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Government Contracting Rules You Need to Know

Filed under Government Contracting. Fact checked on May 24, 2012.

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Government contracting rules, regulations and procedures dictate how you do business with the government. The two most important laws you need to be aware of are FAR (Federal Acquisition Regulations) and FASA (Federal Acquisition Streamlining Act). However, there are numerous other laws that have an impact on government contracting that you should also keep in mind.

You've heard it said many times, "Government contracting seems hard—so many rules and regulations. And, if you don't follow them, the government is just waiting to take you down!"

Actually, nothing could be further from the truth. The government not only actively seeks out small business participation when it buys products and services, but it also goes to great lengths and spends lots of money in outreach programs to find good, qualified small businesses to be its suppliers. For example, it will provide information that will help you bid with minimal risk. Just for the asking, you can find out how much the government bought the last 5 to 10 times, who they bought from, and how much they paid. Try asking for that kind of information from your commercial customers and see what they say!

In reality, there are many similarities in selling your products or services to commercial customers and selling them to the federal government—the same basic business principles and strategies generally apply. Both want a quality product or service at a reasonable price, delivered on time. And in both cases, you need to know your customers' needs, how they buy and who buys what. You need to do your market research. And whether it is a commercial customer or a buying agency of the federal government, you need to arrange face-to-face meetings so you can better clarify what they want and so they can better understand what your company can do to help them.

However, although the approach to the commercial and government market is similar, the procedures and rules of doing business in the government arena are different—and if these differences are not understood, it is here that problems can occur.

However, all of these problems can be minimized if you take the time to gain some basic knowledge of these procedures and rules and to learn how the process works. (Note that we said "minimized," not "avoided," because Murphy's law is always out there waiting to challenge your commitment to the task.)

Government Procedures

The federal government conducts its business through authorized agents, called contracting officers:

  • The Procurement Contracting Officer (referred to as the "PCO") places contracts and handles contract terminations when the contractor defaults.
  • The Administrative Contracting Officer (referred to as the "ACO") administers the contracts.
  • The Termination Contracting Officer (referred to as the "TCO") handles contract terminations when the government terminates for its convenience.

Depending on the situation, the same person may be all three.

Because the government is a sovereign entity (in other words, it is the ruling power), it has rights that commercial businesses do not have. For example, the government has the right to unilaterally revise the contract, so long as changes are within the parameters of the contract.

This means the government can change the quantity it is contracting for, or how it is packaged or how it is being shipped. The contractor is entitled to equitable cost adjustment, but must comply with the changes. The government also has the right to cancel the contract if the need for the product or service no longer exists. Here again, the contractor would be entitled to reimbursement for costs incurred.

Because taxpayer dollars are being spent, the government can impose extensive audit and surveillance requirements under the terms of a contract. However, extensive and stringent requirements are usually imposed only on higher priced contracts (i.e., contracts of $100,000 or more in value) and thus are not usually applicable to contracts with small businesses.

Tip

One of the big fears that small business owners have is that the government will come in and audit their books, go through their files with a vacuum cleaner, and tell them how to run their business. That fear is totally unfounded and far from the truth.

History of Government Laws and Regulations Affecting Contracting

Before the earliest law was passed, private individuals furnished from their own resources whatever supplies and materials the government needed. (How well do you think that would work today?) But that all changed with the Purveyor of Public Affairs Act of 1795, which allowed the government to buy needed supplies and materials.

At the beginning of the Civil War, which created monumental needs for the federal government, the Civil Sundry Appropriations Act of 1861 became law, and this continued the principle of advertised procurements for the next 86 years.

When it became apparent that small companies and their labor force needed protection, the Sherman Antitrust Act of 1890 was enacted.

Finally, the Armed Services Procurement Act, signed into law in 1947, continued the sealed bid as the preferred method of procurement, with specific exceptions. It also attempted to place procurement rules in one location. The result was the Armed Services Procurement Regulation (ASPR).

In addition, there are many other laws and Executive Orders that affect how you must conduct your business if you want to contract with the federal government.

