Complying With The Ts&CsOf Your Government Contract

presented on July 3, 2007 to

The Alliance TexasSmall Business Procurement Fair

Jonathan S. Aronie, Sheppard Mullin Richter & Hampton LLP© SMRH, June 2007May be reproduced with attribution to the author without permission

The Multiple Award Schedule is the Government’s primary contractual vehicle for procuring “commercial items,” i.e., commercial products and services.

“Mirroring commercial buying practices, [the MAS Program] is the fastest, easiest,

and most effective contracting vehicle available, designed to help customer

agencies comply with all the rules and regulations to buy products and services

the right way.”

--GSA’s The Steps to Success, page 3.

The MAS Program may be the fastest, easiest and most

effective contract out there,BUT

IT DOES NOT MIRROR COMMERCIAL BUYING

PRACTICES!

Three Simple Cautions . . .

A MAS Contract looks commercial, but isn’t

A MAS contract can limit a company’s commercial pricing/discounting flexibility

A MAS Contract, if handled properly, does not preclude all commercial pricing flexibility

Benefits Potentially huge revenue source

– Federal agencies purchased more than $33 Billion in FY05

– Homeland Security, Iraq, Katrina

– Cooperative Purchasing/Disaster Recovery Federal agency preference for simplified acquisition

procedures

– Less time

– Less paperwork

– Fewer disputes From contractor’s perspective, somewhat less

burdensome than traditional Government contract

Burdens

Full disclosure to Government prior to negotiation

Government audit rights

Unique terms and conditions

– Price Reductions Clause

– Economic Price Adjustment Clause

– Trade Agreements Act

Significant (civil and criminal) penalties for noncompliance

Parade of Horribles . . .

Breach of contract Price adjustments (retroactive) Price reductions (prospective) Cancellation/Termination Civil False Claims Act

– DOJ initiated– Relator initiated

Suspension/Debarment Collateral suspension/debarment Criminal prosecution

Civil False Claims Act

Civil War era anti-fraud statute

Currently Government’s primary civil fraud statute

“Qui Tam” provisions permit suits to be brought by “relators” on behalf of Government

Relators can be part of the alleged fraud

Significant damages / penalties

Elements Of An FCA Action

A claim

That is false

That is submitted to the U.S. Government

That is made “knowingly”

– Intentionally

– With deliberate indifference

– Recklessly

Slightly different for a “Reverse False Claim”

Damages / Penalties

Treble damages

– $1M actual damages costs you $3 in damages

Up to $11,000 Penalties per violation

– $1 overcharge on 100 invoices costs $300 in damages, plus $1,100,000 in penalties

Plus Plaintiff’s attorneys fees in some cases

Plus your own attorneys fees

Plus collateral damages

Illustrative MAS FCA Settlements

$0

$2

$4

$6

$8

$10

Millions

Cam

eras

Tools

Office

Pro

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ce P

rods.

Office

Pro

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rods.

Mac

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are

Softw

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$98M

High Risk Areas (HRAs)

The Price Reductions Clause

The Price Reductions Clause serves to maintain the relationship between three prices:

– The GSA price

– The BOA price

– The commercial list price

Changes to the relationship subsequent to award trigger the Clause

How Does One Compute A Price Reduction?

Disclosed Discount

Ratio New Discount

Basis of Award

Customer

3% 1 4%

GSA 6% 2 ?

How Does One Compute A Price Reduction?

Disclosed Discount

Ratio New Discount

Basis of Award

Customer

3% 1 4%

GSA 6% 2 8%

How Does One Compute A Price Reduction?

Disclosed Discount

Ratio New Discount

% Increase

Ratio

Basis of Award

Customer

3% 1 4% 33% 1

GSA 6% 2 8% 33% 2

What Does NOT Trigger the Clause?

