The US federal government is the world’s largest purchaser of goods and services. In addition to spending on healthcare (which accounts for a large portion of the federal budget), the federal government purchases a wide variety of products and services, including those relevant to its roles in national security (e.g., weapons and aircraft), administration (e.g., technology or consultant services), infrastructure (e.g., construction of buildings and bridges) and innovation (e.g., research and education).
A company that enters into the world of federal government contracting opens endless business opportunities but is subject to a unique system of laws, regulations and contract clauses that govern procurements by federal executive agencies, and the contractor’s and subcontractor’s related activities. A significant feature of government contracts is the possibility that the contractor may incur civil fraud liability for reckless, negligent or intentional failures to comply with contract provisions under the FCA, particularly under the implied certification and fraudulent inducement theories of liability.
Compliance Requirements Under FAR and DFARS
Congress requires executive agencies to follow a unified set of regulations, the Federal Acquisition Regulation (FAR), for all federal procurement. The Federal Acquisition Regulatory Council created the FAR to standardize government procurement rules, including contract clauses and solicitation provisions. The Department of Defense (DOD), the National Aeronautics and Space Administration, and the General Services Administration first published the FAR in 1983. While the FAR aims to centralize federal procurement, it allows agencies to issue their own regulations to supplement or implement its guidelines. Today, 26 agencies have created their own supplements to the FAR, such as the DOD’s Defense Federal Acquisition Regulation Supplement (DFARS). Agencies also often include unique contract provisions for government contractors.
Government contractors may violate the False Claims Act (FCA) by submitting false records, making billing errors, failing to report overpayments, misrepresenting product origins, and engaging in other misconduct.
Grants and Cooperative Agreements
In addition to procurement contracts, the government provides funding through grants and cooperative agreements to achieve public objectives. Congress must authorize these agreements and may set specific requirements. Some grants incorporate the Uniform Guidance under Title 2 of the Code of Federal Regulations (CFR), while various agencies have established their own rules for grant recipients.
Emerging Issues:
1. Cybersecurity:
The federal government requires contractors to protect sensitive information on their systems. The DFARS 252.204-7012 clause mandates that contractors meet specific cybersecurity standards for handling covered defense information (CDI). In recent years, several lawsuits have targeted contractors for non-compliance. In July 2022, a prominent contractor agreed to pay $9 million to resolve allegations that it falsely claimed compliance with cybersecurity requirements. The Department of Justice (DOJ), through its Civil Cyber Fraud Initiative launched in October 2021, has actively pursued cases against contractors who fail to meet or falsely certify their cybersecurity compliance.
2. Supply Chain Security:
The government enforces supply chain security measures to reduce risks from specific countries or sources. For instance, FAR 52.204-23 prohibits contracting for products from Kaspersky Labs, and other regulations restrict telecommunications equipment from companies like Huawei and ZTE. Recently, the government has intensified enforcement against supply chain fraud. In November 2023, an aerospace company paid $9.4 million to resolve allegations of selling engines with non-compliant parts to the military.
