Procurement Debarment and Suspension of Government Contractors: Legal Overview
Released: 2015-05-27T00:00:00

Debarment and suspension (collectively known as "exclusion") are of perennial interest to Congress because exclusion is one of the primary techniques that federal agencies use to avoid dealings with vendors who have failed, or are deemed likely to fail, to meet their obligations under federal law or government contracts. Debarred contractors are generally ineligible for new federal contracts for a fixed period of time, while suspended contractors are generally ineligible for the duration of any investigation or litigation involving their conduct. Federal law specifies various grounds for exclusion, only some of which expressly relate to procurement. The grounds and procedures for nonprocurement exclusions are outside the scope of this report. However, all persons excluded on procurement or other grounds are listed in the System for Award Management (SAM) (previously the Excluded Parties List System (EPLS)). Contracting officers are generally barred from soliciting offers from, awarding contracts to, or consenting to subcontracts with contractors who are listed as excluded in SAM.

This report discusses grounds and procedures for procurement-related exclusions. In particular, it surveys the authorities requiring or allowing federal agencies to debar or suspend contractors, as well as the due process and other protections for contractors in exclusion proceedings.

Authorities Requiring or Allowing Exclusion

Contractors can currently be debarred or suspended under federal statutes or under the Federal Acquisition Regulation (FAR), an administrative rule governing contracting by executive branch agencies. There are only two explicit overlaps between the causes of debarment and suspension under statute and those under the FAR, involving debarments and suspensions for violations of (1) the Drug-Free Workplace Act of 1988 and (2) various statutes proscribing intentionally affixing a "Made in America" label to an ineligible product sold in or shipped to the United States. However, the FAR includes certain "catch-all" provisions that could potentially make the same conduct grounds for debarment or suspension under statute and under the FAR. One of these provisions authorizes debarment for "any ... offense indicating a lack of business integrity or business honesty." The other authorizes debarment or suspension for "any other cause of [a] serious or compelling nature."

Statutes Requiring or Allowing Exclusion

Some federal statutes include provisions specifying that contractors who engage in certain conduct prohibited under the statute shall or may be debarred or suspended from future contracts with the federal government. Such debarments or suspensions are often referred to as "statutory debarments" or "statutory suspensions" because they are expressly provided for in statute. They are sometimes also described as "inducement debarments" or "inducement suspensions" because they are designed to provide additional inducement for contractors' compliance with the statutes.

Statutes providing for debarment and suspension often require that the excluded party be convicted of wrongdoing under the statute, but at other times, findings of wrongdoing by agency heads suffice for exclusion. Sometimes the exclusion applies only to certain types of contractors, or dealings with specified agencies (e.g., institutions of higher education who contract with the government, contracts with the Department of Defense). Most of the time, however, the exclusion applies more broadly to all types of contractors dealing with all federal agencies. Persons identified by statute—often the head of the agency administering the statute requiring or allowing exclusion—make the determination to debar or suspend contractors. Debarments last for a fixed period specified by statute, while suspensions last until a designated official finds that the contractor has ceased the conduct that constituted its violation of the statute. Generally, statutory exclusions can only be waived by a few officials under narrow circumstances. Heads of procuring agencies generally cannot waive exclusions to allow debarred or suspended contractors to contract with their agency. Table 1 surveys the procurement-related statutory exclusions presently in effect. It attempts to be comprehensive, listing all such exclusions codified in the United States Code (including as notes). It does not list any un-codified provisions that may exist.

Exclusion Under the FAR

As a matter of policy, the federal government seeks to "prevent improper dissipation of public funds" in its contracting activities by dealing only with responsible contractors. Debarment and suspension promote this policy by precluding agencies from entering into new contracts with contractors whose prior violations of federal or state law, or failure to perform under contract, suggest they are nonresponsible. However, because exclusions under the FAR are designed to protect the government's interests, they may not be imposed solely to punish prior contractor misconduct. Federal courts could overrule challenged agency decisions to debar contractors when agency officials seek to punish the contractor—rather than protect the government—in making their exclusion determinations.

Where grounds for debarment or suspension exist, as discussed below, any agency may act to exclude the contractor, potentially including one that does not currently have a contract with the contractor or is not the contractor's "primary" business partner. In practice, though, exclusions are most commonly initiated by the agency under or in regard to whose contract or proposed contract the alleged misconduct occurred.

Debarment

The FAR authorizes agency officials to debar contractors from future contracts under three circumstances. First, debarment may be imposed when a contractor is convicted of or found civilly liable for any so-called "integrity offense." Integrity offenses include

fraud or criminal offenses in connection with obtaining, attempting to obtain, or performing a government contract or subcontract; violations of federal or state antitrust laws relating to the submission of offers; embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, tax evasion, violating federal criminal tax laws, or receipt of stolen property; intentionally affixing a "Made in America" label, or similar inscription, on ineligible products; and other offenses indicating a lack of business integrity or honesty that seriously and directly affect the present responsibility of a contractor or subcontractor.

