Suspended from contracting

On March 15, the General Services Administration announced that it had suspended from contracting with the government 17 separate entities, including Enron, Arthur Andersen and a number of their subsidiaries and officers. Enron was suspended for a year, pending the outcome of a more extensive government investigation. Andersen was suspended indefinitely, based on its criminal indictment for obstructing an official government investigation.

The effect of these suspensions is automatic and far-reaching. Under the Federal Acquisition Regulation (FAR), a government agency may not award a contract to a suspended company unless the agency head or a designee determines in writing that there is a compelling reason to award to that company. In general, there must be something unique about the company's capabilities in order to support such a determination.

Typically, a company's suspension does not affect contracts already awarded, provided that the contracts clearly define the work to be performed. Moreover, under the FAR, civilian agencies may place entirely new orders under a suspended company's indefinite quantity contracts, including Federal Supply Service schedule (FSS) contracts.

However, Defense Department agencies are subject to a different rule. A DOD agency may not place any new orders against a suspended company's FSS contracts, or any other indefinite quantity contracts, even if the underlying contract was awarded before the suspension, unless the agency head issues a written determination that there is a compelling reason for the order.

A company's suspension from contracting with the government precludes the company from acting as a subcontractor as well. Thus, government prime contractors cannot issue a subcontract to a suspended company without a compelling reason to do so. Even then, the prime contractor's officials must first notify the government contracting officer of their intent to award the subcontract and describe the rationale and the extra steps that will be taken to protect the government's interests.

Notably, the FAR's definition of a subcontractor includes any entity that furnishes supplies or services to or for a government prime contractor. In some situations, companies have argued that suppliers should not be considered subcontractors unless the goods or services they provide are incorporated directly into a government project. But the FAR does not support such a narrow reading.

For these reasons, any company that has a contract with the federal government must be careful to make certain that it does not award any subcontracts to a suspended concern unless it can justify the arrangement by compelling reasons and first provides the required notice to the government. Subcontracts already in place may be allowed to continue, but new arrangements for supplies or services should not be awarded to a suspended firm without following these procedures. n

Peckinpaugh is corporate counsel for DynCorp in Reston, Va. This column represents his personal views.