Wednesday, September 4, 2019

Improper Business Practices - "Buying-In"

Last week we began a series on improper business practices as defined in FAR (Federal Acquisition Regulations) Part 3. FAR Part 3 includes sections on the prohibitions of gratuities to Government personnel, contingent fees, subcontractor kickbacks, "buying in"and anti-trust matters. Specific to contractors and subcontractors, FAR Part 3 covers whistleblower protections to contractor employees, requires codes of business ethics and conduct, and prevention of personal conflicts of interest for contractor employees performing acquisition functions. Its also the section that we discussed in Part 1 of this series that requires contractors and subcontractors to implement reasonable procedures to prevent and detect violations of the Anti-Kickback Act. If you missed that post, you should go back and read it.

Today we will be covering the practice of "buying-in"

Buying-in as used in FAR 3.501 is the practice of submitting an offer below anticipated costs, expecting to either increase the contract amount after award (e.g. through unnecessary or excessively priced change orders) or receive follow-on contracts at artificially high prices to recover losses incurred on the buy-in contract.

The practice of buying-in can decrease competition or result in poor contract performance.

FAR does not prohibit contractors from buying-in. But it does caution contracting officers to ensure that buying-in losses are not recovered by the contractor through the pricing of change orders or follow-on contracts subject to cost analysis. FAR lists several safeguards that contracting officers should use to minimize the opportunity for buying-in:

  1. Contracting officers should seek a price commitment covering as much of the entire program concerned as is practical by using multiyear contracting with a requirement in the solicitation that a price be submitted only for the total multi-year quantity or priced options for additional quantities that, together with the firm contract quantity, equal the program requirements.
  2. Contracting officers should perform cost or price analysis to develop a negotiation position that permits the parties to reach agreement on a fair and reasonable price (see FAR 15.405).
Contractors and subcontractors might have valid reasons for buying into a program besides making up the losses on change orders and follow-on work. SBIR (Small Business Innovative Research) contracts are often 'loss' contracts but contractors are willing to take the contract(s) because it represents Government funding on research the contractor planned or desired to do anyway.

Its almost impossible for the Government to determine whether a contractor is "buying-in" to a contract. But contracting officers are not naive and can often sense when such a practice might lead to much higher costs in the long run.

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