Second, in the absence of convictions or civil judgments, debarment may be imposed when government officials find, by a preponderance of the evidence, that the contractor committed certain offenses. These offenses include

serious violations of the terms of a government contract or subcontract; violations of the Drug-Free Workplace Act of 1988; intentionally affixing a "Made in America" label, or similar inscription, on ineligible products; commission of an unfair trade practice as defined in Section 201 of the Defense Production Act; delinquent federal taxes in an amount exceeding $3,000; and knowing failure by a principal to timely disclose to the government credible evidence of (1) violations of federal criminal laws involving fraud, conflict of interest, bribery, or gratuity offenses covered by Title 18 of the United States Code; (2) violations of the civil False Claims Act; or (3) significant overpayments on the contract that occurred in connection with the award, performance or closeout of a federal contract or subcontract and were discovered within three years of final payment.

Debarment can also result, under this provision of the FAR, when the Secretary of Homeland Security or the Attorney General finds, by a preponderance of the evidence, that a contractor has not complied with the employment provisions of the Immigration and Nationality Act.

Third, and finally, debarment may be imposed whenever there exists "any other cause of so serious or compelling a nature that it affects the present responsibility of a contractor."

Debarments last for a "period commensurate with the seriousness of the cause(s)," generally not exceeding three years. As discussed below, due process generally requires that contractors receive written notice of and the opportunity for a hearing regarding any debarment. Debarment-worthy conduct by a contractor's officers, directors, shareholders, partners, employees, or other associates can be imputed to the contractor, and vice versa.

Suspension

The FAR also allows agency officials to suspend government contractors when they suspect, upon adequate evidence, any of the following offenses, or when contractors are indicted for these offenses:

fraud or criminal offenses in connection with obtaining, attempting to obtain, or performing a public contract; violation of federal or state antitrust laws relating to the submission of offers; embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, tax evasion, violations of federal criminal tax laws, or receipt of stolen property; violations of the Drug-Free Workplace Act of 1988; intentional misuse of the "Made in America" designation; unfair trade practices, as defined in Section 201 of the Defense Production Act; delinquent federal taxes in an amount exceeding $3,000; knowing failure by a principal to timely disclose to the government credible evidence of (1) violations of federal criminal laws involving fraud, conflict of interest, bribery, or gratuity offenses covered by Title 18 of the United States Code; (2) violations of the civil False Claims Act; or (3) significant overpayments on the contract that occurred in connection with the award, performance or closeout of a federal contract or subcontract and were discovered within three years of final payment; and other offenses indicating a lack of business integrity or honesty that seriously affect the present responsibility of a contractor.

Agency officials may also suspend a contractor when they suspect, upon adequate evidence, that there exists "any other cause of so serious or compelling a nature that it affects the present responsibility of a ... contractor or subcontractor."

A suspension generally lasts only as long as an agency's investigation of the conduct for which the contractor was suspended, or any ensuing legal proceedings. It generally may not exceed 12-18 months unless legal proceedings have been initiated within that period. As discussed below, certain due process protections apply with suspensions, as with debarment. Suspension-worthy conduct can be imputed, as can debarment-worthy conduct.

Exclusion for Conduct Imputed to the Contractor

The FAR expressly authorizes agencies to extend debarment or suspension decisions to "affiliates" of the contractor if the affiliates are specifically named, and are given written notice of the exclusion and an opportunity to respond. The FAR also provides that the "fraudulent, criminal, or other seriously improper conduct" of an officer, director, shareholder, partner, employee, or other individual associated with a contractor may be imputed to the contractor in certain circumstances, and vice versa. In addition, the conduct of one contractor participating in a joint venture or similar arrangement may be imputed to other contractors if "the conduct occurred for or on behalf of the joint venture or similar arrangement, or with the knowledge, approval, or acquiescence of these contractors." However, while these regulations have been described by one court as "administrative devices to protect the public welfare and to impose on government contractors a higher standard of care," they do not necessarily allow agencies to exclude persons simply based on their job titles or other nominal indicia of control. Similarly, agency exclusion determinations could potentially be vulnerable to challenge on the grounds that they are unreasonable if the agency makes "inconsistent" decisions when determining whether to exclude particular affiliates of a contractor.

Agency Discretion, Administrative Agreements, Continuation of Current Contracts, and Waivers

Not all contractors who engage in conduct that constitutes potential grounds for debarment or suspension under the FAR are excluded from contracting with executive branch agencies. Nor does the debarment or suspension of a contractor guarantee that agencies do not presently have contracts with that contractor, or will not contract with that contractor before the exclusion period ends. Several aspects of the exclusion process under the FAR explain why this is so.

