What You Need to Know to Do Business With the Federal Government
The United States Federal Government marketplace offers a wide-range of contracting opportunities for companies. From products to services and in just about every form and size you can imagine. But navigating the rules and regulations that come with being a federal contractor or subcontractor can be challenging and increase compliance risk. In this course, we will explore the basics of doing business with the United States federal government and suggest strategies to mitigate compliance risk in dealing with the federal government.
Eric Leonard: Welcome to the wonderful world of government contracting. This is what you need to know to do business with the federal government, brought to you by Quimbee. My name is Eric Leonard and I look forward to spending the next 60 minutes journeying down the rabbit hole of government contract law.
With more than 600 billion dollars in purchases annually, the federal government market alone offers tremendous opportunities. But proceed with caution. With opportunity comes risk, and missteps in the federal government contracting world can come with a hefty price that goes far beyond your financial consequences. But with the right roadmap and guardrails, doing business with the federal government can be a profitable and significant revenue generating endeavor. Now you may ask, what does the US federal government buy? Well, maybe the better question is, what doesn't the federal government buy? From missiles to relocation services to leases, federal government purchasing runs the gambit, but let me stress at the outset. And since we only have 60 minutes, the presentation today will focus on federal contracting. And although the government has a number of other methods at its disposal for spending its dollars, we're going to focus today on federal government contracting.
Other methods include grants, financial assistance programs, cooperative agreements, other transaction agreements, to name a few. But for today, we want to focus on the world of how to do business with the federal government using their contracting authority. This presentation will highlight key risks, issues, and compliance obligations that any company should consider as it contemplates entering into the federal government marketplace. And as you'll hear today, government contracts are subject to unique and complex rules that govern all phases of contracting and performance. Failure to comply with these obligations, many of which generally do not exist in the commercial context, can subject a federal contractor to oversight enforcement as well as monetary and criminal penalties. In addition to discussing these obligations and risks, we will briefly discuss the elements of an effective government contracts compliance program. A compliance program is not a nice to have, but a must have when doing business with the federal government.
And finally I'll offer some suggested strategies for managing compliance risk and obligations for federal contracting. So with that, let's get rolling. Contracting with the federal government, as well as state and local governments, involves a complex web of statutes regulations, executive orders, and contract clauses, all of which create potential liabilities. These obligations and liabilities arise from various federal policies that empower the government to obtain value, shape markets and promote competition. Thus, it's vital for a contractor to understand what it would undertake by partnering with the government. As a threshold matter, a bedrock principle of federal procurement is a requirement that all contracts must be awarded through full and open competition, unless an exception applies. This requirement derives from the competition and contracting act and has significant implications for federal contractors, including potential for bid protest litigation and other challenges to contract awards.
Once a contract is awarded, government contractors and subcontractors are subject to unique compliance obligations, not familiar in the commercial setting. These obligations are based, as I noted earlier, on a variety of sources and sometimes shifting policy objectives. Therefore, a contractor will be need to be prepared to implement appropriate policies and procedures or update their existing policies and procedures where possible to comply with all these unique obligations. When entering the federal marketplace, either as a prime contractor, who would do business directly with the federal government, or a subcontractor that does business directly with a higher tiered contractor, a contractor's personnel will be subject to certain core compliance obligations.
These obligations are designed to promote ethics, integrity, and fairness, and to deter waste fraud and abuse in government procurements. Many of these obligations govern how a contractor's personnel interact with the government customers and partners. Today, we'll talk about a few of these, including prohibitions on bribes, kickbacks, gifts and gratuities in connection with federal contracts and subcontracts, prohibitions on paying contingent fees to secure federal contracts, specific rules to prevent conflicts of interests, rules to protect the integrity of the procurement process, including certain restrictions on disclosure and receipt of procurement related information, restrictions on hiring government officials, laws to prevent inclusive bidding and other competitive conduct and restrictions on lobbying for federal contracts.
These are just a few of the ethics and integrity based obligations imposed on government contractors, but we'll talk about these more a little later. In addition to these core statutory and regulatory obligations, the contractor will be subject to additional contract specific obligations based on the standard contract clauses that may be incorporated into a particular contract or subcontract. Many of these clauses derive from what we refer to in government contracts as the Bible, which is the Federal Acquisition Regulation, also known as the FAR. There are literally hundreds of clauses that could be included in a particular contract, depending on many variables, such as the type of product or service being delivered, the value of the contract and the pricing mechanism. But as we'll talk about later, it's not just the FAR that a contractor has to understand and be familiar with. Federal agencies also have their own subsets of the FAR that will add additional obligations and more specific contracting agency obligations on top of whatever obligations might be found in the FAR contract clauses.
However, federal procurement rules also include a more streamlined set of terms and conditions for certain types of contracts and subcontracts for what we call commercial items. Commercial items are products or services that are sold to the general public. Commercial item contracting derived years ago as an attempt to encourage more commercial companies to do business with the federal government by lowering the compliance thresholds and numbers of contract clauses and obligations that would be flowed down either to the prime contractor or to the subcontractor. We'll talk a little bit later about how commercial item contracting may be a viable and effective way to slowly enter the federal marketplace for contractors that aren't familiar with federal government contracting.
