannot tell resellers what to charge, there must nonetheless exist an exchange of information between manufacturer and reseller in order for deals to happen, whether in the government market or elsewhere. Because the government is suspicious these days, it might perceive as price setting what are actually ordinary discussions that occur when manufacturers’ and resellers’ sales staffs overlap.

While manufacturers can never mandate a reseller’s price, manufacturers and resellers can discuss generally what they believe to be the customer’s acceptable price point or budget. In order to avoid courting unwanted attention from federal attorneys, those discussions should occur within the context of a systematic channel relationship, rather than through a mess of ad hoc emails between sales forces.

Kickbacks

The Anti-Kickback Act seems straightforward enough. It states that it can be a felony to offer anything of value, whether directly or indirectly, to a prime contractor or a subcontractor for the purpose of improperly obtaining or rewarding favorable treatment in connection with a federal prime contract or subcontract.⁸⁹ Contracts for noncommercial items worth more than $150,000 must carry within them a clause requiring companies to have in place procedures for preventing and detecting kickbacks, such as employee training and declarations of gifts or gratuities received from subcontractors, and audit procedures.⁹⁰

Until recently, it would have been enough for us to have quoted the law, say something about how corruption is the bane of civilization, and move on, since only the unsophisticated or the criminal think that surreptitious suitcases of cash will get you far in federal contracting.

But things recently got more complicated following a wave of lawsuits unsealed in 2007. The suits asserted that a number of technology companies were making kickbacks to third parties in exchange for those third parties placing their products into the hands of government customers.⁹¹ In a nutshell, the suits alleged that manufacturers made payments to companies—system integrators and consultegrators—hired to impartially evaluate technology options for the government. Instead, those integrators allegedly favored manufacturers that agreed, via the terms and conditions of a market alliance, to pay a certain amount each time the government bought their product as a result of the trusted advisor’s recommendation.

Everyone we’ve talked to on all sides of this issue agrees that a company hired to be a trusted advisor should not have any financial interest in the outcome of its advice. Things get muddy, though, if one tries to determine whether the companies in question were hired to be as disinterested and pure as the lawsuits say they were, especially since system integrators and consultegrators, viewed from a certain perspective, are mainly just marketing and sales organizations anyway.

It’s also unclear whether the lawsuits conflated the many roles that large system integrators and consultegrators can assume in government interactions. Such companies can contain reseller units as well as consulting shops unblemished by mercantilism (in the sense of pushing products). If the system integrators themselves have difficulty in firewalling those units apart, that’s a problem, and one we talk about shortly in the section on organizational conflicts of interest. But we’re not convinced that the incentives exchanged through the market alliance agreements were actually kickbacks, since commercial-item manufacturers are legally entitled to offer incentives as an inducement for resellers to sell their products, even when the customer is the government. The exchanges listed in the lawsuits may not have been “improper,” as the antikickback statute says they must be in order for a kickback to have occurred. Some of the language used in the lawsuits betrays a suspicion that any profit made from a government contract is, by its very fact, improper. The issue is also confused by the fact that the Justice Department intervened in many of these cases but appeared more interested in pursuing the named companies for GSA schedule pricing violations than for kickback charges.

The main lesson for manufacturers seems to be to avoid getting into bed with a company hired by the government for its purity as a trusted advisor.

Before entering into a multicompany program, alliance, or agreement, here are some steps to consider. You might want to make a legal representation that as a condition of participation in the multicompany program, an incentive payment or special consideration will not cause an organizational conflict of interest for the receiver by virtue of its contractual relationship with the federal government. Primes should be contractually bound to affirm that they won’t exert improper influence or hold themselves out as capable of exerting that influence. Should any condition change that could alter the validity of those assertions, companies should notify each other immediately.

As with exchanges between companies when discussing price, incentives should be granted within the confines of a documented program. A cashier’s check with a note “Thanks for all the help!” doesn’t look good, in other words—least of all to the Justice Department.

Contingency fees

In addition to the kickback law, there’s a section within the Federal Acquisition Regulation that might as well be titled the Anti-Fixer Rule. It requires companies to swear that they haven’t retained an outside firm to generate federal business on their behalf, with any part of payment contingent on actual delivery of a contract, unless that outside firm is a “bona fide agency.”⁹² An outside firm is “bona fide” when it “neither exerts nor proposes to exert improper influence to solicit or obtain government contracts.”⁹³

Exempted from this swearing of rectitude are contracts for commercial items. They’re exempted not because the law frees commercial-item vendors to sow corruption, but because bona fide agency affirmations require voluminous documentation of dealings with outside firms, and one of the reasons the government buys commercial items is to cut down on the red tape.

Regardless, any company caught paying a fixer will have the kickback law to deal with, and other nasty consequences may come its way, whether or not it has pledged an oath before a contracting officer.

