United States: Look Before You Leap – Pitfalls And Trip Wires Inherent In Government Contracting

Accepting money from the Government, whether through a contract, grant, or other transaction, does not come for free. In the commercial world, companies typically engage in a cost/benefit analysis when they make major decisions, such as whether to enter a new line of business, extend their product line, open new facilities, or expand globally. To make these decisions, the company tries to understand not simply the available business opportunities, but also the obligations that are imposed and the risks that are inherent. This is equally, if not more, true when a commercial company decides to sell anything to the U.S. Government – whether as a prime contractor or subcontractor. The Federal Government is an extremely large consumer of goods and services, and so it is a marketplace that is hard to ignore. But, seller beware – because with the opportunities arising from this marketplace come obligations with which your company may not be able to comply. Moreover, while compliance may cost you more than you anticipate, noncompliance could destroy your business. So make sure that you look before you leap into the federal marketplace.

What to Watch For...

To help you assess whether to become a government contractor, here is a checklist of some of the key obligations you are agreeing to undertake when you sign on the dotted line. This is not a "one size fits all" checklist because for many of these requirements, certain dollar thresholds need to be hit before they are triggered. Hence, not all of these requirements may be applicable based on your company's structure and/or business. But examples of the obligations that would, or could, apply to your company, depending upon the nature of the contract or subcontract, include:

  • Special intellectual property rules – beware of losing sole ownership and control over your IP because of the:
    • Unusual software licensing terms
    • Unusual Government rights in technical data
    • Special labeling requirements
    • Important limits on remedies for breach of IP obligations
  • Compliance programs – be ready to spend time and energy implementing a comprehensive compliance program
  • Mandatory disclosure of certain types of violations of law – with the requirement extending even to potential violations that you are still investigating
  • Socioeconomic policies that impose significant conduct and administrative obligations on the company, including:
    • Equal Opportunity in hiring
    • Affirmative Action (promoting diversity based on race, gender, veteran status, and even disability)
    • Utilization of Small Business Concerns
    • Combatting Trafficking in Persons
    • Employment Eligibility Verification
    • Veterans Reporting
    • Minimum wage requirements (under the Service Contract Act, Davis Bacon Act, Executive Order, etc.)
    • Country of Origin Requirements
  • Cost allowability and cost accounting constraints
  • Recordkeeping requirements
  • Export controls
  • Extensive supply chain sourcing requirements and tracking (particularly for Defense contractors)
  • Unique ethical prohibitions, such as:
    • Prohibitions on gifts to the customer and suppliers
    • Restrictions on the recruiting and utilization of current and former government employees, and
  • Audit rights to the Government.

Navigating the Field...

Here are a few suggestions on some compliance areas that you may want to give particular attention to as you begin government contracting:

  • Prepare and provide annual training on key compliance requirements
  • Maintain and monitor a hotline for complaints and allegations of noncompliance with government requirements (needed to comply with the obligation to report certain issues to the Government)
  • Conduct investigations of all allegations of violations of Procurement Integrity Act, false representations to the Government, overbillings, etc.
  • Review every solicitation for regulatory and contractual compliance issues – only some Federal Acquisition Regulation clauses are required for a commercial services/products seller, but often solicitations include other regulatory clauses, which would make compliance a contractual obligation
  • Monitor sales to identify any special "most favored customer" obligations to the Government, and if they exist, monitor compliance
  • Monitor all government requests for "rights in data" (IP) to protect intellectual property
  • Monitor any nondisclosure obligations imposed by contracts
  • Maintain accuracy of representations in System for Award Management (SAMS) database
  • Monitor compliance with Combating Trafficking in Persons requirements
  • Maintain and monitor compliance with supply chain obligations
  • Monitor compliance with obligations to flow down certain requirements to subcontractors
  • Maintain compliance with Small Business Subcontracting Plans
  • Monitor compliance with billing requirements, such as restrictions on advance payments or accelerated payments to small business subcontractors.

Oftentimes, "routine" labor laws will come into play, forcing companies to comply not just with the basic terms of their contracts, but also comprehensive regulations issued by the U.S. Department of Labor, including (for example) the following:

  • Prepare and file VETS-100A annually
  • Prepare and file EEO-1 annually
  • Maintain personnel records, such as, job descriptions; job postings and advertisements; interview notes; test and test results used in the application process; records of job offers; job applications; written employment policies; and records pertaining to hiring, assignment, promotion, demotion, transfer, termination, compensation, etc. for one or two years depending on the size of the employer and/or the amount of the contract
  • Post required notices in a conspicuous place (e.g., Service Contract Act, Davis-Bacon Act, EEO, Executive Order 13496, Notice of Employee Rights under federal labor laws)
  • Maintain a compliant Affirmative Action Plan and monitor compliance
  • Ensure job postings comply with relevant regulations, which can require posting the job with the appropriate Employment Service Delivery System
  • Collect and maintain information regarding the gender, race, and ethnicity of each employee and, where possible, the gender, race, and ethnicity of each applicant (self-identification is the preferred method)
  • Monitor compliance with the minimum wage for federal contractors (if applicable)
  • Monitor compliance with the Service Contract Act (if applicable)
  • Monitor compliance with non-discrimination laws applicable to government contractors
  • Monitor compliance with the Fair Pay and Safe Workplaces Executive Order (requires contractors to disclose certain labor law violations when bidding for certain contracts).

Avoiding the Trip Wires...

In addition to the above issues, companies must also be aware of the potential penalties for violating applicable government contract requirements, which extend beyond ordinary commercial remedies. For example:

  • The civil False Claims Act imposes liability for three times the Government's actual damages, plus statutory penalties for knowingly or even recklessly submitting an inaccurate claim or invoice to the Government
  • There is both potential civil and criminal liability under the False Statements Act
  • The Government can engage in administrative proceedings to suspend and debar a company (and its employees).

While all of this may seem daunting, a well-drafted (and well-implemented) compliance plan that addresses all of the applicable requirements before you enter into the government marketplace can minimize your risks and enhance your opportunities.


For most government contractors, there isn't really anything new here – most companies already know about these obligations and are working to manage the risk. But, as government budgets start to climb again as Congress grows weary of sequestration, we thought that it might be time for a refresher (or a reminder). You – and your company – are always better served when you look before you leap, and when you have a map showing you where the trip wires are located.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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