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Risk Management: Identifying & Mitigating Risks in Federal Contracts
Skyler Bernards |
January 17, 2024 |

 12,956 total views

Eight ways to improve legal and compliance risk management

Federal contracts present lucrative opportunities, but they are tied to inherent risks like missed renewals and cybersecurity. However, don’t be discouraged as there are many practices and solutions to navigate these challenges. All it takes is diligence, attention to detail, and a streamlined process. 

First, you must stay up-to-date with the latest contract risk mitigation strategies to manage continuous disruption, innovation, and business agility effectively.
Since public sector procurement accounts for nearly one-third of global government expenditure, it’s understandable to keep an eye on public initiatives and commercial entities receiving government funds.

In this blog post, we’ll delve into best practices for mitigating government contract risks, providing valuable insights and actionable steps to enhance your contract management process.  

Federal Contracts
: 6 Types of Risks 

Before implementing an adequate risk mitigation strategy, it’s important to identify the common risks first:

Financial Risk

Financial risks are the potential financial losses contractors may face. They arise when they overlook important deadlines and critical dates, such as contract expiry or auto-renewal dates, which result in the continuation of unfavorable contracts.

Financial risks are primarily encountered in large construction projects, where a project fails to meet its completion date due to natural disasters, budget inaccuracies, or lack of project planning.

Other financial risk factors are the termination of federal contracts without fulfilling milestones, warranty issues, or missed delivery dates.

Missed delivery dates can result in liquidated damages, which means delays in delivery could result in financial penalty on the contractor for cost overruns. Warranty issues can lead to additional costs for rectification.

Thus, if the completed work has issues, contractors need to fix it, costing them more money instead of getting covered by warranty. These can impact the contractor’s financial performance and ability to secure lucrative contracts in the future.

Legal Risk

Legal contract risks arise when there’s a breach of contract leading to a lawsuit and legal hurdles. Different legal risks exist such as contract non-compliance risks, disputes, or regulatory issues. They usually happen if obligations in a contract aren’t met or industry regulations aren’t complied. 

Breaking intellectual property laws, contract disputes over terms and conditions, incorrectly using legal clauses in federal contracts, and sharing confidential information are other actions that increase legal risk.

Some regulations federal contractors must observe to avoid legal risks include:

The False Claims Act prevents the Government from being charged inappropriately for health care goods and services imposed by persons or companies, typically federal contractors who defraud governmental programs.

These programs or government agencies include Social Security, defense contracts, or healthcare company fraud, wherein a company or individual attempts to get payment from the government for an invalid reason.

The Davis-Bacon Act requires that construction workers on federal or District of Columbia contracts are paid a prevailing wage and benefit rates determined by the government. This applies to prime contracts over $100,000. 

The act is intended to ensure that workers are fairly compensated for their labor. It can drive up the costs of construction projects by at least 7.2%, making them more expensive for the government or other entities funding the projects.

The McNamara-O’Hara Service Contract Act (SCA) requires service employees working on covered contracts to be paid no less than the wage and fringe benefits in their local area. Contractors or subcontractors failing to adhere to these requirements may face serious consequences.

Consequences might include Department of Labor investigations, payment for unpaid wages, and debarment from securing future federal contracts for up to three years.

The Cost Accounting Standards (CAS) provide regulations for estimating, accumulating, disclosing costs and resolving disputes for procurements involving the U.S. government. Contractors need to follow the CAS for the fair allocation of costs, uniformity, and fair competition.

Security Risk

Data breaches, extortion attacks, ransomware attacks, and natural disasters always happen. Healthcare institutions are among those hardest hit in the last decade.

There’s no question about whether you should protect your data anymore. Instead, it is about reducing your security risk. One way to start is by safeguarding the data important for running your business. 

Another important step is determining where your data is most at risk of being breached, potentially leading to privacy law violations.

If your contract management process still involves desktop file folders, email attachments, Excel sheets, or paper documents, automating that process with a contract management software like Unanet is the first thing you should do to reduce risk.

The Department of Defense introduced the Cybersecurity Maturity Model Certification (CMMC) standards at the end of fiscal year 2020. They now require DIB contractors to step up their cybersecurity defenses by meeting certain protection standards, doing self-assessments, or getting third-party certification from The Cyber AB.

Compliance Risk

The Federal Acquisition Regulation (FAR) is a collection of rules and guidelines that government contractors follow, which poses serious business and compliance risks for contractors. 

If a contractor wants to win a government contract, they must show that they’re already compliant or will comply with all the FAR provisions specified by the contracting agency.

FAR compliance includes having a code of conduct, following specific subcontracting procedures, keeping records in a certain way, and ensuring their cost accounting and billing processes are above board.

Some government agencies also have their own “supplements” to the FAR, which add more regulations and guidelines for contractors.

For example, there’s the Defense Federal Acquisition Regulation Supplement (DFARS) for the DOD, the General Services Acquisition Regulation Supplement (GSARS) for the GSA, and the National Aeronautics and Space Administration FAR Supplement (NASFARS) for NASA. 

Here are some ways contractors can eliminate the difficulty in interpreting and applying FAR regulatory compliance:

  • Stay updated with new changes in regulations and requirements that apply to your business on the Office of Federal Contract Compliance Programs website
  • Have regular compliance training (e.g., DCAA compliance) to ensure your organization has clear and well-documented policies and procedures applicable to government contracting

Operational Risk

Operational risk is the potential loss of a client’s assets due to negligence. It is primarily caused by criminal activities like fraud, human-related factors, such as equipment being operated by humans, lack of raw materials, and events.

