Foreign contractors have many misconceptions as to what rules and regulations they must abide by under their contracts with the U.S. Government. The two most common misunderstandings foreign entities often hold, in my experience, are (1) their country laws trump U.S. laws and regulations, and (2) Federal Acquisition Regulations (FAR) rules on cost collection and allocations are less strenuous for foreign contractors. These two misconceptions could not be further from the truth.
Foreign government contractors need to realize that when they execute a U.S. Government contract, they are agreeing to abide by all U.S. rules and regulations applicable to those contracts which are clearly spelled out in Section I (Contract Clauses) of the contract. It is therefore very important that foreign contractors fully understand how those Contract Clauses will impact their operation and accounting infrastructure, as well as the financial risk associated with non-compliance before they sign on the dotted line. If those companies do not have the expertise within the company to ensure an understanding of and compliance with the rules and regulations contained in the contract and how to implement or amend existing systems that will meet government guidelines, it is often critical that they hire outside government contracting expertise to assist them. Often times, minimal expenditure for outside legal and professional counsel could save the foreign concern significant dollars down the road.
The adverse impact of the second misconception will depend on the type of contract entered into with the U.S. Government. If the contract is a competitively awarded contract, then the cost collection and allocation rules and regulations application to this type of contract is limited. However, this limitation only applies to the base contract, any subsequent contract changes or modifications to that base contract requiring disclosure of supporting cost data or invoicing of costs based on actual recorded costs, places the foreign contractor under the cost collection and allocations requirements found in FAR Pat 31 Contract Cost Principles and associated regulatory internal controls.
Foreign contractors with negotiated contracts, both fixed priced and cost reimbursement, are subject to the cost accumulation and allocation requirements delineated in the FAR. This applies to both prime contracts and subcontracts. An example of one such requirement is the submission of certified cost or pricing data for any prime or subcontract over $700,000 during the pre-award bidding process. This requirement subjects the foreign contractor to the rules under the Truth-In-Negotiations Act. The foreign contractor’s compliance with the FAR for the accumulation and allocation of direct and indirect costs is key to their success as a U.S. Government contractor.
In addition to the requirements of the FAR, negotiated contracts give the Defense Contract Audit Agency (DCAA), or another U.S. procurement agency’s auditors,full audit rights, which means full access to the contractor’s books and records. Typical audits are Pre-Award and Post award audits, along with various business systems audits, such as an audit of the contractor’s cost accounting system. Failure to pass such audits could pose significant financial risk to the contractor.
As noted above, if such expertise does not exist within the foreign contractor’s organization, we recommend that the contractor obtains the services of professional and legal firms specializing in U.S. Government contracts.TD Government Solutions, LLC can assist foreign contractors in addressing such issues.