With the ever-changing regulatory environment, understanding clauses and maintaining compliance can be a full-time job. We've picked six of the hottest topics in recent years to ensnare government contractors of all sizes. Join our lively discussion on what's changed and learn how to stay compliant.
Sales & Marketing Alignment: How to Synergize for Success
F09 Six Contract Clauses You Should Be Watching
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Six Contract Clauses
You Should Be
Watching
Breakout Session # F09
Robert Jones, Left Brain Professionals
Melanie Burgess, Burgess Consulting, LLC
Date: July 28, 2015
Time: 4:00-5:15 pm
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Session Objectives
• Critically think about contract
clauses, terms, and conditions
• Understand 6 critical clauses
• Learn reporting requirements, flow
down requirements, and negotiation
possibilities for these clauses
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Positive Share
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Safety Check
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Understanding Your Contract
• We all read our contracts, but do we
understand them?
• How do you review a contract – read
it like a book or jump around?
• Hidden clauses
• Terms in your subcontract
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Complying with Your
Contract
• Now that we understand the
requirements, how do we comply?
• Monitoring contract changes and
modifications
• Staying up to date with regulatory
changes
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Six Contract Clauses
• Termination for Convenience
• Counterfeit Parts
• Cybersecurity
• Conflict Minerals
• Intellectual Property
• Liquidated Damages
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Termination for Convenience
• Unique government right to
terminate a contract at will
– Not addressed in the UCC
• Prime should flow down some form
of this requirement to
subcontractors
• If the clause is incorporated by
reference or unaltered, the prime
has the unilateral right to terminate
the subcontract at will
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Termination for Convenience,
cont’d.
• What to watch for
– Clause incorporated by reference
– Clause allowing prime to terminate at
will
• What to negotiate
– Subcontract term should limit prime’s
right to the extent that the prime
contract is terminated for convenience
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Counterfeit Parts
• What are they?
– Unauthorized copy or substitute part
– Item misrepresented as coming from a legal
source
– An item from a legally authorized source that is
misrepresented as meeting performance
requirements
• Brokers and unauthorized distributors are
highest risk for selling counterfeit parts
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Counterfeit Parts
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Counterfeit Parts, cont’d.
• Small businesses may be exempt from DOD
rule
– Only exempt if prime
– Flow down requirements when prime is subject to
rule
• Reporting requirements
– Self identifying and reporting when counterfeit parts
are discovered
• What to watch for
– DFARS 252.246-7007 Contractor Counterfeit
Electronic Part Detection and Avoidance System
– Tough requirements for inspection of parts
throughout the supply chain
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Counterfeit Parts, cont’d.
• More things to watch for:
– Rework costs due to counterfeit parts
are Not allowable
– Counterfeit parts procedures part of
purchasing system audits
– Potential for penalties for supplying
counterfeit parts and/or not reporting
counterfeit parts
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Cybersecurity
• The protection of computers and computer
systems against unauthorized attacks or
intrusion.
• Risk areas, to name a few:
– Email
– Social media
– Cloud storage
– Online accounts
– Mobile devices
– Corporate networks
– Intellectual property
– Proprietary data
– Personal identification data
– Classified military data
– Homeland Security 15
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Cybersecurity, cont’d.
• Reporting requirements
– Notify Government of cyber intrusions
or incidents within 72 hours
• What to watch for
– DFARS clause 252.204-7012
– Technical data governed by ITAR may
not be stored in the cloud
– Flow down requirements – small &
commercial businesses are not exempt
– Conflicting rules and requirements
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Cybersecurity, cont’d.
• Consequences of non-compliance
– Breach of contract
– Termination
– Suspension or debarment
– Negative past performance
• Use the NIST Framework to setup
compliance system
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Conflict Minerals
• Dodd-Frank Act of 2010
– Holds publicly traded companies accountable
– Requires SEC reporting
– The real requirement – elimination of use
• What are they?
– Tantalum (columbite-tantalite, coltan)
– Tungsten (wolframite)
– Tin (cassiterite)
– Gold
• How we use conflict minerals
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Conflict Minerals, cont’d.
• Reporting requirements
– Due diligence throughout the supply chain
• What to watch for
– Delivery of “conflict free” products
• What to negotiate
– Due diligence procedures
– SEC reporting compliance
– Not certifying to conflict free items
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Intellectual Property
• Most valuable asset any company
owns
• What is it
– Recipes, Drawings, BoMs, Processes
& Methods, Trade Secrets
• Spectrum of rights
– Restricted/Limited to Unlimited
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Intellectual Property
• What to watch for
– Specific license agreements for
property purchased under government
contracts
– Contract requirements that don’t match
the buyer’s need
• What to negotiate
– Everything
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Liquidated Damages
• Effectively a penalty for late delivery
• Usually stated in terms of a %
• What to watch for
– How the damages are calculated
– Applying liquidated damages in the Small
Business Subcontracting Plan
• What to negotiate
– Limit the % of damages and how they are
applied
– Grace period
– Maximum penalty amount
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Contact Information
Robert E. Jones
Left Brain Professionals Inc.
robert@leftbrainpro.com
www.leftbrainpro.com
Melanie Burgess
Burgess Consulting, LLC
melanie@burgessconsulting-llc.com
www.burgessconsulting-llc.com
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Editor's Notes
The idea for this slide is to discuss how the audience goes about reading and understanding their contracts. Things we can discuss:
- kickoff meetings to bring together programs, accounting, and contracts
- reviewing at least the entire contract, not just the sections that pertain to your job
- thinking critically about what clauses and terms require from the company
-
Hidden clauses are those that are incorporated as terms in a subcontract or are not in their typical contract locations – section C (PWS) and H are hot spots for dumping requirements. Clauses are definitely outside of Section I.
Discuss how often FAR clauses are translated as a term or condition in a subcontract. May be buried in the small, column printed attachment to a PO.
Ideas on compliance:
- policies that are not just written but followed
- contract briefs
- update meetings with key stakeholders
- setting a schedule for when things are due, what requirements are
Read CM Mag – back sections on regulatory changes;
Attend seminars
Have internal meetings to share lessons learned and word on the street type info
Existed for many years but became a public issue when included in an aircraft delivered to the Government
Parts that look and behave similarly to OEM parts but do not have the same quality
- difficult to identify these parts as they are made to look identical to legal parts
May not work at all and usually do not work as well as non-counterfeit parts
Must have mitigation policy to identify and quarantine counterfeit parts
Large primes are now incorporating this language into their quality manuals and T&C – not a reference, but the actual language so the DFARS aspect is irrelevant.
Make sure you have purchasing T&C and sales T&C in place to protect your business in regards to warranty and indemnity. The latter can be expensive if you are left holding the bag.
DFARS requires reporting within 72 hours of discovery of a reportable cyber incident
- possible exfiltration, manipulation, or other loss or compromise of UCTI on prime/sub info system
- any unauthorized access to system on which UCTI is present
DFARS clause 252.204-7012 – requires additional safeguards on data
Cloud servers may be located in other countries creating a deemed export
Result of the financial crisis of 2007-2010 – consumer protections
Tin (lead) is used in electronics as solder
Gold lead is also used in mostly high-end electronics
Tantalum is used in capacitors which are in most circuit boards
Tungsten is known best for its use in light bulbs
Difficult, if not impossible to deliver conflict free minerals 100% of the time
Only Apply and Sony currently claim to use all conflict free minerals (need to double check this before WC)
If customer is buying HW with a non-exclusive right to use the tech and no delivery of tech data is required, the contract and license language should match
Hire an attorney to help with interpretation of the Government Purpose rights and negotiating the appropriate terms in your contract