Federal statutes, regulations, and public policy strictly prohibit contractors from exerting improper influence in their attempts to secure government contracts. Such improper influence is defined as any influence that induces or tends to induce a government official to act regarding a government contract on any basis other than the merits of the matter. While there are many ways in which a contractor may exert improper influence, one such way is through the payment of contingent fees to contact officials to secure federal contracts. Contingent fees may be any commission, percentage, brokerage, or other fee that is contingent upon the success that a person or concern has in securing a government contract. The federal government generally prohibits contractors from paying contingent fees in exchange for obtaining government contracts. This prohibition includes the payment of contingent fees between private parties or other contractual arrangements that contemplate a contingent fee in violation of procurement statutes or regulations.
Notably, FAR 3.404 requires contracting officers (CO) to include the clause at Federal Acquisition Regulation (FAR) 52.203-5 “Covenant Against Contingent Fees” in sealed bid procurements. Similarly, the covenant is also included in negotiated contracts in accordance with 10 U.S.C. § 2306 and 41 U.S.C. § 3901. The clause is mandatory in all non-commercial product or services contracts above the simplified acquisition threshold, requiring the contractor to provide a warranty against contingent fees. Specifically, the contractor must provide a warranty that no person or agency has been retained to secure the contract with an agreement or understanding that contemplates the payment of a contingent fee. When the contractor breaches or violates this warranty, the government has the right to annul the contract without liability. In such situations, the government may also deduct the contingent fee from the final contract price or otherwise recover the full amount of the contingent fee.
An exception applies to bona fide employees of government contractors who are subject to the contractor’s supervision and control as to time, place, and manner of performance. Such contractor employees may be paid contingent fees if they do not exert or propose to exert improper influence to solicit or obtain government contracts. These employees must also not hold themselves out as having the ability to obtain government contracts through the exertion of improper influence. Furthermore, an exemption exists for “bona fide agencies,” which are defined as established commercial or selling agencies, maintained by a contractor for the purpose of securing business that neither exerts nor proposes to exert improper influence to solicit or obtain government contracts nor holds itself out as being able to obtain government contracts by exercising improper influence.
As an example, the Court of Appeals for the Second Circuit has previously found a violation of the covenant when a contractor hired the services of a consulting firm on a commissioned fee basis to help secure a government contract, when the owner of the consulting firm provided training to the awarding government agency as a “special Government employee.” In that case, the court held that the owner of the consulting firm could not obtain a commission fee or compensation for services rendered to help the contractor obtain the government contract. Importantly, the exertion or the possibility of exertion of improper influence is a key consideration in determining whether the covenant against contingent fees has been violated. Additionally, even when a contingent fee is permitted under one of the limited exemptions, the fee should not be inequitable or exorbitant when compared to the services performed.
The covenant against contingent fees in federal contracting typically prohibits contractors from paying contingent fees to help secure federal contracts. Therefore, contractors should carefully review contracts with agents hired with the specific purpose of contacting government officials to secure government business. Contractors should ensure that contractual arrangements with such agents do not contemplate a contingent fee. While contingent fees may be permitted in certain situations, under no circumstances can an agent exert or propose to exert improper influence to help the contractor obtain government contracts. By understanding the covenant against contingent fees and its overall framework and exemptions, contractors can avoid inadvertent breaches or violations of the covenant when seeking outside assistance in obtaining federal government contracts.
This Federal Procurement Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.
