A Healthy Government Compliance Program

3 Steps for Avoiding Huge Government Penalties

NOTE: This article originally appeared in the October 2008 issue of Flawless Compliance, under the "Center Stage" section. The link to the actual issue is at the bottom of this article.

I’m proud to announce that as of this month, I’m a Premium Member of the Coalition for Government Procurement. The Coalition is the preeminent association of companies that contract with the US Federal Government, and the people who support them. Of course, government contract compliance is no stranger to me as I’ve spent a significant amount of my recent past working through General Services Administration (GSA) issues with both schedule holders, and law firms supporting schedule holders. Now as we kick off the new US Government fiscal year, I wanted to spend a few minutes on some simple things you can do to take care of your relationship with the US Government.

The Coalition of Government Procurement - The Preeminent Association for GSA Schedule Holders. Click Here to navigate to the associations's website.

Government contracting is just good business sense, and can be a very important part of your overall business strategy. It may take a while to get started, but once you’ve proven yourself as a viable business partner either with quality products, or outstanding service, it can be a very good way to steady through turbulent times – like the kind we’ve been experiencing for the past few months. If you don’t already have a GSA schedule ( the de facto standard for doing business with the US Government and related agencies), take some time to look into it, and then call a good lawyer to help you get one. To find a good lawyer, call Bill Petkovski or Larry Allen at the Coalition and they can point you in the right place. Please tell them that I sent you.

However, with all the benefits comes a level of accountability that is sometimes underestimated. Although there is currently some talk to negotiate this with the US Government, currently the government wants to be – as they put it – your Most Favored Customer (MFC). That means, whenever you sell anything to your MFC, they get the best discounts. And as much as our government likes doing business with you, you can believe this arrangement will not be done on a handshake. There are specific provisions in your contract under the Price Reductions Clause (PRC), which mandate this policy – “all things considered.”

The “all things considered” (my terminology) part is where you can really get tripped up. For instance, it’s not fair that your business with the Government be compared with sales to resellers, as the discounts will obviously be large. Also, what about sales to academic institutions? What about very large deals? All these are legitimate exclusions from PRC analysis.

So as it goes, PRC is a thicket in everybody’s contract and for obvious reasons a place GSA auditors love to focus on in an audit. After your GSA contract is awarded, they may show up periodically for a “contractor assisted visit” – an audit conducted by an Industrial Operations Analyst (IOA). This may seem innocuous at first, however understand that these people are more than just auditors. They are also trained by the Government as investigators, and they will be on the lookout for things that don’t add up.

Before long, they will find their way to your PRC, and look for a way to trigger a Price Adjustment – the official “penalty” for an improper PRC analysis on your part. These price adjustments are the most benign of your problems.

If the auditors see something they don’t like, they can also recommend a termination of your contract – without reason. A GSA contract is a contract of “convenience”, and if they don’t think it’s convenient to do business with you, they can just end it there.

If things look really bad, they can move for a suspension of contract while they determine whether or not you should be debarred. If you are debarred, you cannot do business with ANY government agency. What’s worse, if these “investigators” suspect fraud or anything that smells like it, you might find yourself in a lawsuit with the Department of Justice (DOJ) under the False Claims Act and / or the False Statements Act. As you can imagine, these penalties are very steep, costing up to $10,000 per Government invoice plus treble damages. This can cost your company several million dollars or more.

Believe it or not, all this can happen by just not being organized. I actually have a name for companies that are doing the right thing and just not organized enough to prove it – “The Innocent Prisoners.” The good news is, it doesn’t take much to stave off the more serious symptoms, but you must make a commitment to get organized. Here’s my three step shot of Penicillin for every company:

Step # 1: Analyze your Commercial Sales Practices for Exclusions

You must be clear in your own organization what constitutes a valid comparison for PRC reasons. Do a very thorough analysis of all the current and possible sales situations that might be a reason for exclusion, and have the backup ready to justify a challenge.

Step # 2: Create a Government Contracting Policy and Code of Ethics

This serves two purposes. First and most importantly, it sends a clear signal to the Government that you are making an honest effort to run your company in an ethical manner. This is extremely important, as the more serious allegations and penalties come as a result of alleged unethical conduct. Don’t give the auditors an opportunity to go this route.
Second, it clears up the language of the contract (which is purposely ambiguous) into a lucid and objective statement of contract terms. Your policy should reflect your findings in Step 1, and among other things clearly document all reasons for PRC exclusion.

Step # 3: Create and Execute a Communication Plan

Having a policy on the desk collecting dust will do you no good in an audit. Once your policy is created, ensure that you have plans in place to effectively communicate the policy to all persons involved (email, meetings, training, etc.) on a regular basis. Be diligent on your execution, and be diligent about collecting the evidence of your execution.

Government contracting can be an intelligent business choice, as long as you steer clear from the big pitfalls. I’ve just shown you a three step plan that should help with the more severe types of penalties. Of course, there’s still more work to do, but get started today on building your policy, and communicating it to the right people. You don’t want to be caught in an audit without one.