Federal Acquisition Regulations on Business Practices and Conflicts of Interest: Part 2

The Federal Acquisition Regulation (FAR) is what regulates federal government spending — and thus applies to government contractors that win a contract. The FAR governs wide-ranging aspects of contracting with the federal government, such as competition requirements, exceptions to certain rules, socioeconomic policy, and so forth. Because it is such an overarching policy, it is important to understand the FAR in depth — and more specifically, what it tells you explicitly not to do if you want to stay on the right side of the rules.

We began our exploration of this topic in Part 1 of this blog series, which you may want to read before jumping into our second part, an examination of FAR Part 3 – Improper Business Practices and Personal Conflicts of Interest.

FAR Part 3: Improper Business Practices and Personal Conflicts of Interest

Like the first part of this article, we will focus on Part 3 of the FAR, which outlines policies and practices that should be enacted to avoid improper business practices and personal conflicts of interest, as well as what to do if such infractions actually occur. The goal of Part 3 is to secure the trust of the public, as they are the source (through tax dollars) of the discretionary funding that government agencies use to acquire goods and services. This means that even an appearance of a conflict of interest must be treated as a conflict of interest as well. In this article we’ll explain, by reviewing the second half of Part 3.

  • 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

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Contracting with government employees can result in a conflict of interest.

Subpart 3.6 – Contracts with Government Employees or Organizations Owned or Controlled by Them

This subpart starts by addressing the issue of contracting with employees within the government. To fully understand this, we must first understand the definition of a government employee. Government employees include:

  • Those appointed by one of the following:
    • The President
    • Member(s) of Congress
    • Member of the Uniformed Service
    • Another employee
    • The head of a government-controlled corporation
    • An adjutant general designated by the secretary
  • Those engaged in the performance of a federal function under authority of law or an Executive act
  • Those subjected to the supervision of any of the positions named above while engaged in their duties


The actual policy of FAR Subpart 3.6 is that a contracting officer is not allowed to award a contract to a government employee or any organization substantially owned or operated by one or more government employees. The reasoning is that it may cause a conflict between the employee’s personal interest and their government duties, as well as possibly giving off the appearance of favoritism from the Government towards its employees. The exception is those government employees who are performing roles as experts, advisors, consultants, or members of advisory committees. However, even they can be subject to this rule if the contract arises specifically out of their activity within the government, they are in a position to influence the awarding of the contract, or another conflict of interest exists.

It should be noted that exceptions are possible in the case that the Government’s needs cannot otherwise be met, but these must be designated by the agency head or a designee not below the level of the contracting officer. This authorization should be completed if the contracting officer has reason to believe that the prospective contractor is a government employee, and there is a most compelling reason to award the contract to that particular person. Just be smart — if there seems to be even a hint of conflict of interest, award the contract to someone else or seek an authorization from the appropriate official.

Subpart 3.7 – Voiding and Rescinding Contracts

This subpart outlines the proper procedures for declaring contracts void and rescinding them. A contract may be declared void and rescinded when:

  • There has been a final conviction for bribery, conflict of interest, or some information regarding the contract being exchanged for a thing of value or to give anyone a competitive advantage
  • The agency head has determined that information regarding the contract was exchanged for a thing of value or to give someone a competitive advantage

Final conviction in this case means a conviction for which a sentence has been imposed, no matter whether entered on a verdict or a plea. It should be noted that voiding and rescinding a contract is not the only option in this case, but this subpart will only give details about the procedures related to voiding and rescinding. The goal of the subpart in general is to provide a solution for such happenings, as well as to prevent them in the future.


In the cases above, it is still up to the agency head and head of contracting activity to take account of the information available and decide whether to void and rescind a contract. The agency may also recover the amounts that were expended and property that was transferred in the contract. If a conclusion is able to be made that the party is not responsible, the agency should consider engaging in debarment procedures. Debarment is a process through which a contractor is effectively cut off from the federal government as a non-responsible contractor. Their name is published as ineligible on the System for Award Management (SAM), and they are unable to be awarded a contract by the government or continue any contracts they currently hold except in compelling circumstances. This helps to steer the government clear of shady contractors and keep their record squeaky-clean.


When deciding whether a contract should be declared void and rescinded, follow these steps:

  1. Reporting – the facts of any final conviction will be reported to the agency head, and the agency head will notify the Civil Division, Department of Justice, that they are considering action through Subpart 3.7.
  2. Decision – after careful consideration of the facts, the agency head will decide to declare any contracts related to the conviction void and rescind them, and in the process recover the amounts expended and property transferred under the terms of the contract.
  3. Decision-making Process – throughout the process, the agency should provide a minimum of:
    • A notice of proposed action in writing and sent by certified mail with receipt requested
    • A thirty-day period after the receipt has been received for the contractor to submit any pertinent information
    • If requested within the thirty-day period, a hearing in which both sides can present witnesses
    • The agency head or designee should issue a written declaration that states their determination to void and rescind the contract, reflects upon any value that they have received from that contract, and states the amount and property that should be returned to the agency
  4. Notice of Proposed Action – this notice should state that consideration is being given to voiding and rescinding a contract, as well as reclaiming expenses and property. The contracts affected by the action should be specified, as well as the final offense that made this action necessary. As mentioned above, the contractor has thirty calendar days in which they can submit information or call a hearing, so they should be informed of this. The value that the agency expects to keep from the contract, as well as the value of the expenses and property they are expecting to reclaim should be stated.
  5. Final Agency Decision – notice of this decision should be sent out by mail, receipt requested

Using appropriated funds to influence the awarding of federal contracts, grants, or loans is not allowed in most cases.

