Acquisition Councils Propose Improvements to Federal Contracting Practices

Subpart 9.1 of the Federal Acquisition Regulation (FAR) requires a prospective contractor to demonstrate its “responsibility,” which is defined, in part, as having “a satisfactory record of integrity and business ethics.” To this end, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council have proposed amending the FAR with a rule that would require contractors to “conduct themselves with the highest degree of integrity and honesty.”

The rule proposes that contractors “should have a written code of business ethics and conduct” and should establish and maintain “an internal control system” to detect and prevent improper conduct in connection with the award or performance of government contracts or subcontracts. (For more than a decade, many of the top contractors have implemented various corporate ethics and integrity programs, either on their own or through such organizations as the Defense Industry Initiative.) The rule would also require contractors, at the risk of suspension and/or debarment, to “timely” notify contracting officers when they become aware of violations of federal criminal law with regard to the award or performance of such contracts or subcontracts.

While POGO applauds any and all efforts to ensure contractor integrity and honesty, we immediately noticed several shortcomings in this proposed rule. First, it provides that contractors “should” (not “must” or “will”) have codes of ethics and internal control systems, and these requirements are waived in a wide variety of circumstances: if the contractor is a small business, if the contract is for the acquisition of commercial items or will be performed outside the United States or has a value less than $5 million or a performance period of less than 120 days. Second, and perhaps more importantly, the reporting requirement is unreasonably narrow: contractors are only required to report violations of federal criminal law in connection with a contract or subcontract. What if a contractor breaks the laws of a state or a foreign country? What if it’s a civil or administrative violation? What if the violation doesn’t involve a federal contract or subcontract?

Unfortunately, having a code of ethics and internal controls won’t always ensure integrity and honesty. Just yesterday, for example, it was announced that Chevron Corp. agreed to pay $30 million to settle allegations by the Securities and Exchange Commission that Chevron paid kickbacks in connection with the Oil-For-Food program. The SEC noted that Chevron had a company-wide policy prohibiting such unethical conduct, but management failed in its duty to ensure compliance. So, while POGO thinks this is a step in the right direction, we can’t help but wonder whether this proposed rule will be genuinely effective or whether it will create loopholes big enough to drive an oil tanker through.

POGO also questions the effectiveness of the FAR requirement for prospective contractors to have “a satisfactory record of integrity and business ethics.” We are not alone. At an ABA luncheon last week, Robert Cusick, the Director of the Office of Government Ethics, said that the above provision will remain ineffectual until objective integrity and ethics standards can be created and enforced. POGO's Federal Contractor Misconduct Database proves this – contractors with questionable records continue to receive billions in taxpayer dollars.