For example, the Eight-Hour Work Law of 1892 set the eight-hour workday. The Davis-Bacon Act of 1931 set the minimum wage on the construction site at the local prevailing wage. In 1933, the Buy American Act required the government to buy only American products. The Walsh-Healey Public Contracts Act of 1936, drastically changed in 1994, required a supplier to certify that it was the manufacturer or a regular dealer. This was an attempt to do away with the broker.

In 1941, the Berry Amendment, as it is known, was passed by Congress to ensure that the Department of Defense only acquires certain end products, material and components (mostly food and natural fiber products) that are of U.S. origin, or from a qualifying country. It remained in Defense Department appropriations acts until it became law in 1994. Later it was modified in 2002 and 2006, further restricting the use of specialty metals. It only applies to DoD purchases above the Simplified Acquisition Threshold (over $100,000). DoD contractors need to be especially aware of these restrictions. Do not overlook these requirements.

Later on, the Small Business Act of 1953 was passed, which established the Small Business Administration. The Truth in Negotiation Act of 1962 required both prime and subcontractors on contracts over $500,000 to certify the cost data submitted under the solicitation. Public Law 95-507, which amended the Small Business Act of 1978, formalized the Small Business Subcontracting Plan requirement in contracts over $500,000 to large businesses. At that time, this law was considered a significant change in government procurement practices.

FASA and FARA

Now we come to the recent laws. The Federal Acquisition Streamlining Act of 1994 (FASA) was revolutionary in its impact on the federal acquisition process. It repealed or substantially modified more than 225 statutes and pushed the contracting process into the 21st century.

Among other things, it simplified the federal procurement process, reduced paperwork burdens, and transformed the simplified acquisition process to electronic commerce. Before the law could be fully implemented, the Federal Acquisition Reform Act of 1996 (FARA, also known as the Clinger-Cohen Act) was passed to correct some deficiencies in the earlier legislation and to make more changes. These last two laws were significant events because of the vast changes they made in the way that the government conducts it business. The system is continuing to make adjustments to the new, more open environment.

Example

What prompted the changes in the procurement process as contained in FASA and FARA? The story goes that Motorola was contacted by the Defense Department to supply mobile communication devices to be used by our military in "Desert Storm." The company was more than willing to supply the product, and the price quoted was not an issue.

However, at that time, the law did not allow the government to contract for a basically commercial item. Motorola told the government to take the product and give them a check for the amount agreed upon. The government couldn't do that without a signed contract, an impasse. As hard as the government tried to remove the problem clauses, it couldn't do it.

An ally country, supposedly Japan, came to the rescue. They bought the product and then furnished it to the U.S. government as part of its support of Desert Storm.

After all of this, the powers in Washington finally realized that the procurement process needed some major changes to get in step with the marketplace.

How the Federal Acquisition Streamlining Act of 1994 (FASA) Affects Your Contracting Business

What was so significant about FASA to the interests of small businesses? Here are some of the specific changes that this law made:

