Meeting FAR Ethical Requirements for Contractors

The rather lengthy subheading to a 2004 edition of S&P’s The Review of Securities & Commodities Regulation titled “Enforcement Actions in the Post-Enron World: Zero Tolerance in the White-Collar Arena” says a lot about the climate among federal officials in the mid-2000s:

The Sarbanes-Oxley Act and a New Climate Have Led to Sharply Increased Criminal and Civil Prosecutions with More Draconian Penalties for Corporate Misdeeds. In the Event of Problems, the Best Protections Are a Documented Compliance Program, Prompt and Thorough Investigation of Misconduct, Cooperation with the Government, and Remedial Action.

Not only did Congress pass the Sarbanes-Oxley Act, lawmakers and regulators made significant changes to the most basic rules that govern virtually all aspects of conducting contractual business with the U.S. government, the Federal Acquisition Regulation (FAR).

FAR and ethics

In keeping with the heightened awareness caused by a number of severe and well-publicized lapses of corporate ethical behavior, at the end of 2007 additions were made to FAR that greatly increased the ethical and compliance standards required among federal government contractors.

Specifically, FAR Part 3 (Improper Business Practices and Personal Conflicts of Interested) was substantially modified to include Subpart 3.10, entitled, “Contractor Code of Business Ethics and Conduct.” There are five basic sections of Subpart 3.10:

  • Scope
  • Definitions
  • Policy
  • Requirements
  • Contract Clauses

The last three — Policy, Requirements, and Contract Clauses — are the most important, and while they often appear fairly specific in their requirements, there are some areas that have been left vague and ambiguous. These are critical because government contracts may be cancelled if a business:

  • fails to make delivery as required by the contract;
  • fails to make sufficient progress on the contract; and/or
  • fails to perform any provisions of the contract.

The provisions, of course, include all those that pertain to business ethics and conduct.

Who is covered?

The first item in Policy section of Subpart 3.10 simply states, “Government contractors must conduct themselves with the highest degree of integrity and honesty.” Note the use of the word “must,” and with no exceptions listed, this has to mean “all government contractors.” The next lines are as follows:

    (b) Contractors should have a written code of business ethics and conduct. To promote compliance with such code of business ethics and conduct, contractors should have an employee business ethics and compliance training program and an internal control system that —

      (1) Are suitable to the size of the company and extent of its involvement in Government contracting;

      (2) Facilitate timely discovery and disclosure of improper conduct in connection with Government contracts; and

      (3) Ensure corrective measures are promptly instituted and carried out.

These indicate that anyone contracting with the government must hold themselves to the highest ethical standards. But as it employs phrases such as “should have a written code” and “should have an employee business ethics and compliance training program,” the picture begins to get somewhat fuzzy in terms of what is actually required.

However, as we continue through the regulations, we find that there are certain requirements for any company with contracts that exceed $5 million and are expected to last 120 days or longer, as well as for any company classified as a large business contractor. To be exempt from the large business requirements, a company must meet the small business classification requirements of the North American Industry Classification System. There are also some exceptions for subcontractors who work entirely outside of the United States and subcontractors who only provide commercial items.

Contractor Code of Business Ethics and Conduct

The Requirements section of Subpart 3.10 are more specifically defined in 52.203-13, Contractor Code of Business Ethics and Conduct, and 52.203-14, Display of Hotline Poster(s). We will cover the code of ethics and conduct first.

All contractors, regardless of size, must have a written code of ethics and conduct, provide a copy for every employee who works on the government contract, and promote compliance to its code.

Large businesses, within 90 days after the contract is awarded, must have an ongoing ethics and conduct awareness program, including training and regular communications, and have an internal control system that facilities timely discovery of misconduct and ensure prompt corrective measures. Specifically, the internal control system should:

  • hold periodic reviews of business practices to assure compliance
  • have a reporting mechanism, such as a hotline
  • conduct external audits as appropriate
  • take disciplinary action for ethical misconduct

Also, responsibility for these measures must be taken at a level high enough in the organization so ensure their effectiveness.

While only larger companies are required to have a formal training program, companies of all sizes “should” train their employees. As outlined above they are also held responsible for maintaining ethical standards and making a copy of those standards available to all employees. Therefore, this “two-tier” training requirement might, in practical terms, be a distinction without a difference for government contractors.

Displaying hotline posters in the workplace and providing equivalent information on company websites is also a requirement made of larger companies.

Meeting FAR requirements

As you can see, the regulation’s requirements can be rather complex. And while some measures are suggested by wording that includes phrases such as “contractors should” and others are clearly mandatory using words like “must” and “shall,” the end result is that any business contracting with the federal government needs to take its ethical compliance and training seriously. Failure to meet the contractual requirements of Subpart 3.10 can result in the loss of a contract.

Establishing and maintaining an ethical business environment takes advocacy, training, and an ongoing commitment. In light of the FAR requirements, Lighthouse recognized that businesses need a convenient and comprehensive way to train employees, and for that reason we teamed up with Syntrio, a recognized leader in the field of e-Leaning solutions, to offer an industry-leading catalog of online courses.

One of the courses we are offering is “Ethics and Business Conduct for Government Contractors (FAR).” Employees are educated about the laws that are applicable when contracting with the government, as well as the specific values of the organization. The advanced learning system we use allows for customization, so the learning session can be tailored to fit your company’s values.

As employees work through the session, they are even given hypothetical situations that present ethical challenges and shown how to apply the company’s code of ethics to properly navigate the issues. We think they make a great investment for any company that contracts with the government, or is planning to in the future.

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