After extensive delay, the Obama Administration has adopted the Bush Administration’s regulation imposing the e-Verify system on government contractors. The FAR change will now be effective as of September 8, 2009. The final rule of November 14, 2008 (73 Fed. Reg. 67651) remains unchanged. The only change to my blog entry of December 15, 2008 (below) is the new effective date.

Continuing a decades long practice of using government contracts to implement every conceivable social or policy program, usually having nothing remotely to do with the efficiency or integrity of the public contracting process, the administration has just issued a new regulation that requires government contractors to use the Homeland Security Department’s e-Verify system to verify the eligibility of their employees to work in the United States.  The FAR already requires contractors to label ozone-depleting substances, to reduce waste and encourage recycling, to not participate in the international trafficking in persons, and to comply with prohibitions on the importation of goods manufactured with child labor.  Preferences for small businesses and small disadvantaged businesses are so embedded in the procurement system that we no longer think of them as implementing social policies.  So it should not be surprising that the administration wants government contractors to assist in enforcing the immigration laws.

E-Verify is a free, Internet based system operated by the Department of Homeland Security that allows participating employers to electronically verify the employment eligibility of their newly hired employees.  Based on the information provided by the employee on the Form I-9, E-Verify checks this information electronically against records contained in DHS and Social Security Administration (SSA) databases.

The new regulation, which is effective on January 15, 2009, adds a new Subpart 22.18 to the FAR.  Agencies are required to include a new contract clause entitled Employment Eligibility Verification, found at FAR 52.222-54, in contracts that are:

1.     Over $100,000,
2.     Include work within the United States,
3.     Have a period of performance of 120 days or more, and
4.     Include items or services that are not “commercially available off-the-shelf” as defined by the regulation (FAR 22.1803(c)).

The clause requires a contract to do the following:

1.     Enroll as a federal contractor in the e-Verify program within 30 days of contract award, if not already enrolled. The includes signing the e-Verify program MOU (which is not negotiable).
2.     Verify employees “assigned to the contract” as that is defined by the clause within 90 days after enrollment in the program, 90 days of contract award, or 30 days of assignment of the employee to the contract, whichever is later.
3.     Beginning within 90 calendar days after enrollment in the e-Verify program or the date of award, whichever is later, verify all new employees whether or not they are assigned to the contract within 3 business days after the date of hire.

Contractors have the option of verifying all employees hired after November 6, 1986.  Individuals with active security clearances or who have had background checks and credentials HSPD-12 do not have to be verified.  Information on the e-Verify program can be found at www.dhs.gov/E-Verify.

An employee is not considered to be directly performing work under a contract if the employee:
(1)     Normally performs support work, such as indirect or overhead functions; and
(2)     Does not perform any substantial duties applicable to the contract.

Employees subsequently assigned to the contract must be verified within 30 days of being assigned to the contract.

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CICA, the Competition in Contracting Act (41 USC 253 et seq.), requires the government to obtain supplies and services through “full and open competition through the use of competitive procedures.” There are, of course, a number of exceptions to this requirement and sometimes it seems to me that federal procurement officials put more effort into avoiding competition than they put into running an appropriate competition. Agencies appears to have developed a number of ploys to avoid competition involving task order IDIQ contracts, buzzwords like “standardization,” and (today’s entry) the open-ended support contract.

Here’s how it works. The agency finds an IDIQ or schedule contract, a BPA or some similar contractual ordering vehicle (in this case a Government Wide Acquisition Contract (GWAC)) and issue a task order for “support” to a program. Then, with or without the help of the support contractor, the agency decides what the program needs, say IT services or software tools. The support contractor is then directed to go out and buy whatever is needed. Since the purchase is a subcontract, most federal procurement regulations (specifically the requirement for “full and open competition”) do not apply, making it much easier for agency personnel, who activity participate in the selection process, to get what they want without having to worry about messy things like solicitations, source selection evaluations and bid protests. Or so the theory goes.