  • Changed the small purchase level from $25,000 and under to between $3,000 and $100,000, and provided that all these purchases can enjoy "simplified acquisition procedures," which in effect reserves all of these purchases for small business. Two of the main purposes of the simplified acquisition procedures are to reduce administrative costs and to improve contract opportunities for small, small disadvantaged, small service-disabled-veteran, and small women-owned businesses.
  • The government was mandated to use electronic means to issue and award small purchases (termed by the law as "Simplified Acquisition Purchases" or "SAP"). That means that for contracts under $100,000, there is now a tremendous effort by the government to go "paperless." What does paperless mean? Well, it simply means that the government is entering the era of electronic commerce and technology for doing business. So much for the myth of being buried by government paperwork and red tape.
  • Encouraged government buying offices to use credit cards on all requirements under $3,000. Basically, the intent was to get these "nuisance" buys out of the buying office and simply let the government user buy what was needed quickly and efficiently. This means two things for small businesses: minimal paperwork and a real opportunity for any business that accepts credit cards to increase its business. As we mentioned earlier, in 2005 alone, the federal government spent almost $17.8 billion in credit card purchases in the under-$3000 range. The government now just goes to a local store and buys what it needs.
  • Established commercial items as the preferred products for the government to buy if they meet the government need; to do otherwise requires a justification as to why it is necessary. This last little change is having a major impact on the process. First of all, it has meant a reduction in government personnel that small businesses have to deal with. The more the government buys commercial items, the less it will need buyers, production specialists, pricing specialists, quality assurance specialists and other personnel that were required when the government designed to its own specifications. Second, it has meant that only if the commercial market cannot satisfy the government's need can the government buyer require that items be built to government specifications. In other words, most government specifications and standards will be used only with contracts greater than $100,000, so you, the small business contractor, will have fewer government requirements to worry about.
Government Purchasing Thresholds
Micro-purchases (credit cards) for contracts up to $3,000
Simplified Acquisition Procedures (SAP) for contracts for $3,001 to $100,000 (scheduled to increase to $150,000 in 2010)
Simplified Commercial for contracts $100,000 to $5,000,000
Commercial Off the Shelf (COTS) no dollar limits, any dollar size contract
Commercial Items for contracts over $3,000
Sealed Bids/Negotiations FAR Parts 14 & 15 apply for contracts $100,000 and up

Chart of Laws That Affect Government Contracting

The following chart provides a summary of government contracting rules and how they impact a small business trying to contract with the government.

Laws that Affect Government Contracting
Public Law Result
Purveyor of Public Affairs Act of 1795 Allowed the government to buy needed supplies and materials to perform government functions.
Civil Sundry Appropriations Act of 1861 Continued the principle of advertised procurements for the next 86 years.
Sherman Antitrust Act of 1890 Protected small companies and their labor force from large business.
Armed Services Procurement Act of 1947 Continued the sealed bid as the preferred method of procurement, placed procurement rules in one location and gave us the Armed Services Procurement Regulation (ASPR), which was the beginnings of today's rulebook, the FAR.
Eight-Hour Work Law of 1892 Set the eight-hour workday.
The Davis-Bacon Act of 1931 Set the minimum wage on the construction site at the local prevailing wage.
Buy American Act Required the government to buy only American products.
Walsh-Healey Public Contracts Act of 1936 (note that this law was drastically changed in 1994) Required a supplier to certify that it was the manufacturer or a regular dealer. This was an attempt to do away with the "broker."
Small Business Act of 1953 Established the Small Business Administration.
Berry Amendment of 1941, (later modified in 1994, 2002 and 2006) Mandated that the Department of Defense buys certain items from U.S. or qualifying countries.
Truth in Negotiation Act of 1962 Required both prime and subcontractors on contracts over $500,000 to certify the cost data submitted under the solicitation.
Public Law 95-507, Amendment to the Small Business Act (1978) Formalized the Small Business Subcontracting Plan requirement in contracts over $500,000 to large businesses. Set goals for large primes.
Federal Acquisition Streamlining Act of 1994 (FASA) Revolutionary in its impact on the federal acquisition process. It repealed or substantially modified more than 225 statutes and pushed the contracting process into the 21stcentury. Among other things, it simplified the federal procurement process, reduced paperwork burdens, and transformed the simplified acquisition process to electronic commerce.
Federal Acquisition Reform Act of 1996 (FARA) or (Clinger-Cohen Act) Before FASA could be fully implemented, this Act became law and corrected some deficiencies in the earlier legislation and made more changes.
International Traffic in Arms Regulations (ITAR) These regulations control the import and export of defense-related articles and services on the United States Munitions List.

The Contracting Rulebook and Bible: Federal Acquisition Regulations

No discussion of government procedures and rules is complete without talking about the basic rulebook for government contracts: the Federal Acquisition Regulation, commonly known as "the FAR."

The FAR, which had its beginnings in the Armed Services Procurement Regulation established in 1947, is considered the Bible for federal government contracting. The FAR contains all the rules governing the contracting process as well as all the forms and clauses used in contracts.

