Ax Lawyers – experts in Federal Acquisition Regulations (FAR)

Expanding your business into the federal marketplace can be lucrative, and provide numerous networking and growth opportunities. But be warned: Winning a federal contract also means complying with laws and regulations unique to those doing business with the government. Many new contractors, especially small businesses, are unprepared for the rules and regulations they must follow, which can lead to costly errors and potential legal problems.

The Federal Acquisition Regulation (FAR) is a substantial and complex set of rules governing the federal government’s purchasing process. Its purpose is to ensure purchasing procedures are standard and consistent, and conducted in a fair and impartial manner. So whether you are a small business owner or the contracting official, it is important to understand FAR. There are many costly pitfalls if you don’t take the time to understand the provisions in your contract, which often reference areas of the FAR.

The FAR is issued and maintained jointly under the statutory authorities granted to the Secretary of Defense, Administrator of General Services and the Administrator, National Aeronautics and Space Administration. Statutory authorities to issue and revise the FAR have been delegated to the Procurement Executives in DOD, GSA and NASA.

Government contracts are different from commercial contracts in many important ways. Federal contracts contain or reference many provisions unique to the government. These provisions include requirements for:
Changing the scope of work
Terminating contracts
Making payments
Conducting inspection, testing, and acceptance of delivered goods and services

So your business has been awarded a contract from the government – congratulations! It’s the culmination of a lot of hard work. But there is still work to be done. It’s an important responsibility, because if you cannot perform according to the terms of the contract, the government will not get the product or service it needs and you may find yourself in financial difficulty as well.

Here are some tips to guide you after a government contract is awarded.

Features of the Contract
When you receive the proposed contract, read it carefully before signing. This may look like an imposing task – some contracts may contain many pages, depending on the type of contract and complexity of what the government is buying. However, you will find that many terms and conditions are „boilerplate,“ or standard. Once you read and understand the terms, you will be familiar with them when they appear in your next contract.

One important feature of the contract is the identity of the office that will administer it. In most federal agencies, this is usually the same office that awarded the contract. In the Department of Defense, however, the contract is generally assigned to a special administering office. If you have any questions about the contract, contact the office of administration. Do not proceed and find out much later that you are not in compliance.

While federal contracts are similar to commercial contracts, they are different in some very important ways. They contain or make reference to many general contract provisions unique to the government. These provisions implement various statutory or regulatory requirements applicable solely to federal contracts, such as:

Termination for default and termination for convenience;
Contract changes;
Specifications; and
Inspection and testing.

These matters are described in various parts of the Federal Acquisition Regulations (FAR).

Government contracts provide that the government may cancel (terminate) your contract if:
You fail to make delivery within the time specified in the contract;
You fail to make progress so as to endanger performance of the contract, and/or;
You fail to perform any provisions of the contract.
Before terminating a contract for default, however, the contracting officer must give you an opportunity to remedy defects in your performance or show why your contract should not be terminated.
If your contract is terminated for default, you are entitled only to payment at the contract’s price for items accepted by the government. If the government still needs the items that you failed to deliver, it has the right to procure the same items elsewhere and, if they cost more, charge the excess costs to you. This can be a very serious and costly matter.
If you can show that your failure to deliver or to make progress is excusable, your contract will not be terminated for default. To be excusable, a delay must be beyond your control and not caused by your fault or negligence. If your contract is terminated for default and you can prove that the government’s action was improper, the termination will be treated as one for the „convenience of the government.“
The government may unilaterally terminate all or part of a contract for its convenience. Termination for convenience does not arise from any fault on the part of the contractor, but protects the government’s interests by allowing it to cancel contracts for products that become obsolete or unnecessary.
The government must give you written notice of termination for convenience, but is not required to give advance notice. The notice of termination will usually direct you to stop work, terminate subcontracts, place no further orders, communicate similar instructions to subcontractors and suppliers, and prepare a termination settlement claim. If you fail to follow these directions, you do so at your own risk and expense. You should also receive detailed instructions as to the protection and preservation of all property that is or may become government-owned.
After termination for convenience, the government will make a settlement with you to compensate you fully and fairly for the work you have done and any preparation made for the terminated portion of the contract. A reasonable allowance for profit is also included.

