Federal Register / Vol. 72, No. 225 / Friday, November 23, 2007 / Rules and Regulations 65873 

(2) Facility design solicitations and 

contracts that include the specification 

of energy-consuming products must 

comply with the requirements at 

subpart 23.2. 

* * * * * 

PART 52—SOLICITATION PROVISIONS 

AND CONTRACT CLAUSES 

■ 10. Amend section 52.212–5 by 

revising the clause date to read ‘‘(DEC 

2007)’’; redesignating paragraphs (b)(26) 

through (b)(38) as paragraphs (b)(27) 

through (b)(39); and adding a new 

paragraph (b)(26) to read as follows: 

52.212–5 Contract Terms and Conditions 

Required to Implement Statutes or 

Executive Orders—Commercial Items. 

* * * * * 

(b) * * * 

(26) FAR 52.223–15, Energy Efficiency in 

Energy-Consuming Products (DEC 2007) (42 

U.S.C. 8259b). 

* * * * * 

■ 11. Amend section 52.213–4 by 

revising the clause date to read ‘‘(DEC 

2007)’’; redesignating paragraphs 

(b)(1)(viii) through (b)(1)(xi) as 

paragraphs (b)(1)(ix) through (b)(1)(xii); 

and adding a new paragraph (b)(1)(viii) 

to read as follows: 

52.213–4 Terms and Conditions—

Simplified Acquisitions (Other Than 

Commercial Items). 

* * * * * 

(b) * * * 

(1) * * * 

(viii) 52.223–15, Energy Efficiency in 

Energy-Consuming Products (DEC 2007) (42 

U.S.C. 8259b) (Unless exempt pursuant to 

23.204, applies to contracts when energyconsuming products listed in the ENERGY 

STAR Program or Federal Energy 

Management Program (FEMP) will be—

(A) Delivered; 

(B) Acquired by the Contractor for use in 

performing services at a Federally-controlled 

facility; 

(C) Furnished by the Contractor for use by 

the Government; or 

(D) Specified in the design of a building or 

work, or incorporated during its 

construction, renovation, or maintenance.) 

* * * * * 

■ 12. Section 52.223–15 is added to read 

as follows: 

52.223–15 Energy Efficiency in EnergyConsuming Products. 

As prescribed in 23.206, insert the 

following clause: 

ENERGY EFFICIENCY IN ENERGYCONSUMING PRODUCTS (DEC 2007) 

(a) Definition. As used in this clause—

Energy-efficient product— (1) Means a 

product that—

(i) Meets Department of Energy and 

Environmental Protection Agency criteria for 

use of the Energy Star trademark label; or 

(ii) Is in the upper 25 percent of efficiency 

for all similar products as designated by the 

Department of Energy’s Federal Energy 

Management Program. 

(2) The term ‘‘product’’ does not include 

any energy-consuming product or system 

designed or procured for combat or combatrelated missions (42 U.S.C. 8259b). 

(b) The Contractor shall ensure that energyconsuming products are energy efficient 

products (i.e., ENERGY STAR products or 

FEMP-designated products) at the time of 

contract award, for products that are—

(1) Delivered; 

(2) Acquired by the Contractor for use in 

performing services at a Federally-controlled 

facility; 

(3) Furnished by the Contractor for use by 

the Government; or 

(4) Specified in the design of a building or 

work, or incorporated during its 

construction, renovation, or maintenance. 

(c) The requirements of paragraph (b) apply 

to the Contractor (including any 

subcontractor) unless—

(1) The energy-consuming product is not 

listed in the ENERGY STAR Program or 

FEMP; or 

(2) Otherwise approved in writing by the 

Contracting Officer. 

(d) Information about these products is 

available for—

(1) ENERGY STAR at http:// 

www.energystar.gov/products; and 

(2) FEMP at http://www1.eere.energy.gov/ 

femp/procurement/eeplrequirements.html. 

(End of clause) 

[FR Doc. 07–5799 Filed 11–21–07; 8:45 am] 

BILLING CODE 6820–EP–S 

DEPARTMENT OF DEFENSE 

GENERAL SERVICES 

ADMINISTRATION 

NATIONAL AERONAUTICS AND 

SPACE ADMINISTRATION 

48 CFR Parts 2, 3, and 52 

[FAC 2005–22; FAR Case 2006–007; Item 

II; Docket 2007–0001; Sequence 1] 

RIN 9000–AK67 

Federal Acquisition Regulation; FAR 

Case 2006–007, Contractor Code of 

Business Ethics and Conduct 

AGENCIES: Department of Defense (DoD), 

General Services Administration (GSA), 

and National Aeronautics and Space 

Administration (NASA). 

ACTION: Final rule. 

SUMMARY: The Civilian Agency 

Acquisition Council and the Defense 

Acquisition Regulations Council 

(Councils) have agreed on a final rule 

amending the Federal Acquisition 

Regulation (FAR) to address the 

requirements for a contractor code of 

business ethics and conduct and the 

display of Federal agency Office of the 

Inspector General (OIG) Fraud Hotline 

Posters. 

DATES: Effective Date: December 24, 

2007 

FOR FURTHER INFORMATION CONTACT: Mr. 

Ernest Woodson, Procurement Analyst, 

at (202) 501–3775 for clarification of 

content. For information pertaining to 

status or publication schedules, contact 

the FAR Secretariat at (202) 501–4755. 

Please cite FAC 2005–22, FAR case 

2006–007. 

SUPPLEMENTARY INFORMATION: 

A. Background 

DoD, GSA, and NASA published a 

proposed rule in the Federal Register at 

72 FR 7588, February 16, 2007, to 

address the requirements for a 

contractor code of business ethics and 

conduct and the display of Federal 

agency Office of the Inspector General 

(OIG) Fraud Hotline Posters. The 

original comment period closed on 

April 17, 2007, but on April 23, 2007, 

the comment period was reopened and 

extended to May 23, 2007. We received 

comments from 42 respondents plus an 

additional late comment from one of the 

initial respondents. However, 15 of the 

respondents were only requesting 

extension of the comment period. The 

remaining 27 public comments are 

addressed in the following analysis. 

The most significant changes, which 

will be addressed, are—

•The clause requirement for a formal 

training program and internal control 

system has been made inapplicable to 

small businesses (see paragraph 5.c.v. 

and 11. of this section); 

•The contracting officer has been 

given authority to increase the 30 day 

time period for preparation of a code of 

business ethics and conduct and the 90 

day time period for establishment of an 

ethics awareness and compliance 

program and internal control system, 

upon request of the contractor (see 

paragraph 6.c. of this section); 

•The requirements in the internal 

control system relating to ‘‘disclosure’’

and ‘‘full cooperation’’ have been 

deleted, and moved to FAR Case 2007–

006 for further consideration (see 

paragraphs 2.e. and 6.d. of this section); 

•The clause 52.203–XX with 3 

alternates has been separated into 2 

clauses, one to address the contractor 

code of business ethics and conduct, 

and one to address the requirements for 

hotline posters (see paragraphs 3.h. and 

10.b. of this section); and 

• A contractor does not need to 

display Government fraud hotline 

posters if it has established a 

mechanism by which employees may 

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65874 Federal Register / Vol. 72, No. 225 / Friday, November 23, 2007 / Rules and Regulations 

report suspected instances of improper 

conduct, and instructions that 

encourage employees to make such 

reports (see paragraph 7.a. of this 

section). 

1. General support for the rule. 

Comments: The majority of 

respondents expressed general support 

for the rule. These included consultants, 

industry associations, a non-profit 

contractor, a construction contractor, 

inspectors general and interagency IG 

working groups, other Government 

agencies, and individuals. Many 

respondents were laudatory of the rule 

in general. For example, one respondent 

considered the proposed rule to be a 

‘‘good attempt’’ and another considered 

it to be ‘‘an outstanding, well thoughtout and needed policy change.’’ Others 

identified particular benefits of the 

proposed rule, such as—

•Reduce contract fraud; 

•Reduce waste, fraud, abuse and 

mismanagement of taxpayers’ resources; 

• Enhance integrity in the 

procurement system by strengthening 

the requirements for corporate 

compliance systems; and 

• Promote clarity and Governmentwide consistency in agency 

requirements. 