In addition to any contract specific obligations, expansion into the federal government marketplace as either a prime or subcontractor will also subject the contractor to various socioeconomic obligations, including rules regarding payment of wages and benefits to covered employees for certain types of contracts, particularly services and construction, rules that require the use of small business subcontractors and the performance of federal contracts and rules regarding equal employment opportunity and affirmative action. A government contractor or subcontractor also will undertake obligations that will require it to take steps to secure the supply chain. This has been a significant area of focus in the last few years, and the obligations can flow all the way down the supply chain to, not just first tier subcontractors, but all the way down to fifth and sixth tier subcontractors. And you might ask, how do you, as a contractor, ensure that you're securing your supply chain and that your contractors and subcontractors are complying with their obligations?
Well, there's a concept I mentioned earlier called flowdown clauses, flowdown clauses are situations where a higher tiered contractor will pass down or flow down a particular contract clause or provision to a lower tiered contractor to impose that obligation on the contractor. Many times flowdown clauses are flowed down in order to ensure that the higher tiered contractor can comply with its obligations to either its customer or its higher tiered contractor. Typical flowdown clauses can include a wide range of areas. And a couple that we'll talk about today that have been a focus in the last few years of both the president administrations and also regulatory action are the Buy American rules and other country of origin restrictions that effectively prohibit the sale of goods and services from certain countries, and impose requirements that any product that is delivered to the federal government have a certain percentage of its actual work done, done in a American entity or facility.
This imposes significant limitations, particularly for contractors that in their commercial business may rely on foreign facilities or entities to fulfill their requirements. The other area that we'll talk about in the supply chain are the cybersecurity safeguards. And if you've been watching the news lately, you know that cybersecurity is a major issue, both in the commercial space and in the federal contracting space, and will continue to be a significant area of focus. We've seen a lot of regulatory activity in this area and the requirements, particularly the ones arriving from the department of defense, are significant and need to be understood. And in many cases flowed down the supply chain to lower tier contractors. Finally, as a government contractor or subcontractor, a contractor will face the possibility of oversight and enforcement. The government has a wide range of oversight and enforcement tools to ensure compliance. This includes audits and investigations by Congress, the Department of Justice, agency inspector generals, and other agencies.
Penalties for failing to comply with obligations imposed by a government contract or subcontract can be severe, including termination or disqualification from future contracts known as debarment, suspension, or debarment. Damages and financial penalties are also possibilities as well as even criminal penalties and imprisonment. Let me repeat this for a second. This isn't just fines and monetary penalties for violations. For many of these requirements, the penalty can be, go to jail. We'll talk a little bit more about that later, but this certainly gets the attention, or should get the attention, of anyone wanting to enter the world of federal government contracts. So with that baseline, let's dig a bit deeper into the basics of doing business with the US Federal Government. As noted, when a contractor considers expanding into the federal government marketplace, it's really important to start with that bedrock principle that all contracts must be awarded through full and open competition, unless an exception applies. The bottom line here is the government wants to ensure that there's a level playing field for all the competitors that are seeking business with the federal government.
Some of these requirements are relaxed for very small purchases. For instance, for a contractor to pursue smaller purchases under $250,000, and I'll talk about that threshold in a minute. But for any contractor that wants to pursue significant government opportunities over $250,000, it will likely need to either compete for those requirements in response to a specific RFP known as Request for Proposal, or marketed services through a contract vehicle, such as the GSA schedule or similar task order contracts that allow agencies to place orders with limited or no competition. Before we get to that, let's talk a little bit about some of the simplified ways of government purchasing. For micro-purchases, defined as purchases under $10,000, there are streamlined procedures. These acquisitions are generally priced on a fixed price basis and typically ordered using a government purchase card. Agencies are not required to conduct a formal competition when making micro-purchases, but are encouraged to obtain at least three quotes to promote competition to the maximum extent practicable.
But the contract clauses and actual requirements surrounding micro-purchases are very minor. micro-purchases for the most part are not required to include standard contract clauses. Although, the government agency does have discretion to include certain causes if necessary. micro-purchases are still considered government contracts and subject to certain compliance obligations, such as equal employment opportunity and affirmative action obligations to the extent certain dollar thresholds are exceeded. But they also are subject to other requirements that may be broadly applicable to all government contracts, such as for instance, the broad prohibition against purchasing telecommunications equipment from China known as the Section 889 Restrictions. So you have to be careful and make sure you look and see what might apply even to these small micro-purchases.
I mentioned before, the $250,000 threshold. That's known as the simplified acquisition threshold. In addition, purchases of goods and services below the simplified acquisition threshold also are subject to streamline procedures that are somewhat more formal than the micro-purchase threshold requirements. Like micro-purchases, simplified acquisitions may be placed using government purchase cards or purchase orders and do not require formal competition. However, simplified acquisitions must include a limited number of standard contract clauses, and their subject to the same compliance obligations such as equal employment opportunity and affirmative action. Task order contracts, also known as Indefinite Delivery, Indefinite Quantity, or IDIQ contracts, allow agencies to place orders for the delivery of goods or services at agreed upon prices. Task orders can be structured as fixed price, time-and-materials, or cost reimbursement, or some combination thereof. Task order contracts typically include a variety of standard contract clauses depending on the contract type.
