The federal government has enacted new regulations intended to reinforce contractor ethics and integrity in response to misuse of disaster relief funds by a few unscrupulous contractors during the Hurricane Katrina relief effort. The new regulations went into effect on December 24, 2007, and generally apply to contractors or subcontractors working under contracts or subcontracts that directly benefit the federal government and that are expected to exceed $5 million. The regulations do not apply to state or local government contracts that merely receive federal money.
Written Code of Business Ethics and Conduct
If a contract is expected to exceed $5 million and to last 120 days or more, within 30 days after award of the contract, unless the Contracting Officer provides a longer period, contractors must provide a written code of business ethics and conduct to each employee engaged in the performance of the contract. Subcontracts that have a value in excess of $5 million and a performance period of more than 120 days must also comply with this requirement unless the subcontract is for the acquisition of a commercial item or is to be performed entirely outside of the United States.
Awareness Program and Internal Control System
The awareness program and internal control system requirements apply to contractors and subcontractors who are required to have a code of business ethics and conduct and who are not Small Business Concerns under the Small Business Administration's regulations. In most cases, contractors and subcontractors must establish an ongoing business ethics and business conduct awareness program and an internal control system within 90 days after award of the contract. The internal control system must facilitate timely discovery of improper conduct and ensure that corrective measures are promptly instituted and carried out.
The internal control system should provide for: (1) periodic reviews of company business practices, procedures, policies, and internal controls for compliance with the code of business ethics and conduct; (2) 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; (3) internal and/or external audits; and (4) disciplinary action for improper conduct.
Display of Hotline Posters
During contract performance in the United States, contractors must prominently display in common work areas any applicable agency's fraud-hotline poster or the Department of Homeland Security's poster if required by the contract or the Contracting Officer. The hotline poster regulation applies to contracts that exceed $5 million or a lesser amount established by the agency, if the agency has a fraud-hotline poster or if the contract is funded with disaster assistance funds. But if the contractor has implemented a business ethics and conduct awareness program that includes a reporting mechanism (such as a fraud hotline and the display of its own hotline poster), then the contractor need not display agency fraud-hotline posters unless the Department of Homeland Security mandates their display. If the contractor maintains a Website as a method of providing information to employees, the contractor must also display an electronic version of the poster on the Website. The hotline poster requirement also applies to subcontracts that exceed $5 million unless the subcontract is for the acquisition of a commercial item or is performed entirely outside of the United States.
Contractors who do business with the federal government should start planning for these requirements now. Because each contractor is unique, contractors should not assume that a standard code, awareness program, and internal control system will suffice. If you do business directly with the federal government, you should be talking to your peers, your attorney, and contracting officers about what will work for your business. That way, you can spend the first 30 days after award focused on the task at hand — building the project.
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