Response: None required. 

2. General disagreement with the rule 

as a whole. 

Although all respondents agree that 

contractors should conduct themselves 

with the highest degree of integrity and 

honesty, not all agree that the proposed 

rule is taking the right approach to 

achieve that goal. 

a. Ineffective. 

Comment: One respondent considers 

that this rule will not effectively correct 

the ethics and business conduct 

improprieties. Other respondents note 

that a written code of ethics does not 

ensure a commitment to compliance 

with its provisions. 

Response: There is no law, regulation, 

or ethics code that ensures compliance. 

Laws, regulations, and ethics codes 

provide a standard against which to 

measure actions, and identify 

consequences upon violation of the law, 

regulation, or ethics code. 

b. Unnecessary or duplicative, 

potentially conflicting. 

Comment: One respondent views the 

rule as unnecessary, because it adds ‘‘a 

further level of compliance and 

enforcement obligations where 

contractors already are or may be 

contractually or statutorily obliged to 

comply.’’ Another respondent 

comments that the rule is duplicative of 

other similar requirements. 

Furthermore, meeting multiple 

requirements for the same purpose can 

cause conflicts. 

Response: This rule is not duplicative 

of existing requirements known to the 

Councils. The rule requires basic codes 

of ethics and training for companies 

doing business with the Government. 

Although many companies have 

voluntarily adopted codes of business 

ethics, there is no current Governmentwide regulatory requirement for such a 

code. For DoD contracts, the Defense 

Federal Acquisition Regulation 

Supplement (DFARS) recommends such 

a code, but does not make it mandatory. 

Legislation such as the SarbanesOxley Act of 2002 (Pub. L. 107–204), 

cited by some of the respondents, 

applies only to accounting firms and 

publicly traded companies. SarbanesOxley focuses on auditor independence, 

corporate governance, internal control 

assessment, and enhanced financial 

disclosure. Sarbanes-Oxley provides 

broad definition of a ‘‘code of ethics’’

but does not specify every detail that 

should be addressed. It only requires 

publicly-traded companies to either 

adopt a code of ethics or disclose why 

they have not done so. 

The respondents did not identify any 

specific points of conflict between this 

rule and other existing requirements. 

Since this requirement is broad and 

flexible, capturing the common essence 

of good ethics and standards of conduct, 

the Councils consider that it should 

reinforce or enhance any existing 

requirements rather than conflict with 

them. 

c. Negative effect on current 

compliance efforts. 

Comment: According to one 

respondent, the rule may have a 

‘‘chilling effect’’ on current compliance 

efforts and may create a fragmented 

approach to standards of conduct. 

Response: As stated in the prior 

response, this rule should enhance 

current compliance efforts. 

d. Vague and too broad. 

Comment: Several respondents 

consider the rule too vague and broad, 

so that it is open to different 

interpretations. 

Response: The rule is intended to 

allow broad discretion. The specific 

requirements of the rule will be further 

addressed under paragraph 6. of this 

section. 

e. Change in role of Government. 

Comment: One respondent fears that 

the rule will ‘‘fundamentally change the 

Government’s role in the design and 

implementation of contractor codes and 

programs’’ because it moves from ‘‘the 

well-established principles of selfgovernance and voluntary disclosure’’ to 

‘‘contractual prescriptions and 

potentially mandatory disclosure.’’ This 

respondent states that the proposed rule 

is not just a minor modification of 

existing policy. Rather, it ‘‘would 

change far more than the FAR Councils 

have acknowledged.’’

Response: This rule does constitute a 

change. The Councils are requiring that 

contractors establish minimum 

standards of conduct for themselves. 

However, the rule still allows for 

flexibility and, where appropriate, 

contractor discretion. The Councils have 

deleted any clause requirement relating 

to mandatory disclosure but it will be 

considered as part of the new FAR Case 

2007–006 (72 FR 64019, November 14, 

2007). 

f. Unduly burdensome and expensive 

for contractors. 

Comment: One respondent thinks that 

this rule imposes significant new 

requirements on contractors. Other 

respondents consider the requirement 

unduly burdensome for the contractors. 

They think the rule will be a 

disincentive to doing business with the 

Government. 

Response: Most companies already 

have some type of ethics code. The 

mandatory aspects of this rule do not 

apply to commercial items, either at the 

prime or subcontract level. The rule has 

been changed to lessen the impact on 

small businesses (see paragraph 11. of 

this section). 

g. Impact on small business. 

Comment: Several respondents note 

the impact on small businesses. 

Response: See detailed discussion of 

impact on small business at paragraph 

11. of this section and changes to the 

rule to lessen that impact. 

h. Difficult to administer for 

Government. 

Comment: Several respondents 

consider the rule expensive and 

impractical to administer for the 

Government. One respondent comments 

on the further paperwork burdens on 

contracting officials, and that it cannot 

be effectively administered. 

Response: There are no particularly 

burdensome requirements imposed on 

the Government by this rule. Review of 

contractors’ compliance would be 

incorporated into normal contract 

administration. The Government will 

not be reviewing plans unless a problem 

arises. 

i. Rule should be withdrawn or issue 

2nd proposed rule. 

Comment: One respondent requests 

that the rule be withdrawn. Several 

respondents recommend significant 

redrafting of the proposed rule and an 

opportunity to comment on a second 

proposed rule that makes important 

revisions. 

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Federal Register / Vol. 72, No. 225 / Friday, November 23, 2007 / Rules and Regulations 65875 

Response: Although the Councils 

have made significant revisions to the 

proposed rule to address the concerns of 

the public, the revisions do not go 

beyond what could be anticipated from 

the text of the proposed rule and the 

preamble to the proposed rule. The 

changes are in response to the public 

comments. They do not rise to the level 

of needing republication under 41 

U.S.C. 418b. However, the Councils 

published a new proposed rule on 

mandatory disclosure under FAR case 

2007–006. 

3. Broad recommendations. 

a. Should not cover ethics. 

Comment: One respondent 

recommends not using the term ‘‘ethics’’

throughout the rule. Contractors can and 

should develop and train employees on 

appropriate standards of business 

conduct and compliance for its officers, 

employees and others doing (or seeking 

to do) business with the Federal 

Government. However, contractors 

typically do not teach ‘‘ethics’’ to their 

employees. 

Response: The term ‘‘ethics’’ is a term 

currently used throughout the FAR 

(reference FAR 3.104 and 9.104–1(d)) 

and is not considered to be an 

unfamiliar term to the professional 

business world. However, the Councils 

have modified the term to ‘‘business 

ethics,’’ consistent with usage in other 

FAR parts. 

b. 2005 Federal Sentencing 

Guidelines. 

Comments: Several respondents 

comment that the requirements of an 

internal control system should be like 

the United States Sentencing 

Commission 2005 Federal Sentencing 

Guidelines (Ch. 8 section 8B2.1), either 

by direct incorporation into the FAR or 

by reference. The proposed rule already 

included 8B2.1(b)(2) and (b)(3). One 

respondent is concerned that if they are 

not identical, businesses (especially 

small businesses) will believe they have 

met the compliance requirements of the 

U.S. Government by following the FAR; 

this will create a false sense of security. 

This respondent believes that the FAR 

requirements fall short when compared 

to the corporate sentencing guidelines. 

The respondent also points out that 

there are no clauses applying to smaller 

contracts, or to commercial item 

contracts, although companies with 

these contracts are still subject to the 

sentencing guidelines. Key requirements 

of the guidelines are omitted from the 

rule, such as knowledgeable leadership, 

exclusion of risky personnel, and 

individuals with day-to-day 

responsibility for implementing 

compliance systems. 

Several respondents ask for a specific 

reference to be made in the rule to the 

U.S. Sentencing Guidelines. 

• First, in this area of corporate 

compliance, it could be confusing if it 

appeared that the FAR was setting a 

different standard than the Sentencing 

Commission and the Federal courts, 

which implement the Guidelines. 

