Editor’s note: Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. James Norment leads the Government Representation Practice Group of Ward and Smith, P.A.
RALEIGH, N.C. – Energized by their success at Kill Devil Hills, the Wright brothers convinced the U.S. Army to purchase a new flying machine. By 1908, the Wright brothers and the Army agreed on a contract that was just over three pages long and contained essentially three key terms: the Army wants to buy an airplane that will fly; the Wright brothers agree to sell an airplane that will fly; and the Army will pay an incentive of up to $10,000 if the airplane’s maximum speed exceeds 40 mph.
The federal government has come a long way since then. Today, procurements by all parts of the federal government are highly regulated and extensively documented. Contracts for simple services or goods can be hundreds of pages long. A complex contract, after incorporating the Federal Acquisition Regulation (better known as the "FAR"), can exceed a thousand pages.
Regardless of size, a business inexperienced in government contracting might wonder whether it can compete for the billions of dollars in contracts granted by the federal government every year. Fortunately, with proper planning, a good business plan, and sound legal advice, there is no reason to be discouraged from beginning or expanding federal government sales. However, in the ever-changing world of federal procurement, a prospective government contractor should be well informed about all the risks before submitting any bid.
Government Contracting is Not the Same as Commercial Contracting
Although the federal government market may appear similar to the private marketplace, the procedures and rules of doing business in the government arena are different. Failure to understand those differences almost always leads to trouble. Once a company has entered the procurement process, there are special rules unique to federal contracting that the contractor must understand. The major differences between federal government and commercial contracting are summarized below.
The Contracting Officer
The federal government conducts its contract business only through properly authorized federal employees, called contracting officers. Contracting officers must have specific authority to enter into contracts. This authority is written permission, called a "warrant," from the agency head for the contracting officer to enter into contracts up to a certain amount. If the contracting officer agrees to a contract above that amount, the contract is invalid regardless of whether the contractor is aware that the contracting officer has exceeded his or her limit. So, unlike an officer of a private business, a contracting officer never has "apparent authority" to commit the government to a contract or course of action. Within the bounds of his or her warrant, however, the contracting officer has a good deal of power.
Private sector contracting gives the purchasing party complete freedom to determine how it will go about getting a contract, with whom it will contract, and the contract terms. The private sector purchaser may decide it can get more competitive prices by asking different vendors to bid on a proposal, but it has no obligation to do so and may purchase from any vendor it chooses without the need for a competitive bidding process. In contrast, federal government agencies must follow very specific rules contained in the FAR which, in most instances, are intended to encourage competition (or at least the appearance of competition). In some instances, however, the rules actually limit competition to favored vendors, such as historically underutilized businesses.
The government agency desiring a contract will issue a "Request for Proposal ("RFP"). If the federal agency is conducting the competition according to a set-aside or sole-source process, the RFP will so state. Regardless, the FAR will control the process. In certain cases, an RFP might be issued for what is known as a "multiple award contract" in which a number of contractors are selected to perform under the contract, but the successful contractors must then compete with one another to perform various portions of the work being ordered.
In addition to competing for the contract by submitting the best proposal, you also must be prepared both to initiate and to defend bid protests related to the contract. In the private sector, losing bidders usually have no opportunity to challenge a contract award since purchasers generally are free to contract with vendors upon terms mutually acceptable to the parties. It is difficult to find a basis for any lawsuit, and winning such a lawsuit is even more difficult. In contrast, the federal government has designed a complex, but highly effective bid protest system.
The bid protest system, of course, works both ways. You can be the target of a protest if you are the successful bidder, or you can protest the grant of a contract to another bidder. Protests must be filed properly and within the deadline set out in the contract or regulations (sometimes as short as five or ten days), and the protest procedure must be followed carefully When used properly, protests can be powerful tools for contractors seeking government contracts as successful protests can lead to a new bid or a revised contract award. Contractors who regularly deal with the government treat the protest process as an essential and normal part of winning and keeping a federal contract.