Under a single award task award contract, one IDIQ contract is awarded to a single contractor through a competitive process, and task orders are then placed with that selected contractor without further competition. Under a multiple award task order contract, multiple IDIQ contracts, or sort of master contracts, if you will, are awarded to several contractors, and then all task order holders must be given a fair opportunity to compete for the award of an individual task order. So it's important to understand if you're going to pursue a task order contract, figure out early on, is it a single award contract, thus guaranteeing me the task orders placed in the future? Or is it a multiple award task order, which would require future competition to win the task orders? Some task order contracts, referred to as Government wide Acquisition Contracts or GWACs, awarded by certain agencies can be used by any government agency to acquire information technology, products and services. Examples of GWACs include NASA SEWP, GSA Alliant, and NIH CIO-SP3.
So under these larger vehicles, any agency, even if they're not connected to the agency that awarded the task order, I'm sorry, the IDIQ contract, any agency can place an order with a contractor. Similar to task order contracts, the general services administration, or GSA, has what are called Federal Supply Schedule, FSS contracts, also commonly referred to as GSA schedule contracts or multiple awards schedules. These are long term contracts awarded by the GSA that allow any government agency, as well as certain prime contractors and state and local government, to place orders for products or services at pre-negotiated prices. To receive a GSA schedule award, a contractor must prepare a proposal and submit a proposal along with supporting information, and effectively develop a price list depending on whether it's a product or service that can be ordered from by any federal agency. GSA schedules are typically fixed price or time-and-materials, and they do typically include a variety of contract clauses applicable to commercial items. So the scope of contract clause requirement is going to be on the lower end for GSA schedules like commercial item versus a traditional full and open competition award.
GSA schedules cover a wide variety of goods and services, including IT products, industrial products, office supplies, medical supplies, professional services. The total value of goods and services sold through the schedules each year is in excess of $40 billion dollars. For GSA schedule orders over the simplified acquisition threshold, 250,000, agencies are required to conduct a competition among eligible scheduled contract holders. Where the value of a procurement is above the simplified acquisition threshold of $250,000, and the agency's requirements cannot be met through an existing task order under contract, agencies generally must award contracts using full and open competition. Typically, this means issuing a Formal Request for Proposal, or RFP, evaluating the proposal, making an award based on the criteria announced in the solicitation. Typically, either low price, technically acceptable or best value. In certain limited circumstances, a contract can be awarded without competition, also known as a sole source award, including when the requirement can only be met through one source or urgent and compelling circumstances do not allow time to conduct a competition.
However, such contracts are generally of limited duration until the agency can actually conduct the competition. Contracts awarded through full and open competition can be fixed price, time-and-materials, cost reimbursement, or any combination of these types. But regardless of the contract type, the government must determine that the price of every contract is fair and reasonable. Usually adequate competition is sufficient to establish price reasonableness, but the government can require submission of what's known as cost or pricing data, which includes all cost data that could affect the negotiation of the price. In those circumstances, these data must be certified as being accurate, current and complete, and are subject to audit, and could give rise to retroactive liability for defective pricing if the information is not disclosed or is somehow defective. A contractor may also be required to modify its accounting systems to satisfy certain government standards, including the cost accounting standards if the contractor is entering into cost type contracts or submitting cost or pricing data. Finally, contracts awarded through full and open competition typically include a variety of standard contract clauses depending on contract value, contract type and payment type.
Again, the Bible for this information is the FAR, Federal Acquisition Regulation, which can be found at 48 C.F.R. And before we move off contracting methods and marketplaces, I do want to mention one other new and innovative way the federal government is using to make small purchases through what's known as the GSA's eCommerce portal. This is a pilot program that allows federal users to buy directly from online electronic marketplaces. The eCommerce portal is currently in a proof of concept phase. GSA awarded contracts to three portal providers, Amazon Business, Overstock.com and Fisher Scientific. Under the pilot, a limited number of agencies are authorized to purchase through the portal, and all purchases must be under the micro-purchase threshold of $10,000.
GSA has not announced its plan for after the pilot ends, and it could solicit more providers or extend the pilot to more government users. But either way, this is more indicia of the government's attempt to try to emulate the commercial marketplace wherever it can while at the same time, preserving the principles of full and open competition for larger purchases. Under the eCommerce portal program, when an agency purchases from the platform, that order creates a contract between the vendor and the agency. As a result, unlike the typical prime subcontractor relationships that exist in traditional government contracts, including GSA schedules, the platform providers are not considered prime contractors and do not flowdown obligations to the vendors. Instead, the federal agency placing the order through to portal is responsible for incorporating any terms and conditions that apply to the vendor in each separate order. Because the sales are limited to micro-purchase thresholds, there are limited compliance obligations for vendors, as we discussed earlier. However, vendors can still be subject to other requirements, including the Section 889 ones I mentioned earlier.