First, under the FAR, debarment or suspension of contractors is discretionary. The FAR says that agencies "may debar" or "may suspend" a contractor when grounds for exclusion exist, but it does not require them to do so. Rather, the FAR advises agency officials to focus upon the public interest when making debarment determinations. Because the public interest can be seen to encompass both safeguarding public funds by excluding contractors who may be nonresponsible and not excluding contractors who are fundamentally responsible and could otherwise compete for government contracts, agency officials could find that contractors who engaged in exclusion-worthy conduct should not be excluded, particularly if they appear unlikely to engage in similar conduct in the future. Any circumstance suggesting that a contractor is unlikely to repeat past misconduct—such as changes in personnel or procedures, restitution, or cooperation in a government investigation—can potentially incline an agency's decision against debarment. Moreover, exclusion can be limited to particular "divisions, organizational elements, or commodities" of a company if agency officials find that only segments of a business engaged in wrongdoing. Other contractors generally cannot challenge agency decisions not to debar a contractor who is alleged or could be said to have engaged in debarment-worthy conduct. They generally can only contest an agency's determination of a contractor's present responsibility, which is required prior to a contract award.

Second, agencies can use administrative agreements as alternatives to debarment. In these agreements, the contractor generally admits its wrongful conduct and agrees to restitution; separation of employees from management or programs; implementation or extension of compliance programs; employee training; outside auditing; agency access to contractor records; or other remedial measures. The agency, for its part, reserves the right to impose additional sanctions, including debarment, if the contractor fails to abide by the agreement or engages in further misconduct. The FAR notes such agreements as a possible alternative to debarment, and their formation has historically been seen to be within agencies' general authority to determine with whom and on what terms they contract. Only the agency signing the agreement is a party to it, and other agencies would not necessarily have been aware of the agreement's existence prior to enactment of the Duncan Hunter National Defense Authorization Act for FY2009. Commonly known as the Clean Contracting Act, Sections 871-873 of this act required the General Services Administration to establish a database that includes information related to contractor misconduct beyond that contained in the former Excluded Party List System (EPLS), subsequently incorporated within the System for Award Management (SAM). Called the Federal Awardee Performance Integrity Information System (FAPIIS), the database established by the Clean Contracting Act is required to contain brief descriptions of administrative agreements relating to federal contracts within the past five years (along with terminations for default and nonresponsibility determinations and civil, criminal, and administrative proceedings involving federal contracts that resulted in a conviction or finding of fault) for persons holding a federal contract or grant worth $500,000 or more.

Third, even when a contractor is debarred, suspended, or proposed for debarment under the FAR, an agency may generally allow the contractor to continue performance under any current contracts or subcontracts unless the agency head directs otherwise. The debarment or suspension generally serves only to preclude an excluded contractor from (1) receiving new contracts or orders from executive branch agencies; (2) receiving new work or an option under an existing contract; (3) serving as a subcontractor on certain contracts with executive branch agencies; or (4) serving as an individual surety for the duration of the debarment or suspension. Any contracts that the excluded contractor presently has remain in effect unless they are terminated for default or for convenience under separate provisions of the FAR.

Finally, the FAR authorizes agencies to waive a contractor's exclusion and enter into new contracts with a debarred or suspended contractor. For an exclusion to be waived, an agency head must "determine[] that there is a compelling reason for such action." Some agencies have regulations defining what constitutes a "compelling reason," while others do not. Waivers are agency-specific and are not regularly communicated to other agencies, a situation which a 2005 Government Accountability Office (GAO) report suggested remedying. Agency determinations about the existence of compelling reasons are not, per se , reviewable by the courts; however, other contractors can challenge awards to formerly excluded contractors through customary bid protest processes. Moreover, even when an agency does not waive a contractor's exclusion, it can reduce the period or extent of debarment if the contractor shows (1) newly discovered material evidence; (2) reversal of the conviction or civil judgment on which the debarment was based; (3) bona fide changes in ownership or management; (4) elimination of other causes for which the debarment was imposed; or (5) other appropriate reasons.

