Federal Acquisition Regulations on Business Practices and Conflicts of Interest: Part 1

Issued in 1974, the Federal Acquisition Regulation (FAR) is the primary set of rules in the Federal Acquisition Regulations System regarding government contracting in the US. The FAR System governs the “acquisition process” for executive agencies of the federal government that acquire goods and services via contract with appropriated funds.The process consists of three general phases:

  1. Needs recognition and acquisition planning;
  2. Contract formation; and
  3. Contract administration.

The FAR regulates the activities of government acquisition and program personnel who administer the contracting process. Every federal government agency is required to comply with the FAR System, with a few notable exceptions like the Federal Aviation Administration and the U.S. Mint. Those who are not required to comply have their own specific acquisition rules.

The guiding principles of the FAR are to:

  • Have an acquisition system that satisfies customer needs in terms of quality, cost, and timeliness,
  • Reduce administrative operating costs, and
  • Conduct business with fairness, openness, and integrity.

This last point will be the focus of our two blog series sharing best practices for conducting federal business and avoiding personal conflicts of interest.

Part 3: Improper Business Practices and Personal Conflicts of Interest

Part 3 of FAR outlines policies and procedures to avoid personal conflicts of interest and improper business practices and how to deal with any occurrences of such. FAR Part 3 consists of the following 11 subparts:

  • Subpart 3.1 – Safeguards
  • Subpart 3.2 – Contractor Gratuities to Government Personnel
  • Subpart 3.3 – Reports of Suspected Antitrust Violations
  • Subpart 3.4 – Contingent Fees
  • Subpart 3.5 – Other Improper Business Practices
  • Subpart 3.6 – Contracts with Government Employees or Organizations Owned or Controlled by Them
  • Subpart 3.7 – Voiding and Rescinding Contracts
  • Subpart 3.8 – Limitations on the Payment of Funds to Influence Federal Transactions
  • Subpart 3.9 – Whistleblower Protections for Contractor Employees
  • Subpart 3.10 – Contractor Code of Business Ethics and Conduct
  • Subpart 3.11 – Preventing Personal Conflicts of Interest for Contractor Employees Performing Acquisition Functions

Each Subpart outlines applicable definitions, general standards, policies, contract clauses, and how to report and punish violations. We’ll outline the first 5 of 11 Subparts here.

Canva Security LogoSafeguards

Subpart 3.1, addresses Safeguards. The standard of conduct outlined in this part states that government business be conducted without any preferential treatment, because this business is done with public funds and requires a high degree of public trust. The most basic principal on this matter is that any conflict of interest, or even the appearance of possible conflict of interest in a Government / contractor relationship, must be strictly avoided. A good litmus test is that all parties should feel “no reservation” in full public disclosure of their actions.

This subpart covers various topics, beginning with Section 3.101-2 on the solicitation and receipt of gratuities. This section states that no government official can request or receive any form of gratuity including gifts, loans, entertainment, favors, or anything of monetary value, either directly or indirectly from anyone who plans to, has previously or currently works with the personnel’s agency.

The next section, 3.103 [Section 3.102 is reserved] outlines Independent Pricing, outlining standardization of fixed-pricing, and that pricing is arrived at independently without any communication or unfair competitive advantage. The last section, 3.104, defines Procurement Integrity and clarifies restrictions on disclosing or obtaining information. Outside of the exceptions outlined in this important section, no one can disclose contractor bid or proposal information or source selection information to anyone besides authorized personnel. It goes on to describe procurement integrity violations (or possible violations) in subsection 3.104-7 and explains penalties and remedies for any conduct that violates procurement integrity in subsection 3.104-8.

Finally, subsection 3.104-9 lists the two contract clauses that will be inserted into “other than commercial items” contracts and solicitations that exceed the simplified acquisition threshold:

  • 52.203-8, Cancellation, Rescission, and Recovery of Funds for Illegal or Improper Activity; and
  • 52.203.10, Price or Fee Adjustment for Illegal or Improper Activity.

Canva 100 U.s. Dollar BanknotesContractor Gratuities to Government Personnel

Subpart 3.2 expands on gratuities, specifically the contract clause at 52.203-3 and how to report and treat suspected violations. If it is determined that a contractor, under a contract containing the Gratuities clause, offers a gratuity with the intention to obtain a contract or favorable treatment, they will appear in front of a counsel and if a violation has occurred, they will terminate the contractor’s right to proceed.

Reports of Suspected Antitrust Violations

Subpart 3.3 deals with antitrust terms and reporting for said violations. It defines antitrust activity as practices that eliminate competition or restrain trade, which then usually leads to excessive prices. Such practices may warrant criminal, civil, or administrative action against the participants.

Examples of anticompetitive practices described in FAR section 3.301 are:

  • collusive bidding
  • follow-the-leader pricing
  • rotated low bids
  • collusive price estimating systems
  • sharing of the business.

The final section 3.303 reviews the protocol for reporting any suspected antitrust activities.

Contingent Fees

Subpart 3.4 prescribes procedures and policies that restrict contingent fee arrangements for government procurement to those permitted by 10 U.S.C.2306(b) and 41 U.S.C.3901. In section 3.402 it reviews Statutory Requirements, explaining that because such arrangements may lead to attempted or actual exercise of improper influence, Contractors’ arrangements to pay contingent fees for soliciting or obtaining Government contracts are considered contrary to public policy. It notes there are some exceptions, including if these statutes:

  • Require in every negotiated contract a warranty by the contractor against contingent fees
  • Permit, as an exception to the warranty, contingent fee arrangements between contractors and bona fide employees or bona fide agencies; and
  • Provide that, for breach or violation of the warranty by the contractor, the Government may annul the contract without liability or deduct from the contract price or consideration, or otherwise recover, the full amount of the contingent fee.

This applies to all contracts including sealed bid contracts. The remaining sections outline the contract clauses to include in contracts and solicitations exceeding the simplified acquisition threshold (52.203-5, Covenant Against Contingent Fees), and how to report misconduct if found in violation before or after the bid is awarded.

Canva Business Signature Contract Document Deal

Other Improper Business Practices

In Subpart 3.5 Other Improper Business Practices are reviewed. These practices include:

  • Buying In
  • Subcontractor Kickbacks
  • Unreasonable restrictions on subcontractor sale

Section 3.501 defines Buying-in as submitting an offer below anticipated costs with the intention of increasing the contract amount after the award, or receiving follow-on contracts at artificially high prices to recover losses incurred on the buy-in contract. Because buying in may decrease competition or result in poor contract performance, the contracting officer must assure buying-in losses are not recovered.

Kickbacks are defined in section 3.502 as any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind which is provided to any prime contractor, prime contractor employee, subcontractor, or subcontractor employee for the purpose of improperly obtaining or rewarding favorable treatment in connection with a prime contract or in connection with a subcontract relating to a prime contract. In 1986 The Anti-Kickback Act was signed to deter subcontractors from making payments and contractors from accepting payments for the purpose of improperly obtaining or rewarding favorable treatment.

The final Subpart of 3.5 mentions how 10 U.S.C.2402 and 41 U.S.C. 4704 require that subcontractors not be unreasonably precluded from making direct sales to the Government of any supplies or services made under a contract. However, this does not preclude contractors from asserting rights that are otherwise authorized by law or regulation.

Continue Reading: Part 2, Federal Acquisition Regulations on Business Practices and Conflicts of Interest.

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