So as you may have surmised by now, federal contracting is a highly regulated government and governed by numerous statutes regulations and standard contract clauses. In addition to imposing compliance obligations, the regulatory scheme creates risk and uncertainty as procurement rules are frequently used to achieve political or policy goals that can shift with changes in Congress and or the White House. We've seen Congress enact recently numerous statutes on a range of procurement issues from competition requirements, to procurement integrity, to socioeconomic requirements. As I mentioned earlier, Congress has recently been focused on supply chain security and cybersecurity, so expect more developments in those areas. As these statutes are issued, many times regulations will follow to implement the statutory obligations. Some of these statutory changes can be found in defense authorization acts and other acts of Congress or appropriations acts.
The Federal Acquisition Regulation, the Bible for federal contracting, again, is not the only potential source for federal government contracting regulations. The Defense FAR Supplement, DFARS, and other FAR supplements contain detailed rules and procedures that govern how contracts are awarded and administered by that specific agency. In addition to the FAR, they also contain hundreds of possible standard contract clauses that need to be understood, both in the context of the similar FAR clause that may also be incorporated, and independently. Finally, in addition to formal regulations, the president has the authority to issue executive orders related to federal contracting. We've seen a significant increase in the last decade of the use of executive orders to address federal procurement issues, particularly ones that are more difficult to possibly get through as part of legislation. These orders can affect both prime contractors, as well as subcontractors.
For instance, the Biden administration has issued a number of executive orders affecting government contractors over its first 100 days, including executive orders proposing significant changes in the Buy American rules, mandating mask wearing on federal facilities and calling for measures to promote racial equality and combat climate change in the award of federal contracts. We've also seen an executive order recently that increased the federal minimum wage to $15 effective January, 2022. In addition to executive orders that set forth new priorities, we also have seen executive orders from one administration undoing executive orders from a prior administration, further adding to the chaos at times. So don't fall asleep at the wheel on these executive orders because they can have a significant impact in addition to any federal statutory or regulatory obligations a federal contractor might undertake.
Government subcontractors are subject to extensive legal restrictions that are designed to promote ethics, integrity, and fairness, and we mentioned a few of those earlier. But let's talk a little bit about some of the key compliance obligations and restrictions that will affect how a contractor interacts with potential government contract customers and partners to market its products and services to the federal government. There is a statutory restriction on prohibition of bribery and some of these restrictions, including bribery, are rather obvious and hard to argue with. However, the devil's really in the details. For example, federal law prohibits bribing public officials, or employees of a prime contractor or higher tiered subcontractor. The statute defines a bribe as a thing of value given with specific intent to influence an official act or failure to act, influence an official to commit fraud on the US, or to induce an official to violate his or her official duty.
Now, while we all may be aware of the traditional model of bribery of perhaps providing a envelope with cash to a particular official in order to get favorable treatment or influence an official act, in the case law, the definitions of bribery and definitions of things, such as things of value and influencing of official acts, are pretty broadly defined and aggressively enforced by the Department of Justice. A similar restriction is limitations on gifts and gratuities. Federal law prohibits giving, offering, or promising a public official anything of value to a government official subject to certain narrow exceptions. This precludes a company from providing gifts that are common business courtesies in the commercial space, such as complimentary meals, tickets, or rounds of golf. The trick here is understanding and appreciating that these rules for federal contractors diverge significantly in terms of prohibited practices as compared to the commercial marketplace.
In other the words, an activity that may be perfectly acceptable in the commercial contracting situation, such as paying for someone's greens fees or paying for a customer's greens fees, could get a contractor employee a stint in federal prison if done in connection with a federal contract. And again, these rules are aggressively and forced and broadly interpreted. The Anti-Kickback Act prohibits contractors from receiving offering or providing anything of value for the purpose of obtaining or rewarding favorable treatment in connection with the award of a government prime contract or subcontract. Once again, the key is to look at the terms within the statute, anything of value, favorable treatment. These are interpreted very broadly by investigators and the justice department. And if you're a healthcare contractor, there's a separate, even more stringent Anti-Kickback statute that would apply.
Federal law also prohibits and limits company's ability to enter into contingent fee arrangements, including commissions, percentages, brokerages, or other fees that are contingent upon securing a government contract, except for commissions paid to a contractor's own sales employees or to a bonafide selling agent. So while this payment of contingent fees isn't outwardly prohibited, if you've already used such an arrangement in order to secure a government contract, you need to ensure that you meet the requirements within the statute, particularly that the person that is going to be doing the securing is a bonafide selling agent and meets that definition. Once again, what may be common and accepted, or even expected in the commercial world, might just be illegal in the federal procurement world. And this is another area where you'll see that. Contractors and subcontractors are also subject to a web of conflict of interest requirements.