Contractors' Rights in Exclusion Proceedings

Although agencies generally have broad discretion in determining whether contractors should be excluded for particular conduct, contractors enjoy several protections in the exclusion process. Perhaps the foremost among these is an entitlement to due process of the law under the Fifth Amendment to the U.S. Constitution. Early government contractors were generally held to lack due process protections because contracting with the government was viewed as a privilege, not a right, and courts held that persons were entitled to due process only when deprived of rights. However, this changed in 1964, with the decision by the U.S. Court of Appeals for the D.C. Circuit in Gonzalez v. Freeman . Written by future Chief Justice Warren Burger, who was then a judge for the D.C. Circuit, Gonzalez held that while contractors may not have a right to government contracts, "that cannot mean that the government can act arbitrarily, either substantively or procedurally, against a person or that such a person is not entitled to challenge the processes and the evidence before he is officially declared ineligible for government contracts ." For this reason, the court found that the Commodity Credit Corporation (CCC) had improperly debarred the Thos. P. Gonzalez Corporation, in part, because the CCC failed to provide written notice of the charges against the contractor and did not give the contractor "the opportunity to present evidence and to cross-examine adverse witnesses, all culminating in administrative findings and conclusions based upon the record." A subsequent decision by the D.C. Circuit in Horne Brothers, Inc. v. Laird held that contractors are also entitled to due process in suspension determinations, although the court distinguished between suspensions of shorter and longer duration in finding that a contractor is entitled to pre-exclusion notice and an opportunity to be heard in suspensions of five months but not of three weeks. Because of these and subsequent decisions, the FAR currently provides that contractors must generally receive notice and an opportunity for a hearing before being debarred, but can be suspended without prior notice or an opportunity to be heard so long as they are "immediately advised" of the suspension and allowed to offer information in opposition to the suspension within 30 days.

The judicially developed doctrine of de facto debarment can also serve to protect contractors from improper exclusion in certain circumstances. While the possibility of de facto debarment often arises in connection with agency conduct that also deprives the contractor of a protected liberty interest without due process, the de facto debarment analysis focuses primarily upon conduct outside the debarment and suspension process that effectively excludes contractors. For example, in its 1980 decision in Old Dominion Dairy Products, Inc. v. Secretary of Defense , the U.S. Court of Appeals for the D.C. Circuit found that the Air Force had improperly de facto debarred a contractor through repeated nonresponsibility determinations based on the same information. The Air Force had determined the contractor to be nonresponsible for the award of one contract because of an audit report showing three irregularities in billing statements. The Air Force never informed the contractor of these allegations, in part, because contractors do not routinely receive notice of nonresponsibility determinations concerning them. However, the contractor was later determined to be nonresponsible for the award of a second contract by another contracting officer, who had received news of the earlier determination and relied upon it to conclude that the contractor lacked integrity. The court found that the second nonresponsibility determination constituted an improper de facto debarment because the contractor was excluded from government contracts without any notice of or opportunity to challenge the allegations against it. Later judicial and administrative tribunals have similarly found that an agency improperly de facto debars a contractor based upon repeated nonresponsibility determinations based on the same information, as well as through words or conduct evidencing an intent to exclude the contractor from government contracts.

Additionally, in certain circumstances, agencies' determinations to debar or suspend a contractor could potentially be found to violate the Administrative Procedure Act (APA), particularly if the agency excludes the contractor based upon circumstances that the agency was aware of when it previously found that contractor sufficiently responsible to be awarded a federal contract. Such a situation arose in the 2001 case of Lion Raisins, Inc. v. United States , where the U.S. Court of Federal Claims found that the U.S. Department of Agriculture's (USDA's) suspension of a contractor for falsifying raisin certifications violated the APA, given that the USDA knew of the contractor's conduct when making five prior determinations that the contractor was "responsible." According to the court,

[e]ven assuming plaintiff's alleged conduct evidences "a lack of integrity or business honesty" so as to justify suspension, the court holds that [the suspending official] abused his discretion when he determined that the evidence of plaintiff's lack of integrity in April 1998, which was known to the agency as of May 1999, "seriously and directly" affected plaintiff's "present responsibility" as a Government contractor in February of 2001. The USDA awarded plaintiff five contracts between the completion of its investigation in May 1999 and its decision to suspend plaintiff in January 2001. The USDA statutorily was obligated to make an affirmative finding of plaintiff's responsibility before awarding each of those contracts. In other words, five times between May 26, 1999, and February 1, 2001, the USDA itself affirmed that plaintiff's business practices met the standards for present responsibility. Significantly, by the USDA's own representations, it did so despite the possession of all the evidence that it would later use to suspend plaintiff. The court finds these facts dispositive of the issue of plaintiff's present responsibility. That [the suspending official] knew of the five interim contracts is demonstrated by their incorporation into the administrative record and by his reference to them in his final report and decision. That he nevertheless concluded that suspension was immediately necessary to protect government interests, without pointing to any event as to the issue of immediacy, was arbitrary and capricious.

While the decision in Lion Raisins has been strongly criticized by some commentators and distinguished by some courts, it has been followed or cited approvingly by others and could potentially be construed as precluding agencies from debarring or suspending contractors under the FAR based on "stale" allegations of wrongdoing.