The Top Five Things You Should Know About Federal Procurement Law

The federal contracting market is bigger and more diverse than ever. Each year hundreds of billions of contract dollars are awarded to companies for a broad range of services and products.

Commercial contractors can reap significant benefits from transactions with the federal government, but to do so, they must understand the often-complex statutes and regulations governing such transactions. It is also important for commercial contractors to know the government’s rights regarding technology licenses and pricing information

The following five tips will help general counsel advise commercial contractors entering the lucrative world of federal government contracts.

1. The government is not your average commercial customer. The U.S. Government, as a contracting entity, has special rights and privileges that cannot be contracted away, and which make it vastly different from a commercial entity.

For instance, the government may terminate a contract for its own “convenience” (virtually any reason), and the contractor’s remedies are limited to its costs incurred to date and not its anticipated profits.

The government may institute unilateral changes increasing or limiting the scope of work in a contract, and the contractor, except under certain conditions, must continue to perform, and seek an equitable adjustment to the contract price at a later time. In the event of a dispute with the government, the contractor is required to continue to perform.

The government has an agency, the Defense Contract Audit Agency (DCAA), which is specifically devoted to auditing government contracts pursuant to broad auditing rights embedded in the contracts themselves. As a condition to performing a government contract or subcontract, the contractor must comply – and certify its compliance – with a vast array of socio-economic provisions, including affirmative action plans, small- and minority-owned subcontracting plans, and “Buy American” requirements

Finally, government contractors must comply, and in some cases, certify such compliance, with a host of business ethics statutes and regulations, the violation of which could subject them to civil, administrative (suspension and/or debarment), and criminal penalties.

If your company is a subcontractor, it is very important that the prime contractor does not exploit the Government’s broad rights by making them its own. This requires careful diligence in monitoring the form of the government clauses which the prime contractor attempts to flow down.

2. Your company may be a government contractor and not even know it. Being a federal government contractor – and subject to an array of draconian statutes and regulations – does not depend on having a prime contract with the U.S. government. Companies that supply goods and services or perform work for prime contractors (whether under a formal subcontract or P.O./invoice) fall within the web of government contracts laws by means of mandatory and discretionary flow-down clauses in the prime contract, and regulations specifically aimed at subcontractors.

Companies need to be aware of where their products and services are flowing upstream and need to pay careful attention to the boilerplate clauses embedded within their contracts and purchase orders (watch for references to FAR – the Federal Acquisition Regulation – and clauses that begin with 52.XXX). These clauses can subject contractors to unexpected obligations and penalties, which are completely unfamiliar to the commercial world.

3. If your company is selling products or services to the government that it offers for sale in the commercial marketplace, your company gets cut significant slack. In the last 20 years, Congress and federal regulators have streamlined the regulations applicable to contracts for the supply of “commercial items,” which includes products and services. Contractors who may be wary of selling to the government should know that a different set of government contracts clauses, much more similar to the commercial environment, apply when the contractor is selling “commercial items” to the government

Contractors may be able to use their standard commercial clauses in such cases. These are often “deal-breaker” clauses such as warranties and software licenses. Subcontractors should know that often times the laundry list of “flow-down” clauses that the prime contractor customer attempts to jam down their corporate throats are not applicable to the subcontract because the subcontractor is supplying commercial products or services.

4. Beware of the long arm of the government when it comes to supplying technology. Unfortunately, the patent, data, and computer software rights clauses and regulations governing government contracts are dense, confusing, and ever-changing. Compounding the problem is that there is a different set of regulations which apply to defense contracts than apply to civilian agency contracts.

However, the general principle is that if an invention is created or technology (in the form of data or computer software) is produced using government funds (either under a prime contract or flowed down from a prime contract) the government gets unlimited, nonexclusive, royalty-free rights to use it for any purpose, including giving it to your competitors for developing a second source. Your company retains title and rights to use it in the commercial marketplace, but the government gets unlimited access to it to use for any purpose.

However, if your company supplies technology developed at private expense, the government’s rights are much more limited. Moreover, if your company supplies technology that constitutes a “commercial item,” the government’s rights are even more limited (and should be identical to your commercial licensees).

Your company must understand and demand the protections afforded by the clauses protecting pre-existing technology, and properly identify the technology to ensure that it is entitled to such protections.

5. The government sometimes is entitled to your company’s most sensitive financial information on costs and the bottom line. Government contracts come largely in two varieties – cost-plus-fixed-fee contracts and fixed-price contracts.

CPFF contracts require the disclosure of costs incurred in the performance of the contract and are subject to heavily regulated provisions governing which direct and indirect costs are allowable, reasonable and properly allocable to the government contract. Moreover, the contractor’s direct costs and indirect cost pools and rates are routinely audited by the government to determine their appropriateness.

Even fixed-price contracts, including fixed-price subcontracts, in some cases can result in the government requiring the contractor to disclose pricing information under its right to determine whether the fixed price is reasonable.

Daniel J. Kelly is a partner in the government contracts practice group at the law firm of Gadsby Hannah LLP in Boston. He can be reached at [email protected]