Lawyer Article

While most of the country was digesting turkey, an important Federal Acquisition Regulation rule was made final. As of Friday, November 23, 2007, a contractor code of business ethics and conduct is now required for many government contractors and subcontractors submitting proposals and entering new contracts. While many government contractors and subcontractors have voluntarily adopted codes of business ethics, only the Department of Defense regulations previously recommended a code and no regulation made it mandatory until now.

Contracting officers are required to include the new FAR clause 52.203-13, Contractor Code of Business Ethics and Conduct in all solicitations and contracts going forward except: 

• Commercial item contracts under FAR part 12 
• Contracts that will be performed entirely outside the United States 
• Contracts not expected to exceed $5 million (including all options) and the performance is less than 120 days

The clause requires that the contractor flow down the substance of the clause to all subcontractors except where the three exceptions above apply.

Note that small businesses are not exempt from the clause as either prime or subcontractors. One of the reasons cited in the rule's commentary was the Army Suspension and Debarment Official's statement that the majority of small business he encounters in review of Army contractor misconduct have not implemented contractor compliance programs.

In an effort to keep the regulations from becoming an undue burden on small businesses, the policy guidance is that the code of conduct should be "suitable to the size of the company and extent of its involvement in Government contracting." The commentary to the new rule says that, "[t]he Government will not be reviewing plans unless a problem arises." Of course, these codes of conduct will be scrutinized when something has gone wrong and the scope that seems appropriate then will likely differ from the company's perspective upon commencement of contract performance. The flexibility in the rule presents a challenge for any contractor or subcontractor to demonstrate compliance.

Contractors have 30 days following contract award, unless the contracting officer extends the deadline, to have a written code of business ethics and conduct in place and to provide a copy to each employee engaged in performance of the contract.

While every contractor and subcontractor is required to promote compliance with its code of business ethics and conduct, small businesses are exempt from the requirements for an awareness program and internal control systems, which must be in place within 90 days after contract award, unless the contracting officer extends the deadline. Keeping in mind that the policy guidance also states that the awareness program and internal control systems should also be "suitable to the size of the company and extent of its involvement in Government contracting," the clause says an internal control system shall facilitate timely discovery of improper conduct and ensure corrective measures are promptly instituted and carried out. While no specific program is required, the clause offers examples of things that the internal control system "should provide for:" periodic review of business practices, procedures, policies, and internal controls; an internal reporting mechanism such as a hotline; internal and/or external audits; and disciplinary action for improper conduct. No additional guidance or examples are provided to describe the minimally compliant awareness program.

Clearly this effort involves more than simply e-mailing a copy of a code to all employees. The human resources department needs to be involved in distributing the code to existing employees and new hires and should have policies to address disciplinary actions. Inside or outside reviews and audits need to be budgeted, planned, and staffed. The best internal reporting system needs to be considered. Most companies have various elements of a code of business ethics and conduct and related internal controls in place already. In a very short period of time, government contractors and subcontractors must determine how best to ensure they are compliant with this minimum standard established in the new FAR clause.

Many government contractors and subcontractors have established internal control systems consistent with the United States Sentencing Commission 2005 Federal Sentencing Guidelines. The FAR clause includes some elements of the Sentencing Guidelines' recommended internal control systems, but is a lesser standard. Contractors and subcontractors should be aware that compliance with this new FAR clause may not be sufficient to mitigate the punishment of the organization or its leaders under the Sentencing Guidelines and may consider implementing more stringent internal control systems.

A new FAR clause 52.203-14, Display of Hotline Poster(s) was issued in conjunction with the code of business ethics and conduct rule. The rule is a bit confusing because there are several options and exceptions. Where a company establishes its own internal reporting mechanism, such as its own hotline the contractor or subcontractor need not display an agency fraud hotline poster, except the Department of Homeland Security hotline poster must be displayed, if applicable. The clause may provide information about how to obtain the contracting agency's own required posters. Otherwise, the contractor or subcontractor may display any agency fraud hotline poster.