Disputes with the Federal Government
Similar to the protest process, the federal government has established a unique system for addressing contractor disputes and claims during the performance phase of a contract. Federal government contract disputes are governed by the Contract Disputes Act, together with the more detailed rules set forth in the FAR. The FAR encourages informal dispute resolution between the contractor and the contracting officer. If the informal negotiation fails, the formal dispute process begins when the contractor files a claim with the agency. The contractor can seek three basic types of relief through the claims process: payment for additional or disputed work; interpretation of contract terms; or an order for the agency to take a certain action. The contracting officer then attempts to negotiate a settlement of the claim with the contractor. If a resolution cannot be achieved, the contracting officer must issue a final written agency decision.
Only after the final agency decision is issued can the contractor begin litigation against the government. Suing the federal government is not the same a suing a private business in a local court. Instead, contractors must use a special administrative law court, called a "Board of Contract Appeals," as the initial decision-maker for the dispute. An unsatisfactory decision by the Board can be appealed only to the U.S. Court of Federal Claims. Normally, only contracts with very large sums of money at stake make it to this appellate court.
Changes and Termination for Convenience Clauses
Contract changes and termination take on a new significance in contracts with the federal government. The federal government requires contractors to agree to a "changes clause" which allows the government to unilaterally order the contractor to make changes within the scope of the contract. The contractor must make the ordered change, although in many cases the government may grant an adjustment in the contract price.
Government contracts also often contain a "termination for convenience" clause, which is not often seen in the private sector. This clause allows the government to terminate the contract if termination is in the government’s interest. In theory, the government may stop development or delivery at any time, and the contractor usually will be paid its costs and profits up to the time of termination, but no more.
Audit and Accounting Requirements
The federal government imposes audit and surveillance requirements on contractors. The government may audit a contractor’s costs, profits, progress, and performance during a contract and for up to three years after the conclusion of the contract. These audits may be conducted by a variety of federal agencies, including the contracting agency’s Inspector General, the Defense Contract Audit Agency, and the Government Accountability Office. Audits and accounting demands are a fact of life in federal government contracting. Although these audits can be burdensome, there are established procedures and contractor protections that help make the audit process less burdensome.
False claims in bids or failure to perform contracts in the private sector sometimes lead to civil litigation. The federal government, however, can turn to a special power when it encounters cheating, stealing, or other bad behavior: criminal prosecution. This severe and feared tool lurks in the FAR and the criminal laws. Wise contractors monitor their government contract practices for possible violations of criminal law, while foolish or unprepared contractors can find themselves facing possible imprisonment, hefty monetary fines, and disqualification from future federal contracting if criminally convicted. The criminal violations usually occur when the contractor makes a false claim for compensation or a false statement to the federal government. Contractors must train their employees to be aware of the danger of false claims and statements.
In the private contracting context errors or false claims are considered by some as an acceptable part of competition since in most cases the only downside is a requirement to make corrections to any discovered errors. In contrast, any false claim or statement to the federal government–even if inadvertent, innocent, or committed by a rogue employee–should be brought immediately to the attention of your legal counsel. There are often ways to work out potentially devastating problems, but early detection and action are essential.
Regulations, Rules, and Risks
Federal contracting can be lucrative, but it also requires an understanding of the complex and relatively rigid procedures and rules used by the federal government. Most federal government procurement is competitive, and when it is not, even more complicated regulations apply. In addition, the federal government has an immense volume of procurement regulations and specific processes for various types of procurements. Some knowledge of the federal procurement system goes a long way to improve the chances of a business winning, keeping, and successfully performing government contracts.
Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. James Norment leads the Government Representation Practice Group of Ward and Smith, P.A. His practice encompasses a variety of business law matters related to vendor to state and federal government contracts, procurement, and related disputes. Comments or questions can be sent to email@example.com.