International Law Advisory - Managing Reconstruction Contracting Risks

By all accounts, it looks like the U.S military and reconstruction contractors will be in Iraq and Afghanistan for the foreseeable future.  Indeed, 2005 should see tens of billions of supplemental spending authority for Iraq and Afghanistan operations.  It goes without saying that these are dangerous countries in which to work.  Indeed, the recent withdrawal from Iraq of a relatively large U.S. construction firm with substantial experience in the Middle East coupled with contractor casualties during a recent mess hall bombing in Mosul are two of many examples of the challenging environment  and also underscore the broad and continuous impact that the security environment has on reconstruction contracting.  And all the while, given the controversial nature of the war in Iraq in particular, contractors are under constant scrutiny in the U.S. and abroad regarding their compliance with government-contracting and other regulations applicable to their work in the region.

With elections in Iraq fast-approaching, and with reconstruction contractors in the U.S. continuing to be viewed from a “fishbowl” by oversight agencies, Congress and the public, it makes sense now more than ever for companies with a presence in the region to effectively manage physical security and legal compliance risks, and for companies wishing to pursue new work in the region to take these issues into account before committing to go abroad in the first place.  In other words, no one should take working in Iraq or Afghanistan lightly.

We thought it would be useful to summarize some of the major risks and issues of working in Iraq and Afghanistan.  In several instances Steptoe attorneys have written more extensive articles regarding these subjects, e.g., Special Compliance Considerations When Supporting the U.S. Government Abroad and Department of Commerce Revises the Export Licensing Framework for Iraq:  The Practical Impact on U.S. Government Contractors.  We would be happy to forward you reprints of these articles at your request.

Disclosures and Consents from Employees

It is an unfortunate reality that many contractor employees have been killed or injured in Iraq and Afghanistan.  Prior to sending employees abroad, it is important to ensure that they are going to the region with their “eyes open.”  Therefore, it is essential that the risks of working in such an environment be disclosed to them and that you have their written informed consent prior to “deployment.”  Moreover, among other things, employees should receive as much training and orientation as feasibly possible prior to entering the region.  Sending employees abroad without such informed consent -- or without thoroughly briefing them and otherwise preparing them for the risks (and compliance expectations) -- is a recipe for significant problems for employees and companies alike.   

If you have questions regarding the HR-related aspects of working in Iraq or Afghanistan, please contact Andy Irwin or Ed Krauland.

Employee Protection Issues/Private Security Contractors

Although circumstances sometimes vary, U.S. and allied militaries often are not responsible for providing specific force protection to U.S. contractors.  Therefore, many companies find that they need to hire private security contractors to protect their employees.  Some private security contractors are truly “blue chip” organizations, skilled in working effectively -- and compliantly -- in the most dangerous environments in the world.  Given that this is a largely unregulated industry, however, many other companies have less solid reputations.  If you work with the wrong company, you face physical security as well has legal compliance risks.   In other words, when you hire a private security contractor, it is essential that you know how to “choose the right horse.”  Moreover, on a related note, contractors often face tough decisions regarding whether their own employees should be armed, and the extent to which their contracts allow such measures.  Indeed, arming your employees may have specific implications under U.S., in-country or international law, and result in any range of potential liabilities.

To the extent you would like to discuss legal compliance and due-diligence issues associated with hiring private security contractors or other issues related to protection of employees, please contact Andy Irwin or Ed Krauland.

Defense Base Act Insurance

Almost all entities working abroad in support of U.S. government reconstruction contracts need to be covered by Defense Base Act insurance, although DBA insurance is often costly to obtain.  Foreign subcontractors also are required to be covered under DBA insurance.  Contractors without DBA insurance are possibly violating the terms of their contracts; moreover, they are also dramatically heightening their potential liabilities in the event of the death or injury of an employee in the course of employment abroad.

If you have further questions regarding the Defense Base Act and other insurance regimes applicable to government contracting abroad, or related issues associated with the War Hazards Compensation Act, please contact Andy Irwin or Tom Barletta.

Export Controls

Since last Summer, U.S. export controls vis-à-vis Iraq have been eased.  In short, the Bureau of Industry and Security (BIS) of the Department of Commerce is now handling Iraq export licensing issues, rather than Office of Foreign Assets Control (OFAC) at the Department of the Treasury.  The same has been true for Afghanistan since shortly after the overthrow of the Taliban Government in early 2002.  Most regulatory exceptions are now clearly applicable for Afghanistan and Iraq.  But that does not mean that all items can be shipped to Iraq and Afghanistan license free.  It is conceivable that companies working in various heavy industrial and technology sectors in particular may have some items that may require U.S. export licenses.  Certain security-related equipment may also have export licensing implications.  Moreover, shipments from elsewhere in the world may also require U.S. or foreign export licenses.