Even in the case of small federal contracts, having numerous people handling them creates multiple opportunities for errors, with 92% of mistakes in contract management being attributed to human error.

To identify operational risks, management assesses potential problems in daily operations, such as system malfunctions or supplier delivery delays. For instance, storing important documents in a wildfire-prone region poses an operational risk. Mitigation strategies may include offsite digital backups and fireproof safes.

Operational risk covers various aspects that management must prioritize regarding addressing and mitigating. At the same time, management must also decide which risks can be accepted.

However, there is no advantage in accepting operational risk. Unlike some other types of risks, it is impossible to eliminate threats to the company’s operations. As long as human beings and processes are involved, there’s always a certain level of risk most especially when it comes to federal contracts.

5 Ways to Manage Risks in Federal Contracts

Now that we are done discussing potential risks with regards to federal contracts, we need to focus on proactive management strategies. Here are actionable ways to mitigate contract risks throughout the entire contract process:

Conduct thorough risk assessments

Identifying federal contracts with a higher risk profile can help you prioritize the areas that need more attention and pinpoint any weak spots in current contracts.

These high-risk contracts could involve significant financial implications, business operations, or sensitive and proprietary information.

Doing so can ensure that nothing slips through the cracks, as each department brings its unique perspective and expertise.

For example, the legal team can spot potential legal liabilities, the financial team can evaluate financial implications, and the operational team can assess operational difficulties and their impact on your day-to-day business operations.

Risk assessment shouldn’t be seen as a one-time task. It is a process that spans the entire lifecycle of a contract. Regularly review and update each contract’s risk profile to find new risks that weren’t present in the past assessment. Then, you can effectively address them promptly.

Implement risk management strategies

When implementing risk management strategies, you should tailor them to the risks identified in the assessment. The risks can be in any category and not limited to financial, operational, or compliance-related. For instance:

  • Financial risk management strategies include implementing robust business controls, having strict approval processes for financial transactions, and conducting regular financial audits.
  • Operational risk management strategies include analyzing vendors or partners, examining market trends and conditions, and assessing the company’s operational capacity.
  • Compliance risk management strategies include dedicating more resources to areas of high risk depending on the data derived from the compliance risk assessment, increasing the frequency of compliance audits, and setting clear timelines for the respective teams to implement mitigation strategies and keep everyone on the same page.

Beyond these category-specific strategies, you should develop contingency plans and maintain reserves to cope with unforeseen events or changes. This may include keeping a rainy day fund, securing lines of credit, or having backup suppliers.

Finally, contract negotiation is also an option to mitigate risk exposure. This may seek terms that limit the contractor’s liability, ensure payment for work is made, or provide for dispute mechanisms.

Regularly monitor and reassess risk exposure 

When managing risks throughout the contract lifecycle, closely monitor and adjust your strategies as needed. You should regularly take a step back at least once a year or every few months to reevaluate the risks you’ve already identified and see if anything has changed. 

This will help spot any new risks that might have evolved or emerged so you can assess the effectiveness of your risk mitigation strategies. 

Gather feedback from your project teams and stakeholders. They might have some valuable insights and spot risks you might have missed. It’s also a good idea to provide risk management training to the employees so they can all contribute to the process. This practice can help enhance a company’s adaptability and resilience despite challenges.

Work with a compliance officer or a consulting firm

Working with a compliance officer or a consulting firm, such as Deloitte’s Risk and Financial Advisory Services, can help manage risks in federal contracts.

Compliance officers advise your business leadership on necessary actions or changes that should be implemented to ensure compliance. They act as partners, helping you understand and navigate potential risks.

Although the compliance officer is usually the company’s general counsel, it’s not always the case. They also organize regular training sessions for employees to inform them about critical regulatory changes and updates.

This is especially important in an environment where regulations are constantly evolving. A chief compliance officer (CCO) typically oversees compliance-related activities in larger companies like Pfizer.

Additionally, a compliance officer may collaborate with a contract compliance specialist who specializes in conducting detailed audits and reviewing business practices to ensure adherence to regulations. This involves tracking important compliance metrics and ensuring agreements comply with relevant laws.

Embrace technology

Using AI technology in contract management has numerous benefits. It organizes and analyzes data, improves oversight of potential risks, and allows for proactive opportunities.

AI systems are great at examining federal contracts to comply with legal and regulatory standards and minimize the chance of unintentional non-compliance.

They also help legal departments automate their risk assessment processes. Submitting an agreement to the AI platform can quickly flag any language beyond the company’s established guidelines. Attorneys and legal staff can review clauses the AI identifies as high-risk while swiftly approving low-risk sections.

Prepare for federal spending budget cuts

If there are federal spending cuts, your program and contract with the government could be in jeopardy. This happens when the government no longer needs the products or services covered by the contract due to a lack of funds or changes in priorities.

It may be challenging to dispute a termination for convenience in such cases. However, as a contractor, you still have certain rights. The most important one is the ability to submit a termination settlement proposal under specific clauses mentioned in the Federal Acquisition Regulation 52.249-1 through 52.249-7.

The specific details may vary depending on the clause in your contract, but basically, it means you have the right to get paid for the work you have already done, usually with a fair profit included.

Additionally, you can request reimbursement for costs incurred due to the termination, including professional fees related to preparing the termination settlement proposal.

For example, the U.S. Department of Health and Human Services terminated part of its contract with Philips, a company from the Netherlands. Philips had already delivered thousands of ventilator configurations to the Strategic National Stockpile and significantly increased ventilator production.

Despite the termination, Philips could still seek payment for the completed work and recover costs associated with the termination process.

Author: Skyler Bernards

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