This was apparently the plan in a case recently decided the by Court of Appeals for the Federal Circuit. (Distributed Solutions, Inc., and STR, L.L.C., v. United States, No. 2007-5145, August 28, 2008) This case involves a procurement of software for the Joint Acquisition and Assistance Management System program (JAAMS), a joint United States Agency for International Development (USAID) and Department of State (DOS) program to develop a common computer platform between the two agencies. In November 2003, a task order was issued to SRA International, Inc. (SRA), under GSA’s Millennia GWAC to provide “technical services and support for information technology purposes.” In June 2005, the agency, assisted by SRA, issued a Request for Information (the June RFI) soliciting sources for “commercial off-the-shelf (COTS) Acquisition and Assistance (A&A) solutions for JAAMS.” After reviewing the June RFI responses, the agency announced that it had decided “to pursue alternative courses of action.” The agency then decided to task SRA with selecting the software vendors, which SRA did first by issuing an RFI of its own (the August RFI) and then making a selection. Two disappointed software vendors unsuccessfully protested to GAO and subsequently to the Court of Federal Claims. Both GAO and the Court treated the protests as nothing more than subcontractor protests, which neither forum will hear.

The Court found that the contractors had standing (i) because they responded to the June RFI, demonstrating that they were potential offerors, and (ii) because they had a direct economic interest, having been deprived of the opportunity to compete to provide the software solution, a contract that could have been worth $10 million. The Court also found that the contractors had alleged a number of non-frivolous statutory and regulatory violations.

This left the key question, whether the complaint alleged statutory and regulatory violations “in connection with a procurement or a proposed procurement.” The Court of Federal Claims jurisdictional statute for bid protests, 28 USC 1491(b), includes three bases for jurisdiction: (I) objections to a solicitation; (ii) objections to an award; and (iii) “any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” The contractors relied on the third basis for bid protest jurisdiction.

The Court, citing RAMCOR Services Group, Inc. v. United States, 185 F.3d 1286, 1289 (Fed. Cir. 1999), noted that the operative phrase “in connection with” is very sweeping in scope. Acknowledging that the bid protest jurisdictional statute (28 USC 1491(b)) does not define either “procurement” or “proposed procurement,” the Court adopted the statutory definition of “procurement” found in the OFPP Act at 41 U.S.C. § 403(2). Under this definition, “procurement” includes “all stages of the process of acquiring property or services, beginning with the process for determining a need for property or services.” Although the Court did not comment on this, the statutory definition from the OFPP Act has been adopted by the Federal Acquisition Regulation. See 48 CFR 2.101.

The recent flap regarding the private security services provided to the State Department by Blackwater has obscured a very important reality about the Iraq war. Since 2000, the number of Defense Department contracts has nearly doubled. Presently the number of civilian contractor employees in Iraq exceeds the number of military personnel there. As more and more services within the military are outsourced, reliance on civilian contractors to support overseas active military operations has increased significantly. As a result, civilian contractor employees face risks once handled entirely by military personnel. In places like Iraq and Afghanistan (and many other places in an increasingly dangerous world), civilian contractor employees face the very real possibility of injury, kidnapping and death. For the sake of these employees and their families, these risks must be addressed by appropriate insurance coverage, something for which Congress has in fact provided.

Federal Workmen’s Compensation Law: Federal law requires all U.S. government contractors and subcontractors to secure workers’ compensation insurance for their employees working overseas. The related statutes include the Defense Base Act, 42 U.S.C. §§ 1651-54 and the Longshore and Harbor Workers’ Compensation Act, 33 U.S.C. §§ 901-50.