To the extent that you would like more information about Iraq or  Afghanistan export licensing, please contact Ed Krauland, Andy Irwin or David Lorello.  If you would like to discuss European export controls potentially applicable to working in Iraq or Afghanistan, please contact Maury Shenk of our London office.

Sanctions

Iraq and Afghanistan are no longer subject to U.S. sanctions, which is why, as explained above, BIS rather than OFAC, administers the export licensing regime for each country.  However, there are still in place many sanctions against Specially Designated Nationals (SDNs) that may be present in Iraq and Afghanistan.  Although given the fluidity of the environment it would be next to impossible to absolutely ensure that every incidental contact that your company makes is not with an SDN, it is particularly important for companies to undertake to have some formal system in place to screen potential subcontractors, vendors, and other contacts against the SDN list.  This a matter of physical security as well as compliance with U.S. law.  Moreover, given that Iran and Syria are subject to U.S. sanctions, contractors also need to have systems in place to ensure that their subcontracting, procurement and logistics activities do not run afoul of such sanctions, particularly because foreign subcontractors may be used to dealing with entities -- or even have offices in -- Iran or Syria.

We have substantial experience in counseling companies regarding the implementation of systems to screen against SDNs, and in developing subcontracting mechanisms to help ensure compliance with U.S. law.  Please contact Ed Krauland, Andy Irwin or David Lorello for more information.

Agency-Specific Purchasing Requirements

The U.S. Agency for International Development (USAID) -- one of the main sources of Government contract funding in the region -- requires its contractors to comply with an exceedingly complicated set of rules called “Source, Origin and Nationality.”  These rules often overlap with U.S. sanctions, but in some cases extend beyond sanctions.  For instance, some countries that are not sanctioned by the U.S. are still subject to restrictions under these rules.  Moreover, the rules cover a multiplicity of rather arcane topics such as whether or not a contractor may subcontract with certain state-owned organizations

In the past, compliance with USAID’s “Source Origin” rules has resulted in contractor confusion and government investigations.  Working for USAID -- whether in Iraq or Afghanistan, or elsewhere -- necessitates learning these rules and implementing systems to comply with them.  If you would like a copy of the rules, or would discuss how to implement compliance systems, please contact Andy Irwin or Ed Krauland.

Cost Accounting/Allowability Issues

Much of the work being performed in Iraq and Afghanistan is pursuant to cost-reimbursable contracts with the U.S. Government or cost-reimbursable subcontracts.  Cost allowability and cost-accounting are difficult topics even when applied to the most straightforward domestic government contracts.  However, in a wartime environment, where every day brings  a new challenge and where Government customers may sometimes make demands on contractors that government auditors may later second guess, the need to be aware of -- and comply with -- cost accounting and cost-allowability rules is particularly challenging.

Should you have questions regarding cost issues as they apply to government contracting in the Middle East -- or should you need assistance in formulating a response to Defense Contract Audit Agency (DCAA) or Inspector General (IG) inquiries -- please contact Tom Barletta or Andy Irwin.

Subcontracting

Government contracting is a complicated and often counter-intuitive field to many commercial companies in the U.S.  And in 2003 a good number of those companies rushed into Iraq, in particular, because of the lure of new business.   But beyond that, U.S. public procurement rules are even more confusing to companies from the Middle East, Europe and Asia.  The reality is that many U.S. contractors working in the region have large subcontractor bases of non-U.S. contractors, including many local subcontractors.  (Indeed, having guidance materials translated into local languages for subcontractors is an increasingly common aspect of government contracting in the region.)  

Even if work is being performed under the most permissive of contracting environments, e.g., fixed-price purchases of commercial items/services with no work performed inside the U.S., it is both prudent and necessary to flow down certain Federal Acquisition Regulation (FAR) clauses to these companies.  Moreover, not all work will be fixed price, commercial -- some proportion of subcontracts will be cost-reimbursable.  In all instances, however, subcontractors need to understand rules -- and develop systems -- that they may not have had to implement prior to working in Iraq or Afghanistan.  Indeed, given the scrutiny currently associated with reconstruction contracting, contractors can expect that government audits will focus on their subcontracting and procurement practices, and in some instances, subcontractors (e.g., in a cost reimbursement environment) themselves may be subject to government audits.

We have substantial experience advising companies regarding both prime contracting and subcontracting under U.S. Government contracts in the Middle East.  Please contact Danny Sauls or Andy Irwin if you have further questions.

Steptoe Contacts:

Tom Barletta:                (202) 429-8058
Andy Irwin:                   (202) 429-8177
Ed Krauland:                  (202) 429-8083
David Lorello:                (202) 429-6757
Danny Sauls:                 (202) 429-8054
Maury Shenk:                44 (0) 20-7367-8092