And a lot of these derive from the principle I mentioned earlier which is the goal of the government work with a level playing field for all competitors that are seeking to do business with the federal government. One of these rules is known as the organizational conflict of interest rule. And under that rule, a company can be deemed unable to provide impartial assistance or advice to the government, or the company's objectivity and performance may be impaired, or the company has an unfair advantage due to previous work for the government. In any of these three circumstances, that contractor may be prohibited from pursuing future work, essentially, if that contractor had, let's say, inside information, non-public information, or if that contractor had set the specifications for the bid, or had work involved that went into the setting of the specifications of the bid.
There may be circumstances where that contractor will be prohibited from bidding on the future work. There are also similar conflict of interest rules relating to personal conflicts of interest that need to be understood. But again, it's all about ensuring a level playing field and making sure that one company doesn't have an unfair competitive advantage over another based on the prior work or inside knowledge. Once again, this type of competitive advantage information, or at least opportunities to seek that information, are not unusual in the commercial marketplace. But doing that under a federal government contract and seeking that information to use it and exploit it to provide a competitive advantage is just the type of situation that may end up getting your company precluded from pursuing a future award.
There's also a statute called the Procurement Integrity Act. And under the Procurement Integrity Act, it's unlawful to request or receive government source selection information, which is really government evaluation information or results, or competitor proprietary information, contractor bid and proposals. Once again, this is a very specific rule to federal contracting, and while information and commercial context may be readily available or ascertainable on things like competitor pricing, competitor bids, things of that nature, in the federal government contracting marketplace, that could be a violation of Procurement Integrity Act and carry possibly criminal implications. Federal government contract law also restricts the hiring or even contacting of certain officials about employment, meaning government officials, former government officials, and the law may also may limit the activities that former government officials can engage in after leaving the government. In some circumstances, it's a bar from a certain number of years and participating in a particular procurement or could be even broader than just a couple years or longer than a couple years.
The idea here is to limit the ability of contractors to exploit the relationships and knowledge of former government officials, again, to ensure a level playing field. Finally, there are complexing rules involving antitrust laws that prohibit contractors from engaging in price fixing, sham or courtesy bids, bid rigging, market allocations, or other anti-competitive activities. Federal law also prohibits the use of appropriated federal funds to influence or attempt to influence officials in connection with the award extension or modification of a contract grant, loan, or cooperative agreement. Federal law requires disclosure of lobbying contacts made in connection with government contracts, even if appropriated funds were not used. Okay, so let's take a quick breath. That's a lot. And hopefully at this point, I haven't scared you away from doing business with the federal government. And as you can see, contract of the federal government is no small undertaking and not one that can be done on the fly if you want to remain a viable company.
Trust me, we've seen the bad ending to this movie, and it's not one you want to experience. Keep in mind, these statutes and regulations I've described above are just a few of the myriad statute and regulations that might govern the conduct of federal contractors and their personnel. For instance, if your contract involves classified information, there are additional enhanced security regulations and requirements that would need to be followed to protect the integrity of that information and limit the distribution and dissemination of that information. So it's really, this is just the tip of the iceberg in terms of potential statutes and regulations that a federal contractor must know and abide by when doing business with the federal government. And remember, penalties for compliance can be serious and not to be overlooked. And these penalties don't just include penalties potentially for contractors, but also individual liability.
So how do I stay out of jail and make this federal procurement endeavor a successful one? Well, step one is to have a federal government contracting compliance plan and program that includes training. And when we say compliance plan, we don't just mean a generic code of ethics or plan focused on good business practices, but one focused specifically on federal procurement obligations. The good news is that federal procurement rules provide flexibility to use controls that are suitable to the size of the company and extent of its involvement in government contracting. So there's no one size fits all approach. An effective program will be integrated into a contractor's processes which can be tailored and modified to address the government contract unique obligations that align with likely obligations. At a minimum, a contractor can expect to need to adopt a written code of conduct, implement an ethics and compliance training program, and implement or modify as appropriate, certain internal controls to address unique compliance obligations imposed on government contractors.
Some of these internal controls include the following, standards and procedures to facilitate timely discovery of improper conduct in connection with government contracts. As we'll talk about a little later, government contracts are subject to a unique, mandatory reporting requirement for certain types of violations. If there's credible evidence of a violation of certain criminal statutes or the False Claims Act or a substantial overpayment, a federal contractor may have an [inaudible 00:37:52] obligation to report this to the appropriate authorities. Contractor compliance plans also need to have mechanisms to ensure that corrective measures are promptly instituted and carried out to the extent there is a violation, then a corrective measure is in place. They also must have an assignment of responsibility at a sufficiently high level and adequate resources to ensure effectiveness of the business ethics awareness and compliance program, an internal control system. We refer to this as tone at the top. Any compliance program has to have assignment of responsibility to high level officials within the organization to ensure that the obligations are being met.
