Differences Between Federal Government Contracts and Contracts Between Commercial/Business Firms
UPDATED: February 20, 2013
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When two commercial firms enter into a contractual relationship, their contract is governed by the Uniform Commercial Code (if applicable) as well as by relevant state common laws that apply to contracts. As long as a contract does not violate public policy and is in accordance with these and other laws (i.e., protecting shareholder interests in public companies), private parties are permitted to make any contractual arrangements they wish. When the federal government enters into a contract, however, there are very different rules that apply and there are a variety of regulatory requirements and statutes that exist that set parameters on the contractual relationship.
Why are Government Contracts Different?
When two private entities create a contract, they are spending their own money or, in some cases, the money of shareholders. Some laws to protect shareholders, including requirements that executives and board members act in the best interests of the company. Private contracts between commercial entities, however, are made based on business decisions influenced by free market principles. Even if the contract turns out to be a bad one and the business or the shareholders lose money on the deal, this loss is a risk they took as part of investing or operating a business.
When the federal government enters into a contract, on the other hand, the money at stake comes from the taxpayer. Unlike investors in a public company, taxpayers don't have the opportunity to decide not to "invest" their tax dollars if they believe the government is making bad contractual choices, nor do they have the opportunity to bring a shareholder lawsuit if they think the government wasted their money or entered into a bad deal.
Without free market forces holding governments accountable for making sure their contracts make sense, something else has to protect the taxpayers investment. Further, when the government acts, they act on behalf of the people and the contracts they enter into are often for the public good (or at least supposed to be for the public good). Laws on government contracts help to make sure, then, that the federal government only enters into contracts that serve their citizens and makes the best use of tax dollars.
How are Government Contracts Different?
Government contracts are subject to a number of different laws that private contracts are not. Just a few examples include the Federal Property and Administrative Services Act of 1949 (governs the acquisition of non-land property and construction companies by civilian government agencies); The Armed Services Procurement Act of 1947 (governs the acquisition of non-land property and construction services by defense agencies); and the Competition in Contracting Act (requires open competition before a contract is awarded except in limited circumstances).
These and other laws impose a variety of requirements. For example, the laws mandate a specific open bidding process, and that anyone contracting with the government must comply with drug free workplace standards, minimum wage standards and affirmative action requirements, among others.
These are just a few examples of the types of additional restrictions placed on government contracts. For more information on the many laws that apply to government contracts and the differences between government and private entity contracts, speak with an experienced attorney who specializes in the field.