The American Recovery and Reinvestment Act of 2009: What Contractors Need to Know

By Neal I. Sklar, Adam P. Handfinger and Warren E. Friedman

In an attempt to jump-start the economy, President Barack Obama just signed the $787 billion dollar economic stimulus bill into law as the American Recovery and Reinvestment Act of 2009 (the “Act”). These billions of dollars will engage contractors throughout the country to, among other things, modernize federal and other public infrastructure; make key energy efficiency retrofits; repair public housing and to weatherize moderate-income housing.

However, with great opportunity comes great risk. With the Act’s countless projects on the horizon, contractors need to be aware of new ways of doing business as well as expansive federal requirements that may flow into these projects. Contractors will need to understand the unique challenges of doing business with the government and the inherent risks involved.

The federal government is not just another owner. Private contractors who do not regularly contract with the government may be totally unaware of the “strings” that can be attached to federal funds, including the application of federal cost principles, federal purchasing and negotiation procedures for subcontractors and suppliers, restrictions on the employment of subsidiaries and affiliated companies, required subcontract provisions and other procurement regulations.

The failure to follow these regulations can often result in the denial of cost recovery, or worse, the application of severe penalties such as the complete forfeiture of rights because of false statements or claims. Knowledge of the contractor’s responsibility under these laws and implementation of proper procedures is critical to compliance and, ultimately, profitability and survival as a government contractor, especially since the government has increased efforts to punish ethics violations.

Understanding the ins and outs of government regulations becomes even more significant as government projects and local projects with government funding change from traditional lump sum, hard-bid contracts to design/build, best value and other forms of contracting that require contractors to demonstrate that costs are “reasonable” and to submit to government audits.

Even contractors with substantial government contracting experience face new challenges as a result of recent changes in laws and regulations, adverse court decisions, and expanded government policies relating to contractor integrity, ethics, compliance, methods of contracting, immigration, authority and funding.

The Federal Acquisition Regulations (“FARs”) also pose some new challenges for contractors. These regulations apply to all contracts that are “awarded with funds made available in [the] Act.” It is uncertain what this means for contractors because the FARs do not define whether projects awarded to states with funds from the Act will be subject to the new regulations or whether only those projects awarded directly by the federal government are subject to these regulations.

Other examples of challenges can be seen in the recent changes in FAR ethics and compliance regulations.

For instance, contractors and subcontractors with government contracts in excess of $5 million and a performance period of more than 120 days must have a formal compliance program in place with the following elements: a code of ethics and conduct that must be provided to each employee engaged in the performance of the contract; an employee ethics and compliance training program; and internal control systems designed to prevent and detect ethics violations, including a hot line and an audit program.

Additionally, for any contracts over the threshold, including those closed out within the last three years, contractors must voluntarily report to the government when there is credible evidence of: violations of the criminal provisions of federal ethics laws such as the False Claims Act, the False Statements Act, the Anti-Kickback Act, as well as statutes related to bribery, gratuities and mail and wire fraud; violations of the civil provisions of the False Claims Act; and any “significant overpayments” on government contracts.

Failure to comply can result in suspension and/or debarment (including possible collateral debarment by individual states).

Any projects funded through the Act will be subject to both the “Buy American” requirement and Davis-Bacon requirements. The “Buy American” requirement mandates that steel, iron, and even manufactured goods used in construction and infrastructure projects funded be produced in the United States.

The Davis-Bacon Act, a federal law established during the Great Depression, requires that any contracts and projects funded directly or assisted in whole or in part by the federal government must include provisions for paying workers prevailing wages and benefits.

While government contracts can be very attractive, especially in light of the current economic circumstances facing the construction industry, there are serious risks that must be understood and addressed before bidding on projects funded with federal money. The foregoing summary of issues is not intended to identify all risks or regulations that contractors should address. Contractors should conduct a thorough review of the requirements in order to ensure compliance.

This article is not intended to provide specific legal advice, but instead as general commentary regarding legal matters. You should consult with an attorney regarding your legal issues, as the advice you may receive will depend upon your facts and the laws of your jurisdiction.