Sales to Federal agencies Sales outside the basis of award (if within

disclosed commercial practices) Sales of products/services not on Schedule Certain fixed price, high dollar value orders Certain “spot discounts” provided equally to

the Government Quotation or billing errors, properly reported

to GSA Other disclosed and pre-approved sales

The Price Reductions Clause (Lessons Learned)

Exercise care in preparing CSPF

Make clear what sales will trigger PRC and what sales will not trigger PRC

Propose a practical Basis of Award

Develop an infrastructure that will identify PRC-triggering sales

Promote and enforce compliance

Contractor Team Arrangements

MAS contractors can team Facilitates award of large, complex tasks Facilitates small business participation CTAs vs. subcontracts Key compliance considerations

– All members must be MAS contractors– Each member must sell at its own Schedule price– Each member must pay its own IFF– GSA now permits single POC for invoicing/billing

GSA’s Suggested Elements Of A Quality CTA Identify participants, responsibilities, schedules, items Define key terms Identify scope, performance period, termination

provisions Identify fees, etc. Identify administration functions and process Establish license and other proprietary rights Establish representations and warranties Identify confidentiality provisions Identify indemnification provisions Identify governing law Establish how disputes will be resolved

The IFF

Currently ¾%

Funds MAS Program

Fee paid by purchasers; passed through vendor

to GSA

Included in published price

Teammates each pay own IFF

Significant room for error

Scope Of Contract Issues

Two key questions– Is the product/service within the scope of your

Schedule?– Is the product/service on your Schedule?

Terminology– “On Schedule” or “Schedule Item”– “Non-Schedule” or “Non-FSS”– “ODC”– “Ancillary Item” or “Incidental Item”– “Open Market”

GSA’s recent investigative focus in this area Recent bid protests

TAA Overview

All Schedule products and services must comply with the Trade Agreements Act (TAA)

– Products must be “substantially transformed” in an eligible country

– Services must be performed by a company “established” in an eligible country

Schedule contractors must take TAA compliance seriously

Small Business Subcontracting

Companies must promote the use of small businesses as subcontractors to the “maximum extent practicable”

“Goals” set prior to contract award

Good faith efforts required

Failure to undertake good faith efforts can result in significant penalties

Everyone must understand new recertification rules

Why Do Bad Things Happen To Good People?

A few recurring scenarios…

Failure to understand Government Contracts environment

Sales growth outpaces infrastructure growth

Management focuses on revenue, without focusing on compliance

Decentralized operations without centralized control

Lack of training

Failure to listen to people “on the ground”

How Can “Bad Things” Be Prevented?

The Importance of a Comprehensive Internal

Compliance Program

Management Must Be Committed To Compliance Senior officer must be assigned overall responsibility

Compliance program must be tailored to organization

Program must incorporate Code of Conduct

Personnel must have access to hotline

Personnel must receive training

Compliance must be key to advancement

Program must be monitored and audited

Breach of program must result in discipline

Program must be reviewed and updated regularly

Top 10 Ways To Ensure Compliance…

Adopt written pricing/discounting policies, educate your team, and adhere to those policies religiously

Implement a standard pricing/discount structure with centrally controlled, carefully monitored approval process for non-standard sales

Negotiate a Basis of Award that you can live with

Use “carrot and stick” to ensure non-federal divisions understand and comply with contract

Provide regular training

(Continued)

Limit the number of people dealing with Government customers

Institute redundant safeguards Conduct periodic compliance reviews Be proactive in responding to non-federal

concerns so the Schedule rules do not become a hindrance that folks try to circumvent

Take advantage of knowledgeable company resources

A brief, shameless plug for the Second Edition of Multiple Award Schedule Contracting, by John Chierichella and Jonathan Aronie

– Only comprehensive guide to the MAS program

– Useful Vendor Resource Guide– Nationally recognized

contributors• Ernst & Young• Coalition for Government

Procurement• Government Officials

– Hardcover or paperback– Available at

www.schedulecontracts.com and

Jonathan S. Aronie, Esq.Sheppard Mullin Richter & Hampton LLP

Washington, DC

202.218.0039 phone202.302.4855 cell202.312.9416 fax

jaronie@sheppardmullin.com

Jonathan’s professional experience includes litigating under the qui tam provisions of the False Claims Act, drafting corporate compliance plans, conducting internal investigations (proactive and defensive), and counseling corporate clients in an array of federal regulatory and statutory matters. He frequently meets with, negotiates against, and represents clients before the Department of Justice, the General Accounting Office, the General Services Administration, and the various agencies of the Department of Defense. Jonathan writes a monthly procurement column for Federal Computer Week and is the co-author of the leading book on the Multiple Award Schedule Program. He is cleared at the highest levels and frequently counsels clients in classified matters relating to national security.