• Second, the Sentencing Guidelines 

are subject to routine reexamination and 

revision by both the Sentencing 

Commission after substantial study and 

public comment, and the Federal courts 

in specific cases, allowing for 

adjustments to this proposed rule 

without having to open a new FAR case. 

Therefore, the respondent believes 

that the Guidelines should serve as the 

baseline standard for a contractor’s code 

of ethics and business conduct. By 

referencing the Guidelines, we would be 

able to ensure that the Federal 

Government speaks with one voice on 

corporate compliance. 

Response: The initiators of the case 

asked that the FAR mirror the DFARS. 

The DFARS provisions are very similar 

to the Sentencing Guidelines and are 

adequate for this final rule. It would 

require public comment to include 

additional requirements from the 

Sentencing Guidelines as requirements 

in the FAR. The request to more closely 

mirror the Sentencing Guidelines is 

being considered as part of a separate 

case, FAR 2007–006. 

c. Make pre-award requirement. 

Comments: One respondent suggests 

making the rule a pre-award 

requirement, to ensure that only 

contracts are awarded to firms electing 

to conduct business in an ethical 

manner, consistent with FAR Part 9. 

The respondent believes that once 

contractors choose to implement the 

program with employees acknowledging 

the consequences of violations, it 

becomes a self-perpetuating program, 

requiring no additional actions by the 

contractor other than certification for 

new awards. 

Response: FAR Part 9 (9.104–1(d)) 

already provides that a prospective 

contractor must have a satisfactory 

record in integrity and business ethics 

as a standard for determining a 

prospective contractor responsible as a 

pre-award requirement. The Councils 

believe that the respondent’s suggestion 

would encumber or circumvent new 

contract awards which the Government 

wishes to encourage. Therefore, no 

change to the rule has been made. 

d. Hire certified management 

consultants (CMCs). 

Comments: One respondent 

recommends that the rule be amended 

to encourage Government agencies that 

are hiring consultants to hire Certified 

Management Consultants or those who 

ascribe or commit to a code of ethics 

from an acceptable professional 

organization such as the Institute of 

Management Consultants for all 

Government contracts, including 

consulting and/or advisory services. 

Response: It is the contractors’

responsibility to comply with the rule 

and establish a code of business ethics. 

The Government cannot endorse any 

particular business or organization as an 

appropriate contractor. Therefore, the 

Councils have not changed the rule in 

response to this comment. 

e. Use quality assurance systems. 

Comments: One respondent states that 

the rule does not lead to future 

improvements in compliance methods. 

The respondent recommends that, 

where possible, corporate compliance 

systems might be bolstered by drawing 

on and meshing compliance with 

existing quality assurance systems. 

Traditional quality assurance systems, 

used to capture errors, may be applied 

to corporate compliance systems to 

catch and root out ethical and legal 

failures. 

Response: The cost of additional 

controls may or may not balance with 

the benefit received and should be 

carefully considered prior to 

implementation. While a contractor may 

elect to draw on existing systems as an 

additional internal control, the Councils 

have left the rule unchanged in this 

regard and do not specifically require 

use of existing quality assurance 

systems. 

f. Establish rewards rather than 

punishments. 

Comments: One respondent states that 

the regulation offers an opportunity to 

establish a regulation that rewards 

contractors who behave appropriately, 

contradicting the Federal Government’s 

‘‘. . . mindset to penalize the wrong doer 

rather than rewarding the desired 

behavior.’’

Response: The Councils do not agree 

that this regulation should include a 

special ‘‘reward’’ for contractors who 

behave ethically. The Government 

‘‘rewards’’ contractors who perform 

satisfactorily through payment of profit 

on the contract, favorable past 

performance evaluations, and the 

potential award of additional contracts. 

g. Should not be mandatory - be more 

like the DFARS. 

Comments: Several respondents 

expressed the view that the FAR rule 

should be modeled on the DFARS rule 

at Subpart 203.70, which is 

discretionary rather than mandatory. It 

states that contractors should have 

standards of conduct and internal 

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65876 Federal Register / Vol. 72, No. 225 / Friday, November 23, 2007 / Rules and Regulations 

control systems. One of these 

respondents believes that the proposal 

to impose contractual mandates is 

misguided. 

Response: The discretionary rule in 

the DFARS is no longer strong enough 

in view of the trend (U.S. Sentencing 

Guidelines and the Sarbanes-Oxley Act) 

to increase contractor compliance with 

ethical rules of conduct. According to 

the Army Suspension and Debarment 

Official, the majority of small businesses 

that he encounters in review of Army 

contractor misconduct, have not 

implemented contractor compliance 

programs, despite the discretionary 

DFARS rule. 

However, with regard to the 

requirement for posters when the 

contractor has established an adequate 

internal reporting mechanism, see 

paragraph 7. of this section. 

h. More logical sequence for 

procedures and clause, and delete 

opening paragraph of procedures. 

Comment: One respondent 

recommends that the proposed changes 

at 3.1003 be rewritten in a logical 

sequence. This respondent also 

recommended that the clause 

paragraphs should be rewritten in 

logical sequence with the alternate 

versions sequentially deleting the last 

paragraphs instead of creating the delete 

and renumber provisions. 

Another respondent recommends 

deletion of the opening paragraph at 

3.1003 because following the 

procedures does not ensure that the 

policies are implemented. 

Response: The procedures section has 

been completely rewritten to reduce 

redundancy and inconsistencies. The 

Councils have separated the clause into 

two clauses, which makes the second 

point about logical order in the clause 

moot. The opening paragraph at 3.1003 

has been deleted. 

4. Policy. 

a. ‘‘Should’’ vs. ‘‘shall.’’

Comment: At least four respondents 

comment on an inconsistency between 

‘‘should’’ in the policy and ‘‘shall’’

elsewhere. Section 3.1002, Policy, states 

that contractors ‘‘should’’ have a written 

code of ethics, etc, while the Section 

3.1003, Procedures, and the contract 

clause at 52.203–13 makes the programs 

mandatory unless the contract meets 

one of several exceptions. 

Response: The inconsistency was 

deliberate. The policy applies to all 

contractors but the specific mandatory 

requirements of the clause apply only if 

the contract exceeds $5 million and 

meets certain other criteria. Section 

3.1003 has been rewritten as 

‘‘Mandatory requirements’’ to clearly 

distinguish it from the policy, which 

applies to all Government contractors. 

b. ‘‘Suitable to’’ vs. ‘‘commensurate 

with.’’

Comment: One respondent comments 

that the policy uses the phrase ‘‘suitable 

to’’ the size of the business whereas the 

clause uses the term ‘‘Commensurate 

with.’’

Response: The phrase ‘‘commensurate 

with’’ has been deleted from the clause. 

5. Exceptions—general. 

Comments: Two respondents 

commented on the exceptions to the 

rule in general. 

•The rule be revised to list exceptions 

separately. 

•The key exceptions to the rule in 

subpart 3.1003(a) and 3.1004(a)(1) are 

not consistent. 3.1003(a) exempts 

contracts awarded under FAR Part 12 

from the required employee ethics and 

compliance-training program and 

internal control system, or displaying 

the fraud poster, but it does not list the 

exemption from having a written code 

of business ethics. 3.1004(a)(1) clearly 

exempts contracts awarded under FAR 

Part 12 from all of the clause 

requirements. 

Response: The Councils partially 

concur with the respondents’

recommendations. The Councils have 

revised the final rule to—

• Move the exceptions into the clause 

prescription; and 

• Delete the conflicting wording in the 

proposed rule at 3.1003(a). 

a. Commercial items. 

i. Concur with exception for 

commercial items. 

Comment: Two respondents agree that 

the rule should exclude contracts 

awarded under FAR Part 12. One 

respondent agrees with the intent of the 

rule concerning consistent standards of 

ethics and business conduct for Federal 

contracts, and the exclusion FAR 12. 

Another respondent agrees that all 

contractors should have written codes of 

conduct as a good business practice 

code of, but believes the FAR Part 12 

exemption should be from the full 

coverage of the rule, including the 

written code of conduct requirement. 

Response: The Councils note that the 

FAR Part 12 exemption does include 

exemption from the requirement for a 

written code of conduct (see 

introductory paragraph at beginning of 

this Section 5.) 

ii. Disagree with exception for 

commercial items. 

