Subpart 3.5 - Other Improper Business

Practices

Parent topic: Part 3 - Improper Business Practices and Personal Conflicts of Interest

3.501 Buying-in.

3.501-1 Definition.

Buying-in, as used in this section, means submitting an offer below anticipated costs, expecting to-

(1) Increase the contract amount after award (e.g., through unnecessary or excessively priced

change orders); or

(2) Receive follow-on contracts at artificially high prices to recover losses incurred on the buy-in

contract.

3.501-2 General.

(a) Buying-in may decrease competition or result in poor contract performance. The contracting

officer must take appropriate action to ensure buying-in losses are not recovered by the contractor

through the pricing of-

(1) Change orders; or

(2) Follow-on contracts subject to cost analysis.

(b) The Government should minimize the opportunity for buying-in by seeking a price commitment

covering as much of the entire program concerned as is practical by using-

(1) Multiyear contracting, with a requirement in the solicitation that a price be submitted only for

the total multi-year quantity; or

(2) Priced options for additional quantities that, together with the firm contract quantity, equal the

program requirements (see subpart 17.2).

(c) Other safeguards are available to the contracting officer to preclude recovery of buying-in losses

(e.g., amortization of nonrecurring costs (see 15.408, Table 15-2, paragraph A, column (2) under

"Formats for Submission of Line Item Summaries") and treatment of unreasonable price quotations

(see 15.405).

3.502 Subcontractor kickbacks.
3.502-1 Definitions.

As used in this section—

Kickback means any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of

any kind which is provided to any prime contractor, prime contractor employee, subcontractor, or

subcontractor employee for the purpose of improperly obtaining or rewarding favorable treatment in

connection with a prime contract or in connection with a subcontract relating to a prime contract.

Person means a corporation, partnership, business association of any kind, trust, joint-stock

company, or individual.

Prime contract means a contract or contractual action entered into by the United States for the

purpose of obtaining supplies, materials, equipment, or services of any kind.

Prime Contractor means a person who has entered into a prime contract with the United States.

Prime Contractor employee, as used in this section, means any officer, partner, employee, or agent

of a prime contractor.

Subcontract means a contract or contractual action entered into by a prime contractor or

subcontractor for the purpose of obtaining supplies, materials, equipment, or services of any kind

under a prime contract.

Subcontractor—

(1) Means any person, other than the prime contractor, who offers to furnish or furnishes any

supplies, materials, equipment, or services of any kind under a prime contract or a subcontract

entered into in connection with such prime contract; and

(2) Includes any person who offers to furnish or furnishes general supplies to the prime contractor

or a higher tier subcontractor.

3.502-2 Subcontractor kickbacks.

The Anti-Kickback Act of 1986 (now codified at 41 U.S.C. chapter 87, Kickbacks,) was passed to

deter subcontractors from making payments and contractors from accepting payments for the

purpose of improperly obtaining or rewarding favorable treatment in connection with a prime

contract or a subcontract relating to a prime contract. The Kickbacks statute-

(a) Prohibits any person from-

(1) Providing, attempting to provide, or offering to provide any kickback;

(2) Soliciting, accepting, or attempting to accept any kickback; or

(3) Including, directly or indirectly, the amount of any kickback in the contract price charged by a

subcontractor to a prime contractor or a higher tier subcontractor or in the contract price charged

by a prime contractor to the United States.

(b) Imposes criminal penalties on any person who knowingly and willfully engages in the prohibited
conduct addressed in paragraph (a) of this section.

(c) Provides for the recovery of civil penalties by the United States from any person who knowingly

engages in such prohibited conduct and from any person whose employee, subcontractor, or

subcontractor employee provides, accepts, or charges a kickback.

(d) Provides that-

(1) The contracting officer may offset the amount of a kickback against monies owed by the United

States to the prime contractor under the prime contract to which such kickback relates;

(2) The contracting officer may direct a prime contractor to withhold from any sums owed to a

subcontractor under a subcontract of the prime contract the amount of any kickback which was or

may be offset against the prime contractor under paragraph (d)(1) of this section; and

(3) An offset under paragraph (d)(1) or a direction under paragraph (d)(2) of this section is a claim

by the Government for the purposes of 41 U.S.C. chapter 71, Contract Disputes.

(e) Authorizes contracting officers to order that sums withheld under paragraph (d)(2) of this section

be paid to the contracting agency, or if the sum has already been offset against the prime

contractor, that it be retained by the prime contractor.

(f) Requires the prime contractor to notify the contracting officer when the withholding under

paragraph (d)(2) of this section has been accomplished unless the amount withheld has been paid to

the Government.

(g) Requires a prime contractor or subcontractor to report in writing to the inspector general of the

contracting agency, the head of the contracting agency if the agency does not have an inspector

general, or the Attorney General any possible violation of the Kickbacks statute when the prime

contractor or subcontractor has reasonable grounds to believe such violation may have occurred.

(h) Provides that, for the purpose of ascertaining whether there has been a violation of the

Kickbacks statute with respect to any prime contract, the Government Accountability Office and the

inspector general of the contracting agency, or a representative of such contracting agency

designated by the head of the agency if the agency does not have an inspector general, shall have

access to and may inspect the facilities and audit the books and records, including any electronic

data or records, of any prime contractor or subcontractor under a prime contract awarded by such

agency.

(i) Requires each contracting agency to include in each prime contract, other than for commercial

products or commercial services, exceeding $150,000, a requirement that the prime contractor

shall–

(1) Have in place and follow reasonable procedures designed to prevent and detect violations of the

Kickbacks statute in its own operations and direct business relationships (e.g., company ethics rules

prohibiting kickbacks by employees, agents, or subcontractors; education programs for new

employees and subcontractors, explaining policies about kickbacks, related company procedures and

the consequences of detection; procurement procedures to minimize the opportunity for kickbacks;

audit procedures designed to detect kickbacks; periodic surveys of subcontractors to elicit

information about kickbacks; procedures to report kickbacks to law enforcement officials; annual

declarations by employees of gifts or gratuities received from subcontractors; annual employee

declarations that they have violated no company ethics rules; personnel practices that document

unethical or illegal behavior and make such information available to prospective employers); and
(2) Cooperate fully with any Federal agency investigating a possible violation of the Kickbacks

statute.

(j) Notwithstanding paragraph (i) of this section, a prime contractor shall cooperate fully with any

Federal Government agency investigating a violation of 41 U.S.C. 8702 (see 41 U.S.C. 8703(b)).

3.502-3 Contract clause.

The contracting officer shall insert the clause at 52.203-7, Anti-Kickback Procedures, in solicitations

and contracts exceeding $150,000, other than those for commercial products or commercial services

(see part 12).

3.503 Unreasonable restrictions on subcontractor sales.

3.503-1 Policy.

10 U.S.C. 4655 and 41 U.S.C. 4704 require that subcontractors not be unreasonably precluded from

making direct sales to the Government of any supplies or services made or furnished under a

contract. However, this does not preclude contractors from asserting rights that are otherwise

authorized by law or regulation.

3.503-2 Contract clause.

The contracting officer shall insert the clause at 52.203-6, Restrictions on Subcontractor Sales to the

Government, in solicitations and contracts exceeding the simplified acquisition threshold. For the

acquisition of commercial products or commercial services, the contracting officer shall use the

clause with its Alternate I.