Restriction on Fees to Consultants

It is often beneficial for government contractors to use consultants.  The expertise of a consultant may be very specific and of limited use to a contractor, so that hiring a full-time or part-time employee to perform the same task is not justified.  A consultant may assist with identifying and responding to procurement opportunities.  Many consultants propose to receive commissions if the contractor receives a contract based on the consultant's services.  Before entering into any consultant agreement or agreeing to pay commissions, contractors should familiarize themselves with the Covenant Against Contingent Fees.

The Covenant Against Contingent Fees is contained in the Competition in Contracting Act (CICA) and implemented in FAR 52.203-5.  In general, prospective contractors are barred from hiring another company to help obtain government contracts and then paying for these services with a fee that is contingent upon receipt of the contract award or that is calculated as a percentage of the proceeds from a government contract. An exception is made for services provided by a "bona fide agency” retained by the contractor for the purpose of securing business. Prospective contractors must submit a warranty certifying that they have not entered into any prohibited contingent fee arrangements in connection with their pursuit of the contract award.  The warranty is not required for acquisitions below the simplified acquisition threshold or those for commercial items. 

Regardless of what is indicated in the consulting contract, whether a consultant is retained to “solicit or obtain” a contract will be determined based on the work to be performed.  The U.S. General Accounting Office (GAO) has held that even where an agreement did not include solicitating or obtaining a contract in the consultant’s scope of work, it is possible that based on the work to be performed by the consultant, the agreement may fall under the Covenant.  A significant factor is whether the agent will have contact with the government. The GAO has stated:

The fact that a selling agency's fee is contingent upon the contractor's receiving the contract award is insufficient to bring a fee agreement under the contingent fee prohibition; rather, the regulation contemplates a specific demonstration that an agency is retained for the express purpose of contacting government officials, where such contact poses a threat of the exertion of improper influence to obtain government contracts. Convention Mktg. Servs., B-245660.3; B-246175, Feb. 4, 1992, 92-1 CPD ¶ 144.

E&R, Inc.--Claim for Costs, B-255868, B-255868.2, May 30, 1996, 96-1 CPD ¶ 264 at 3-4; see also Holmes & Narver Services, Inc., 70 Comp. Gen. 424 (1991), 91-1 CPD ¶ 373 at 7 (noting that the arrangement was proper since, among other things, there was no evidence that the consultant offered services that “involved any contact or dealing with the government on this procurement.”).  If the consultant will not be in contact with the government, the consultant agreement should so state.  Because of the need to contact agencies for information during the procurement process, however, this is often not the case.

If the agreement is to “solicit or obtain” a government contract, the issue is whether it demonstrates a "bona fide agency" relationship.  The FAR sets forth the requirements that must be met for a contractor to take advantage of the bona fide agency exception to the warranty requirement. The primary requirement is that the consultant hired to secure business must not seek to obtain business by exerting “improper influence.”  Improper influence is defined at FAR 3.401 as “any influence that induces or tends to induce a Government employee or officer to give consideration or to act regarding to a Government contract on any basis other than the merits of the matter.”  One factor as to whether the agreement qualifies for the "bona fide agency" exception is the size of the commission. In Custom Signs Today, B-237956, Apr. 10, 1990, 90-1 CPD ¶ 379, the agreement proposed a 20% commission. The contracting officer determined that the highest fee ever allowed for such services on the particular type of contract (a General Services Administration multiple award schedule contract for advertising displays, signs, and related products) was 12%, and that the contingent fees allowable for similar services averaged between five and seven percent. Based on a determination that the 20% contingent fee was disproportionate to the actual value of the services, the GAO held that the contracting officer properly rejected the protester's proposal as the agreement did not constitute a “bona fide agency relationship.”  Based on this case and others, contractors should only agree to a fair, market commission rate, or risk a finding that there is no bona fide agency relationship.

There are various penalties if a consultant is found not to be a bona fide agency and therefore the agreement is a violation of the Covenant Against Contingent Fees.  Violation of the Covenant Against Contigent Fees can result in annulment of the contract, deduction of the commission amount from the monies paid to the contractor by the government, recovery of the amount from the contractor, debarment or suspension, and referall of suspected fraudulent or criminal matters to the Department of Justice.

Consequently, a contractor should take steps to insure that its marketing agreements with consultants are in conformance with CICA and implementing regulations.  At a minimum, a consultant agreement should contain (i) a specific representation by the consultant that it is a "bona fide agency" as defined by the FAR; (ii) specifically acknowledge that the consultant shall neither exert nor propose to exert improper influence to solicit or obtain government contracts and that it does not hold itself out as being able to obtain any government contract or contracts through improper influence; and (iii) that any compensation be at market rates.