The FAR has recently gone through a significant rewrite to reflect and implement all of the changes made by all the recent laws. In order to do business with the federal government, you definitely need to have a basic knowledge of what is in the FAR and how to use it.

Work Smart

The FAR is designed to be a guide, not a limiting rulebook. Under recent changes in the law, contracting officers can use "good business practices" that make sense in making decisions and in negotiating terms instead of having to consult a rulebook on each decision.

The FAR is divided into 53 parts, each part dealing with a separate aspect of the acquisition process. The first six parts deal with general government acquisition matters and the next six parts deal with aspects of acquisition planning. The rest of the FAR deals with other topics, such as simplified acquisition threshold (formerly known as small purchases), large dollar value buys, labor laws, contract administration, applicable clauses and forms.

Relevant parts for small businesses include Part 19, Small Business Programs, and Part 52, which contains the standard terms and conditions contained in a government contract.

Although the FAR is the primary acquisition regulation for the federal government, each government agency may issue an agency acquisition supplement to the FAR. We therefore have the Defense Federal Acquisition Regulation Supplement (DFARS), the General Services Acquisition Regulation Supplement (GSARS), and the National Aeronautics Space Administration FAR Supplement (NASFARS), just to name a few. Many of these are on the Internet at the agency's web site.

These supplements are not stand-alone documents, but must be read in conjunction with the FAR. Therefore, when preparing a proposal or quote, remember to look at the relevant supplement, in addition to the FAR, to make sure added requirements don't apply. The FAR has more than 1000 pages and a supplement may be another 1000 pages, but only a relatively small portion is used in any single contract. That is why it's important, when dealing with a government office, to ask which regulation governs their acquisition procedures. Make sure that you read any changes to the rule before you quote. Don't assume, ask!

Warning

Congress gave the Federal Aviation Agency (FAA) the authority to develop its own acquisition regulations; therefore it is not bound by the FAR. Although the FAA has chosen to adopt or adapt many parts of the FAR, don't assume that its provisions are all just like those in the FAR. Some quasi-government agencies, like the Tennessee Valley Authority or United States Postal Service, are not bound by the FAR, but many of their acquisition regulations are adaptations of FAR provisions.

You can buy a copy of the FAR in hard copy from the Government Printing Office (GPO) or read it online or buy it from a third party like CCH, Law & Business. If you order the FAR from the Government Printing Office, make sure that the price includes all updates, as they occur, so you will always have current information when you prepare a proposal. Updates are important because of the potential impact on the way you will bid. It could change the cost and therefore your quote!

When you view the FAR on the Internet, make sure that you check the update date for the same reason. The softbound type is current until the next update.

Work Smart

The Department of Defense is transforming a significant portion of the DFARS to the DFARS Procedures, Guidance and Information (PGI). The PGI is a companion resource to the DFARS. DFARS PGI is a new, web-based tool so the entire acquisition community can simply and rapidly access non-regulatory Department of Defense (DoD) procedures, and guidance and information relevant to FAR and DFARS topics.

The DFARS still remains the source for regulation and implementation of laws, as well as DoD-wide contracting policies, authorities and delegations. In other words, DFARS will answer the questions, "What is the policy?" and "What are the rules?" DFARS PGI will connect the acquisition community to the available background, procedures and guidance, answering the questions, "How can I execute the policy?" and "Why does this policy exist?"

It is believed DFARS PGI will not only provide a rapid method of disseminating non-regulatory material to contracting officers and the entire acquisition community, it will also serve as a real-time training tool by making relevant information available on your topic of interest. DFARS PGI is new and will be evolving in the months ahead. It'll be in simpler language, in an easy-to-follow format, and with new tools for searching and retrieving current and past information on FAR and DFARS requirements.

Just remember that the government is ready to do business, on a competitive basis, with competent, qualified companies that can supply the products or services it requires at a reasonable price. You, the new contractor, must know what their game plan is. Once you have some understanding of the federal buying process, you can enter this market with greater confidence and be successful and profitable.

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