With the recent worldwide economic downturn, many companies are searching for a reliable customer with an increasing demand for products and services. That customer is the federal government. Doing business with the government presents unique opportunities and challenges. Some companies may avoid business with the government due to fears that government business is too complex. Understanding the issues is the key to managing that complexity, and not letting it manage you.

Here are the top 10 issues to keep in mind when doing business with the government.

1. A variety of laws and regulations protect the taxpayers' interests by regulating the government's business dealings. These range from administrative directions government bidding and contract performance, through criminal laws designed to punish out and out fraud. With the proper knowledge and systems in place, the risks and (at least initial uncertainty) involved with these rules can be effectively managed.

2. The government requires its contractors, even those selling “commercial” products or services, to have a formal compliance program to ensure the rules are followed. Successful compliance programs consist of standards of conduct and policies and procedures for dealing with the government, and often include internal controls and training. A well-designed and properly implemented compliance program can pro-actively prevent most problems, as well as minimize penalties if a problem does occur.

3. The type of products or services (“commercial” or custom), and the type of contract the government uses, generally determine the scope of your responsibilities as a government contractor. Contracts for commercial items, for example, generally require fewer government-specific contract clauses than a contract for a custom built piece of military equipment. The first rule of thumb is to read the contract documents carefully, and obtain any clarifications as soon as possible.

4. You must treat government employees differently than you might treat your commercial customers. Gifts and gratuities may not be given to government employees. Unlike a standard sales effort, where a business lunch or dinner may be normal, government employees may not be given anything of value, including meals, trips, or tickets to events. A violation of these laws can result in various penalties, starting with termination of the contract. Thus, company employees should be trained about applicable gratuities laws early on in the process.

5. The government wants to do business with small and/or minority firms. To further this goal, on some contracts the government gives preferential treatment to those types of entities. While still small in terms of percentage of total contracts awarded, in absolute numbers, the dollars are significant. Eligibility for these programs can be complicated, so it is important for a company looking at them to fully understand requirements, including possible limits on subcontracting with large and/or non-minority firms.

6. All government contracts contain certain provisions that differ from commercial contracts. For example, a termination for convenience clause gives the government the absolute right to terminate all, or any part, of your contract, at any time. Termination for the convenience of the government is not based on “fault,” but merely reflects the possibility that the government's requirements may have changed. Termination in this context does not negatively impact the company in future interactions with the government. Another different provision is a broadly written “changes” clause, which allows the government to unilaterally change many of the performance elements of the contract, including the scope work, delivery schedules, and specifications. You will get paid for the additional costs incurred, but you must comply with the government's directions. Even if the contract does not explicitly include these (or other mandatory) clauses, they are part of the contract. Knowledge that these clauses exist, and they are applied, helps mitigate any potential “surprises” down the road.

7. Protecting your intellectual property rights requires a thorough understanding of the pertinent intellectual property regulations and contract provisions. Unlike a private contract, “owning the patent” is not enough. In government contracts, the standard intellectual property provisions (that may or may not be clearly spelled out in the contract) give the government broad license rights, and in some cases outright ownership. These provisions are negotiable, however. As in most things, knowledge is, if not actual power, at least protection.

8. Subcontractors (or any company selling through indirect channels like dealers or distributors) are still considered government contractors. While the subcontractor does not have a one-on-one contractual relationship with the government, government regulations are still very important. In most contracts, the government requires the prime contractor to flow-down certain provisions into subcontracts. Contracts for commercial items tend to have fewer flow-downs than contacts for government-only items, but even these subcontracts are driven by the government rules and regulations.

9. Government contracts reflect the government's preference for American-made products. Most notably, the Buy American Act requires, with a few exceptions, that contractors provide domestic products. This preference is waived, however, for products that come from or are “substantially transformed” in, a country with a reciprocal government procurement treaty with the United States. There is significant flexibility here, but compliance with country of origin rules can be tricky, so expert advice is a must.

10. Government contractors must comply with various labor standards. These will vary depending upon the nature of the contract, but may impact wage rates, overtime, and equal opportunity rules. Generally (but not always), smaller firms are exempt from some or all of these requirements.

Government contracts provide an exciting opportunity for many companies. Navigating the rocks and shoals takes some planning and effort, but particularly in the current business environment, firms are finding the rewards well worth the effort.

William Weisberg is a partner, and Angela Nadler and Joyce L. Tong are associates in the government contracts department at Bryan Cave LLP in Washington, D.C. They counsel clients in all aspects of government contracting. Contact Weisberg at William.weisberg@bryancave.com or call 202-508-6108.