The Defense Base Act covers these contractor activities:
• Work on U.S. military bases outside of the United States
• Public work contracts with any U.S. government agency, including construction and service contracts, in connection with national defense or with war activities outside the United States;
• Work funded under the Foreign Assistance Act, if the contract is performed outside of the United States;
• Providing welfare or similar services outside of the United States for the benefit of the Armed Forces, e.g. the USO.
If any one of the above criteria is met, all employees engaged in such employment, regardless of nationality, are covered under the Act. Additionally, the prime contractor is responsible for assuring coverage of subcontractor employees. Three major insurance carriers currently providing Defense Base Act insurance coverage are ACE-USA, AIG, and CAN. A number of companies self-insure.

One problem contractors have faced is that the appropriate clause is often not incorporated in government contracts. Without the contracting officer’s acknowledgement that the Defense Base Act applies, it may be a challenge to get the cost of the insurance recognized in the contract price. Without the clause in the contract, the contractor may be unaware that the statutorily mandated workmen’s compensation insurance should be obtained.

The War Hazards Compensation Act. The WHCA provides benefits to persons covered by the DBA who are injured or killed due to an “armed conflict” in the foreign country where the claimant is working; or who are detained or taken prison by hostile forces. The WHCA provides coverage to employees who would not otherwise be covered because the injuries or deaths were caused by hostile action.

Risk Management: In addition to providing insurance for employees, the contractor needs to take into account the dangerous environment into which it is placing its employees by seeing that the employees, on-site managers and executives are educated as to the risks and the steps that can be taken to minimize those risks. Employees need to know what to expect both physically and mentally and what steps to take in advance, what situations to avoid, what defensive steps can be taken to minimize the danger involved in working in a dangerous environment and what to do if the worst happens. Managers and executive need to know what preventative action to take and what steps need to be taken in the event of an employee’s injury, abduction or death.

Education of this type needs to be provided by individuals and organizations that have on-the-ground, recent experience in these kinds of situations and that can provide practical, timely guidance for employees and for the organization. To get a gritty feel for what is required, see “Staging Security in a Theater of War” by Scott Ast in the Security Management Online Archive (http://www.securitymanagment.com/library/001728.html).

Conclusion: Putting one’s employees into a war zone is a complicated, expensive and stressful activity. Issues are raised with which U.S. businessmen and most government contractors may not be comfortable. Nevertheless, these issues need to be addressed before employees are sent into harm’s way.

This comes under the category of “I’m from Washington and I’m here to help you.” (Which as I am sure everyone knows is quite a joke outside of the Beltway, along with “The check’s in the mail” and “Sure I’ll respect you in the morning.”) Sometime in the next couple of months, a change in the Federal Acquisition Regulation (FAR) will require Contractors, upon award of a government contract over $5,000,000, to have a code of ethics and business conduct and ethics and compliance training program and internal control systems.

Although technically limited in scope, this anticipated requirement has broader implications for government contractors and, if a compliance program is not already in place, will increase the cost of doing business with the government, especially for small government contractors.

The proposed FAR change would require Contractors, upon award of a contract in excess of $5,000,000, to display the appropriate fraud hotline posters during contract performance at contract work sites in the United States. If the contract is in excess of $5,000,000 and has a period of performance in excess of 120 days, in addition to displaying the posters, Contractors will be required to have a written code of ethics and business conduct within 30 days of contract award. Within 90 days of award, the Contractor would also be required to have in place an employee ethics and compliance training program and appropriate internal control systems “suitable to the size of the company and its involvement in Government contracting.”

This requirement will not apply to contracts for “Commercial Items” (see Part 12 of the FAR) or to contracts performed outside the United States. Flow down to subcontracts over $5,000,000 is also required.

The proposed FAR provisions do not explain what constitutes an acceptable code of ethics and business conduct or an acceptable compliance training program. The Contractor’s internal control system is required to “facilitate” timely discovery and disclosure of improper conduct in connection with Government contracts and to “ensure” that corrective measures are promptly carried out. Examples area given as to what should be included in an internal control system:
(i) periodic review of company business procedures;
(ii) an internal reporting mechanism, such as a hotline;
(iii) appropriate audits;
(iv) disciplinary action;
(v) timely disclosure of any suspected violations; and
(vi) full cooperation with any Government investigations or corrective actions.