And when there is a violation, that it's being addressed at the highest levels within the organization. Plans must also have a process and procedure to screen out principles for conduct that violates the code of conduct. So for instance, if there is an individual in the organization that has committed a violation of federal criminal law, that may be covered under certain exclusion requirements, the plan needs to have a way to ensure that that person will be excluded from a participation. And there also may be requirements in certain circumstances to disclose that violation, whether it's in a representation [inaudible 00:39:17] or through a mandatory disclosure to the federal government contract customer. The plan also must have a requirement to perform periodic reviews of company business practices, procedures, policies, and internal controls for compliance with the contractor's code of business ethics and conduct, and the special requirements of government contracting. This may take the form of compliance audits, training, or some combination thereof, but there needs to be... This has to be more than just a plan on paper.
There also needs to be an internal reporting mechanism, a hotline, to let employees confidentially report suspected improper conduct. There also must be policies and procedures that will discipline employees who violate the code of conduct or applicable law, setting forth standards and expectations so that it's understood that if there is a violation, it will be dealt with swiftly and strongly, is highly recommended. Finally, I mentioned our earlier mandatory disclosure, there also must be a process to disclose the improper conduct to the government whenever there is credible evidence of improper conduct. So your plan needs to not only function as a method for disclosing improper conduct when there's credible evidence, but also make it clear what that process is in your compliance plan. And finally, make sure your plan has a process to ensure full cooperation in any government audit or investigation.
Now, a contractor may be able to repurpose or augment their existing operations or compliance materials, but given the obligations above, they're likely going to need to create some new processes to ensure full compliance with federal requirements. So what are some of the other areas of federal contracting I need to be familiar with if I'm going to design a government contracts compliance program and enter the federal marketplace? Well, as I noted before, the federal acquisition system is also subject to statutes, regulations and executive orders that reflect and implement public policy objectives, including socioeconomic goals and programs. As with most compliance obligations, these obligations are flowed through contract terms and flowed down through sub contract clauses. And these will typically apply depending on the value or type of contract. However, some obligations such as equal opportunity likely will apply by operation of law, even if the contract clauses may not be expressly incorporated into a contract or subcontract. Here's a few of the basic socioeconomic clauses that a contractor needs to be aware of.
One, the Service Contract Act where the value of a service contract is over $2,500 so a very low threshold, each service employee employed in the performance of the covered government contract must be paid at a minimum wage plus specified fringe benefits in accordance with wage determinations established by the secretary of labor. These wage determinations identify specific job categories and minimum wages and fringe benefits in the geographic area where the services are to be performed. Service Contract Act covers a wide range of employees performing services for the federal government. A similar act, the Davis–Bacon Act, also requires minimum wages and benefits to be paid to employees involved in construction-related work. When the value of a contract is over $250,000, a contractor must provide the maximum practical opportunity for small businesses to participate in performance. Small business participation is another highly visible socioeconomic goal that federal contracts are seeking to advance. Where the value of the contract is over $750,000, the contractor also must develop a plan to include goals for how a small business will participate.
There also are requirements for certain employee verification known as eVerify where contracts are over $150,000, the contractor must use the eVerify system to verify employment eligibility of all new employees hired in the US, whether or not those new hires are engaged in the performance of the contract or not. We mentioned earlier equal employment opportunity, when a contractor that enters into a single contract or subcontractor subcontract over $10,000 or a series of contractor subcontracts with an aggregate value of $10,000 in any 12 month period must take steps to provide equal opportunity to employees and applicants, regardless of race, color, religion, sex, sexual orientation, gender identity, or national origin. Contractors also must submit required compliance reports and develop written affirmative action program for each establishment if it has contract subcontracts over $50,000. There are also additional equal employment opportunity requirements. When the value of a contract is over $150,000, the contractor must comply with requirements for providing equal opportunity for veterans, which includes among other things prohibiting discrimination against qualified, protected veterans, and also requiring affirmative action by the contractor to employ in advance employment qualified protected veterans.
Where contracts are over $15,000, there are similar equal opportunity requirements for workers with disabilities. One other recent development in the socioeconomic section of the FAR, which is FAR Part 22, or at least part of the FAR Part 22 and FAR part 19, the anti human trafficking requirements. Federal contractors are required to take steps to implement the US government zero tolerance policy against human trafficking. If the contract is for supplies other than commercial available off the shelf or [inaudible 00:45:37] items, and those supplies are acquired outside the United States, or there are services to be performed outside the US, and the estimated value exceeds 500,000, the contractor must implement a compliance plan that is appropriate to the size and complexity of the contract, as well as the nature and scope of the activities to be performed for the government. Combating trafficking in persons has been a significant initiative undertaken by the federal government over the past few years. And this clause, the anti-human trafficking clause found in the FAR Part 22, implements those initiatives.
