With the recent report that Grainger has been accused of not complying with its contracts to supply government agencies, distributors that sell to the government should reexamine their own systems to ensure they are in full compliance with obligations under the law.
Many companies are so intent on getting government contract awards that they later forget about having to comply with the numerous obligations tucked in the contract documents. But forgetting or ignoring federal contract obligations is risky business and not recommended.
This is especially true because government agencies are growing more aggressive about auditing contracts. So all government contractors, whether new to the federal arena or old hands, need to think about their contract compliance programs.
The federal government is the world’s largest customer, annually buying some $350-plus billion of commercial goods and services. Over the past 15 years, federal government agencies have successfully moved to buying commercial items more like their large commercial company counterparts. However, while selling goods and services to the feds is now more similar to the commercial marketplace, government contracts include many obligations not found in most commercial contracts.
Leveraging its buying power, the federal government includes in its contracts numerous laws and regulations of varying purposes. Some are intended to protect a contractor’s workers, some aim to promote government contracting for small and minority businesses, while others seek to promote the purchase of American-made products.
The breadth and scope of these requirements is too expansive to be covered in its entirety here. The point is that a government contractor, unlike many commercial contractors, must understand the need to comply with these unique obligations to the government.
At its essence, a company’s government contract compliance means (a) being aware of its obligations under a contract, (b) understanding the requirements of each of those obligations, (c) designating one or more individuals to be responsible for those obligations, (d) establishing the systems necessary to track those obligations and (e) monitoring performance of those obligations.
One Example: Source of Origin
By way of example of what contract compliance entails, let’s look at one common government contract obligation. In order to boost and protect the U.S. economy, government contractors are often required to provide U.S.-made items or goods from preferred countries pursuant to legislation such as the Buy American Act, the Trade Agreements Act and the Berry Amendment.
Likewise, the federal government uses its procurement arm as a way to boycott or otherwise prohibit the purchase of goods or services from countries that are in not in good standing with the U.S. These obligations are often called “source of origin”provisions.
From the perspective of contract compliance, a government contractor must first and foremost recognize that a particular contract includes one or more clauses concerning source of origin obligations.
It’s not enough to get an award and ignore the “boilerplate”provisions of the contract; ignorance is not a defense. So after an award at the latest, a contractor must list all of its obligations under the contract, including, in this example, its obligation to deliver only U.S. items or goods from certain preferred countries.
Let’s move from awareness of a company’s source of origin obligation to its understanding of it. What exactly does the source of origin clause mean? Can components come from a non-preferred country but be assembled in the U.S.? What if part of a system comes from a non-preferred country but the rest from the U.S.? These and many other questions may need to be answered for a contractor to understand the extent of its obligations.
Next is the company’s designation of responsibility for compliance. Will the contract’s administrator be responsible for insuring that all goods delivered under the contract are made in the U.S. or a preferred country in compliance with the source of origin clause? Or should the company’s supply manager be the designated to comply with this clause?
And how will compliance be effected in practice? Will someone manually scan all delivery orders for source of origin? Or will an automated system be required by adding a source of origin field to the company’s computer database?
Finally, who will monitor whether the company’s source of origin compliance program is working? Its auditors? Outside attorneys? An internal compliance department? If the company doesn’t monitor its own compliance, the company is, in effect, letting the government’s audit agency monitor compliance for the company. This is not a good idea.
Failure to comply with source of origin requirements can result, at a minimum, with the cancellation of the contract. It can carry heavier penalties, including debarment, suspension, fines and even jail time.
A savvy federal contractor understands the implications of all of its various obligations and is wise to implement compliance policies and practices, and to educate its employees on the added level of scrutiny which applies to business dealings with the government. A contractor’s only real choice is to comply with the requirements of its contracts or stay out of the federal government procurement arena.
Government contracts compliance is by no means impossible. It does require analysis, organization and discipline. Mainly, government contracts compliance requires a contractor’s management to demand that its employees take the company’s compliance obligations seriously.
Andrew Mohr is a partner in the law firm of Cohen Mohr LLP. Mohr specializes in government and commercial contracts, including GSA schedules, security clearance, contract administration and compliance, teaming agreements, subcontracts, dealer contracts, regulatory analysis, bid protests and claims. C. Kelly Kroll is an associate at Cohen Mohr with extensive experience in GSA Schedule contract proposal preparation, negotiation and administration. Mohr’s email is firstname.lastname@example.org; Kroll’s email is email@example.com; and either can be reached at (202) 342-2550, and online at www.cohenmohr.com. © Copyright Andrew Mohr &C. Kelly Kroll 2008, All Rights Reserved.