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discuss the code's approach to the requirement that certain contracts must be in writting and the...

discuss the code's approach to the requirement that certain contracts must be in writting and the alternative methods of compliance

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Threshold for Application of Mandatory Requirements

FAR 3.1001 states that the “requirements set forth in the clauses at 52.203-13, Contractor Code of Business Ethics and Conduct, and 52.203-14, Display of Hotline Poster(s), are mandatory if the contracts meet the conditions specified in the clause prescriptions at FAR 3.1004.” The thresholds for applicability of these two clauses differ slightly. Neither clause is required for acquisition of commercial items under FAR Part 12, nor for contracts that will be performed entirely outside the United States. The Code of Conduct clause is only to be used for contracts that are expected to exceed $5 million in value and that have a performance period of 120 days or more. The Fraud Hotline Poster clause is required when the agency has a fraud hotline poster or if the contract is funded with disaster assistance funds, and exceeds $5 million in value or such lesser thresholds as established by the agency.Hereinafter, contracts that meet these criteria will be referred to as “covered contracts.

Code of Business Ethics and Conduct
All Contractors The mandatory requirements in FAR 52.203-13 are divided into those that apply to all contractors and those that only apply to large businesses. Any contractor that receives a covered contract must comply with the requirements set forth in 52.203-13(b). Specifically, the contractor must, within 30 days after contract award,
Have a written code of business ethics and conduct,
Provide a copy of the code to each employee engaged in the performance of the contract, and
Promote compliance with its code of business ethics and conduct.

Large Businesses

The requirements that are only mandatory for large businesses are set forth in FAR 52.203-13(c). This provision specifically states that the requirements do not apply “if the [c]ontractor has represented itself as a small business concern pursuant to the award of this contract.” It is important to note that a business must be classified as a small business pursuant to the North American Industry Classification System (NAICS) code applicable to that specific solicitation in order to be exempt from these requirements. Thus, an emerging business may win some contracts where they are exempt from the requirements of this section and may win others where the same requirements are mandatory.
Per FAR 52.230(c), the large business contractor shall establish, within 90 days after contract award,

1. An ongoing business ethics and business conduct awareness program and

2. An Internal Control System.

i.The contractor’s internal control system shall:

A.Facilitate timely discovery of improper conduct in connection with government contracts; and
B.Ensure corrective measures are promptly instituted and carried out.
ii. For example, the contractor’s internal control system should provide for:
A.Periodic reviews of company business practices, procedures, policies, and internal controls for compliance with the contractor’s code of business ethics and conduct and the special requirements of government contracting.

  B.An internal reporting mechanism, such as a hotline, by which employees may report suspected instances of improper conduct, and instructions that encourage employees to make such reports;
C.Internal and/or external audits, as appropriate; and
D.Disciplinary action for improper conduct.

However, the contracting officer (CO) can allow a longer period than 30 or 90 days. The regulations do not offer guidance as to when it would be appropriate for the CO to grant more time, nor does the clause limit the amount of additional time that can be granted.
As was the case in the FAR 3.10 policy statement, the term “code of business ethics and conduct” is not defined. Similarly, no guidance is provided as to what constitutes an acceptable awareness or compliance promotion program. Though the clause does set forth some objectives of an internal control system, it does not prescribe any specific approach. Conspicuous by its absence is any requirement to disclose improper conduct.
Though some of the terminology is taken from the U.S. Sentencing Guidelines, the lack of precise definitions is exacerbated because the policy statement and clause requirements use different terms to describe what appear to be similar, if not the same, functions. Per the policy, all contractors of whatever ilk should have an ethics and compliance training program. Additionally, any contractor, large or small, that wins a covered contract must promote compliance with its code of conduct. Large contractors that win a covered contract must further establish an ongoing business ethics and conduct awareness program. As these phrases are undefined, it is impossible to determine, with any level of confidence, how a training program differs from a promotional program or from an awareness program.
However, as the FAR Council purposely uses different terminology applicable under different circumstances, the phrases must be describing different programs. All businesses that win a cov- ered
con- tract must promote compliance while only large busi- nesses must both promote compliance and establish an awareness program. Therefore, it can be deduced that an awareness program is more extensive than promotion activities. Despite the fact that training is only mentioned in the non-mandatory policy section, it would be foolhardy for any contractor to assume that an acceptable promotion or awareness program could lack training.
Significantly, the government is not required to review and approve the code, the training program, the promotional activities, or the awareness program. Though not specified in the clause, the FAR Council stated that the CO is only required to verify that internal controls exist. However, it is not clear how this verification is to be
accomplished. Of course, the larger defense contractors may be subject to Defense Contract Audit Agency review of their internal controls. The FAR Council states that the CO may request information pertaining to the compliance program as part of routine contracts administration, but is not required to do so. Compliance with these requirements would most likely be reviewed in the event an ethics violation has occurred.
Presumably, this laissez faire approach has been adopted, in part, to minimize the paperwork and bureaucracy associated with the new requirements. As the clause lacks terminology definitions, acceptability guidance, or approval requirements, the contractor has wide leeway to draft a code of conduct, promote compliance, provide training, and establish an awareness program and internal controls in any manner that seems appropriate under the circumstances. In fact, if there are no ethical issues, the government may never know whether a contractor complied with this clause. On the other hand, in the event an ethics violation occurs, the contractor may discover that in addition to their other problems, the government may consider them to be noncompliant with this clause and, thus, in default of their contract. The government could reach this conclusion even if the contractor implemented a compliance program that it believed was adequate. Such a finding would not only subject the contractor to the possibility of a default termination, but would also presumably result in harsher treatment from the justice system, not the leniency typically granted to companies with strong compliance programs. Therefore, contractors should take the requirements of the clause seriously, even though it does not require government approval.
There is another subtle difference between the mandatory requirements applicable to all contractors and those applicable only to large businesses. For all contractors, only employees “engaged in the performance of the contract” need to be provided with copies of the contractor’s code of business ethics and conduct.

Mandatory Requirements:

Display of Hotline Posters The mandatory requirements set forth in FAR 52.203-14 are, thankfully, much simpler to understand. All contractors shall prominently display the pertinent agency or Department of Homeland Security (DHS) fraud hotline poster. The specific posters to be displayed will be identified by the CO in the clause. The posters are to be displayed at business segments performing work under the contract or at work sites. To the extent a contractor maintains a Web site as a method of providing information to employees, the contractor shall display an electronic version of the poster(s) on the Web site.13

There is a caveat, however. The contractor does not have to display the agency poster if the contractor has a business ethics and conduct program that includes a reporting mechanism such as a hotline poster. However, the DHS poster, if required, would still have to be displayed. As previously noted, there is no requirement for a reporting mechanism to allow for anonymous reporting. Additionally, this clause also must be included in any covered subcontracts. This ability to use your own hotline poster in lieu of the agency’s poster is important because it will almost always be in the contractor’s best interest to have employees report misconduct to the company rather than directly to the government.


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