Comments: Three respondents 

comment that the rule should apply to 

commercial contracts. They note that 

although other Federal agencies 

currently maintain polices similar to the 

rule, none of the agencies exclude 

contracts for commercial services. One 

respondent recommends that the rule 

apply to commercial item contracts or 

require that such contractors should 

have compliance systems in place, 

especially since such firms fall under 

the Sentencing Commission’s general 

expectation that corporations will put 

appropriate compliance systems in 

place. Another respondent is concerned 

that the ‘‘errant behavior of contractors’’

will not stop at contracts awarded under 

FAR Part 12 and by carving out a major 

segment of acquisitions to which the 

rule will not apply, the rule suboptimizes its intended effect of reducing 

unethical behavior. 

Response: The Councils do not agree 

the clause should be included in 

contracts awarded under Part 12. 

Requiring commercial item contractors 

to comply with the mandatory aspects 

of the rule would not be consistent with 

Public Law 103–355 that requires the 

acquisition of commercial items to 

resemble customarily commercial 

marketplace practices to the maximum 

extent practicable. Commercial practice 

encourages, but does not require, 

contractor codes of business ethics and 

conduct. In particular, the intent of FAR 

Part 12 is to minimize the number of 

Government-unique provisions and 

clauses. The policy at 3.1002 of the rule 

does apply to commercial contracts. All 

Government contractors must conduct 

themselves with the highest degree of 

integrity and honesty. However, 

consistent with the intent of Pub. L. 

103–355 and FAR Part 12, the clause 

mandating specific requirements is not 

required to be included in commercial 

contracts. 

iii. Disagree with exception for 

commercial items if contract is for 

advisory and assistance services. 

Comment: One respondent believes 

that the rule should apply to all 

advisory and assistance services, some 

of which are commercial items. 

Response: The Councils have not 

agreed to make further distinctions 

between the types of contracts to which 

the rule should apply. For the same 

reasons stated in answer to the prior 

comment, the Councils do not agree to 

application of this rule to advisory and 

assistance services that are commercial 

items. 

b. Outside U.S. 

Comment: Two respondents comment 

on the exception for contracts to be 

performed outside the United States, 

mostly from a definitional perspective. 

i. Supporting office in the U.S. 

Comment: One respondent suggests 

that the meaning of ‘‘work currently 

performed outside the United States’’

needs to be better defined. The 

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proposed rule is unclear whether offices 

in the United States supporting the 

foreign project would be required to 

comply. 

Response: The term ‘‘performed 

outside the United States’’ is used 

throughout the FAR several dozen 

times. There is never any explanation 

regarding possible application to offices 

in the United States supporting the 

foreign project. If part of a contract is 

performed in the United States and part 

of it is performed outside the United 

States, then the part performed in the 

United States is subject to whatever 

conditions apply to work performed in 

the United States. 

ii. Outlying areas. 

Comments: One respondent 

specifically endorses the exception for 

contracts performed outside the United 

States. However, the respondent 

requests clarification of the term 

‘‘outlying areas.’’

Response: This term is defined in 

FAR 2.101. 

c. Dollar threshold. 

Eight respondents commented on the 

rule’s $5 million threshold. 

i. Should not allow agencies to 

require posters below $5 million. 

Comments: One respondent does not 

support the requirement at the 3.1003(c) 

that authorizes agencies to establish 

policies and procedures for the display 

of the agency fraud hotline poster for 

contracts below $5 million. 

Response: Federal agency budgets and 

missions vary and are distinct. Some 

agencies already require display of the 

hotline posters below the $5 million 

threshold. For this reason, agencies that 

desire to have contractors display the 

hotline poster should be allowed to 

implement the program in a way that 

meets their needs. Therefore, the 

Councils have not made any change to 

the rule in response to this comment. 

ii. There should be no threshold. 

Comment: Three respondents suggest 

removing the $5 million threshold and 

requiring all contractors to comply with 

the rule. 

In addition, the late supplemental 

comment received from the U.S. 

Government Office of Ethics expressed 

concern that a specific instance of 

conflict of interest problems occurred 

with two contracts that would not meet 

the $5 million threshold. 

Response: The Councils do not agree 

with removal of the threshold. 

Removing the $5 million dollar 

threshold and requiring all contractors 

to comply with the rule is not practical. 

At lower dollar thresholds, the costs 

may outweigh the benefits of enforcing 

a mandatory program. Nevertheless, the 

policy at 3.1002 applies to all 

contractors. 

The Councils note with regard to the 

OIG audit report ED-OIG/A03F0022 of 

March 2007, that the contractor in 

question did not include the required 

conflict of interest clauses in its 

subcontracts and consulting agreements. 

This is the essence of the problem rather 

than the lack of a contractor code of 

ethics and compliance and internal 

control systems in contracts less than $5 

million. 

iii. How is application of the 

threshold determined? 

Comment: One respondent is 

concerned that the rule fails to state 

how the $5 million threshold for the 

application of the clause is to be 

determined and questions if the 

threshold should apply to contracts 

with multi-years as the option years for 

such contracts may not be awarded, 

thereby impacting the total value of the 

contract award. The respondent 

recommends that the threshold apply to 

contracts with one term and only to the 

base year in contracts with options. 

Response: FAR 1.108(c) provides 

uniform guidance for application of 

thresholds throughout the FAR. 

iv. $5 million threshold is too low. 

Comments: One respondent is 

concerned that many companies have 

not implemented programs that would 

adequately meet the rule and that the $5 

million threshold is too low. It will 

therefore serve as a disincentive for 

many small and medium—sized 

companies who may not be willing or 

able to comply with the requirement to 

implement training and control systems. 

Response: The $5 million threshold is 

consistent with the threshold 

established by the U.S. Department of 

Defense (DoD) for contractor ethics. DoD 

contracts with the largest number of 

Federal contractors. Therefore, the 

Councils have not made any change to 

the threshold for application of the 

clause. For revisions made to lessen the 

impact on small business see paragraph 

11. of this section. 

v. Alternate standards. 

Comment: One respondent 

recommends that the rule focus on the 

size of the firm and its volume of 

Federal work over a more significant 

period of time, and that SBA size 

standards and some proportion of the 

work the contractor performs be used as 

determining factors. 

Response: The Councils have revised 

the final rule to limit the requirement 

for formal awareness programs and 

internal control systems to large 

businesses, while retaining the $5 

million threshold for application of the 

clause. The clause needs to be included, 

because it might flow down from a 

small business to a large business, from 

whom full compliance would be 

required. Although the proposed rule 

allowed contractors to determine the 

simplicity or complexity and cost of 

their programs ‘‘suitable to the size of 

the company and extent of its 

involvement in Government 

contracting,’’ this left many respondents 

unsure as to what would be acceptable 

(see also paragraph 11. of this section). 

Comment: One respondent is 

concerned that the rule does not 

adequately identify which contractors 

should be covered by the requirements 

and suggests that the kind of work and 

responsibilities of the contractor is a 

better indicator of the need for ethics 

rules than the size of the contract award. 

Response: As a practical matter, all 

contractors doing business with the 

Government should have a satisfactory 

of integrity and business ethics, 

irrespective of the work the contractor is 

performing or the dollar amount of the 

contract. However, given the volume 

and complexities of work contractors 

perform for the Government, it is not 

practical to apply the rule on the basis 

of a contractor’s work or 

responsibilities. It is more realistic for 

the Government to establish monetary 

thresholds and/or size standards to 

ensure its widest impact and viability. 

d. Performance period. 

Comments: Five respondents 

commented on the 120-day performance 

period, considering that 120 days is too 

short, because it takes longer than that 

to implement a compliance program, 

including an internal control system. 

Even if the compliance programs can be 

implemented in the required timeframe, 

that leaves as little as 30 days between 

implementation of the program and 

completion of the contract. The 120-day 

performance period operates as a 

disincentive to small and medium size 

companies. Some respondents 

recommend using a minimum of one 

year for the period of performance. 

