The Small Entity Compliance Guide; A Sheep in Sheep’s Clothing

September 13, 2015

So I’m rummaging through emails and come across a notice of a FAR update and see something called a “Small Entity Compliance Guide.”  “Great,” I thought, “finally someone is trying to get information to small businesses about what they need to do to comply with the various government contracting regulations that get dumped on them from time to time.”  Then I kept looking and, much to my dismay, what should appear but the Federal Acquisition Circular that has been published yea these many years with a new title.  What a disappointment.  Of course, it is entirely understandable. Congress comes along with the ‘‘Small Business and Work Opportunity Act of 2007’’ (buried in the ‘‘U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007’’), without of course increasing any manpower or funding to do any of this.  So what can one expect of an already overstretched agency but to morph something already being done into something that meets the letter of the congressional mandate without actually doing any additional work (other than pasting a new title on the Federal Register notice).  Still, I was disappointed.  A Small Entity Compliance Guide is a great idea.  I hope one day soon we will see one that actually helps a small business.  Until then we’ll just keep searching the internet.


Doing business with the Government: Step Zero.

August 19, 2015

Your business can’t even bid on a federal government contract without registration with the “System for Award Management.” This registration can be done entirely on-line at sam.gov and anyone could do it (well, with minimal computer skills).
That said, I have been surprised, but probably shouldn’t be, that businesses wanting to get into the federal contracting world choose not to do it themselves. There a lot of companies out there that will sell you help with this registration bundled with a lot of marketing services. I have friends with government contract marketing companies and I know they do good work, but it can get pricey for a start-up.
Having done a number of these in the last few months, I have decided that I and my office manager should offer this service as a standalone product for a fixed price. If you are interested, feel free to contact me at jvanhorne@vanhornelaw.com for pricing and more information on the process.


Finessing CICA Redux: Another Attempt by Government IT Offices to Avoid Competition

January 11, 2011

A bit over a year ago, I wrote about an interesting government agency strategy to avoid having to deal with the messiness of “full and open competition.” (See https://vanhornelaw.wordpress.com/2008/09/05/finessing-cica-the-open-ended-support-contract-ploy/) Now it is time to discuss another ploy to avoid the annoyance of competition, the purported standardization determination.

On January 3, 2011, the Court of Federal Claims issued a preliminary injunction against the Department of the Interior’s attempt to standardize on Microsoft’s email system without conducting a competition. After attempting unsuccessfully to interest the Department in its ability to provide an email system for the Department, Google protested various actions of the Department to implement its sole source decision to use the Microsoft product. You can see a copy of the opinion at http://tinyurl.com/4956j5g.

From the opinion, it is pretty clear that Interior had made the decision to standardize on Microsoft some time ago, perhaps as early as 2007. For months, in 2009 and 2010, Google corresponded with and met with Interior officials to pitch its competing product. Up until late 2010, Interior essentially led Google on, claiming that a competition would be held for the Department’s email system. When solicitation documents became public in late 2010, it was finally clear that there was to be no competition and that Interior had made a final, internal decision to go with Microsoft. The actual solicitation was issued only to selected Microsoft resellers to implement the standardization decision.

This is not a new tactic among government IT offices. In 2007, the Department of Homeland Security tried to do the same thing with the acquisition of financial systems software. (See Savantage v. US, http://tinyurl.com/24vj2rg.) Both DHS and Interior set up the actual solicitation so that the real party in interest, the software developer, could not bid on the procurement by making the procured services only for implementation of a sole source designation of the software to be used. This appears to be an effort to simply avoid having to have a competition for the software since IT personal have developed their own preferences for a particular company’s software and choose not to subject that preference to the competitive market place. Obviously, the strategy becomes problematic when the sole source determination fails to meet statutory and regulatory requirements. Secondarily, the strategy also makes it more difficult for the software developer to challenge the procurement.

