Applicability of ISO 14000 Standards to Government Contracts

Laurent Hourcle and Frederick J. Lees

Professor Frederick J. Lees is the E.K. Gubin Professor of Government Contracts Law and Co-Director of the Government Contracts Program at The George Washington University Law School. Laurent Hourcle is Associate Professor of Environmental Law at the Law School. For the past three years they have been co-teaching a seminar on environmental issues in government contracts.

[27 ELR 10071]

The federal government procurement process has long been used as an engine for social change, including in the environmental area.¹ At the present time, it is also driving toward adoption of commercial and private-sector quality and management systems standards in order to integrate the public and private-sector industrial base. With the current downsizing of the federal government, the promotion of dual-use technologies,² the emphasis on acquisition of commercial goods and services, and the recent implementation of performance-based contracting measures, adoption of certain international and commercial standards is both timely and in the best interests of the federal government and its contractors.

The General Services Administration (GSA), the Department of Defense (DOD), and other federal agencies have recently adopted the International Organization for Standardization (ISO) 9000 family of standards, a set of world-wide standards used to document, implement, and demonstrate quality assurance systems, as an alternative to the applicable federal/military standards.³ Such action may well be a precursor to the acceptance of other similar commercial standards, such as ISO 14000. ISO 14000 is a series of voluntary, international environmental-management standards designed to help companies manage, measure, and improve the environmental aspects of their operations.⁴ This Dialogue addresses the mechanisms by which the evolving ISO 14000 management structure might have a role in the modern, more commercially oriented, federal procurement process.

Several advantages accrue to the government and its contractors from adopting appropriate international and commercial standards, such as ISO 9000 and 14000, as contractual provisions, either as an alternative to or in lieu of the federal/military standards and specifications currently in use.⁵ From the government's standpoint, the contracting agency would have the ability to obtain readily demonstrable evidence that it is dealing with a qualified contractor before award of the contract, thus lessening the contracting officer's burden in making the required determination of affirmative responsibility.⁶ Further, the risk of dealing with an unknown or potentially unqualified party is minimized. From the contractor's standpoint, the necessity of maintaining separate quality-control or environmental-management systems for governmental and commercial work would be obviated. The use of a single globally accepted system in a contractor's facility would clearly enhance its ability to compete in the world-wide marketplace. The use of such recognized standards would also serve to increase the common level of understanding between the contractor and the government agency as to contractual requirements, and would lessen the opportunities for misunderstandings and disputes.

Another potentially significant advantage to using ISO 14000 as a benchmark standard in government contracts arises out of the General Agreement on Tariffs and Trade (GATT).⁷ Just as domestic regulatory environmental limitations can become caught in the complicated challenges regarding whether they are impermissible nontariff barriers to trade under GATT, there are similar concerns with respect to procurement by GATT member governments. GATT, however, provides a general exception to its proscriptions when a "requirement" is based on an international treaty or a recognized international standard. The [27 ELR 10072] developing ISO 14000 standard should likely meet that test, and thus, would be insulated frompotential protests under GATT if made a requirement in government acquisition.⁸

The perceived barriers to introducing the ISO 14000 and similar standards into the government-procurement process include the traditional proscription on an agency's use of overly restrictive specifications in the solicitation/contract that exceed the "minimum needs" of the government and lessen the field of competition. Another barrier is the related problem of justifying a "special standard of responsibility" based on ISO certification that would prequalify or narrow the field of competition. In addition, the recently enacted Federal Acquisition Reform Act (FARA)⁹ largely eliminates current nonstatutory-based certification requirements and restricts future certification requirements. These steps are seemingly at odds with incorporating ISO 14000 certification into the federal procurement process. Finally, the administrative process involved in promulgating a uniform, governmentwide regulation providing for use of international or commercial standards is substantial.¹⁰ These barriers could be at least partially overcome by making ISO 14000 certification an evaluation factor, a contract requirement, a means by which a debarred or suspended contractor can have its ability to contract with the government restored, or a criterion for determining a contractor's profit in award-fee contracts.

