Federal contractors are generally familiar with the many FAR provisions listed in a solicitation or contract. So, it can be tempting to simply gloss over these pages of the solicitation, absentmindedly checking off the right box or signing off on the required representations without familiarizing yourself with each provision–or the consequences that come if each is violated. But naturally, we don’t recommend a cursory review. And one important FAR provision contractors should definitely familiarize themselves with is the Covenant Against Contingent Fees (FAR 52.203-5)–as the consequences of violating that one can be rather grave.
The Covenant Against Contingent Fees is a representation made to the government by a contractor, stating that the contractor has not retained any person or agency to solicit or obtain the government contract for a contingent fee. A contingent fee is defined under the clause as “any commission, percentage, brokerage, or other fee that is contingent upon the success that a person or concern has in securing a Government contract.”
In accordance with FAR Part 3, the Covenant Against Contingent Fees implements the Government’s longstanding belief that “Contractors’ arrangements to pay contingent fees for soliciting or obtaining Government contracts have long been considered contrary to public policy because such arrangements may lead to attempted or actual exercise of improper influence.” FAR 3.402.
Improper influence is “any influence that induces or tends to induce a Government employee or officer to give consideration or to act regarding a Government contract on any basis other than the merits of the matter.” FAR 52.203-5.
FAR 52.203-5, Covenant Against Contingent Fees.
The Contractor warrants that no person or agency has been employed or retained to solicit or obtain this contract upon an agreement or understanding for a contingent fee, except a bona fide employee or agency. For breach or violation of this warranty, the Government shall have the right to annul this contract without liability or, to deduct from the contract price or consideration, or otherwise recover, the full amount of the contingent fee.
When is the Clause Required?
A contracting officer is required to include the warranty in solicitations and contracts that exceed the simplified acquisition threshold, excluding those for commercial products or services under FAR Part 12. FAR 3.404.
The Bona Fide Employee and/or Agency Exception.
The clause grants an exception for “contingent fee arrangements between contractors and bona fide employees or bona fide agencies.” FAR 3.402(b).
A bona fide employee is “a person, employed by a contractor and subject to the contractor’s supervision and control as to time, place, and manner of performance, who neither exerts nor proposes to exert improper influence to solicit or obtain Government contracts nor holds out as being able to obtain any Government contract or contracts through improper influence.”
A bona fide employee may resemble the following scenario:
A contractor hires a full-time, salaried employee to assist with the company’s overall business development. The employee’s duties include attending networking events, identifying federal contracting opportunities, and assisting the contractor with preparing proposals. This would constitute as a bona fide employee. The individual is under the company’s supervision and control as a salaried employee and was not hired solely to obtain a specific government contract.
A bona fide agency is “an established commercial or selling agency, 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 any Government contract or contracts through improper influence.”
An older version of the FAR (FAR 3.408-2(c) (1995) provided a list of factors as additional guidance for determining whether an entity constitutes as a bona fide agency:
Proportional Fee. The agent’s fee “should not be inequitable or exorbitant when compared to services performed or to customary fees for similar services related to commercial business.”
Knowledge of Business. The entity “should have adequate knowledge of the contractor’s products and business, and other qualifications necessary to sell the products or services on their merits.”
Continuing Relationship. “The contractor and the entity should have a continuing relationship or, in newly established relationships, should contemplate future continuity.”
Established/Ongoing Concern. The entity “should be an established concern that has existed for a considerable period, or be a newly established going concern likely to continue in the future.”
General Representation. An entity that “represents the contractor in Government and commercial sales should receive favorable consideration,” although an entity “that confines its selling activities to Government contracts is not disqualified.”
While the FAR no longer includes this guidance, courts have long recognized these factors as relevant in determining whether an entity is a bona fide agency.
What are the Consequences for Violating the Provision?
Again, a breach or violation of the warranty allows the Government to “annul the contract without liability or to deduct from the contract price or consideration, or otherwise recover, the full amount of the contingent fee.” Further, if the provision is knowingly violated, a contractor could face liability under the False Claims Act.
While agreeing to comply with all the FAR provisions incorporated in a federal contract can seem like an administrative hassle at times, there is significant value in understanding what is required from each provision to ensure regulatory compliance.
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