It would appear that GAO simply will not address this type of procurement law violation because the protester is not, and cannot be, a bidder. The Court of Federal Claims, on the other hand, has repeatedly shown a willingness to address CICA finessing ploys of various types. I assume this is because the two bid protest forums work under quite different jurisdictional mandates. The statutory mandate to GAO in ruling on bid protests is to “determine whether the solicitation, proposed award, or award complies with statute and regulation.” 31 U.S. Code 3554(b)(1). The Court, however, is under a mandate “to render judgment on an action by an interested party objecting to a solicitation by a Federal agency for bids or proposals for a proposed contract or to a proposed award or the award of a contract or any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” 28 U.S. Code 1491(b)(1). What the Court has that GAO does not is jurisdiction over “any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” The Court interprets this third leg of its jurisdictional statute quite broadly, relying on the very broad definition of “procurement” from the Office of Federal Procurement Policy Act, 41 U.S. Code 403(2)(which is mirrored in the FAR at 2.101). See Ramcor Services Group, Inc. v. United States, 185 F.3d 1286, 1289 (Fed. Cir. 1999).

So what is going on here? Why the tendency for this type of ploy to show up in the government IT arena? I would suggest that defining requirements, as would be necessary for a competitive procurement, is really not an easy task. By just getting comfortable and familiar with and then specifying one software product, the requiring office can avoid the unpleasant task of actually articulating what the agency needs. It would appear that procurement officials, perhaps because of a lack of technical expertise, can get snowed by inadequate sole source justifications. This is then compounded with use of all of the IDIQ type contracts available to the contracting officer (e.g., GSA schedule contracts, GWACS, various agency BPAs) which also help disguise the real sole source selection. Since the Savantage decision, and now certainly after the Google decision, it hopefully will be obvious that this particular CICA finessing ploy isn’t all that likely to succeed.


Non-US Contractors Taxed To Pay For 9/11 Medical Benefits

January 3, 2011

The James Zadroga 9/11 Health and Compensation Act of 2010 was signed by President Obama on January 2, 2011. The Act established the World Trade Center Health Program and, among other things, provides for medical monitoring and treatment benefits to eligible emergency responders and recovery and cleanup workers who responded to the September 11, 2001, terrorist attacks.

To pay for the costs of this program, the Act imposes what amounts to a two percent gross revenue tax on “foreign persons” for amounts received as US government contractors for work performed in certain countries. The US Government contracts covered are those for services performed in, or goods produced or manufactured in, any country which is not a party to an international procurement agreement with the United States.

There are several bilateral trade agreements covering government procurement, but the primary multilateral agreement covering government procurement is the World Trade Organization Agreement on Government Procurement. Although the specific countries covered by this definition will most likely be specified in regulations that will certainly be issued to implement this Act, the countries most likely covered are Iraq, Afghanistan, Pakistan, India, central Asia and the Middle East (excluding Israel but including the Persian Gulf countries), and Turkey.

The Act defines “foreign person” as any person other than a United States person. The tax will apply to contracts awarded on or after January 2, 2011.


Protesting in the Nation’s Capital

September 6, 2010

It’s not what you’re thinking. Public protests and rallies, political or otherwise, are a time honored and cherished democratic tradition here in Washington DC, but that’s not the kind of protest I’m talking about.  My interest is the procurement process of the District of Columbia Government and its pre-award dispute process, the bid protest.  I recently had occasion to review this bid protest remedy and here for your education (as opposed to legal advice – since it’s free) is a summary of what I found.

The federal bid protest remedies (at the Government Accountability Office (“GAO”) and the U.S. Court of Federal Claims (“COFC”)) are reasonably well known.  Not as well know is that many state and local public procurement systems also have bid protest remedies of varying degrees of independence and professionalism.  For contractors doing business with the District of Columbia government there is a bid protest remedy at the DC Contract Appeals Board (“CAB”).  The CAB bid protest has many similarities to GAO and COFC bid protests, but some important differences as well.

Here’s what you need to know: Protests are possible against most but not all DC Government entities.

