Understanding the Covenant Against Contingent Fees

Breaking into federal government contracting can be daunting. There are ever-changing compliance obligations to consider and complex bidding and proposal submission requirements to navigate. An entire industry of sales consultants, proposal writers, and lobbyists promising to help tap into the more than $600 billion federal marketplace are only a Google search away. Engaging the services from one of these firms is generally allowed, but there are restrictions. This article deals with one of those restrictions: the Covenant Against Contingent Fees (FAR 52.203-5), which restricts how government contractors pay third-party sales agents.

The procurement process depends on bidders believing government contracts are awarded fairly and based on merit. Having an “in” with a government official shouldn’t matter. The Covenant Against Contingent Fees is a representation contractors make to the government warranting that they have not engaged a person or agency to solicit or obtain the government contract under a contingent fee arrangement. This clause reflects the policy that sales agents should be discouraged from claiming to hold improper influence over the government procurement process.

However, this policy is tempered by the reality that, in the commercial and non-government marketplace, sales agents are routinely compensated via sales commissions. Accordingly, the covenant contains two important exceptions. First, the Covenant Against Contingent Fees is not included in solicitations and contracts for commercial items (see FAR 3.404). Therefore, contingency fees are allowed in contracts awarded under FAR Part 12. Second, the clause allows a “bona fide” employee or agency to be retained and compensated on a contingent fee basis.

What does it mean to be “bona fide” in the eyes of the government?

FAR 52.203-5 defines a “bona fide agency” as “an established commercial or selling agency, maintained by a contractor for the purpose of securing business, that neither exerts nor proposes to exert improper influence to solicit or obtain government contracts nor holds itself out as being able to obtain any government contract or contracts through improper influence.”

Put simply, a bona fide agency cannot claim to have an “in” with government buyers. And even if it had an “in,” it must not use it to help steer contracts to its clients. The case law addressing who is a “bona fide” agent under Covenant Against Contingent Fees builds on this concept and focuses on four factors.

1. Proportional fee: The agent’s fee cannot be inequitable or exorbitant when compared to the services performed or to customary fees for similar services related to commercial business.
2. Knowledge of the business: The agent should have adequate knowledge of the contractor’s products and business, and other qualifications necessary to sell the products or services on their merits.
3. Continuity of relationship: The contractor and agency should have a continuing relationship or, if newly established, should contemplate future continuity.
4. Established/ongoing concern: The agent should be an established concern that has existed for a considerable period or be a newly established going concern likely to continue in the future.

The consequences of running afoul with the Covenant Against Contingent Fees can be severe. The clause gives the government to right to annul a contract without liability or to deduct the full amount of any contingent payment from the contract. A knowing breach of the clause could also expose a contractor to False Claims Act liability which may include significant fines and treble damages.

Government contractors should ask themselves a few questions when considering using a sales agent on a contingent fee basis.

• Is the sales agent commission structure the same for federal government and non-government sales?
• Does the sales agent understand my business, products or services?
• Is the sales agent only able to help on a specific solicitation or with a particular agency?
• Does the sales agent have a track record?
• Do the sales agent’s promises sound too good to be true?

By receiving bona fide answers to these questions, government contractors can work to avoid the common pitfalls of violating the Covenant Against Contingent Fees.