Doing Business with the Government must be a Strategic Decision

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Government contracts are a stable source of company revenue, but they come with strings attached. They are tough to obtain and maintain. Not only is the process of breaking into the government marketplace complicated, but complying with related regulations post award can also be a challenge. On the upside, doing business with the government is slightly affected by the expansion and contractions in the economy, resulting in a steady stream of income for contractors for years to come.

In reality, many business bidders primarily focus their resources on obtaining contracts, with less emphasis on their compliance requirements after winning the contracts. The decision to pursue government contracts must be strategic to account for hedging against compliance risks. For example, creating a business plan to pursue federal contracts must be based on the coordination of all organizational functions, including HR/compliance, to force the contractor to answer questions about who the competition is, what makes the contractor different from them, and equally important, the applicable regulations and compliance. What you get out of this self-examination is a better sense of whether you can handle the different aspects of being a federal contractor, including compliance.
Would You Choose Debarment Over Compliance?

Many OFCCP reviews end in settlements, involving awards of back pay, interest, agreements to engage in extensive self-monitoring going forward, and job offers to name the most common remedies. Very few cases end in debarment. Perhaps even rarer is the case where the federal contractor specifically agrees to debarment. That, however, is exactly what has happened with two contractors in the last few months. According to the OFCCP’s administrative complaint against Independent Food Corporation (IFC), from September 15, 2006 through December 31, 2007, IFC was party to a contract with the US Department of Defense for more than $800,000. The OFCCP alleged that IFC violated E.O. 11246 by engaging in discriminatory hiring practices against female and Hispanic applicants for entry-level production positions. The OFCCP further alleged that IFC violated VEVRAA by failing to list all suitable job openings with the appropriate local office of the State’s employment service system. The Consent Decree does not provide details as to the alleged noncompliance, nor is it clear how IFC allegedly acted (or failed to act) in violation of Section 503 of the Rehabilitation Act. Similarly, the OFCCP initiated an audit of the law firm Shapiro DiCaro in June 2012 and requested copies of its AAP’s under E.O. 11246, Section 503 and VEVRAA. While the law firm eventually produced them, it refused to reply to requests for further documentation, and specifically told the OFCCP it would not do so. The parties actually terminated the federal contract in question in April 2013.

Both contractors entered into Consent Decrees on November 7, 2013 and April 15, 2014 respectively. Both contractors agreed not to bid for, knowingly enter into, knowingly perform work or knowingly provide services necessary to any future Government contracts or subcontracts, and will be debarred from future contracts, subcontracts, extensions or substantive modifications of existing contracts or subcontracts for three and two-year minimums, respectively, and until they: 1) request reinstatement and 2) prove their compliance with E.O. 11246, Section 503, VEVRAA and all implementing regulations, to the OFCCP through a full compliance review.

Now, most members of the federal contracting or affirmative action community know that debarment in OFCCP cases is rare. In fact, since 1965, it is estimated that fewer than 70 cases have been resolved in this way. What will trigger a debarment? Generally, a case of egregious violations of E.O. 11246, Section 503, or VEVRAA (or implementing regulations) or, as with Shapiro DiCaro, refusal to provide requested records in connection with a compliance review will leave a contractor vulnerable to debarment.

Why does, or would a federal contractor choose to be debarred, as Independent Food Corp and Shapiro DiCaro did? We are not given any indication why either IFC or Shapiro DiCaro did so. While IFC essentially chose to forfeit a contract worth more than $800,000, Shapiro DiCaro opted to stop a stream of income amounting to about $300,000 over the period between 2007 and 2013. Since settlements involving payment of back wages and interest, or other similar arrangements, tend to include ongoing monitoring, a contractor may not wish to be subjected to ongoing monitoring. IFC and Shapiro DiCaro may have determined that the cost of compliance is too much (to many this would seem improbable, given how lucrative many federal contracts prove to be, however). Perhaps their missteps were so egregious that they would need at least three years before they could even hope to bring themselves in compliance with E.O. 11246, Section 503 and VEVRAA. Or, perhaps they simply did not want to be bothered with whatever they perceived as the extra work.

Debarment prevents violators from participating in any federal contracts for bidding process until they can “purge the contempt” by complying. The purpose is not to punish the contractor, but to provide an incentive to change its behavior and comply. It will be interesting to see if IFC and Shapiro DiCaro decide to pay the price and someday re-enter the federal contracting arena. In the meantime, what can we glean from these cases? First, compliance with the aforementioned laws and their implementing regulations is something contractors should take seriously and include it in their business plan and strategic decisions prior to bidding for federal contracts. The OFCCP certainly does take compliance seriously. Second, contractors who do not take compliance seriously can lose current contracts, and the right to bid on or participate in current and future contracts. Federal contracts can be quite lucrative. Many businesses are therefore loath to turn them away by agreeing to be debarred. Third, contractors who are proactive in ensuring their compliance from the beginning and on an ongoing basis usually find that the time, money and energy expended is usually more than outweighed by the cost of defending an audit and remedying violations after the fact, and more importantly, the revenue to be gained from the contract itself. Finally, even a contractor who has been debarred or is being threatened with debarment can still “undo” the consequences by showing the OFCCP that it has remedied the issues leading to the debarment in the first place.