Response: The Councils do not concur 

that 120 days is too short. Although on 

an initial contract it may take some time 

to get the program established, on 

follow-on contracts the program will 

already be in operation. Many contracts 

responding to emergency situations are 

of short duration, and are the very type 

of contract that needs to be covered. The 

contracting officer is given leeway in the 

final rule to expand the 90-day period 

(See paragraph 6.c. of this section). 

e. Other exceptions. 

Comment: Two respondents 

submitted comments suggesting an 

expansion to the list of exceptions. 

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65878 Federal Register / Vol. 72, No. 225 / Friday, November 23, 2007 / Rules and Regulations 

One respondent recommends two 

additional exceptions to the language at 

3.1003, to make it clear that the new 

subpart is only applicable for new, open 

market, contract awards or agreements. 

Additional exceptions would include 

‘‘delivery or task orders placed against 

GSA Federal Supply Contracts, using 

Part 8 procedures,’’ and ‘‘orders placed 

against task order and delivery order 

contracts entered into pursuant to 

Subpart 16.5, Indefinite Delivery 

Contracts.’’

Another respondent recommends that 

research and development contracts 

issued to universities and other 

nonprofit organizations be exempt from 

the rule. Research institutions uniformly 

have business codes of conduct and 

internal controls to enable the reporting 

of improper conduct as well as 

disciplinary mechanisms (reference 

OMB Circular A–110). In addition, the 

National Science and Technology 

Council’s Committee on Science is 

currently developing voluntary 

compliance guidelines for recipients of 

Federal research funding from all 

agencies across the Federal Government, 

to help recipients address the prudent 

management and stewardship of 

research funds and promote common 

policies and procedures among the 

agencies. 

Response: The rule is not applicable 

to existing contracts. Therefore, an 

exception for delivery or task orders 

placed against GSA Federal Supply 

Contracts or issued under existing 

Indefinite Delivery Contracts is not 

necessary. 

While universities and other 

nonprofit organizations may have 

existing guidelines, policies and 

procedures for business codes of 

conduct, there are many benefits of 

including a clause in new solicitations 

and contracts. The rule will strengthen 

the requirements for corporate 

compliance systems and will promote a 

policy that is consistent throughout the 

Government. Therefore, the Councils 

have not made any changes to the rule 

in this regard, although the burden on 

small businesses has been reduced (see 

52.203–13(c)). 

6. Contractor program requirement. 

a. Lack of specific guidelines. 

Comments: Various respondents 

express the view that the rule should be 

more specific about the required 

programs. 

• Some provided examples of what 

should be included. 

• One was concerned that contractors 

have increased risk of False Claims Act 

because when seeking payments under 

fixed-price construction contracts, they 

would have to certify that they sought 

compensation ‘‘only for performance in 

accordance with the specifications, 

terms, and conditions of the contract’’, 

including the new and highly subjective 

requirements in the proposed rule. 

• One recommended that the FAR rule 

should be held until GAO finishes its 

study of contractor ethics at DoD. 

• Another recommended that the 

Councils should establish a 

Government-industry panel to develop a 

minimum suggested code of ethics and 

business conduct based upon the best 

practices many contractors already 

employ. 

Response: This rule gives businesses 

flexibility to design programs. Many 

sample codes of business ethics are 

available on-line. The specific issues 

that should be addressed may vary 

depending on the type of business. To 

provide more specific requirements 

would require public comment. The 

new FAR Case 2007–006 will propose 

the imposition of a set of mandatory 

standards for an internal control system. 

The Councils will welcome suggestions 

for further FAR revisions when the GAO 

finishes its study. 

b. Compliance. 

Comment: Several respondents 

questions how the contracting officer 

would verify compliance with the 

requirements. There is no requirement 

for submission to the Government. The 

internal control system states what 

should be included. Are these 

mandatory requirements or is it the 

judgment of the contracting officer? 

Response: The contracting officer is 

not required to verify compliance, but 

may inquire at his or her discretion as 

part of contract administrative duties. 

Review of contractors’ compliance 

would be incorporated into normal 

contract administration. The 

Government will not be routinely 

reviewing plans unless a problem arises. 

The Government does not need the code 

of ethics as a deliverable. What is 

important is that the Contractor 

develops the code and promotes 

compliance of its employees. 

‘‘Should’’ provides guidance and 

examples, rather than a mandatory 

requirement. The contracting officer 

does not judge the internal control 

system, but only verifies its existence. 

c. Time limits. 

Various suggestions were made about 

the time allotted to develop a code of 

ethics. 

• One respondent recommends 180 

days for the code. 

• Another recommended an extension 

to 60 days after contract award. 

• One respondent states that it takes 

significantly longer than 30 days to put 

a written code of conduct in place. In 

order to be successful, the process 

should include an analysis of what 

should be in the code, drafting the code, 

stakeholder input, publication, and 

communication of the resulting code. 

This is difficult to accomplish in less 

than 6 months and usually requires at 

least a year to do well. 

The same respondents also 

commented about whether 90 days is 

sufficient to develop a training program 

and internal control systems. For 

example, one respondent comments that 

compliance training programs must be 

well designed and relevant to be 

effective. Establishing an internalcontrol system also takes significantly 

more than 90 days. According to the 

respondent, the rule would yield 

‘‘cookie-cutter’’ compliance, devoid of 

any real commitment to ethics and 

compliance. 

Response: Although the Councils 

consider that the specified time periods 

are generally adequate, the Councils 

have revised the clause so that 

companies needing more time can 

request an extension from the 

contracting officer. The Councils also 

note that an initial code and program 

can be subject to further development 

over time, as experience with it suggests 

areas for improvement. 

d. Internal Control Systems—

mandatory disclosure and full 

cooperation. 

Comments: Six respondents consider 

the requirements for the internal control 

system regarding disclosure to the 

Government and full cooperation with 

the Government to be problematic. 

Reporting suspected violations of law is 

troubling and requested more 

information on the trigger to the 

requirement. One respondent expresses 

concern with possible violations of 

constitutional rights associated with the 

disclosures. 

Other respondents are concerned that 

‘‘full cooperation’’ can force companies 

to relinquish or waive the attorneyclient privilege. One respondent 

requests that the preamble state that full 

cooperation does not waive attorneyclient privilege or attorney work 

product immunity. 

Another respondent recommends 

expansion of the full cooperation 

requirement to cover audits. Information 

received by the OIG may precipitate an 

audit, rather than a criminal 

investigation. 

Response: The Councils note that the 

most controversial paragraphs 

(paragraphs (c)(2)(v) and (vi) in the 

proposed rule) were not mandatory, but 

were listed as examples of what a 

contractor internal control system 

should include. The mandatory 

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Federal Register / Vol. 72, No. 225 / Friday, November 23, 2007 / Rules and Regulations 65879 

disclosure requirement in paragraph 

(c)(1)(i) of the proposed rule was not 

clear about disclosure to whom. The 

Councils have removed the disclosure 

requirement at paragraph (c)(1)(i) of the 

proposed clause and the examples at 

(c)(2)(v) and (vi) from this final rule. 

These issues were included for further 

consideration in the proposed rule 

issued for public comment under FAR 

Case 2007–006. 

7. Display of posters. 

a. Agency posters. 

i. Government posters are 

unnecessary, if the contractor has 

internal reporting mechanisms. 

Comments: Several respondents do 

not agree that Government hotline 

posters should need to be displayed if 

the contractor has its own code of ethics 

and business conduct policy and 

processes already in place to conform to 

the DFARS rule. 

One respondent cites DFARS 

203.7001(b), which recognizes and 

permits companies to post their own 

internal hotline poster, in lieu of an 

agency Inspector General (IG) hotline 

poster, for employees to have an outlet 

to raise any issues of concern. The 

respondent believes this coverage is 

adequate and there is no need to impose 

an additional requirement to display 

agency IG hotline posters. 

Another respondent states that the 

rule that requires all Federal contractors 

to post agency hotlines would deny 

such contractors the opportunity to 

funnel problems through their internal 

control systems and frustrate at least 

much of the purpose of establishing 

such systems. One respondent states 

that companies want an opportunity to 

learn about internal matters first and to 

be in the best position to take corrective 

action. 