Contract Changes
Because the government’s needs change from time to time, government contracts contain a clause authorizing the contracting officer to unilaterally order changes in the specifications and other contract terms. The changes must be „within the general scope of the contract.“ The contractor is obliged to perform the contract as unilaterally changed by the contracting officer. A change is within the scope of the contract if it can be regarded as within the contemplation of the parties at the time the contract was entered into. The government cannot use a change order to change the general nature of the contract. The contractor is entitled to an equitable adjustment in price and delivery schedule if changes are ordered.

The obligation to make prompt payments for products delivered or services rendered is, generally speaking, the primary obligation of the government on a procurement contract. Payment is, naturally, of utmost importance to the small business. Your contract will specify the government office responsible for payment and will contain invoicing instructions. The more accurate your invoices, the more quickly you will be paid, so it is important to understand the payment process thoroughly. Prompt payment on all contracts serves the best interest of both the contractor and the government. Under certain circumstances, if the government does not accomplish prompt payment, you can submit a request for interest payments.
Under fixed-price contracts, the method of payment can vary with the dollar value of the contract. For relatively small contracts with a single item of work, you will generally be paid the total contract price in one lump sum. Payment is made after the government accepts delivery. For larger contracts with many items, you can invoice and receive partial payments. For example, in a contract for 120 units with a delivery rate of 10 per month, you can invoice each month for the price of delivered (and accepted) items. Larger fixed-price contracts and subcontracts where the first delivery is several months after award may contain a clause permitting you to receive progress payments based upon costs incurred as work progresses.
Because progress payments are based on work that is not completed, you must repay them if you fail to complete the work. To protect its interest, the government takes title to your work-in-process for which progress payments have been made. To qualify for progress payments, you must have an accounting system that can accurately identify and segregate contract costs.

The federal government has exact specifications for most of the products and services it buys on a regular basis. In all likelihood, your contract will contain such precise specifications. In fact, the specifications – which describe the government’s requirements – were contained in the invitation for bids or request for proposals on which you based your bid or proposal.
Once an award is made to your company, you are contractually bound to deliver the product or service described in the specifications. Sometimes, the basic specifications will make reference to and incorporate other Federal specifications. You are, of course, bound by the terms of these specifications as well as the basic specifications. Failure to deliver a product meeting these terms may result in termination of your contract by default.
Never bid on a contract unless you have read and understood all of the specifications. Also, read the specifications again before you start work under the contract.

Inspection and Testing
Government contracts provide that the government may inspect and test the items you deliver to determine if they conform to contract requirements and specifications. The government will not accept a contractor’s product unless it passes inspection. The type and extent of inspection and testing depend largely on what is being procured.

Recommendations and Advice for Your New Contract
In addition to having a working knowledge of government contracting procedures, you should be aware of the following:
The government conducts its business through authorized agents called contracting officers. Only a contracting officer has authority to bind the government, unless you are otherwise advised in writing. However, even contracting officers have limits on their authority, so do not hesitate to make sure of the authority of the person with whom you are dealing.

Government procurement has historically been used as a vehicle for advancing various national, social, and economic objectives. As a government contractor, you will be required to comply with the labor standards statutes (Service Contract Act, Contract Work Hours and Safety Standards Act, etc.) and other statutes advancing national socio-economic objectives, except for certain contracts where such legislation is specifically stated as nonapplicable.
You should become familiar with the contract provisions protecting the integrity of the government procurement process. These provisions include the „officials not to benefit“ clause, the „anti-kickback“ provisions, the „gratuities“ clause, and more.

Disputes between you and the contracting officer may occur under the contract. Federal contracts contain a clause setting forth procedures to resolve disputes. If the contracting officer issues a decision that is not satisfactory to you, you must make a timely appeal to the Board of Contracts Appeal or the decision becomes final.

Do not attempt to build something bigger, better, or different than called for by the contract. If you do, it may be too big or too heavy or may not fit and the government will not accept it. Simply comply with the contract terms, particularly the specifications.

If your contract requires production, establish a production control schedule to assure that you will have the right materials in-house at the right time to meet delivery requirements. Make sure to place any subcontracts promptly and schedule delivery of subcontracted items carefully to avoid over- or under-stocking. If it appears you will not meet your schedule, notify the administration office immediately to obtain assistance. Failure to deliver on time gives the government the right to cancel your contract, with possibly disastrous results to you.

Being e-commerce-savvy is very important in doing business with the Federal Government. For example, if you want to do business with the Department of Defense, you must be able to invoice and receive payments electronically. Therefore, small business owners interested in doing business with the federal government should master electronic commerce.