Finally, there are, as I mentioned earlier, there are a number of socioeconomic focused executive orders. Even in the last few months, we've seen orders come out prohibiting workplace discrimination on the basis of sex, sexual orientation and gender identity. An order revoking prior administrations, restrictions on diversity training, orders requiring federal agencies to address unequal barriers to opportunities in their policies and programs, orders facilitating climate friendly procurements, orders prohibiting certain federal government employees from being hired by contractors, if the employee's previous work involved any of the company's federal government contracts, and as I mentioned earlier, an executive order to raise the federal contractor minimum wage to $15 per hour. Okay, but is there a simpler, less involved way and less risky way to enter the federal marketplace? This seems like a lot, and there has to be a simpler way to go about this that may limit my risk and obligations. Well, as I mentioned earlier, there is. Commercial item contracting
Under commercial item contracting, the number of clauses that will apply to a potential prime contract or subcontract are limited significantly. Now that doesn't mean that under our commercial item contract, only those required clauses in the FAR, which are a limited subset, will be applied. But it certainly means that as a contractor, you have a stronger bargaining power if what you're offering is a commercial item that is a product or service sold to the general public, you have much greater bargaining power in order to limit the number of clauses that would be applied to the procurement. The idea here is the commercial item rules are seek to streamline the procurement and include terms that only mirror commercial practices. Again, hoping to attract more commercial companies into the federal marketplace. So let's talk quickly about a few areas that help to illustrate the key differences between the terms and conditions in commercial item contracts and non-commercial item contracts.
Let's talk about commercial pricing. In a commercial item context, contracts are limited to fixed price or time-and-materials. There are no cost reimbursement contracts. So the contract type is more limited and simpler. Under non-commercial, you could have fixed price time-and-materials cost reimbursement contracts, and you could have a requirement to disclose things like cost or pricing data. Well under a commercial item contract, there's no requirement to submit certified cost or pricing data. Instead, the prices determine fair and reasonable through what's known as a price analysis. Non-commercial item certified cost and pricing data likely will be required unless a certain exception applies. For commercial items in the world of audits, the government generally has more limited rights to audit the contractors' records. Whereas in non-commercial item contracts, contractors are required to maintain records and other evidence sufficient to reflect properly. All costs claimed in the performance of a government contract in a cost reimbursable contract, and they must permit the government to examine and audit those records.
Finally, with respect to changes, in a non-commercial item government contract, the government acquires broad rights to make unilateral changes within the general scope of the contract, but must make an equitable adjustment if it increases the contractor's price or schedule. Under a commercial item contract, changes can only be made by the mutual agreement of both parties. So the power dynamic with respect to these clauses is much more balanced between the government and the commercial item contractor. So we spent a lot of time so far talking about what it means to be a prime contractor to the federal government. That's really only part of the story. The success or failure of many procurements depends not only on the prime contractor, but many times relies on the performance by the subcontractor. Subcontractors are generally considered private contracts governed by state law because the government lacks privity with the subcontract. But federal procurement rules require prime contractors to flowdown certain obligations.
Ultimately, however, the prime contractor remains responsible for ensuring that all third party products it's selling comply with the terms of the prime contract, which is a primary driver for why flowdown clauses are provided. Therefore, to the extent of contractors entering into prime contracts with the federal government, needs to ensure that the subcontractor also is providing either products or services that comply with the obligations the prime contractor has agreed to with the federal government. One principle step is identifying what is and what is not a subcontract. The term subcontract broadly defined and can include any agreement that's necessary to the performance of the prime contract or under which any portion of the prime contract's obligations is performed. This inquiry is highly dependent on the specific nature of the requirements and simply calling it a entity, a vendor or a supplier doesn't necessarily mean it won't be a subcontractor. But this is an important distinction to figure out early on as to whether a company is merely a vendor, meaning they don't support or not necessary to the performance of the prime contract, or they are a subcontractor because it will govern their compliance obligations significantly.
I mentioned earlier, some of the Buy American restrictions and other country of origin restrictions as critical flowdown areas. Government contractors must be careful to ensure that all their products and services delivered to the government comply with any of these applicable country of origin restrictions. And without flowdown of the same restrictions to subcontractors, it's pretty difficult if not impossible for a contractor to figure out if they're complying with Buy American and trade agreement act restrictions. Another area that requires prime contractors to secure their supply chains and ensure subcontractor compliance of cybersecurity. I mentioned earlier, cybersecurity is a hot issue in Congress, as well as the government contracts community. And it's been the subject of a number of new statutes and regulations over the recent years. Government contractors that have been entrusted with sensitive government information are required to implement appropriate security protocols, including network protections to safeguard that information.
And they must ensure that their subcontractors, if those subcontractors have access to that information, that their subcontractors are also taking appropriate measures. One of the more recent developments in cybersecurity compliance obligations is Section 889 of the fiscal year 2019 National Defense Authorization Act which prohibits federal agencies from either procuring directly or contracting with any entity that uses any equipment system or service that uses covered telecommunications or services from China, mainly Huawei and ZTE, plus certain video surveillance equipment manager manufacturers. These requirements apply broadly to all federal contractors, including those selling under the government's GSA schedule contract.
And these are only a few of the potential flowdown areas. In a typical government contract, there may be hundreds of clauses that need to be flowed down or sought to be flowed down to a subcontractor, but it's important for a subcontractor and a prime contractor to look very carefully as to what clauses need to be, or are required to be flowed down, and which clauses make good business sense. Generally, what clauses are flowed down ultimately comes down to a discussion between, a negotiation between, the prime and the subcontractor. Now we've mentioned earlier in this presentation the possibility of government and over enforcement and oversight of government contracts. I want to delve a little bit more into these concepts before we wrap up the presentation. Remember, as you enter into the government marketplace as a prime contractor or subcontractor, there are a number of different oversight penalties, and the biggest, arguably the biggest, hammer available to the government is suspension or debarment from federal contracting.