Even if the new clause is not included in the contract, the FAR will say that Contractors “should have” a written code of ethics and business conduct and an employee ethics and compliance training program and an internal control system. While this may not be an explicit requirement, the government can award contracts only to “responsible” contractors. (FAR 9.103) To be determined “responsible,” a contractor must have “a satisfactory record of integrity and business ethics.” (FAR 9.104-1) So to not have the code of ethics and business conduct, the training program and the internal control system that the FAR says the contractor “should have,” is an invitation to a contracting office to find the contractor to not be “responsible,” which would provide a basis to not make an award.

Of course, businesses of any significant size should already have an effective compliance system. Under the federal sentencing guidelines for organizations, a corporation can alleviate the harshest aspects of its criminal vulnerability by demonstrating that it has put in place an “effective compliance program.” The organizational guidelines criteria embody broad principles that, taken together, describe a corporate “good citizenship” model. While the guidelines do not offer precise details for implementation, they do provide seven key criteria for establishing an “effective compliance program” and identify three additional factors to be considered. Implementing the principles of the guidelines would be a good place to start in meeting the new government contracting requirements. More detail on the sentencing guidelines may have to be a subject of a future commentary.

Although both the proposed FAR provision and the federal sentencing guidelines recognize that a compliance program has to be tailored to the size, structure, context and market of an organization, it still will involve a significant on-going cost of doing business. However, given the negative impact of corporate malfeasance in marketplace, to say nothing of the legal implications, compliance programs are now an establish feature of the business landscape.

Government Contracts CPR Redux: In the first of these short memos we discussed the two circumstances that required an immediate legal response even before the government contracts lawyer hasn’t shown up yet, federal investigations and bid protests. We also promised to address when and how to start an adversarial process with a government customer. Unfortunately, we were side-tracked with client concerns about selling and financing government contracts businesses. This led to the need to explain in detail the federal Anti-Assignment Acts and we decided to pass that explanation on for your amusement.

“Annulling” Government Contracts: Selling to the government or buying or lending to government contracting businesses can be full of delightful traps for the unwary. Today’s curiosities are the Anti-Assignment Acts. If you are a litigator or corporate attorney or represent lenders, you already know what fun it can be to deal with so-called anti-assignment clauses. For the last century and a half, the federal government has had a doozy. Contracts with the federal government assigned in violation of the Anti-Assignment Acts (31 USC 3727 and 41 USC 15} are unenforceable against the government, “annulled” to be precise. But never fear. Thanks to Congress, loopholes abound.

As you would suspect, the problem comes up most often when transferred corporate assets include government contracts and when a borrower wants to use government receivables as collateral. Naturally, each situation has a unique, paper intensive solution. This is the government after all.

The M&A Scenario: When acquired corporate assets include government contracts, the contracts are in some fashion assigned to the buyer. Because of the prohibition against assignment of contracts with the federal government, this can appear to be a problem, but doesn’t need to be. First of all, if you are dealing with a stock purchase and the target corporation remains in existence after the sale, the government generally won’t care. As far as they are concerned, they are still dealing with the same corporation. As a buyer, the government is usually unconcerned who owns the stock. Companies with facility security clearances are an exception; they will know who they are and what a change of ownership means to them. Exon-Florio concerns would raise other ownership issues regardless of the type of acquisition.

On the other hand, if the sale is accomplished by asset transfer or the target corporation is no longer in existence after completion of the transfer, there will be an assignment that is technically a violation of the Anti-Assignment Acts. There is one very simple (and generally unavoidable) way of solving this. Get the government’s consent. The Anti-Assignment Acts do not impact the validity of the assignment as between the assignor and assignee. They are only for the government’s protection and the government, either by consent or implication, can waive that protection.