Only “aggrieved parties” can protest.  “Aggrieved parties” are essentially the same as “interested parties” under GAO and COFC bid protests.  An aggrieved party is defined as “an actual or prospective bidder or offeror (i) whose direct economic interest would be affected by the award of a contract or by the failure to award a contract, or (ii) who is aggrieved in connection with the solicitation of a contract.”

Timeliness rules are very strict, similar but not exactly the same as GAO.  A protest based on problems with a solicitation must be filed prior to bid opening or the time set for receipt of proposals.  Other protests (essentially post-award protests) must be filed no later than ten (10) business days after the basis of the protest is “known or should have been known.”

There are provisions for an automatic stay of contract performance which can be over-ridden by the agency.  Similar to GAO protests, the agency must file a report and the protestor must file comments.  However, the time frames are 20 days for the report and 7 days for the comments.   The CAB’s decision must be issued within 60 business days from the date the protest is filed

As with GAO, a protester can be represented by a non-attorney officer.  Of course, that can result in the protester not having access to confidential agency information. The CAB has a protective order process that allows attorneys and consultants to have access to the confidential information.

Here are some technical details: The DC Contract Appeals Board is the designated forum for hearing and deciding both contractual disputes and bid protests involving the DC government pursuant to the DC Procurement Practices Act of 1985, effective February 21, 1986 (D.C. Law 6-85) (D.C. Code Ann. §§ 2-301.01 to 2-311.02).  The Act applies to all contracts and intergovernmental and interagency agreements for the procurement or disposal of goods and services by executive agencies and employees subordinate to the Mayor.

The Board is composed of Administrative Judges who hear and decide the cases. DC Code § 2-309.08 (“Protest procedures”) and Chapter 3 of the Board Rules provide detailed requirements and rules governing protests of solicitations and awards.

The Board issues written decisions, which are published in the District of Columbia Register (DC Reg).  Full text searches of the Board’s published decisions are possible at the published decisions search page of the CAB website (http://cab.dc.gov).  The CAB has provided for comprehensive electronic filing in bid protest (and other) cases through the LexisNexis File & Serve.

While no bidder should protest frivolously, you may want to think twice about doing so before the DC CAB.  If the Board decides a protest has been frivolous, it can order the protester to pay the agency’s attorney fees (fortunately limited to $100 per hour) and damages for delay of an awarded contract.

Notwithstanding that interesting fillip in the rules, it is good to see that the DC procurement process has a judicial remedy for problems in the award of contracts.


Court of Federal Claims Jurisdiction Over Non-Procurement Protests

January 16, 2010

In a recent Court of Federal Claims decision (Ozdemir v. United States, 19 November 2009), Judge Damich clarified the Court’s jurisdiction over protests of solicitations and awards of contracts other than procurement contracts. In a time when the government is pumping out vast sums for economic recovery through a number of formal vehicles (grants, etc.), this remedy could become increasingly important to those frustrated in their dealings with the federal government.

The Ozdemir case arises from the very first solicitation issued by the Department of Energy’s Advanced Research Projects Agency (“ARPA-E”). This solicitation requested concept papers so ARPA-E could select promising energy-related technologies for research and development funding. To provide this funding, the solicitation identified grants, cooperative agreements and technology investment agreements as the anticipated legal vehicles. Interested parties were required to request an “application control number” by a given deadline. Mr. Ozdemir failed to make a timely request for this number and the agency refused to consider his concept paper when he submitted it.

The government chose to defend against Mr. Osdemir’s protest by moving to dismiss on the theory that the Court did not have jurisdiction because the solicitation did not relate to a procurement. Although the parties argued over whether or not the solicitation related to a procurement (the solicitation included one reference to a procurement instrument), the Court sidestepped this issue to deal with a more fundamental issue, whether the Court had jurisdiction over non-procurement protests.

After concluding that the precedents offered by the government did not support their position that the Court’s bid protest jurisdiction did not extend beyond procurement matters, the Court proceeded to set out two bases for its conclusion that its bid protest jurisdiction extends beyond procurement matters. (Senior Judge Merrow applied similar reasoning in Red River Holdings, LLC, v. United States, July 17, 2009, however, in that case the protest involved a maritime contract, which was clearly a procurement matter, and the parties agreed that the Court had jurisdiction; the jurisdiction issue was raised sua sponte by the Court.)

