Congress imposes new hurdles for contractors.

Several statutes directly relevant to government contractors became law recently, and companies doing business with the federal government should worry about these new laws for a number of reasons.

First, Congress wants to place work now performed by contractors into the hands of federal employees through a "contracting-in" process. Second, Congress is tightening the use of the "commercial item" exemption for certain procurements, and imposing tougher limitations on organizational conflicts of interest restrictions. Moreover, Congress continues its attack on contractor recovery of indirect costs and profit for subcontractor effort.

Finally, Congress has opened the door for increased contractor liability, as agents of the government, for mistreatment of any individual "in the custody or under the physical control" of the government.

In Section 343 of the FY 06 DOD Authorization Act, Congress ordered the Department of Defense to "prescribe guidelines and procedures" to facilitate reviews for migrating work from contractors to the federal government. In effect, Congress instructed DOD to give "special consideration" to contracts that have been performed by federal government employees at any time since Oct. 1, 1980; are associated with inherently governmental functions; were not awarded on a competitive basis; or have been determined "to be poorly performed due to excessive costs or inferior quality."

Congress passed a similar provision in Section 842(b) of the FY 06 Transportation, Treasury and HUD Appropriations Act. There, Congress ordered that OMB Circular A-76 "shall provide procedures and policies for these [public-private] competitions [to convert work from contract to federal employee performance] that are similar to those" that would allow conversion of work from federal employees to a contractor.

The language in these provisions is problematic because it is so broad. For example, under the criteria in the DOD Authorization Act, any work that federal employees performed at any time in the last quarter-century, that contractors now perform, must be given "special consideration" for conversion to federal employee performance. Similarly, contract work "associated" with inherently governmental functions must be given such special consideration, along with any contract not competitively bid or determined to have excessive costs or inferior quality. Congress provided no measures to indicate how "excessive" or "inferior" costs and quality must be to qualify.

Title VIII of the DOD Authorization Act contains a number of polices to expand congressional oversight of increased costs in major defense acquisition programs (Sec. 801-802, 804), and control over the treatment of a major weapon system as a "commercial item." In Section 805, Congress sought to gain visibility into the role of "lead system integrators" in major systems, focusing on organizational conflicts of interest and the use of "pass-through charges" by such integrators. Congress defined these charges as "a charge for overhead or profit on work performed by a lower-tier contractor ... that does not ... promote significant value added with regard to such work."

This provision continues the attack on prime contractor recovery of indirect costs and profit on subcontractor effort. It is especially troubling because DOD appears to have the discretion to determine what "does not promote significant value added with regard to" subcontracted work. Equally worrisome: Such a limitation on indirect cost recovery appears to ignore government regulations on indirect cost accounting contained in federal Part 31 of the Federal Acquisition Regulation and the Cost Accounting Standards.

Section 841 of the DOD Authorization Act orders the General Accounting Office to review DOD efforts to identify and assess vulnerability in DOD contracts to fraud, waste and abuse. GAO must submit a report to Congress within six months, including findings and recommendations. Contractors can anticipate that this report will give new ammunition to those calling for more contractor scrutiny.

The DOD Appropriations Act also contains Title X, prohibiting "cruel, inhuman or degrading treatment or punishment" for any individual "in the custody or under the physical control of the United States Government, regardless of nationality or physical location." Contractors, especially contractors performing security functions, must be alert to the fact that they may be considered "agents" of the U.S. Government and open to liability for mistreatment of any individual. Section 1004 provides for a limited defense if the person charged "did not know that the practices were unlawful and a person of ordinary sense and understanding would not know the practices were unlawful."

These statutes demonstrate that companies doing business with the federal government should expect increased challenges in obtaining, performing and withstanding audits and investigations related to government contracts.

Robert E. Lewis Jr. ([e-mail]) is Manager of Government Affairs in FEI's Washington, D.C., office and liaison to FEI's Committee on Government Business. He wishes to acknowledge the contribution to this ARTICLE of Stephen D. Knight, a long-time government contracts attorney and partner with Smith Pachter McWhorter.