Subpart 3.8 – Limitations on the Payment of Funds to Influence Federal Transactions

This subpart is a partner to 31 U.S.C. 1352, “Limitation on use of appropriated funds to influence certain Federal contracting and financial transactions,” which outlines the prohibition on using funds appropriated by legislation to pay anyone to influence those in government responsible for awarding Federal contracts, grants, or loans, as well as Members of Congress. In this section, we’ll be talking about how to actually implement this law in regards to the awarding of contracts.


As with all elements in life, laws also includes exceptions. In this case, a reasonable payment to an officer or employee of a person who is either in the process of requesting or is already receiving a contract, loan, or grant, is excused if the payment is in service of agency or legislative liaison activities that are not directly connected to a covered Federal action (i.e. awarding contracts, loans, or grants). This liaison could include information about the person’s products or services, conditions and terms of sale, or how an agency could apply or adapt the person’s product for use, as well as other such benign information.

Another exception is payment for those rendering technical or professional service to the government in terms of the preparation, submission, or negotiation of materials related to the covered Federal action that their employer is receiving. This also applies to those that are not employed by the one receiving the covered Federal action if they provide similar services, such as consultants or trade associations. It should be noted that professional and technical services are specified to mean advice and analysis directly applying any professional or technical discipline.

The Secretary of Defense has the power to exempt any covered Federal action from these restrictions if it is determined to be in the national interest to do so.


After all those complicated exceptions, you would think that the policy would be as convoluted and confusing as possible. Actually, it’s quite simple: the contracting officer just needs to receive the certifications and disclosure as outlined in FAR Subsection 52.203-11 before awarding any contract exceeding $150,000.

Subpart 3.9 – Whistleblower Protections for Contractor Employees

This subpart has the purpose of implementing various other laws protecting whistleblowers as they apply to contracting.


Essentially, government contractors are not allowed to punish their employees for going to the authorities about a violation of the law relating to the contract. Punishment in this case means discharging, demoting, or discriminating against that employee in any way. The authorities that the employee might tell are Members of Congress, an agency official, or an official of the Department of Justice. Not only does this apply to contracts that have already been awarded — it can also be in regards to competition for a contract.

Procedure for Submitting a Complaint

Any employee that believes their employer has broken this rule should first file a complaint with the Inspector General of the agency that awarded the contract. This should include the contractor’s name, the contract number, an account of how it violated the law, a description of the discriminatory act, and the date that it occurred.

Procedure for Investigating a Complaint

The Inspector General ultimately has the power to decide if the complaint is warranted. If the Inspector General decides it’s worth looking into, he/she must inform those involved, and both sides are able to submit a written response to any findings within thirty days. The head of the agency is also able to request additional investigation.


So it’s determined that a contractor has discriminated against a whistle-blowing employee. How is this fixed? The head of the agency is ultimately responsible for deciding which action to take between the choices of ordering the contractor to:

  1. Take affirmative action
  2. Reinstate the person with proper compensation
  3. Pay the employee the amount spent on the complaint

Or, perhaps all three.

Subpart 3.10 – Contractor Code of Business Ethics and Conduct

This subpart deals with the requirements and implementation of codes of ethics and conduct for contractors. It is a given that contractors should conduct themselves with the highest degree of integrity and honesty at all times, but this part outlines how that should be done.


Contractors are required to have a written code of business ethics and conduct. In addition to this code, they need to have an employee training system for their particular code, as well as ensuring that any breach of the code is quickly dealt with. This code should include such issues as fraud, conflict of interest, bribery, and gratuity, as well as what to do in the case of an overpayment.

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Employees are not allowed to use non-public information for personal gain.

Subpart 3.11 – Preventing Personal Conflicts of Interest for Contractor Employees Performing Acquisition Functions

In order to fully understand Subpart 3.11, it’s necessary to know what exactly what is considered a personal conflict of interest. A personal conflict of interest, as defined in the FAR, is any situation in which the employee has financial interest, personal activity, or relationship that would prevent them from acting in the best interest of the government.


Contractors are required to identify any possible conflicts of interest among their employees, as well as more specifically preventing prohibiting employees from using nonpublic information for their own personal gain. In other words, all the responsibility is on the shoulders of the contractor.


So how are contractors to know about all of their employees’ conflicts of interest? According to the FAR, they should require each of their employees who are involved in the acquisition process to disclose their conflicts of interest on a regular schedule and regarding each separate contractual task. Plus, each employee should be required to update the disclosure whenever their situation changes in such a way that may cause a new conflict of interest to occur. If an employee does have a conflict of interest, they should not be allowed to perform a task relating to that contract. In order to fulfill the second part — the ban on disclosing nonpublic information for personal gain — contractors should obtain from each of their employees a nondisclosure agreement.

The only way in which this rule can be circumvented is if the contractor proves to the head of the contracting activity that the conflict of interest cannot be avoided. In this case, the head of the contracting activity has the power to either issue a plan to mitigate the conflict of interest or waive the rule altogether.

There you have it, a full breakdown of FAR Part 3, Improper Business Practices and Personal Conflicts of Interest. Get to know these regulations and you’ll be in a better position to keep yourself in the clear with regard to procurement integrity. But of course, if you have any real concerns or questions, it’s best to consult with a contracts attorney or your agency counsel for a formal assessment and opinion on your circumstances.

Read More: A Quick Reference Guide to FAR Section 2.101 – Definitions

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