Another states that while the agencies 

currently all mandate that their 

contractors display a fraud hotline, none 

mandate that their contractors display a 

Government hotline. DoD, Veterans 

Administration, and Environmental 

Protection Agency currently require 

their contractors to post their agency 

hotlines unless they have ‘‘established a 

mechanism, such as a hotline, by which 

employees may report suspected 

instances of improper conduct, and 

instruction that encourage employees to 

make such reports.’’ Several other 

respondents recommend that the FAR 

Councils take the same approach. 

Response: Although the proposed rule 

did not prevent contractors from posting 

their own hotline posters, the Councils 

have determined that it will fulfill the 

objective of the case to mirror DFARS 

252.203–7002, Display of DoD Hotline 

Poster, i.e., display of the Government 

posters is not required if the contractor 

has established an internal reporting 

mechanism by which employees may 

report suspected instances of improper 

conduct along with instructions that 

encourage employees to make such 

reports. 

ii. Too many posters are unnecessary 

and potentially confusing. 

Comments: Several respondents 

believe that requiring all contractors to 

display the hotlines for all Federal 

agencies for which they are working—

without regard to the number of such 

agencies, or the contractors’ own efforts 

to encourage their employees to report 

any evidence of improper conduct—

would have several negative and 

unintended consequences. Rather than 

facilitate reporting, multiple postings 

could confuse employees. To which 

agency should they report a particular 

problem? Adding agency-specific 

requirements to existing compliance 

programs dilutes the impact and 

message of the existing program and 

will likely lead to confusion among 

professionals. A bulletin board with 

myriad compliance references will be 

confusing at best. 

Response: Each agency’s IG may 

require specific requirements and 

information for posters. There is no 

central telephone number or website 

that serves as the hotline for all agency 

IGs. However, under the final rule, if the 

company has its own internal reporting 

mechanism by which employees may 

report suspected instances of improper 

conduct along with instructions that 

encourage employees to make such 

reports, there is no need to hang 

multiple agency posters. 

iii. Responsibility for determining the 

need for displaying an agency IG Fraud 

Hotline Poster? 

Comment: Several respondents note 

that the Inspector General Act of 1978 

gives the agency’s IG (not the agency) 

the responsibility for determining the 

need for, and the contents of, the fraud 

hotline poster. 

Response: The Councils agree that it 

is not the agency that decides the need 

for the poster, but the agency IG. The 

Councils have made the requested 

change at FAR 3.1003(b). 

b. Department of Homeland Security 

(DHS) Posters. 

i. Only when requested by DHS? 

Comment: One respondent states that 

in the Federal Register background and 

in the proposed language at 3.1003(d)(2) 

the guidance seems to imply that the 

display of the DHS poster is required for 

contracts funded with disaster 

assistance funds, when and only when 

so requested by DHS. 

Response: This interpretation is 

correct. The final rule clarifies that it is 

the DHS Inspector General that requests 

use of the posters. 

ii. Different poster for each event is 

not best approach. 

Comment: One respondent believes 

that the contractor’s own hotline, if one 

exists, is better suited to providing a 

mechanism for employees to report 

concerns than a different poster for each 

event. 

Response: DHS Inspector General 

must determine whether to use eventspecific or broad posters to cover 

multiple events. However, the Councils 

have revised the final rule to permit use 

of the Contractor’s own hotline poster if 

the contractor has an adequate internal 

control system. 

8. Remedies. 

Comments: Four comments 

concerning proposed remedies were 

received. In general, two of the 

respondents questioned consistency in 

application, consistency, and due 

process, and two were generally 

opposed to the remedies. 

• One respondent asks whether there 

‘‘should be remedies for noncompliance when the contractor is not 

required to affirm or otherwise prove 

compliance, and when there is no 

adequate guidance for the CO regarding 

a determination of compliance?’’

Without guidance, contracting officers 

in different agencies may make different 

assessments of the same contractor. 

• One respondent ‘‘cannot find any 

rational relationship between the 

proposed ‘‘remedies’’ and any damages 

or other losses that the Government 

might suffer from any breach of the new 

contractual requirements ethics codes 

and compliance programs.’’ This 

respondent strongly recommends that 

the contractual remedies be limited to 

such equitable measures as may be 

necessary to bring the contractor into 

compliance with its contract obligations 

to implement certain procedures, and 

omit any monetary penalties. 

• One respondent expressed a similar 

concern that the remedies ‘‘are 

improper, excessive and unwarranted.’’

• One respondent requests provision 

of due process with a proposal to 

include the following text; ‘‘Prior to 

taking action as described in this clause, 

the Contracting Officer will notify the 

Contractor and offer an opportunity to 

respond.’’

Response: The Councils have decided 

that remedies should not be specified in 

the clause. The FAR already provides 

sufficient remedies for breach of 

contract requirements. 

9. Flowdown. 

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65880 Federal Register / Vol. 72, No. 225 / Friday, November 23, 2007 / Rules and Regulations 

a. Objections to rule also apply to 

flowdown. 

Naturally, those respondents that 

oppose the rule in general or in 

particular, will also oppose its 

flowdown in general or in particular. 

For example, 

•Comment: One respondent 

recommends exempting this 

requirement for subcontracts less than 

one year in length, rather than 120 days. 

Response: See discussion in 

paragraph 5.d. of this section. 

•Comment: Another respondent states 

that this requirement will negatively 

impact universities, especially given the 

flow-down requirements for prime 

contracts. This respondent recommends 

that research and development contracts 

issued to universities and other 

nonprofit organizations should be 

exempt from this proposed rule. 

Response: See discussion at paragraph 

5.e. of this section. 

•Comment: Another respondent states 

that the rule has not estimated the 

number of small business 

subcontractors that will be adversely 

impacted by this requirement. 

Response: See discussion at paragraph 

11. of this section. 

b. Rationale for the flowdown. 

Comment: One respondent states that 

there is no rationale provided for this 

troubling and perplexing flowdown 

requirement and would like it to be 

deleted from the rule. None of the 

agencies currently require any 

flowdown to subcontractors. 

Response: The same rationale that 

supports application of the rule to prime 

contractors, supports application to 

subcontractors. Meeting minimum 

ethical standards is a requirement of 

doing business with the Government, 

whether dealing directly or indirectly 

with the Government. The rule does not 

apply to contracts/subcontracts less 

than $5 million, exempts all commercial 

contracts/subcontracts, and the final 

rule reduces the burden on small 

business, whether prime or 

subcontractor. 

c. Implementation. 

Comment: One respondent has 

questions about the implementation of 

the flowdown. What is a subcontract—

does it include purchase orders? The 

Government and the construction 

industry have a different concept of 

‘‘subcontract.’’ They are concerned that 

the meaning of ‘‘subcontract’’ is 

therefore far from clear to general 

construction contractors and their 

subcontractors. Are prime contractors 

expected to distinguish subcontracts for 

commercial items from subcontracts for 

other goods and services? 

Response: This issue is not specific to 

this case. Sometimes construction firms 

think that ‘‘subcontract’’ does not 

include purchase orders. The FAR does 

not make this distinction. The intent is 

that the flowdown applies to all 

subcontracts, including purchase orders. 

Prime contractors are expected to 

distinguish subcontracts for commercial 

items from subcontractors for other 

goods and services, not only for this rule 

but for many other FAR requirements 

(see FAR clause 52.244–6, Subcontracts 

for Commercial Items, which is 

included in all solicitation and contracts 

other than those for commercial items). 

d. Enforcement. 

Comment: Several respondents are 

concerned with how the flowdown 

requirement will be enforced. One 

respondent is concerned that prime 

contractors should not be responsible 

for subcontractors’ compliance with this 

requirement. Monitoring of subcontracts 

would impose a significant new cost on 

prime contractors. Another respondent 

requests that the rule be revised to 

clarify that primes are not responsible 

for monitoring subcontractor 

compliance. This respondent is 

particularly concerned about the 

impracticality of a small or mediumsized business supervising the 

compliance of major subcontractors. 

