New rules for federal contracts.

• Author: McGrath, Dorn C.
• Position: Ethics Corner

The Defense Department expects contractors to adhere to the highest degree of integrity and honesty. Effective Dec. 24, 2007, the government-wide federal acquisition regulation (FAR) mandates a written code of ethics for almost all government contractors.

Specifically, for contracts projected to exceed $5 million and 120 days or more of performance, a new standard contract clause, "Contractor Code of Business Ethics and Conduct," mandates a code within 30 days of contract award. The FAR requires contractors to provide a copy of the company's code to each employee, and the contractor must promote overall compliance as part of its ethics program.

This includes timely discovery of government contract-related improper conduct, and effective corrective measures. Other suggestions for internal controls include periodic reviews, internal reporting mechanisms, audits, and disciplinary action for improper conduct. Unless a contractor qualifies as a small business, an "awareness program" and an "internal control system" are both required within 90 days of contract award. Only contracts performed entirely outside the United States or for commercial items are exempted from the new ethics program requirements.

The FAR adds a second new standard contract clause, "Display of Hotline Poster(s)," requiring contractors to prominently display government fraud hotline posters at contract performance sites and on any website maintained for employees. The clause requires government contracting officers to identify the posters that must be displayed. However, the requirement is eliminated if the contractor "has implemented a business ethics and conduct awareness program, including a reporting mechanism," such as a company hotline.

The new codes also apply to subcontractors. Unless a subcontract is for commercial items or is performed outside the United States, the ethics program and the hotline poster clauses must be flowed down to subcontracts exceeding $5 million with a performance period of more than 120 days.

The new ethics program regulations provide little guidance on what constitutes a suitable code or system of internal controls, but many models are available, and contractors have flexibility to custom fit a workable ethics program adapted to any industry or type of business. Contracting officers may want to confirm that the now required ethics programs are in place, but the government should not be in a position to "micromanage" specific program contents...