For years, in-house counsel have struggled with how best to persuade their clients to establish codes of business conduct, implement training programs, and adopt systems for assessing contract compliance. While the wisdom of all three activities was obvious to lawyers, who have the benefit (or misfortune) of witnessing firsthand the pervasive impact of not doing these things, the message often was lost on revenue-driven sales organizations that could not quite grasp — or preferred not to grasp — the ROI of a robust internal compliance program.

Several months ago, corporate law departments were given a new arrow in their compliance quiver in the form of FAR Case 2006-007, Contractor Code of Ethics and Business Conduct. This proposed rule, which is set to become final before November of this year, establishes mandatory prescriptions for ensuring ethical federal contractor conduct.

For contractors holding federal contracts exceeding $5 million, with performance periods of 120 days or more, the proposed rule requires that they:

  • Display the Agency’s "Fraud Hotline" poster (actually, this requirement, which some contractors have to meet regardless of the new rule, covers contracts regardless of the performance period, and, at the Agency’s discretion, contracts valued at less than $5 million)
  • Adopt a written code of ethics and business conduct
  • Establish an employee ethics and compliance training program
  • Establish an internal control system and
  • In certain circumstances, flow these requirements down to their non-commercial items subcontractors

While the rule does not provide much guidance regarding the components of a reasonable code of ethics and business conduct, it does offer some top level, and highly predictable, suggestions regarding what makes a suitable internal control system. In this regard, the proposed rule advises contractors that their systems should:

  • Facilitate the timely discovery and disclosure of improper conduct in connection with Government contracts, and
  • Ensure that corrective measures are promptly implemented and carried out.

The proposed rule illuminates these requirements further with several examples of the capabilities of a suitable internal control system. Specifically, the proposed rule suggests that an internal control system should provide for:

  • Periodic reviews of policies, procedures, and practices to ensure consistency with the code of ethics and business conduct
  • An internal hotline or other reporting mechanism
  • Internal and/or external compliance audits, as appropriate
  • Disciplinary action for improper conduct
  • Timely reporting to Government officials of suspected wrongdoing, and
  • Full cooperation with Government investigations into any such wrongdoing

Many contractors will see a correlation here to the factors typically considered by debarring officials.

To its credit, the proposed rule recognizes that not all federal contractors are created equal, and advises that compliance programs should be suited to the size of the contractor and to the extent of its involvement in Government contracting. In other words, "Mom & Pop Lawn Service LLC" need not implement a compliance program of the same size and scope as "Behemoth Worldwide Corporation."

The timing of the implementation of the programs, however, is the same for everyone. The proposed rule requires that, where applicable, the code of ethics and business conduct must be implemented within 30 days after contract award. The training program and internal control system must be established within 90 days. For all practical purposes, this means that contractors need to have made progress on their code, training program, and control system at or before contract award.

While the proposed rule is broad in its coverage, it is not all-encompassing. It excludes contracts awarded outside the United States as well as "commercial items contracts awarded pursuant to FAR Part 12." With respect to the latter, one question the proposed rule does not answer is whether GSA Schedule contractors will be deemed to fall within the scope of the exclusion. While Schedule contracts incorporate the core clauses prescribed by FAR Part 12, they technically are awarded pursuant to FAR Part 8. One would hope that the final rule resolves this ambiguity.

In the end, the new rule should not instill fear. While it is true that the rule, once implemented, will create yet one more regulation upon which even a careful contractor could stumble; for the most part, the forthcoming requirements are things that a careful federal contractor– be it a defense contractor, a GSA Schedule contractor, or any other – should have been doing already. And now law departments will have an increased regulatory foundation to cite in support of the compliance advice that they have been giving their clients for years.

Authored by:

Jonathan Aronie