Response: The contractor is not 

required to judge or monitor the ethics 

awareness program and internal control 

systems of the subcontractors—just 

check for existence. The difficulty of a 

small business concern monitoring a 

large business subcontractor is true with 

regard to many contract requirements, 

not just this one. The Councils plan to 

further address the issue of disclosure 

by the subcontractor under the new FAR 

Case 2007–006. 

10. Clause prescriptions. 

a. Extraneous phrase. 

Comment: Several respondents note 

that something is wrong with the 

following phrase in 3.1004(a)(1)(i): ‘‘

...or to address Contractor Code of 

Ethics and Business Conduct and the 

display of Federal agency Office of the 

Inspector General (OIG) Fraud Hotline 

Poster’’. 

Response: The extraneous phrase has 

been removed from the final rule. 

b. Alternates. 

Comment: One respondent says that 

what ‘‘triggers the insertion of Alternate 

I or II clause language is ambiguous in 

the text of the Policy and Procedures 

sections of the rule and the confusion is 

compounded when read with the 

language used in the clause.’’

One respondent comments that if the 

contract period of performance is less 

than 120 days and the agency has not 

established a requirement for posting at 

a lower dollar level, there is no 

requirement to include the clause; in 

this case Alternate II is never invoked. 

Another respondent recommends at 

3.1004(c)(2) changing ‘‘at a lesser 

amount’’ to ‘‘for contracts valued at $5 

million or less’’. 

Response: The Councils have decided 

to use two separate clauses, rather than 

one clause with alternates. The 

conditions for use of the alternates were 

so diverse, that it was impossible to 

comply with the FAR drafting 

conventions that the prescription for the 

clause should include both the 

requirements for the basic clause and 

any alternates. Although the Councils 

do not agree with the respondent 

(because the conditions are connected 

by ‘‘or’’ rather than ‘‘and’’), any 

ambiguity in the prescription for 

Alternate II has been eliminated by the 

use of two clauses. The language at 

3.1004(c)(2)(now 3.1004(b)(3)(ii)) has 

been clarified. 

11. Regulatory Flexibility Analysis. 

a. Impact on small business requires 

regulatory flexibility analysis. 

Comment: Several respondents note 

that the rule will have a substantial 

impact on small business. The SBA 

Chief Counsel for Advocacy commented 

that the Councils should therefore 

publish an Initial Regulatory Flexibility 

Analysis. The SBA Chief Counsel for 

Advocacy points out that the minimal 

set-up cost for the ethics program and 

internal control system would be 

$10,000, according to one established 

professional organization; there would 

be further costs for maintaining the 

system, periodic training, and other 

compliance costs. 

Another respondent asks how the 

finding that ‘‘ethics programs and 

hotline posters are not standard 

commercial practice’’ squares with the 

claim that the proposed rule ‘‘will not 

have a significant impact on a 

substantial number of small entities’’. 

The respondent notes the absence of any 

cost estimate, or impact on competition 

for contracts and subcontracts. Midsized and small construction contractors 

would find the cost and complexity of 

restructuring their internal systems, and 

continuously providing the necessary 

training to employees scattered across 

multiple sites, to be very substantial, 

and might well exceed benefits of 

pursuing Federal work. (Another 

respondent echoes this.) The respondent 

recommends the Councils undertake a 

fresh data-driven analysis of how 

severely such mandates are likely to 

impact small businesses, including the 

level of small business participation in 

Federal work. 

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Federal Register / Vol. 72, No. 225 / Friday, November 23, 2007 / Rules and Regulations 65881 

Another respondent comments that 

the rule may have an unduly 

burdensome impact on Government 

contractors, particularly smaller 

contractors. It may deter small and 

minority owned businesses from 

entering the Federal marketplace and 

from competing for certain contracts. 

b. Alternatives. Several alternatives 

were presented for small business 

compliance with the regulation. 

• Since small business size standards 

for the construction industry are well 

over $5 million in annual revenue, the 

exclusion of contracts under $5 million 

is not likely to insulate small business 

from the cost of compliance. Federal 

construction contracts typically exceed 

$5 million, and small construction 

contractors regularly perform them. 

Instead of $5 million, the requirements 

should be linked to the size standards 

the SBA established, and some 

proportion of the work that the 

contractor performs for the Federal 

Government. The construction industry 

size standard for general contractors is 

$31 million in average annual revenue. 

The requirements should be imposed on 

only the firms that both exceed the 

standard and derive a large proportion 

of their revenue from Federal contracts. 

• Delay the flow down requirement to 

small business subcontractors, pending 

review of data on impact on small 

business subcontractors (SBA Chief 

Counsel for Advocacy). 

• Provide additional guidance for 

small businesses on a code of ethics 

commensurate with their size. 

Response: 

Exclusion of commercial items. The 

original Regulatory Flexibility Act 

statement as published did not identify 

the rule’s exclusion for commercial 

items. The burdens of the clauses will 

not be imposed on Part 12 acquisitions 

of commercial items. This is of great 

benefit to small businesses. 

Reduced burden for small businesses. 

The Councils acknowledge the difficulty 

and great expense for a small business 

to have a formal training program, and 

formal internal controls. The Councils 

also acknowledge that the public was 

confused about the proposed rule’s 

flexible language for small business: 

‘‘Such program shall be suitable to the 

size of the company.’’

The Councils have maintained the 

clause requirement for small businesses 

to have a business code of ethics and 

provide copies of this code to each 

employee. There are many available 

sources to obtain sample codes of ethics. 

However, the Councils have made the 

clause requirements for a formal 

training program and internal control 

system inapplicable to small businesses 

(see also paragraph 5.c.v. of this 

section). 

Because the clause 52.203–13 is still 

included in the contract with small 

businesses, the requirements for formal 

training program and internal control 

systems will flow down to large 

business subcontractors, but not apply 

to small businesses. 

The Councils note that if a small 

business subsequently finds itself in 

trouble ethically, the need for a training 

program and internal controls will 

likely be addressed by the Federal 

Government at that time, during a 

criminal or civil lawsuit or debarment 

or suspension. 

This is not a significant regulatory 

action and, therefore, was not subject to 

review under Section 6(b) of Executive 

Order 12866, Regulatory Planning and 

Review, dated September 30, 1993. This 

rule is not a major rule under 5 U.S.C. 

804. 

B. Regulatory Flexibility Act 

The Department of Defense, the 

General Services Administration, and 

the National Aeronautics and Space 

Administration certify that this final 

rule will not have a significant 

economic impact on a substantial 

number of small entities within the 

meaning of the Regulatory Flexibility 

Act, 5 U.S.C. 601, et seq., because the 

rule does not require use of the clause 

requiring contractors to have a written 

code of business ethics and conduct if 

the contract is—

• Valued at $5 million or less; 

• Has a performance period less than 

120 days; 

• Was awarded under Part 12; or 

• Will be performed outside the 

United States. 

Furthermore, after discussions with 

the Small Business Administration 

(SBA) Office of Advocacy, the Councils 

have made inapplicable to small 

businesses the clause requirement for a 

formal compliance awareness program 

and internal control system. 

C. Paperwork Reduction Act 

The Paperwork Reduction Act does 

not apply because the changes to the 

FAR do not impose information 

collection requirements that require the 

approval of the Office of Management 

and Budget under 44 U.S.C. 3501, et 

seq. 

List of Subjects in 48 CFR Parts 2, 3, 

and 52 

Government procurement. 

Dated: November 16, 2007. 

Al Matera, 

Director, Office of Acquisition Policy. 

■ Therefore, DoD, GSA, and NASA 

amend 48 CFR parts 2, 3, and 52 as set 

forth below: 

■ 1. The authority citation for 48 CFR 

parts 2, 3, and 52 continues to read as 

follows: 

Authority: 40 U.S.C. 121(c); 10 U.S.C. 

chapter 137; and 42 U.S.C. 2473(c). 

PART 2—DEFINITIONS OF WORDS 

AND TERMS 

■ 2. Amend section 2.101 in paragraph 

(b), in the definition ‘‘United States’’ by 

redesignating paragraphs (1) through (7) 

as paragraphs (2) through (8), 

respectively, and adding a new 

paragraph (1) to read as follows: 

2.101 Definitions. 

(b) * * * 

United States * * * 

(1) For use in Subpart 3.10, see the 

definition at 3.1001. 

