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Government Contracts & Investigations Blog
negotiations. Again, depending on the dollar value, such contracts also may require the contractor or subcontractor to comply with complex Cost Accounting Standards (“CAS”), which govern the allocation of costs to government contracts. In addition, cost reimbursement contracts and subcontracts are subject to the Cost Principles, which address the types of costs for which the Government will and will not reimburse the contractor. Failure to comply with TINA, CAS, or the Cost Principles can result in significant liability, including cost disallowances, and potential FCA violations. Thus, if a target has contracts that are subject to TINA, CAS, or the Cost Principles, the buyer should assess the adequacy of the target’s policies, procedures, and systems for ensuring compliance with these requirements. It is also common for buyers to identify these issues specifically in connection with a general representation of compliance with law and contract requirements.
• Small Business Issues: Agencies have goals for awarding contracts to small businesses. They take those goals seriously. Some government contracts are set aside for small businesses. In other cases, small businesses may receive preferential treatment in the evaluation and source selection process. The Government determines whether a contractor is a small business based on its revenue or number of employees plus the revenue or number of employees of all of its affiliates. The rules define affiliation very broadly. Acquiring a small business or even making a substantial investment in a small business can result in a loss of small business size status. Once a contractor loses its small business status as the result of an acquisition, it is no longer eligible for small business set-asides, agencies can no longer count awards toward their small business goals, and there is some risk that existing awards could be terminated for convenience. Thus, the buyer should identify the contracts that were awarded to the target as small business set-asides and determine whether the target will continue to qualify as a small business after the acquisition. If the target will not continue to qualify as a small business, the buyer should consider: (1) the risk that the Government will terminate existing contracts for convenience or decline to exercise options; (2) whether there are opportunities for large businesses for the type of work the target performs (e., whether contracts for such work are typically set aside for small businesses); and (3) the likelihood that the target will be able to compete with those large businesses for such work.
• Socio-Economic Requirements: Government contractors and subcontractors must comply with a host of socio-economic requirements, including, for example, those relating to equal opportunity and affirmative action, small business subcontracting, prevailing wage rates, and employment eligibility verification. These requirements are contained in mandatory contract clauses, which, in most cases, must be “flowed down” to subcontractors. In addition to imposing substantive obligations, these clauses include burdensome recordkeeping and reporting requirements. Noncompliance can result in consequences ranging from the assessment of liquidated damages to contract termination and, potentially, suspension or debarment from government contracting. Thus, the buyer should determine whether the target has adequate policies and procedures to ensure compliance with these clauses. The buyer should also review the target’s standard form subcontracts to ensure that the target is flowing down all mandatory clauses to its subcontractors.
• Past Performance and Responsibility: The Government is required by law to consider past performance as an evaluation factor in most procurements. The Government maintains a database, known as the Contractor Performance Assessment Reporting System (“CPARs”), into which contracting agencies upload their evaluations of a contractor’s performance on a contract-by-contract basis. Agencies use records from this database in their past performance evaluations. Adverse past performance ratings, particularly anything below a “Satisfactory” rating, can have a significant impact on a contractor’s ability to obtain future work. Thus, buyers should consider requesting CPARs for material contracts and requesting representations and warranties regarding adverse past performance. It is also advisable to identify any
16 | What You Need to Know About Mergers and Acquisitions Involving Government Contractors and Their Suppliers Volume IV — Key Issues in Government Contracts Due Diligence