Overview
FAR Subpart 3.5 addresses specific improper business practices that undermine the integrity of the federal procurement process. It establishes regulations to prevent "buying-in" (low-balling bids to recoup losses later), prohibits subcontractor kickbacks under the Anti-Kickback Act of 1986, and ensures that prime contractors do not unreasonably restrict subcontractors from selling directly to the Government.
Key Rules
- Anti-Buying-In Policy: Contractors are prohibited from submitting offers below anticipated costs with the intent to increase contract prices later through change orders or high-priced follow-on contracts.
- Kickback Prohibition: No person may provide, solicit, or accept any "thing of value" (money, gifts, gratuities) to improperly obtain or reward favorable treatment regarding a prime contract or subcontract.
- Mandatory Reporting: Prime contractors and subcontractors must report suspected kickback violations in writing to the agency Inspector General or the Attorney General if they have reasonable grounds for suspicion.
- Internal Controls: For non-commercial contracts exceeding $200,000, prime contractors must maintain written procedures to prevent and detect kickbacks (e.g., ethics training, audit procedures, and annual employee declarations).
- Direct Sales Protection: Prime contractors generally cannot include terms that prevent a subcontractor from selling their products or services directly to the Government.
- Government Audit Rights: The Inspector General and the GAO have the authority to inspect contractor facilities and audit books/records to investigate potential kickback violations.
Responsibilities
- Contracting Officers (COs):
- Identify and mitigate "buying-in" risks by using multi-year contracting or priced options.
- Offset the amount of suspected kickbacks against monies owed to the prime contractor.
- Direct prime contractors to withhold kickback amounts from subcontractors.
- Ensure mandatory clauses (52.203-6 and 52.203-7) are included in solicitations and contracts based on applicable thresholds.
- Prime Contractors:
- Establish and follow formal anti-kickback procedures (for contracts >$200k).
- Cooperate fully with any Federal agency investigating potential violations.
- Notify the CO when funds have been withheld from a subcontractor at the Government's direction.
- Inspectors General (IG) / Attorney General:
- Receive reports of suspected violations and conduct investigations.
- Pursue criminal and civil penalties against violators.
Practical Implications
- Price Realism Matters: In real-world scenarios, if a contractor submits an exceptionally low bid, the CO will likely perform a price realism analysis. To avoid "buying-in" accusations, contractors should be prepared to justify low prices through efficiency or unique technical approaches rather than intended future recovery.
- Compliance Infrastructure: Large-scale government contractors cannot simply rely on a "handshake" culture. The requirement for formal anti-kickback procedures means firms must invest in compliance officers, ethics hotlines, and regular internal audits to remain eligible for awards over $200,000.
- Administrative Offsets: The Government has the "power of the purse." If a kickback is discovered, the CO does not need a court order to stop payment; they can unilaterally offset the suspected amount from the prime contractor's invoices, creating significant cash-flow risks for the firm.
- Subcontractor Freedom: Subcontractors who feel pressured by a prime contractor to sign "exclusive" deals that prevent them from bidding on future government requirements can cite FAR 3.503 to challenge those restrictive covenants.