Now you will find lots of case law to the effect that the Anti-Assignment Acts do not apply where the transfer of the government occurs by “Operation of Law”, e.g., mergers, reorganizations. This precedent is great if you are in litigation but not particularly useful in advising clients entering into an asset sale, assuming they wish to avoid litigation.

The only way to get the government’s express consent to a transfer of a government contract so that the buyer will be acknowledged by the government as being in privity is to enter into an agreement the government calls a Novation. This is a three-party agreement between the buyer, seller and the government. It is an agreement separate from the agreements constituting the sale and its only real purpose is to get the government’s consent to the transfer of the contract (or contracts). The regulations (48 CFR Subpart 42.12) have a “suggested” form of the novation agreement that must be adapted to the situation, but don’t expect contracting officers to agree to depart from this form in any material way. This form isn’t a novation agreement in the traditional sense because it has the seller continuing to guarantee the performance of the contract by the buyer. This guarantee provision needs to be addressed in the agreements between the buyer and seller with appropriate warranties. Consent to transfer of contracts associated with an asset sale is voluntary on the part of the government, but under most circumstances contracting officers will go along with a novation agreement. A refusal by the government to consent to the assignment can also be addressed in the sale agreements. In requesting a novation, you should note the fairly extensive documentation of the asset sale that is required by the regulations.

Financing Government Contractors: Receivables tied to federal government contracts make very attractive collateral. After all, the receivable’s payor is self-defined as solvent, all indications to the contrary notwithstanding. And why not. If the federal government can’t pay its contractors, failure of specific collateral is going to be the least of your client’s problems. But more than being a credit worthy payor, the federal government automatically pays interest on invoices not paid in a timely manner thanks to the cleverly named Prompt Payment Act.

Because of the Anti-Assignment Acts, prior to 1940, banks could not create an assignment that gave them any rights against the government if payments were made to the borrower rather than the assignee. Now, by carefully following the requirements of the somewhat misnamed Assignment of Claims Act and implementing regulations (48 CFR Subpart 32.8), a financing institution can assure that the government will make payments only to the assignee and that the government will be liable to the assignee if payments are misdirected to the borrower.

Assignment of government contract proceeds as collateral is now very doable and routine, but there are lots of ways to mess things up. First, the assignee cannot be just anyone. The assignee must be a bank, a trust company or some other financial institution. For successful assignment of a contract’s proceeds, the contract must provide for payments of at least $1,000 and must not specifically prohibit such assignments. The assignment must be for all proceeds under the contract, be made to one assignee (who can act as agent for multiple sources of financing), and not be subject to further assignment. Also the assignment cannot be merely a security interest in the contract proceeds but must transfer ownership in the proceeds to the assignee. And the assignment is only of the contract proceeds; no privity of contract between the government and the assignee is created.

Now comes the really tricky part where most government contract assignment problems show up: notice. The government must have actual notice of the assignment. By its actions, the government can be held to have waived that requirement, but it is so much cheaper just to make sure notice was received in the first place. The regulations are replete with very detailed procedures to follow in order to provide effective notice. In general notice must be received by the contracting officer, the disbursing office and any surety. There is some good news. Once the payment is received by the assignee, the government cannot recoup it on the basis of any liability of the assignor for any reason short of fraud.

If the government screws up and pays the contractor even though there is a valid assignment in place, the assignee can sue the government to recover the payment (but not for breach of contract), but must go the U.S. Court of Federal Claims to do so.

One final note. Plaintiffs seem to regularly try to sue the federal government on unliquidated claims that have been assigned to them by the real party in interest. As a rule, this won’t work. If a potential plaintiff shows up at your door with a case against the feds based on an assigned claim, you will be in for some heavy lifting if you decide to take the case.