Organizational conflicts of interest

Scenes from a federal contracting world growing stricter about organizational conflicts of interest (OCI): In 2010, Lockheed Martin sold its enterprise integration group, also to private equity. Also in 2010, Computer Sciences Corporation sold off an engineering unit. In 2009 Northrop Grumman sold off TASC, a profitable intelligence community advisory service unit, to private equity investors. A few years earlier, in 2006, Northrop Grumman shut down its information technology reseller unit. Word on the street was that executives grew scared when they learned that their reseller was mostly responding to requirements the company learned about through its government systems integration work.

Lawyers we spoke with said those companies probably could have kept those units and mitigated or neutralized the existing or potential conflicts of interest the units posed to the larger company, but that such efforts would have been overwhelmingly time-consuming and costly because they must be negotiated procurement by procurement.

Case law and federal regulations divide OCI into three types: unequal access to information, biased ground rules, and impaired objectivity.

Unequal access to information occurs when a company’s government work requires it to gain access to nonpublic information and the firm in question then makes use of it for any other purpose other than executing the contract.⁹⁴

Biased ground rules emerge when a company hired to provide systems engineering or technical assistance (known as SETA work), or is hired to draft solicitation specifications for a competitive acquisition, also competes to provide the system for which it’s shaping the requirements.⁹⁵

Impaired objectivity exists when a contractor would be in the position of evaluating its own products or services or those of a competitor’s.⁹⁶

Just as there are three types of OCIs, there are three major ways of resolving them: neutralization, mitigation, and avoidance. Take the distinction between these methods with a grain of salt; it can be tough to spot the difference between, say, neutralization and avoidance.

Mitigation is a company policy put in place to counteract the effects of an OCI from occurring in the present. A company can essentially do two things to mitigate an OCI. First, it can put in place a firewall so that personnel and systems exposed to a conflict are logistically, probably even literally, walled off from other business units of the company. Second, it can also hire an independent subcontractor to perform portions of the work that would create an OCI. Think of the latter option as a double one-way firewall of extra-thick cast concrete.

Avoidance consists of actions to avoid an OCI in the future, such as the government excluding a class of contractors from bidding on work if their participation would create a future OCI, structuring the contract so that a company can see only information that is already publicly available, or contractually excluding from a procurement tasks that would require a contractor to use subjective judgment.

Neutralization occurs when the government concludes that the potential OCI is terminal and that neutralization and mitigation are unacceptable as remedies, so it forbids the performer of one type of work from bidding on another type.

Contracting officers these days are more likely to accept a plan of avoidance than of mitigation. In the past, they might have accepted a mitigation plan that didn’t even technically resolve an OCI but at least gave the appearance of doing so. Today, they’re under more pressure to be tough—hence the recent divestiture activity among major contractors we noted above.

ENDNOTES

1. FAR 9.406-2(c).

2. FAR 9.405-2(b).

3. FAR 9.407-4(b).

4. FAR 9.406-4(a).

5. FAR 9.405(a).

6. FAR 9.402(b).

7. FAR 2.101.

8. 18 USC 706(2)(a).

9. FAR 3.1003(a).

10. FAR 3.1004(a).

11. FAR 3.1004 and 52.203-13(c).

12. DHS: FAR 3.1004(b) and 52.203-14; DoD: DFARS 203.1004(b)(2)(ii) and 252.203-7004.

13. 18 USC 201.

14. 18 USC 201(b).

15. 18 USC 201(d).

16. 13 CFR 2635.203(d).

17. 5 CFR 2635.204(a).

18. Obama, Barack. “Ethics Commitments by Executive Branch Personnel.” Executive Order 13490 of Jan. 21, 2009. Section 1.1.

19. 5 CFR 2635.203(b)(1).

20. 5 CFR 2635.203(b)(2).

21. 5 CFR 2635.202(c)(5).

22. 5 CFR 2635.204(g).

23. 5 CFR 2635.204(g)(4).

24. 5 CFR 2635.204(g)(2).

25. U.S. Office of Government Ethics. Lobbyist Gift Ban Guidance. DAEOgram O-09-007. February 11, 2009.

26. 5 CFR 2635.204(b).

27. FAR 3.104-8(b).

28. FAR 3.104-2(b)(2).

29. 5 CFR 2635.601.

30. FAR 3.104-3(c)(i).

31. 18 USC 207(a)(1).

32. 5 CFR 2641.201(c)(3).

33. 18 USC (a)(2).

34. FAR 3.104-3(d); the felony penalty is specified in 41 USC 423(d).

35. FAR 3.104-3(d); penalty in 41 USC 423(d).

36. 18 USC 207(c).

37. Salary amounts obviously change with inflation. The official rule is that a senior civil servant is anyone paid 86.5 percent of Level II of the executive schedule salary rate. There are three basic salary “schedules” in federal civilian government: the general schedule (which covers the vast majority of federal employees), the senior executive service schedule, and the executive schedule, which is for high-level political appointees.

