A contingent or contingency fee is any fee for services provided where the fee is payable only if there is a result. In government contracts, that fee for a favorable result is likely a percentage value of a contract successfully acquired.
In the commercial sector, it’s not only acceptable but often customary for a business to pay a contingent fee to a third party that can leverage its business contacts or otherwise provides valuable services in drumming up business.
Prohibition – Contingency Fee Federal Acquisition Regulation (FAR)
In government contracts, however, contingent fees are prohibited by law. See, 41 USC 254(a)) (prohibiting contingent fees in negotiated contracts) and FAR 3.400 and 3.403 (prohibiting contingent fees in sealed bids). Moreover, the Federal Acquisition Regulation (“FAR”) includes a Covenant Against Contingent Fees generally forbidding the use of an agent or employee engaged by a federal contractor to obtain a contract for a contingent fee. FAR 52.203-5.
Concerned with the ability of a third party to use its contacts in government to manipulate interfere with a company’s fair access to opportunities and contracts, the U.S. Supreme Court in the earliest case on-point, states “contingent-fee agreements with agents, by their very nature, “suggest the use of sinister and corrupt means” and should be “uniformly declared invalid.” Providence Tool Co. v. Norris. 69 U.S. 45 (1864). But it did not take long for the Court to acknowledge that agency arrangements could also involve “legitimate professional services.” Oscanyan v. Arms Co., 103 U.S. 261 (1880).
In an attempt to reconcile the need to avoid corruption with the potential for legitimate service, the contingency fee federal acquisition regulation establishes an exception allowing government contractors to use “bona fide employee[s] or agenc[ies]” on a contingent basis where an agreement “may be structured in an effort to prevent corrupt practices.” Capital- Keys, LLC v. Ciber, Inc., 875 F. Supp. 2d 59 (D.D.C. 2012); FAR 52.203-5(b).
FAR 3.4 Limitation / Covenant Against Contingency Fee Exceptions
Despite the general prohibition, there are exceptions, including the bona fide agent exception, where a two-part test applies. First, there is a “threshold requirement that an entity not use improper influence.” The case law interpreting FAR 3.4 and FAR has made clear that the fact that an agent’s fee is contingent upon the contractor’s successful performance of the contract, or even upon receiving the contract award, is not sufficient, by itself, to bring a fee agreement under the contingent fee prohibition unless an agent is expressly retained to contact government officials, where such contact poses a threat of the exertion of improper influence to obtain a contact. Convention Mktg. Servs., B-245660.3; B-246175, Feb. 4, 1992, 92-1 CPD ¶ 144.
The second part of the test is set forth under the federal regulations establishing additional criteria for evaluating the applicability of the bona fide agency exception. Keefe Co. v. Americable Int’l, Inc., Civ. No. 94-1568, at 5 (D.D.C. May 11, 1998).
Existing case law and the contingency fee federal acquisition regulation applies the following factors to assess the bona fide agency exception, but the SBA has wide latitude in interpreting these requirements and has made mistakes in the past. Therefore, it is important to consult an Attorney to verify the factors and accurate application to each unique set of facts.
Bona Fide Agent: Five Factors of Assessment
The case law and regulatory history surrounding the covenant describe five key factors that should be examined when evaluating whether an arrangement is with a “bona fide” agent:
- Proportional Fee—The agent’s fee “should not be inequitable or exorbitant when compared to services performed or to customary fees for similar services related to commercial business.”
- Knowledge of Business—The entity “should have adequate knowledge of the contractor’s products and business, and other qualifications necessary to sell the products or services on their merits.”
- Continuing Relationship—“The contractor and the entity should have a continuing relationship or, in newly established relationships, should contemplate future continuity.”
- Established/Ongoing Concern—The entity “should be an established concern that has existed for a considerable period or be a newly established going concern likely to continue in the future.”
- General Representation—An entity that “represents the contractor in Government and commercial sales should receive favorable consideration,” although an entity “that confines its selling activities to Government contracts is not disqualified.”
E.g. Process Equipment f.u.b.o Kingston Tool Co. v. United States, 17 Ct. Cl. 251, 268-69 (Ct. Cl. 1965).
FAR 3.4 Contractor Warranty
Under the contingency fee federal acquisition regulation prospective contractors must submit a warranty certifying they have not entered into any prohibited contingent fee arrangements in connection with their pursuit of the contract award. FAR 3.404. Keep in mind, the warranty is not required for all acquisitions, e.g. acquisitions below the simplified acquisition threshold or those for commercial items. FAR 3.404. As well, the warranty is not inapplicable to or found in its commercial items contracts. FAR 52.203-5. See also FAR 3.405(a).
A contractor’s violation of the warranty against contingent fees can result in the rejection of a bid or proposal, annulment of the contract without cost or liability to the government, or deduction of the full amount of any contingent fee from the contract price. Such misrepresentations may also lead to the initiation of suspension or debarment proceedings under an 8a company’s Participation Agreement and referral to the Department of Justice for potential prosecution of a false statement in connection with the contractor’s certification that it paid no contingent fees (FAR 3.402 and 3.405). The imposition of penalties such as rejection of a bid or proposal and referral to the Department of Justice does not require the actual award of a contract to the contractor.
FAR 3.405 — Misrepresentations or Violations of the Covenant Against Contingent Fees.
(a) Government personnel who suspect or have evidence of attempted or actual exercise of improper influence, misrepresentation of a contingent fee arrangement, or other violation of the Covenant Against Contingent Fees shall report the matter promptly to the contracting officer or appropriate higher authority in accordance with agency procedures.
(b) When there is specific evidence or another reasonable basis to suspect one or more of the violations in paragraph (a) above, the chief of the contracting office shall review the facts and, if appropriate, take or direct one or more of the following, or other, actions:
(1) If before award, reject the bid or proposal.
(2) If after award, enforce the Government’s right to annul the contractor to recover the fee.
(3) Initiate suspension or debarment action under FAR Subpart 9.4.
(4) Refer suspected fraudulent or criminal matters to the Department of Justice, as prescribed in agency regulations.
For immediate help with contingency fee federal acquisition regulations and or Misrepresentations or Violations of the Covenant Against Contingent Fees, contact our government contracts lawyers at 1-866-601-5518 for a FREE INITIAL CONSULTATION.