It Looks So Good: Because the U.S. Government buys more than $370 billion of goods and services each year, it is an enticing market for many businesses that have done little or no selling to government agencies. The market for state and local government purchases is of the same order of magnitude. Selling to the federal government is lauded (by the government) as being much easier than it used to be (which is true), so many businesses think that government contracts can’t be all that much different than commercial sales. Like many messages from the feds, this one should be taken with a grain of salt. It is true that selling to the government is much easier than it was even a decade ago; however, the differences are still significant and they can trip up and frustrate a business that is not prepared for those differences. So the odds are that sooner or later a client will call you either with a question about getting a government contract or because it is in trouble with a government contract. This commentary addresses what can be done and what should not be done while waiting for the government contracts expert to arrive at the scene of the crisis.

There are two situations that require an immediate response. Although the details are different, these situations arise in state and local government contracting also.

The Dark Side of Government Contracting. The following situations and their implications will come as no surprise to you, but as you know, they will come as a big shock to the client: The government customer has uttered one of those “fighting words” such as “fraud” or “bribery.” Or the client has gotten a call from the FBI or an agency Inspector General or an auditor. Or equally likely, the client has discovered a situation that may be a serious violation of the rules. This may not happen as often as it did when there were so many more ways for a government contractor to screw up, but the government customer is still the one customer that has its own cadre of policemen and is quite willing to send them after vendors whom they find annoying. Government customers are not like commercial customers who resolve disputes mostly by civil litigation (although the government can do that too).

There are still a plethora of federal crimes intended to prevent vendors from taking unfair advantage of a government customer, so it behooves a government contractor to know the rules and follow them. But that is a topic for future commentary. Beyond that, government contractors are often encouraged to make self-disclosures. This is not necessarily advisable, certainly not before a careful investigation of the facts and analysis of the legal implications of those facts. Because of the multitude of potential investigative agencies, government contractors may also be confronted by investigators who can be less than professional with their methods and allegations. Government contracting is still subject to technical and convoluted regulations; the existence of a regulatory violation, let alone a criminal violation, can be determined only after a careful review of the facts and analysis of the applicable rules. Guilty or not, any businessman must take seriously any assertion by a government customer that an illegal act has occurred or any indication that an investigative agency has developed an interest in the businessman’s activities or any internal disclosure of a potential violation.

Such situations need to be treated like any potential white collar matter, with appropriate limitations on the client’s statements and preservation of evidence and prompt and careful internal investigation covered by privilege. Like other potential white collar situations, the client needs the advice of your white collar expert and your subject matter expert. Prompt but not precipitate action by counsel and the client are the order of the day.

And Even More Possibilities for Litigation: The other situation requiring rapid response is the pre-award dispute. Government contracting is unique in that the failure of the government buyer to follow applicable procurement rules gives rise to judicial and administrative remedies. Clients can find themselves on either side of these pre-award disputes, referred to as bid protests, either protesting an award to a competitor or defending an award to themselves. With these disputes, rapid action is vital to protect the client’s remedies. If a protest is filed within 10 calendar days, contract awards can be withheld or contract performance suspended. Protests may be taken to the procuring agency, the General Accountability Office (formerly known as the General Accounting Office) or the U.S. Court of Federal Claims. Agency and GAO protests must be filed in 10 working days of actual or constructive knowledge of the basis for the protest. We all know that it usually takes a client a week to decide whether to talk to a lawyer. You can do the math. D efending against a protest can also be time critical because the administrative and judicial protest processes move quickly. Deciding whether to protest is not a simple decision. There are both marketing and legal considerations to consider carefully. For large defense contractors dealing with bet-your-company bids, there may be no meaningful choice but to protest. For the typical client dabbling in government contracts, the issue can be difficult and confusing and decisions must be reached under considerable time pressure.

Although bureaucrats are not immune from typical customer emotions, it is important to understand that the government buyer’s motivations are not necessarily those of the usual commercial buyer. When and how to start an adversarial process with a government customer, either during the bidding process or during contract performance, is another topic for future commentary, as are the differences in the marketing and bidding processes in government contracting. Until then, be aware of the two situations that really need a quick response to protect the client’s interests, the threat (or even a hint) of a criminal investigation and the pre-award bid protest process.