First, the Court found support in something cleverly called the Last Antecedent Rule (which, it turns out, is rather like the Pirate Code, more of a suggestion than a rule). The Last Antecedent Rule is a rule of statutory interpretation that was explained by the Federal Circuit in Anydrides & Chems. Inc. v. United States, 130 Fed.3d 1481, 1483 (Fed. Cir. 1997) (quoting 2A Sutherland Statutory Construction, 4th ed., § 47.33):

The rules of grammar apply in statutory construction:

Referential and qualifying words and phrases, where no contrary intention appears, refer solely to the last antecedent, which consists of “the last word, phrase, or clause that can be made an antecedent without impairing the meaning of the sentence.”

The government focused on the last phrase of the jurisdictional statute (28 USC § 1491(B)(1)), “in connection with a procurement or proposed procurement,” claiming that this phrase modified the entire sentence. Because there is no comma immediately before this phrase, the Court, applying the Last Antecedent Rule, determined that the phrase modified only the immediately preceding phrase (“any alleged violation of statute or regulation”), not the entire sentence. Thus, the rest of the sentence provides several independent bases of jurisdiction, including a protest against a solicitation for proposals for a proposed contract and a protest against a proposed award. The Court found its jurisdiction in these phrases since ARPA-E had clearly issued a solicitation which contemplated an award.

Also the government argued that “contract” in this context meant procurement contract, relying on the definitions in the Federal Grant and Cooperative Agreement Act (31 USC 6301-08), the Court found this assertion unsupported and held that “contract” in § 1491(b)(1) encompasses a wide range of formal agreements, including grants and cooperative agreements.

The Court also noted that the ARPA-E solicitation clearly contemplated an “award,” giving the Court a second basis for jurisdiction as a protest against a proposed award. This does not seem to me to be as strong a basis for jurisdiction, since at best, Mr. Ozdemir was complaining about a refusal to consider an award to him, not a proposed award to a third party. However, given the Court’s expansive reading of 1491(b)(1) (including the noted “hexadic” use of the conjunction “or”), the idea that one could protest an “award,” without reference to a contract (however defined) and without reference to a solicitation raises some interesting possibilities. Might it cover a financially significant endorsement of a commercial product by a federal agency or federal official that prejudiced a competitor (prejudice being a required element of the Court’s jurisdiction)?

The Court found further support for its reading of § 1491(b)(1) in its analysis of the history of the Court’s bid protest jurisdiction. Specifically, the Court noted that prior to enactment of the current language in § 1491(b)(1) in the Administrative Dispute Resolution Act of 1996 (“ADRA”), the Court had jurisdiction over protests involving award of non-procurement contracts, such as timber sales, and that there is no indication that ADRA in any way was intended to restrict the Court’s bid protest jurisdiction, only to expand it.

Although this decision was not the first since 1996 to recognize the Court’s jurisdiction over non-procurement protests, it certainly is unique in its thorough discussion of the issue, all the more intriguing for having occurred in a pro se case.

My personal perspective is that federal agencies have for some time been looking for creative ways to avoid exposure to bid protests, mostly by using highly complex, multi-agency IDIQ procurement vehicles or by having support contractors doing what would normally be agency procurements. It will be interesting to see, in this environment, how the agencies react to this clear assertion of the Court’s jurisdiction over non-procurement bid protests.


The HR Implications of Privatized War; Putting Employees in Harm’s Way

October 4, 2007

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.


Government Contractors To Be Drafted Into the War on Corporate Misconduct

September 10, 2007

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 Annulment; What You Need To Know About The Anti-Assignment Act While Waiting For The Government Contracts Lawyer To Show Up.

August 1, 2007

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.


CPR For Government Contractors; What To Do Until The Government Contracts Lawyer Shows Up.

April 26, 2007

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.