On July 9, 1999, the Clinton Administration published a proposed rule in the Federal Register (vol. 64, num. 131, pp. 37359-37361) to clarify the standards used in determining which businesses are eligible to receive federal contracts. Under the proposal, businesses that repeatedly and substantially violate safety, health, environmental, labor, tax or antitrust laws could be deemed ineligible for federal contracts. Under current regulations, the federal government can only contract with "responsible contractors," and this proposal offers a clarification of what it means to be a "responsible contractor."

Comments are being accepted until November 8, 1999 (address below). OMB Watch will be submitting comments in support of this proposal, as we believe that any entity with repeated and substantial violations of laws or regulations should not be eligible for federal financial awards. Our comments will offer suggestions for strengthening the proposal to make it easier to understand and implement.

Although such a proposal may seem obvious -- why should businesses that break the law be rewarded with federal contracts? -- the Chamber of Commerce has Apromised an all-out fight in opposition to the proposed rule. The Chamber has helped organize a business-led coalition, called the National Alliance Against Blacklisting, which includes the National Association of Manufacturers and the Business Roundtable, that claims the proposed rule would create a "blacklist" of law violators. (These are the same organizations that have promoted legislation that would undermine federal regulatory protections.) However, the Federal Acquisition Regulatory Council has stated that there are no plans for such a list. And most of the business arguments are based on inaccuracies or misinterpretations of the FAR proposal.

On July 9, 1999, the Department of Defense, the General Services Administration, and the National Aeronautics and Space Administration proposed changes to the Federal Acquisition Regulation (FAR), which governs federal contracts. The proposal contains three major changes to the FAR:

• Contractor Qualifications. Adds examples to the FAR of what a procurement officer may consider when determining whether a potential contractor has a "satisfactory record of integrity and business ethics," which is already part of current FAR standards. These examples include "persuasive evidence" of noncompliance with "tax laws... labor laws, employment laws, environmental laws, antitrust laws or consumer protection laws." The FAR would also be amended to require organizations to have the necessary workplace practices and legal compliance to "assure a skilled, stable and productive workforce."
  
• Labor Relations Costs. Amends the FAR to forbid federal contractors from billing for costs of influencing the decision of employees to support or oppose unionization. Similar rules have been part of programs such as Medicare and Head Start, but currently federal contractors are reimbursed for anti- or pro-union activities, which have nothing to do with fulfilling a contract.
  
• Legal Fees. Amends the FAR to make clear that contractors cannot be reimbursed for legal costs where a legal or administrative proceeding is initiated by the federal government and the contractor was found to have violated a law or regulation or where there was a settlement (unless such costs were negotiated as part of the settlement). Currently, the FAR forbids reimbursement when the contractor is convicted in a criminal proceeding, liable in civil and administrative proceedings involving fraud or monetary penalties, or loses a debarment or termination of contract decision. The FAR change would add situations where the federal agency brings a civil or administrative proceeding in which there is contractor liability but may not result in monetary penalties imposed. (The proposal cites decisions by the National Labor Relations Board and the Equal Employment Opportunity Council as examples.) In these situations, the contractor may not seek reimbursement of their legal costs.

The current FAR identifies seven standards that must be met for a potential contractor to be deemed "responsible," and hence qualified for the federal contract. For example, the contractor must "have adequate financial resources to perform the contract," be able to "comply with the required or proposed delivery or performance schedule," and have a satisfactory performance record.

The proposed FAR amends and clarifies two of these standards: Sec. 9.104-1(d) which requires the organization to have a "satisfactory record of integrity and business ethics;" and Sec. 9.104-1(e) which requires the organization to have the "necessary organization, experience, accounting and operational controls, or the ability to obtain them."