Although perhaps lawyers defending False Claims Act cases may disagree with that statement, but let's talk about both of those now. Suspension and debarment processes are designed not as penalties for contractors, but designed to protect the government from doing business with federal contractors and subcontractors that are not deemed presently responsible. The government has brought authority to suspend or to borrow a contractor or subcontractor for a variety of reasons, including a knowing failure to disclose a violation of federal law, a lack of business integrity, serious violations of the contract terms or history of unsatisfactory performance, or any cause of so serious of compelling nature that it affects the present responsibility of the contractor or subcontractor. There can also be a statutory department in certain circumstances if authorized by statute, such as under the surface contract act. But either way, this is not where you want to be for obvious reasons.
There are procedures to challenge potential suspension or debarments, but there are costly and come at great risk to the company's future business. The mandatory disclosure rules I mentioned earlier are somewhat new and unique and applicable to federal government contracts and subcontracts. Again, under the mandatory disclosure rules, federal government contractors must timely disclose credible evidence of procurement related fraud and other violations of federal, civil, and criminal law, and a failure to do so can result in suspension or debarment from doing business with the federal government. Government contractors are also potentially subject to audits and investigations by a wide range of entities, including agency inspector generals who have brought authority to investigate allegations of waste fraud and abuse. The Department of Justice investigates and prosecutes violations of procurement related laws, including the False Claims Act. The Department of Labor conducts audits for requirements, including the Service Contract Act and other related labor and employee requirements.
These are typically enforced through the Department of Labor's office of federal contract compliance, OFCCP, which reviews the contract and subcontractors compliance with equal employment and affirmative action requirements. The GAO also has broad authority to access any of the contractors directly pertinent records involving transactions relating to a government contract. Defense Contract Audit Agency, DCAA, also conducts a variety of different audits for DOD contractors and other entities, including audits of contractor cost record and systems, or defective pricing for cost and pricing situations that I mentioned earlier. And finally, Congress conducts investigations and oversight hearings on procurement related issues. So there's a lot of stakeholders that may have an interest in your particular performance on a government contractor. Contractors are expected to provide full cooperation with any government audit or investigation, which can include producing records and providing access to employees.
If a violation is found, the government can terminate a government contract either for default or for convenience. A default termination occurs if the contractor fails to perform or in some way jeopardizes contract performance. Generally, the contractor is given an opportunity to cure default. But if a government does terminate a contract for default, it's entitled to receive the excess costs of procurement and other available damages. But the government also has a unilateral right to terminate a contract for its convenience, pretty broad in terms of the scope of reasons, if no reason at all. And if it does, the contractor's entitled to recover its cost, plus a reasonable profit for the work performed before the termination. However, the contractor is not entitled to recover anticipated profits on the terminated work.
If there are disputes between contractors and the government under the contract disputes act, the contract disputes act requires that any dispute must be first resolved administratively by submitting a claim to the government contracting officer. Typically, these are disputes involving performance of a government contract or monetary disputes. If those disputes can't resolve administratively, the contractor can appeal to the board of contract appeals or the court of federal claims. Another type of litigation that's possible is a bid protest litigation. This is typically when a losing party bidder challenges, the award of a federal contract, including possibly the award of task orders, and claims that there's a violation of applicable procurement laws, regulations, or solicitation terms. These protests can be filed with the contracting agency, the GAO or the court of federal claims. False Claims Act is another one of the government's primary tools for prosecuting perceived procurement fraud.
The government can recover three times actual damages suffered by the government, plus monetary penalties for each false claim. There is a broad range of activity that has been encompassed by the False Claims Act, including inflation of cost estimates in charging, failing to provide current accurate and complete cost of pricing information, double billing, product substitution, false certifications, or providing worthless or substandard products. Dollar recoveries and False Claims Act can run into the millions. And it is a primary tool used by investigators to try to enforce federal procurement rules.
So where does this leave us? Is it worth becoming a federal contractor? This all sounds pretty ominous, right? Well, yes and no. It's true that a company needs to go into federal contracting with its eyes wide open and ready to invest not only in winning contracts, but also must invest in a compliance infrastructure. That is, this is a must have and a company that ignores compliance does so at great risk and cost to its company shareholders. But there are great benefits to the commercial marketplace, financial and otherwise. Then again, if you want to just dip your toe into federal contracting, maybe try entering the market as a commercial item contractor or subcontractor, which will limit the risk and scope of applicable federal obligations. Either way, many companies successfully navigate these federal contracting rules and regulations, and in exchange have built up a steady, reliable revenue stream, a pretty valuable commodity in this less than predictable world we all live in. So for those that choose to follow the path of government contracting, I hope this presentation today helps set the stage for what to expect. Best of luck.