* * * * * 

PART 3—IMPROPER BUSINESS 

PRACTICES AND PERSONAL 

CONFLICTS OF INTEREST 

■ 3. Add Subpart 3.10 to read as 

follows: 

Subpart 3.10—Contractor Code of Business 

Ethics and Conduct 

Sec. 

3.1000 Scope of subpart. 

3.1001 Definitions. 

3.1002 Policy. 

3.1003 Mandatory requirements. 

3.1004 Contract clauses. 

Subpart 3.10—Contractor Code of 

Business Ethics and Conduct 

3.1000 Scope of subpart. 

This subpart prescribes policies and 

procedures for the establishment of 

contractor codes of business ethics and 

conduct, and display of agency Office of 

Inspector General (OIG) fraud hotline 

posters. 

3.1001 Definitions. 

United States, as used in this subpart, 

means the 50 States, the District of 

Columbia, and outlying areas. 

3.1002 Policy. 

(a) Government contractors must 

conduct themselves with the highest 

degree of integrity and honesty. 

(b) Contractors should have a written 

code of business ethics and conduct. To 

promote compliance with such code of 

business ethics and conduct, contractors 

should have an employee business 

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65882 Federal Register / Vol. 72, No. 225 / Friday, November 23, 2007 / Rules and Regulations 

ethics and compliance training program 

and an internal control system that—

(1) Are suitable to the size of the 

company and extent of its involvement 

in Government contracting; 

(2) Facilitate timely discovery and 

disclosure of improper conduct in 

connection with Government contracts; 

and 

(3) Ensure corrective measures are 

promptly instituted and carried out. 

3.1003 Mandatory requirements. 

(a) Requirements. Although the policy 

in section 3.1002 applies as guidance to 

all Government contractors, the 

contractual requirements set forth in the 

clauses at 52.203–13, Code of Business 

Ethics and Conduct, and 52.203–14, 

Display of Hotline Poster(s), are 

mandatory if the contracts meet the 

conditions specified in the clause 

prescriptions at 3.1004. 

(b) Fraud Hotline Poster. (1) Agency 

OIGs are responsible for determining the 

need for, and content of, their respective 

agency OIG fraud hotline poster(s). 

(2) When requested by the 

Department of Homeland Security, 

agencies shall ensure that contracts 

funded with disaster assistance funds 

require display of any fraud hotline 

poster applicable to the specific 

contract. As established by the agency 

OIG, such posters may be displayed in 

lieu of, or in addition to, the agency’s 

standard poster. 

3.1004 Contract clauses. 

Unless the contract is for the 

acquisition of a commercial item under 

part 12 or will be performed entirely 

outside the United States—

(a) Insert the clause at FAR 52.203–13, 

Contractor Code of Business Ethics and 

Conduct, in solicitations and contracts if 

the value of the contract is expected to 

exceed $5,000,000 and the performance 

period is 120 days or more. 

(b)(1) Insert the clause at FAR 52.203–

14, Display of Hotline Poster(s), if—

(i) The contract exceeds $5,000,000 or 

a lesser amount established by the 

agency; and 

(ii)(A) The agency has a fraud hotline 

poster; or 

(B) The contract is funded with 

disaster assistance funds. 

(2) In paragraph (b)(3) of the clause, 

the contracting officer shall—

(i) Identify the applicable posters; and 

(ii) Insert the website link(s) or other 

contact information for obtaining the 

agency and/or Department of Homeland 

Security poster. 

(3) In paragraph (d) of the clause, if 

the agency has established policies and 

procedures for display of the OIG fraud 

hotline poster at a lesser amount, the 

contracting officer shall replace 

‘‘$5,000,000’’ with the lesser amount 

that the agency has established. 

PART 52—SOLICITATION PROVISIONS 

AND CONTRACT CLAUSES 

■ 4. Add sections 52.203–13 and 

52.203–14 to read as follows: 

52.203–13 Contractor Code of Business 

Ethics and Conduct. 

As prescribed in 3.1004(a), insert the 

following clause: 

CONTRACTOR CODE OF BUSINESS 

ETHICS AND CONDUCT (DEC 2007) 

(a) Definition. 

United States, as used in this clause, 

means the 50 States, the District of Columbia, 

and outlying areas. 

(b) Code of business ethics and conduct. (1) 

Within 30 days after contract award, unless 

the Contracting Officer establishes a longer 

time period, the Contractor shall—

(i) Have a written code of business ethics 

and conduct; and 

(ii) Provide a copy of the code to each 

employee engaged in performance of the 

contract. 

(2) The Contractor shall promote 

compliance with its code of business ethics 

and conduct. 

(c) Awareness program and internal 

control system for other than small 

businesses. This paragraph (c) does not apply 

if the Contractor has represented itself as a 

small business concern pursuant to the 

award of this contract. The Contractor shall 

establish within 90 days after contract award, 

unless the Contracting Officer establishes a 

longer time period—

(1) An ongoing business ethics and 

business conduct awareness program; and 

(2) An internal control system. 

(i) The Contractor’s internal control system 

shall—

(A) Facilitate timely discovery of improper 

conduct in connection with Government 

contracts; and 

(B) Ensure corrective measures are 

promptly instituted and carried out. 

(ii) For example, the Contractor’s internal 

control system should provide for—

(A) Periodic reviews of company business 

practices, procedures, policies, and internal 

controls for compliance with the Contractor’s 

code of business ethics and conduct and the 

special requirements of Government 

contracting; 

(B) An internal reporting mechanism, such 

as a hotline, by which employees may report 

suspected instances of improper conduct, 

and instructions that encourage employees to 

make such reports; 

(C) Internal and/or external audits, as 

appropriate; and 

(D) Disciplinary action for improper 

conduct. 

(d) Subcontracts. The Contractor shall 

include the substance of this clause, 

including this paragraph (d), in subcontracts 

that have a value in excess of $5,000,000 and 

a performance period of more than 120 days, 

except when the subcontract—

(1) Is for the acquisition of a commercial 

item; or 

(2) Is performed entirely outside the United 

States. 

(End of clause) 

52.203–14 Display of Hotline Poster(s). 

As prescribed in 3.1004(b), insert the 

following clause: 

DISPLAY OF HOTLINE POSTER(S) (DEC 

2007) 

(a) Definition. 

United States, as used in this clause, 

means the 50 States, the District of Columbia, 

and outlying areas. 

(b) Display of fraud hotline poster(s). 

Except as provided in paragraph (c)—

(1) During contract performance in the 

United States, the Contractor shall 

prominently display in common work areas 

within business segments performing work 

under this contract and at contract work 

sites—

(i) Any agency fraud hotline poster or 

Department of Homeland Security (DHS) 

fraud hotline poster identified in paragraph 

(b)(3) of this clause; and 

(ii) Any DHS fraud hotline poster 

subsequently identified by the Contracting 

Officer. 

(2) Additionally, if the Contractor 

maintains a company website as a method of 

providing information to employees, the 

Contractor shall display an electronic version 

of the poster(s) at the website. 

(3) Any required posters may be obtained 

as follows: 

Poster(s) Obtain from 

lllllllll lllllllll 

lllllllll lllllllll 

(Contracting Officer shall insert— (i) 

Appropriate agency name(s) and/or title of 

applicable Department of Homeland Security 

fraud hotline poster); and 

(ii) The website(s) or other contact 

information for obtaining the poster(s).) 

(c) If the Contractor has implemented a 

business ethics and conduct awareness 

program, including a reporting mechanism, 

such as a hotline poster, then the Contractor 

need not display any agency fraud hotline 

posters as required in paragraph (b) of this 

clause, other than any required DHS posters. 

(d) Subcontracts. The Contractor shall 

include the substance of this clause, 

including this paragraph (d), in all 

subcontracts that exceed $5,000,000, except 

when the subcontract—

(1) Is for the acquisition of a commercial 

item; or 

(2) Is performed entirely outside the United 

States. 

(End of clause) 

[FR Doc. 07–5800 Filed 11–21–07; 8:45 am] 

BILLING CODE 6820–EP–S 

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