38. 18 USC 207(d).

39. The rule applies to political appointees, senior executive service civil servants, generals or flag officers, or any DoD employee who was a program manager, deputy program manager, procuring contracting officer, administrative contracting officer, source selection authority, member of the source selection evaluation board, or chief of a financial or technical evaluation team for a contract worth more than $10 million.

40. DFARS 203.171.

41. U.S. Government Accountability Office. Defense Contracting: Post-Government Employment of Former DoD Officials Needs Greater Transparency. GAO-08-485. May 21, 2008.

42. FAR 15.201(c).

43. FAR 10.1001(a).

44. In an attempt to clear up common misunderstandings about federal acquisition, the Office of Management and Budget issued in February 2011 a “myth-busting” memo in which it named belief in a prohibition on individual meetings prior to the issuance of a solicitation as its number one misconception. “There is no requirement that the meetings include all possible offerors,” OMB stated. See U.S. Office of Management and Budget. “Myth-Busting”: Addressing Misconceptions to Improve Communication with Industry during the Acquisition Process. February 2, 2011. Attachment 1.

45. FAR 15.201(f).

46. The Procurement Integrity Act is implemented in FAR 3.104.

47. The territories are Puerto Rico, the Northern Mariana Islands, American Samoa, Guam, the U.S. Virgin Islands, and Wake Island; FAR 52.222-26 (b) for minorities and women; FAR 52.22-35 (d) for veterans.

48. Penalties for nonconformance regarding women and minorities are in 41 CFR 60-1.27(b); veterans, 41 CFR 60-300.66(c); and individuals with disabilities, 41 CFR 60.741.66.

49. 41 CFR 60.1-20(d).

50. FAR 52.222-26(b); FAR 52.222-35(e) and 52.222-36(b).

51. 41 CFR 60-1.12(a); 41 CFR 60-300.80(a); 41 CFR 60-741.80(a).

52. 41 CFR 60-1.12(e); 41 CFR 60-300.80(b); 41 CFR 60-741.80(b).

53. 41 CFR 60-1.5(a)(7). Any company with a stated preference for Native American workers can’t discriminate on the basis of religion, sex, or tribal affiliation.

54. FAR 22.802(a) and 22.807(b); 41 CFR 60.1-1.4(a)(7).

55. 41 CFR 60.1-1.4(d).

56. FAR 52.222-26(c).

57. FAR 22.804-1.

58. 41 CFR 60-2.1(d)(2).

59. 41 CFR 60-2.14.

60. 41 CFR 60-2.14(b).

61. 41 CFR 60-2.16(b).

62. 41 CFR 60-2.16.

63. 41 CFR 60-216(e).

64. 41 CFR 60-2.17(d).

65. 41 CFR 300.5(d).

66. FAR 52.222-35(c).

67. 41 CFR 60-300.5(a)(6).

68. FAR 22.1303 and 41 CFR 60-300.5(a)(10).

69. FAR 52.22-35(b)((3) via FAR 21.1303 and 41 CFR 60-300.40(b).

70. 41 CFR 60-300.44(b); (d); (f); (h).

71. “Affirmative Action and Nondiscrimination Obligations of Contractors and Subcontractors Regarding Protected Veterans; Proposed Rule.” Federal Register 76, No. 80. RIN 1250-AA00. April 26, 2011: 23358-23421.

72. 41 CFR 60-741.5(d).

73. 41 CFR 60-741.40(a).

74. 41 CFR 60-741.40(b).

75. “Affirmative Action and Nondiscrimination Obligations of Contractors and Subcontractors Regarding Individuals With Disabilities; Proposed Rule. Federal Register 76, No. 237. RIN 1250-AA02. December 9, 2011: 77056-77105.

76. FAR 22.1002-1 and 22.1003-1.

77. 29 CFR 213(a).

78. 29 CFR 4.113(a)(3).

79. 29 CFR 4.111(a).

80. 29 CFR 541.300(a).

81. 29 CFR 541.100(a).

82. 29 CFR 541.200(a).

83. 29 CFR 541.400(a).

84. 29 CFR 4.123(e).

85. Federal Standard 1037C.

86. 29 CFR 4.123(e).

87. The certification clause is FAR 52.222-52; the corresponding contractual clause is FAR 52.222-53.

88. FAR 3.103-1.

89. 41 USC 51-58.

90. FAR 3.502-2(i) and 3-502-3.

91. The allegations were first made in qui tam lawsuits filed in 2004 by two litigants named Norman Rille and Neal Roberts.

92. FAR 52.203-5.

93. FAR 52.305-5(b).

94. FAR 9.505-4.

95. FAR 9.505-1 and 9.505-2.

96. FAR 9.505-3.