Better by FAR
New contracting ethics regulations will alter the playing field
- By David Hubler
- Aug 04, 2007
The General Services Administration is nearing completion of a proposed new ethics regulation that will affect all contractors with government contracts and subcontracts worth $5 million or more.
A GSA spokeswoman said some procedural issues remain before the final draft rule is sent for approval to the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council, which drew up the original ethics statute.
Experts say an amended Federal Acquisition Regulation ? the rules that regulate the procurement policies and practices of some 25 federal agencies ? should be issued within the next few months. They advise contractors to prepare for it now.
Under the proposed FAR Subpart 3.10, well-funded and effective ethical compliance programs will become table stakes for winning federal contracts, keeping them and getting paid, said Richard Cellini, vice president at Integrity Interactive Inc., a provider of Web-based risk-management tools and training.
"Contractors are really balanced on a knife edge here because they're damned if they do report wrongdoing and comply with these regulations," he said. "They're also damned if they don't."
The real change, he said, is not that more corporate wrongdoing is going on. It is, rather, that the government is growing far less tolerant of it in the wake of the high-profile corporate scandals of the past few years.
The scrutiny on ethical lapses in business is reflected in the contracting community's support for the proposed regulation.
"We're for it," said Barry Cullen, president at the Contract Services Association. "We think it's important that the industry conducts its business in an ethical manner."
Cullen said CSA has been collaborating with the Acquisition Reform Working Group, an umbrella organization of defense contractor organizations, and "they're supportive of it, too."
CSA is planning to offer some classes on the ethics changes for members and nonmembers, he added.
"The provisions in the new rule apparently are a reaction to the scandals that have rocked the procurement community," David Nadler, partner in the law firm of Dickstein Shapiro, recently wrote in Federal Computer Week. "The [new] rule is consistent with recent legislative initiatives intended to address the standards of conduct for government contractors and to make the acquisition process more transparent."
"Some changes are probably needed," said Mark Amtower, founding partner of Amtower and Co. "But like the Sarbanes-Oxley fiscal disclosure law, we are looking at an area that may 'tax' smaller companies proportionately more, even though the requirements for smaller companies appear less difficult."
Amtower said larger contractors have specialists or can hire them to deal with such developments; small companies usually have generalists who wear more than enough hats.
Even before companies win federal contracts they will be required to show they have a written code of ethics and business conduct, and an ethics and compliance training program for all employees, Cellini said. "For the very first time, ethics and compliance risk management is not just a cost of doing business. It's actually a critical requirement for winning business."
The biggest impact is that the new requirements will be mandatory and apply to all companies, public and private, foreign and domestic, Cellini said.
"Mere window-dressing will not be enough," he said. "They're looking for something much, much more effective."
Cellini said contractors also must have effective controls in place to uncover and correct compliance breaches. "Also, you have to publicize within your company government fraud hotlines," he added. "You have to tell your employees who to call in the government if [they] think [their] company is committing government fraud."
Company ethics compliance programs also must be appropriately well-funded. "The government will look at the size of your business overall and the amount of business you do with the government and demand that you fund [the programs] on a proportionate basis," Cellini said.
That means a company with hundreds of millions of dollars in contracts won't be allowed to spend only a few thousand or even a few hundred thousand dollars on compliance programs. "The new FAR is specific about proportionality," he said.
Also, compliance controls must be effective at detecting wrongdoing and disclosing it to the government, Cellini said. "They expect the whistle to blow."
The government expects a certain amount of contracting wrongdoing, he said, and "the real penalties will be reserved not for people who commit wrongdoing but for people who commit wrongdoing and don't detect it and report it to the government."
Compliance also poses a couple of legal issues. "If you do have a problem and you report it to the federal government, what does that do to the attorney/client privilege?" he wondered. "And what does it do to your Fifth Amendment right not to have to incriminate yourself? Frankly, the government hasn't addressed those properly."
Cellini said the government will monitor the FAR on a "look-back" basis. "All of a sudden the auditors will show up," he said, and ask for proof of compliance from the start of the contract in question. "As with your taxes, they'll impose penalties for the period during which you were noncompliant."
He said those penalties range from serious to severe, from withholding payment to forfeiture of the contract revenue and debarment from future federal contracting.
"As an attorney," Cellini said, "I have represented companies trying to come back after having been debarred, and it's virtually impossible."Associate Editor David Hubler can be reached at email@example.com.