March 21, 2007

Proposed FAR Amendments Would Impose New Compliance Program Requirements on Contractors

Holland & Knight Alert
David S. Black

The federal government is considering amending the Federal Acquisition Regulation (FAR) to require certain contractors to have a code of ethics, as well as an ethics and compliance training program and an internal control system. The new rule would apply to contracts for non-commercial items with all agencies exceeding five million dollars, with performance periods of 120 days or more.

Any contractor falling under the proposed new rule would be required to do all of the following:

  1. display the agency Office of Inspector General (OIG) Fraud Hotline poster at its U.S. work sites and on the company’s intranet
  2. have a written code of ethics and business conduct within 30 days of award
  3. establish an employee ethics and compliance training program within 90 days of award
  4. establish an internal control system within 90 days of award

The proposed rule states that a company’s employee training program and internal controls should be appropriate for and proportionate to the size of the company and the extent of the company’s government contracts business. Among the requirements of an internal control system are the following:

  • periodic assessments of the company’s compliance policies and procedures
  • internal and external audits
  • an internal hotline for employees to report possible improper conduct
  • disciplinary action for improper conduct

The proposed rule would flow down to subcontracts for non-commercial items that exceed five million dollars. Violations of the rule would be punishable by the withholding of contract payments or the loss of award fee.

The current draft of the proposed rule exempts commercial item contracts or those contracts performed outside the United States from the hotline poster and ethics requirements.

The proposed rule may be found at the Federal Register Online at
. Written comments on the proposed rule are due on April 17, 2007.

Of course, whether or not this rule becomes effective, it is prudent for companies whose business involves federal or state contracts to have comprehensive compliance and ethics programs in place. This is true even for companies with commercial items contracts, such as the GSA schedules. Such programs help contractors to navigate the often complex regulatory procedures governing the performance of and payments received under such contracts. Effective compliance and ethics programs will help to ensure compliance with regulatory requirements and to detect early in the process any failures of compliance. In the event of violations, government audits and/or enforcement actions, compliance programs can help to demonstrate the company’s good faith and lack of fraudulent intent. This can be crucial in reaching fair, appropriate and cost-effective resolutions and settlements with government agencies. Good programs can also help to avoid suspension, debarment or exclusion from participation in government programs and future contracts. In light of the significant and often unallowable costs of defense and investigation, damage to reputation, harm to shareholders or owners, and settlement costs, an effective compliance and ethics program is essential to a government contractor’s success.

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