Government Contracts: Your Rights, Protective Clauses

One of the advantages to selling commercial items and services to the government is that you avoid complying with many government rules. Unfortunately, the government still tries to impose many commercially unacceptable terms and conditions in its contracts.

The Federal Acquisition Regulation (FAR) instructs contracting officers to consider commercial practices in contracts for commercial items. Contracting officers are supposed to listen to company objections and accommodate actual private-sector practices in contracts. Do they? Not always.

Here we look at contractual clauses found in FAR Section 52.212-4. You should have your version of these clauses available to attach as addenda in commercial-item contracts.

Acceptance: The government accepts commercial items based on an open-ended clause that "reserves the right to inspect or test any supplies or services that have been tendered for acceptance," without specifying a time period.

In practice, the government almost never inspects or tests a commercial item. The only proof of acceptance a company may ever get is a paid-up invoice.

The solution: Make contractual acceptance contingent on satisfactory delivery, and allay government fears about receiving a damaged or defective product by promising to make things right under the warranty provisions. Stipulate that the government has a right to inspect items for damage or defects, but that once the government signs a delivery receipt, the inspection is over. You're not asking the government to give up its right to remedy for defects -- you're simply clarifying that defects revealed after delivery are to be addressed by the warranty.

The government-written contract clause suggests this is correct. The clause says that "the government must exercise its post-acceptance rights (1) within a reasonable time after the defect was discovered or should have been discovered; and (2) before any substantial change occurs in the condition of the item, unless the change is due to the defect in the item." In plainer English, it seems government says that remedy of defective items is a matter of post-acceptance, which is a matter for the warranty.

Acceptance Of Services: With a time-and-materials contract, companies can often tie acceptance for purposes of revenue recognition to submission of an invoice for hours worked. Problems arise under fixed-price services contracts when the government insists on hourly invoices. When responding to a fixed-price solicitation for services over a long period of time, incorporate milestones that trigger government acceptance upon completion.

The more complex a services contract, the more finesse you'll need in defining when delivery and acceptance occur. The contract language can get dense and will often not map neatly to generally accepted accounting practices given the government's orientation toward its unique cost accounting standards.

NEXT: Warranties, Damages and The SAFETY Act

Warranty: It's one thing to warrant an item; it's another thing to affirm that commercial items "are merchantable and fit for use for the particular purpose described in this contract," as the government wants.

"Merchantability" is problematic for technology vendors. It requires items to conform with trade standards and be fit for the purpose for which they are ordinarily used. But which trade standards? As for fitness for a particular purpose, interactions with technology created by other vendors may cause your product to encounter problems beyond your control.

You should not be held responsible for things over which you have no control. For most technology sales this clause should be eliminated or very precisely defined in the contract. Don't just strike it out; it must be expressly disclaimed.

Damages: The boilerplate damages clause in FAR 52.212-4 seems sound at first glance. It says that "except as otherwise provided by an express warranty, the contractor will not be liable to the government for consequential damages resulting from any defect or deficiencies in accepted items."

Unfortunately, "consequential damages" covers indirect damages only. Most businesses want to limit their direct liability, too -- which in government contracting means convincing the contracting officer to agree to your standard "commercial limitation of direct damages" clause.

SAFETY Act: For a tiny corner of the technology market, the government extends immunity to sellers of "qualified anti-terrorism technology" if a civil lawsuit arises in connection with a terrorist act.

The Support Anti-terrorism by Fostering Effective Technologies (SAFETY) Act of 2002 allows sellers of Homeland Security Department-certified technology and anti-terrorism services to claim the "government contractor defense" in a civil lawsuit. Under certain conditions, this defense immunizes certified sellers from tort liability because they've acted on behalf of the government.

To qualify for the government contractor defense, companies must receive precise government specifications, manufacture to that specification, and warn the government about any dangers they discover. And yet, only government military systems have specifications precise enough for the government contractor defense.

Gaining SAFETY Act "certification" is different from getting a "designation." Designation is an intermediary and less robust protection that merely limits, not eliminates, tort liability. Designation is a prerequisite to certification, though companies can (and probably should) apply for both simultaneously. And remember that SAFETY Act immunity is only good in lawsuits arising from a terrorist act.

The preceding information was adapted and digested from the book "The Inside Guide to the Federal IT Market," published by Management Concepts Press. For more information, visit www.insideguidetofederalit.com.

Steve Charles is a co-founder and executive vice president of immixGroup, which helps technology companies do business with the government. He is a frequent speaker and lecturer on technology and the federal procurement process. He can be reached at [email protected]