Infotech and the Law

Are You a Government Contractor? Are You Sure?

Devon Hewitt

By Devon Hewitt

The greater Washington region is in the middle of a technology boom, the likes of which is rivaled only by the growth and pre-eminence of Silicon Valley on the West Coast. Technology, however, does have a history in Washington.

Before .com companies littered the landscape, Washington served as the headquarters for myriad government contractors, many of which provided some technology product or service to the government. While those contractors remain in the area, the focus now arguably has shifted away from the government and to commercial business.

And many of these companies now are concerned if they must comply with the labyrinthine rules and regulations associated with doing business with the government. The government's complex contractual and regulatory web still exists and, for some unwary companies, creates a trap.

Even if your company provides only off-the-shelf products or standard shrink-wrapped software and does not sell directly to the government, the company may be subject to certain rules and regulations typically applied to government contractors. The definition of the term "subcontractor" found in various federal regulations provides this link between government and commercial business.

The Federal Acquisition Regulations (FAR) prescribe that many of its government-specific contract clauses be "flowed down" to all subcontractors at any tier of a prime contractor. FAR defines subcontractor to include any "supplier, distributor, vendor or firm that furnishes supplies or services" to or for a prime government contractor or another subcontractor.

The Office of Federal Contract Compliance (OFCCP) regulations, likewise, define subcontractor as any business that provides goods or services that are necessary to the performance of a government contract. A company is considered a government subcontractor and, therefore, subject to federal regulation if it sells software or hardware to another company, which later incorporates it in a product delivered to the government under contract or to a company that relies on such software or hardware in producing a government deliverable.

The extent to which standard government contract clauses are applicable to subcontractors largely depends on the nature of the product and service provided by the subcontractor. Subcontractors providing commercial items are subject to the least amount of government regulation. Commercial items include goods or services that are "customarily used for nongovernmental purposes" and that have been sold to the general public.

FAR states that a prime contractor should flow down only three FAR clauses to subcontractors providing commercial items: Equal Opportunity, Affirmative Action for Special Disabled and Vietnam Era Veterans and Affirmative Action for Handicapped Workers. These clauses reflect the policies set forth in Executive Order 11246, which prohibits government contractors and subcontractors from discriminating in employment and require them to take affirmative action to ensure equal employment opportunity.

The executive order expressly requires government prime contractors to include the anti-discrimination and affirmative action clauses in all nonexempt subcontracts.

What if your company is successful in eliminating all government-specific clauses from its contracts, purchase orders or letter agreements? Unfortunately, the fact that a contract omits any reference to these FAR or similar clauses does not shield a subcontractor from compliance with the executive order. OFCCP regulations state that the executive order requirements will apply to contractors and subcontractors as a matter of law, whether the FAR clauses or other clauses are included in the contract or subcontract.

Your company should be concerned about this matter because OFCCP has announced it intends to survey the pay practices of some 60,000 federal contractors in 2000. OFCCP's discovery of a violation of these equal opportunity and affirmative action requirements could result in serious penalties for a company, including publication of the name of the company and its union; cancellation, termination or suspension of the company's federal contracts; debarment from future contracts; and referral of the company to the Equal Employment Opportunity Commission or the Justice Department for civil and criminal proceedings.

A company's lack of awareness of the applicability of these equal opportunity and affirmative action requirements to its commercial business also could put the company at considerable financial risk.

Devon Hewitt is a partner of Government Contracts at ShawPittman in McLean, Va. She can be reached at devon.hewitt@ shawpittman.com.

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