Ever wonder how important federal money is to the state’s construction industry? Perhaps I can cast a bit of light. Since 2000, the federal government has awarded 165,610 contracts worth $256 billion to 12,689 Texas defense contractors. This information is furnished by the U.S. Department of Defense and posted at governmentcontractswon.com.

Leslie Guajardo

In one city alone, San Antonio, 30 contracts worth $700 million were scheduled to be awarded for Base Realignment and Closure projects during fiscal 2009, which ended Sept. 30. Those contracts were in addition to the $1.2 billion in BRAC-related construction awarded during fiscal year 2008. Meanwhile, the Fort Worth District of U.S. Army Corps of Engineers has allocated more than $7 billion for non-defense projects extending into 2014.

These are just a couple of examples, and remember that they have nothing to do with the federal stimulus money flowing into the state. Suffice it to say, government work is an appealing arena for contractors. And it always will be as long as we need military bases, highways, bridges, airports, VA hospitals, etc.

Because federal work has been more dependable than private-market construction the past couple of years, many contractors are bidding government projects for the first time. What many of them do not understand, however, is that with government contracts come accounting and reporting rules that can change quickly.

An example of this occurred late last year, and many contractors may not be aware of it. In November the Civilian Agency Acquisition Council and Defense Acquisition Regulations Council issued an amendment to the Federal Acquisition Regulation. The change went into effect in December. Essentially it established mandatory disclosure requirements for certain violations of federal criminal law, including fraud, conflict of interest, bribery, violation of the False Claims Act, and significant overpayments on a contract.

The amendment also required contractors to establish and maintain specific internal controls to “detect, prevent and disclose’’ improper conduct in connection with the award of any government contract or subcontract. The amendment issued new causes for suspension and debarment, which can be found in Fed. Reg. 219, 67064 (Nov. 12, 2008).

The bottom line is that a contractor can be suspended from government bidding when a principal in the company knowingly fails to disclose evidence of violations of federal law in connection with a contract award, performance or close out. “Principal’’ is defined as an officer, director, owner, partner or a person having primary management of supervisory responsibilities. The rule goes on to say that, ”…moreover, since such failures remain a cause for suspension or debarment for a period of up to three years after final payment, they could include a failure to disclose a violation in connection with a contract entered into many years ago.’’

Under the new rules, contractors have 90 days after a contract is awarded to establish a business ethics awareness program. It must also create an internal control system that provides for compliance with the mandatory disclosure requirements. Most of these requirements are limited to contracts or subcontracts in excess of $5 million with a performance period of 120 days or more. The requirements include small-business and commercial-item contracts. In addition, there is a provision that makes nondisclosure by any prime contractor grounds for suspension or debarment.

A key aspect of the amendment is the requirement that company owners must share information about violations in a timely fashion. Although “timely’’ is not defined very well, the final amendment states that contractors “will have the opportunity to take some time for preliminary examination of the evidence to determine its credibility before deciding to disclose to the government.’’

Also not clearly defined is “significant overpayment.’’ The amendment notes, however, that overpayment “implies more than just dollar value and depends on the circumstances of the overpayment as well as the amount. It is within the discretion of the suspension and debarment officials to determine whether an overpayment is significant and whether suspension and debarment would be the appropriate outcome for failure to report such overpayment.’’

In describing how internal controls should be established, the amendment states that minimum standards should:

  • Assign responsibility for internal controls at a “sufficiently highly level’’ and provide adequate resources.
  • Perform reasonable due diligence on potential principals to find out whether they have engaged in conduct that conflicts with the contractor’s code of business ethics.
  • Prescribe period review of business practices, procedures, policies and internal controls for compliance with the contractor’s code of business ethics and conduct.
  • Provide full cooperation in government audits, investigations or corrective actions.
  • Set forth disciplinary action for improper conduct and “failure to take steps to prevent or detect improper conduct.

In a nutshell, the revised amendment means contractors need to pay close attention to the people and processes they use to bid on government work. Major violations are pretty easy to avoid, but the new rule also targets conflicts of interest, gratuity violations found in Title 18 of the U.S. Code, and significant overpayments. These areas, particularly conflicts of interest, can be easily overlooked.

Until the marketplace returns to some level of normalcy, government contracts will continue to be an appealing source of new work. It’s important, however, that contractors not rush blindly into the process. They need to study the Federal Acquisition Regulation and specifically Fed. Reg. 219, 67064 (Nov. 12, 2008). And then they need to create the compliance program and internal control system set forth by the amendment.