Subcontractor Due Diligence: 8 Questions to Ask

Prime contractors are responsible for negligence in the selection of subcontractors. In one fraud perpetuated against the U.S. Department of Interior’s Fish and Wildlife Service, two individuals were engaged in a series of transactions that were intended to hide the involvement of one of them from the government.

Of course, many government contractors depend on subcontractors to deliver goods or services to fulfill a contract. The case described in the right-hand box involves a primary contractor, but the same type of scheme could be engaged in at the subcontractor level.

Depending on the government agency, a contractor may be required to submit information regarding its subcontractors during the bidding process. Alternatively, a contractor may be required to submit information regarding subcontractors as they are engaged. Regardless, gathering information about subcontractors not only ensures compliance and provides information that is often needed during the bidding process, it can also help your company learn about potential business partners.

Ask the following questions when conducting subcontractor due diligence:

  1. In the last five years, have potential subcontractors been involved in lawsuits or government enforcement actions? Have they been cited for violations of federal, state or local laws or regulations? If so, how were the violations resolved?
  2. Does your subcontractor have an employee code of conduct? Do they require that all employees sign the code?
  3. Does the subcontractor have a whistleblower employee hotline?
  4. Is the subcontractor financially stable? Depending on the subcontractor’s role and importance to the overall contract, consider requesting approval from the subcontractor to contact the company’s CPA firm directly to receive copies of financial statements
  5. Has the subcontractor been mentioned in news coverage in a negative light? (You can find this out with an Internet search.) If so, how did their management respond when asked about the coverage?
  6. Have you considered requiring subcontractors to fill out a due diligence form? These documents ask for information such as: when the company was formed, a description of services, number of employees, locations, customer base, a copy of the company’s most recent annual report, audited financial statements, revenue and expense forecasts, a business plan, customer references and a Dun & Bradsheet company analysis.
  7. Have you requested a list of the subcontractor’s executive management members, including their resumes? Often, companies will post senior management resumes and biographical information on their Web sites. In addition, consider cross checking the resumes posted on a company’s Web site against the resume posted on professional networking sites such as LinkedIn. If discrepancies regarding the executive management are uncovered, consider engaging third party to conduct a formal background check.
  8. Does your subcontractor carry the appropriate insurance coverage?

This is not exhaustive list and the number and type of questions you should ask varies according to the size, type and complexity of the government contract being pursued.

In addition, there are statutory provisions governing post-government employment for federal employees that should be factored into your hiring decisions, as well as those of your subcontractors.

Here are the three types of restrictions:

Lifetime ban – If a federal government employee is involved in a specific contract, he or she may go to work for the contractor, but he or she can never act as a negotiator before any agency for the lifetime of that particular contract

Two-year ban – If a federal government employee is involved in a specific contract during the last year of his or her tenure with the government, he or she may go to work for a contractor, but he or she cannot act as a negotiator before any agency for two years on that particular contract

One-year (no contact) ban – “Senior employees” may not appear or communicate with any employees of their former agency on behalf of the contractor

There are also certain restrictions on compensation after an employee leaves the government based on representations made while he or she was employed. Your attorney can provide information on restrictions, as well as the definition of “senior employees” as it relates to the one-year ban.

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