The proposed FAR changes provide examples of what constitutes a "satisfactory record of integrity and business ethics," stating that "examples of an unsatisfactory record may include persuasive evidence of the prospective contractor's lack of compliance with tax laws, or substantial noncompliance with labor laws, employment laws, environmental laws, antitrust laws, or consumer protection laws." An agency procurement officer could consider such violations in determining whether a contractor was "responsible." That determination would affect eligibility for the particular contract under review.

The FAR proposal states that adverse responsibility determinations should be based upon "final adjudication" of violations of law or regulations, or upon "persuasive evidence of substantial noncompliance with a law or regulation." The proposal defines this as "not isolated or trivial, but repeated and substantial violations establishing a pattern or practice... The facts and circumstances in each case" must be examined.

Despite the statement that the violations must be repeated and substantial, the National Alliance Against Blacklisting (NAAB), led by the Chamber of Commerce, has suggested that a single violation could lead to an adverse determination. NAAB states on their web site, "Will one violation of an already extremely complex maze of employment laws be enough to render a company's practices 'unsatisfactory'?"

Starting from this false assumption, NAAB goes even further. They claim that a single violation would lead to being "blacklisted" from receiving any federal contracts. "Blacklisting could happen without due process -- public notice, hearing or successfully [sic] appeal process..." NAAB also argues that "contractors who are blacklisted under these proposed federal regulations may also be blacklisted from many state contracts."

NAAB's claims are inaccurate. The FAR already requires procurement officers to make determinations based on "integrity and business ethics." This would not change under the FAR proposal; the proposal simply provides examples of law violations that should be considered under this standard.

Organizations that receive adverse determinations are not now "blacklisted" and this too would not change. When asked about this issue, a representative of the Federal Acquisition Regulatory Council (FAR Council) stated that there are no plans for such a blacklist. Moreover, the determination of a contractor's "responsibility" is made on a case-to-case basis for the contract in question, and is not a "debarment" for all federal contracts.

As for the issue of due process, the FAR already provides for an agency appeal process if the organization feels that an adverse agency determination was wrong. Executive Order 12979, Agency Procurement Protests, provides specific steps that agencies must establish to ensure a fair process for protesting agency decisions. The standards set forth in E.O. 12979 are found in the FAR at 48 CFR 33.103. Nothing in the proposed FAR would change this. In addition, that same part of the FAR provides details on taking protests beyond the agency to the General Accounting Office and, for small entities, to the Small Business Administration. In addition, businesses currently have, and will continue to have, the right to appeal an agency decision in federal district court under the Administrative Procedure Act.

Although the proposed FAR changes have no bearing on debarment and suspension from all contracts, it should be noted that the FAR provides detailed procedures to protect due process when a debarment or suspension is pursued. In other words, there is no way that a contractor could be "blacklisted" without being notified and given ample opportunity to present its position, with an opportunity to appeal a decision.

There is growing evidence that these anti-scofflaw changes are needed, and the Avondale Shipyards in Louisiana is a perfect example. Despite being found liable for various unfair labor practices (such as firing pro-union workers) and hundreds of violations of the Occupational Safety and Health Act (Avondale was fined $573,000 for 473 unsafe hazards in the workplace), Avondale still receives navy contracts.

According to the General Accounting Office, 80 firms that violated the National Labor Relations Act received over $23 billion in contracts in Fiscal Year 1993. In Fiscal year 1994, $38 billion was awarded to 261 federal contractors that were cited by OSHA for 5,121 violations, many of which were willful and serious. (General Accounting Office: "Worker Protection: Federal Contractors and Violations of Labor Law," October, 1995, and "Occupational Safety and Health: Violations of Safety and Health regulations by Federal Contractors," August 1996.) Clearly, not all federal contractors are in compliance with federal law.

Comments on the proposed rule are being accepted until November 8, 1999, and should be addressed to: General Services Administration, FAR Secretariat (MVR), 1800 F Street, NW, Room 4035, Washington, DC 20405, Attn: Laurie Duarte.

For more information, contact OMB Watch's Reece Rushing.