'Tis the Season for Government Contracts: Five Key Compliance Issues for Retailers Selling to the Government

by Perkins Coie

As retailers move closer to the end of the government fiscal year in September, ’tis the season for receiving government contracts.  Federal agency budget authority for discretionary spending generally mandates that agencies either obligate their appropriated funds by the end of the fiscal year or return them to the Treasury general fund.  In other words, it’s "use it or lose it," and agencies hate to lose it.  While federal buyers may resemble Santa Claus at this time of year, retailers should be fully aware of certain key obligations tied to government sales, which are described below. 

EEO and Affirmative Action Plan Requirements

The government is strengthening its auditing and enforcement of Equal Employment Opportunity and Affirmative Action requirements.  The government has long required that federal contractors and subcontractors not discriminate based upon gender, race, religion, disability and other attributes.  In addition, companies must, among other things, post EEO obligations in the workplace, issue notices about their EEO policies to unions, file EEO reports, and give the government access to company facilities for compliance purposes.

The government also requires contractors with more than 50 employees and contracts, or subcontracts in excess of $50,000, to develop an Affirmative Action Plan containing EEO goals.  Covered contractors must put their plans in place within 120 days of contract signing.  The government estimates that more than half of all covered contractors do not have these plans ready on time. 

Retailers must assure that their training, processes and record keeping demonstrate compliance with EEO rules or risk unwelcome and potentially expensive enforcement actions.

Establish and Maintain a Written Code of Business Ethics and Conduct

A compliance program, including a code of business ethics and conduct, is mandatory for government contractors that have been awarded a contract expected to exceed $5 million and require performance for 120 days or more.  The code must be in place within 30 days after contract award and be available to each affected employee.

In addition, a contractor must self-report if it has credible evidence of certain violations of law or significant overpayments in connection with the award or performance of a federal contract or subcontract.  The overwhelming majority of contractor self-disclosures to date have related to individual employee time mischarging.  Contractors must be alert, however, to potential violations of law, including violations of the False Claims Act.  Failure to timely report what is later determined to be a violation of law increases the risk of severe consequences, such as suspension and debarment.

Comply With Government-Specific Pricing Rules

Serious problems can arise if a retailer fails to comply with special government pricing rules required under General Services Administration (GSA) multiple award schedule (MAS) contracts.  Generally speaking, MAS contractors must disclose their pricing practices to the government and maintain, for the entire period of the contract, a constant relationship between the disclosed commercial pricing and the prices they charge to the government.

Contractors provide their standard commercial sales practice information to GSA through a Commercial Sales Practices form.  A "knowing" failure to provide and maintain current, accurate and complete information can subject a contractor to damages and penalties under the False Claims Act.  In addition, GSA tracks the prices a company charges to the government against a negotiated "basis of award"  customer or category of customers.  Failure to disclose a price reduction provided to a basis of award customer may expose the contractor to a price adjustment and/or liability under the False Claims Act.

In short, retailers holding GSA MAS contracts must vigilantly monitor their commercial pricing to ensure compliance with government pricing rules.

Comply With the Trade Agreements Act

Retailers and other companies that sell products to the federal government need to assure compliance with the sourcing restrictions of the Trade Agreements Act (TAA).  The TAA generally applies to government purchases in excess of approximately $200,000 for products and services and just under $8 million for construction. 

The TAA implements a number of trade treaties that grant nondiscriminatory treatment to products from signatory, or "designated," countries.  Government contractors are generally prohibited from supplying end products made in nondesignated countries such as China and Malaysia.  To comply with the TAA, the contractor must sell to the government only end products that have been "substantially transformed" in the United States or in a designated country.

However, complying with the TAA can be difficult, especially within such industries as information technology, medical supplies, clothing and footwear, and office supplies.  For one thing, the retailer in these industries is typically several steps removed from the manufacturer.  For another, the country of origin of a manufacturer's product can change based on numerous factors, such as labor costs, shipping costs, factory capacity and component availability.  Within this fluid environment, retailers and other contractors often fail to meet the TAA's requirements because their procurement departments: (1) do not sufficiently maintain information about product country of origin; or (2) fail to provide such information to the personnel responsible for government contract compliance.

To protect themselves, government contractors should develop procedures to track country of origin information and regularly communicate this information to contract compliance personnel.  In addition, contractors should obtain written certifications from manufacturers stating that they will supply only TAA-compliant products for government orders.  Finally, contractors should try to obtain indemnification from manufacturers for any damages resulting from failure to live up to their certifications.

If Selling to the Defense Department, Be Wary of the Berry Amendment

Retailers and manufacturers of food, clothing, fabric-based products and certain other commodities must assure compliance with the special, Congressionally required domestic preference requirements known as the Berry Amendment.  The Berry Amendment preferences generally apply to defense procurements in excess of $150,000 for an article or item of food; clothing; tents, textiles, canvas and various natural and synthetic fabrics; and hand or measuring tools.

Because the Berry Amendment requires supplies to be "wholly" produced in the United States, covered contractors must monitor not only the country of origin of end products but also the country of origin of components.  Contractors bound by the Berry Amendment (like those bound by the TAA) should track country of origin information and regularly communicate it to compliance personnel.  In addition, such contractors should obtain certifications from manufacturers and, if possible, indemnifications.

Final Caution for Retailers with Government Contracts

Federal contracts typically include a number of obligations not found in commercial contracts.  This list highlights just some of the key compliance issues that may arise for retailers serving the federal market.  Failing to comply with these and other obligations may expose a company not only to standard breach of contract claims, but also to civil and criminal penalties under the False Claims Act.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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