It’s that time, again: gym ad season. No matter where I go, I’m inundated with targeted ads telling me 2023 is the year I’ll make the gym a habit. The gyms are right, though, the new year is a good time to make new habits. If the gym isn’t your thing, let me recommend something else—improved compliance.
Contracting with Uncle Sam means playing by his rules, and, boy, does he have a lot of them. The Federal Acquisition Regulations (“FAR”) are filed with compliance requirements. Things are even more onerous for small businesses, which also have the Small Business Administration (“SBA”) regulations and reporting requirements to contend with.
Itemizing every compliance requirement would result in a prohibitively long post. Instead, my colleagues and I have curated a limited list of compliance considerations that we believe provide a good start for a small business federal contractor looking to strengthen its compliance regime.
Prepare a Contractor Code of Ethics
Contrary to what you may see on the evening news, the federal government expects its contractors to behave ethically. In fact, it requires it. The federal government will not contract with entities it believes are unethical.
Ethics compliance usually takes the form of an ethics plan or code of conduct. The FAR makes clear that “[c]ontractors should have a written code of business ethics and conduct.” Plans should be tailored to the size of the company, facilitate the timely discovery and disclosure of improper conduct, and provide consequences and corrective measures for violations. Federal contracts exceeding $6 million will also incorporate FAR 52.203-13, Contractor Code of Business Ethics and Conduct, which requires contractors to introduce an ongoing business ethics awareness and compliance program.
The new year is a great opportunity for compliance departments to dust off ethics plans and make updates to address new challenges, incorporate lessons learned, and confirm their ongoing compliance.
Retire Expired Small Business Joint Ventures
Small business joint ventures should not last forever. By regulation, small business joint ventures must be of limited purpose and duration. The SBA reinforces these limitations by limiting the offering period of joint ventures to two years starting when the joint venture receives its first contract. Thereafter, it may perform any work it is awarded—even if those awards are outside the two-year window—but may not submit new bids without risking affiliation between the members.
Companies often overlook retiring out-of-date joint ventures. Establishing a joint venture is time consuming and (depending on how you feel about SAM.gov) tedious. As separate legal entities, there is often little impetus to wind-up operations. Consequently, many joint ventures linger. The temptation to repurpose an old joint venture for a re-compete, or a new opportunity can be all too tempting.
Avoid the temptation by retiring joint ventures with expired ordering periods from competitive planning. For those small business joint ventures that have completed all their contracts, wind up operations.
Update Small Business Joint Ventures for Continued Compliance
Compliance with the SBA’s joint venture regulations is often a moving target. The SBA is continually revising the joint venture regulations to ensure the program is being administered in the manner desired by the SBA. Consequently, joint ventures can fall out of compliance from year to year.
A joint venture must comply with the SBA’s joint venture regulations as of the date that it submits its bid. Failure to do so can result in successful size protest challenges and the loss of an award. Reviewing joint ventures for continued compliance with current joint venture regulations can save future heartache by identifying discrepancies before they become fatal.
Confirm FAR Flow-Downs in Subcontracts
The federal government does not have a contractual relationship with subcontractors, but that doesn’t stop Uncle Sam from trying to pull the strings. This is where FAR flow-down provisions come into play. Many FAR provisions obligate the prime contractor to incorporate the substance of the clause—that is “flow-down” the requirements—into subcontracts.
Omitting mandatory flow-down provisions can cause significant headaches. FAR flow-downs are a contractual requirement of the prime contract. Forgetting to incorporate necessary provisions into subcontracts is technically a breach of the prime contract. More practically, when the government seeks to enforce FAR requirements, it can be difficult to compel similar compliance from subcontractors if the contractual clauses are left out of the subcontract.
While FAR flow-downs are something that should be largely settled at the time the subcontract is negotiated, it never hurts to confirm compliance. Moreover, prime contracts can be modified to include new provisions that include flow-down requirements. As such, annual review of subcontracts to confirm continued compliance and save heartache later.
Recalculate Size and Affiliation
For many businesses, the end of the calendar year coincides with the close to the fiscal year. For small businesses, concluding the fiscal year can have major implications for size eligibility. Size in federal contracting is measured by either the five-year average of a firm’s total income plus costs of goods sold, as those items are reported on a completed tax return, or a 24-month average of employees. Qualifying as small is required for participation in the SBA’s socioeconomic programs and for set-aside contracts.
Integral to size is affiliation. When calculating size for federal contracting, the SBA aggregates the revenue or employees of the offeror with its affiliates. The touch stone for affiliation is the ability of one business to control the actions of another. For example, the SBA will presume affiliation when ownership or management is shared between two firms.
The new year offers a great opportunity to recalculate a business’s size to confirm it continues to meet the applicable size standards or develop strategies for successfully emerging from the small business pools. This is particularly true since the SBA recently increased the size standards associated with many NAICS codes to account for inflation. Concurrently, businesses should also review ownership, management, and business relationships to evaluate potential affiliations.
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Like the gym, federal contracting compliance programs are tedious and seldom yield immediate results. But both are worth the effort. Work done improving compliance now can minimize current risks and prepare your business for what lies beyond 2023. So what are you waiting for? New year, new (compliance) you!
If you’re looking for more compliance content, be sure to check out some of our other posts. Like this one on joint venture compliance, or this one on updated Buy American Act requirements. And if you need help with any federal contracting issue, feel free to give us a call.