ISO 14000 as an "Evaluation Factor" in Contract Award

There are many forms of government contracts, from "off the shelf" buys of simple commercial products (e.g., toilet paper, pencils, and paper clips)¹¹ to more complex competitive proposal procurements where there can be a less precise definition of goods or services being procured (e.g., build a replacement system for the space shuttle or make a proposal on how a vendor might build and operate lodging facilities in the National Park System). In this latter category, contractors' proposals (bids) may be evaluated based on factors other than price, and granting an award normally involves negotiations with several offerors. Among the more sophisticated source-selection methodologies currently popular is the "best value" technique, in which offerors' proposals are evaluated based on predefined and publicly announced evaluation factors that are traded off against the offeror's price proposal. ISO 14000 compliance could be included as one of these evaluation factors or sub-factors. In other words, a contractor would not be required to be ISO 14000 compliant, but being ISO 14000 compliant could lead to a higher technical rating and tip the scales in a vendor's favor to win the contract.

Generally speaking, agencies have been afforded a great deal more latitude in developing the critical factors to be weighed in a best-value procurement than in setting firm, specific, "must have" contractor prequalification requirements. Best-value selection procedures require much more agency effort; however, such procedures and their variants are increasingly used in major contracts when environmental implications are significant. ISO 14000 could be incorporated in two ways: (1) ISO 14000 certification might be used as the decisive factor or companies with certification could be rated higher in the evaluative process when cost and other factors are rated approximately equal; or (2) points in the evaluative process could be assigned to "environmental management systems," wherein ISO 14000 compliance would be prima facie evidence garnering a maximum score, while non ISO 14000 companies would have to justify their entitlement to environmental management scores.

Using a concept correlative to the second alternative, many major contracts require a "pre-award" survey. In the survey, agency representatives visit one or more contractors being considered for a possible award to perform an on-site evaluation of the offeror's claimed capabilities and competencies. These surveys are also intended to verify a vendor's qualifications and capacity to perform the contract. Pre-award survey checklists are normally prepared. ISO 14000 compliance or the equivalent could be made part of these checklists to support the necessary capability or responsibility determinations for award.

A recent bid protest case that in part involved the analogous ISO 9000 standards is illustrative as to how using ISO [27 ELR 10073] 14000 as a contractual requirement or evaluation factor might work in practice. Krueger International, Inc.¹² involved a bid protest over an award of a Federal Prison Industries (UNICOR) contract. Kreuger, the disappointed bidder, complained that the awardee's bid failed in several respects to comply with the requirements of UNICOR's solicitation, including ISO 9001 certification. The Comptroller General allowed UNICOR to reopen discussions to allow supplementation of technical information, including that regarding ISO 9001 certification, but did not allow a revision of the competitor's cost proposals. Significantly, it was the awardee's compliance with the solicitation's ISO 9001's requirements that was at issue in the case, rather than the use of ISO 9001 certification as an evaluation factor or contract requirement.

ISO 14000 as a Contract Requirement

The general rule in government procurement is that agencies should only contract to meet their "minimum needs."¹³ Therefore, for the government to include ISO 14000 certification as a specific requirement or "special standard of responsibility"¹⁴ for a particular acquisition, it must be necessary either to assure satisfaction of an agency "need,"¹⁵ or be grounded in law. For this discussion, a "requirement" is defined as either a necessary precondition that an offeror must meet to demonstrate his or her ability to perform the contract (a determination that the contracting officer must make before awarding the contract) or a performance requirement specifying either the manner in which the work is to be accomplished or defining the end product.

To demonstrate a "need," the agency must be able to articulate a benefit it will receive by virtue of the certification (e.g., that the contractor can more assuredly meet tight delivery schedules that are important to the agency's mission) or that the agency is less likely to incur liability due to the contractor's failure to perform properly. Adding additional prequalification "requirements" in agency solicitations, however, would have the effect of limiting eligible vendors, and therefore competition,¹⁶ and is not in keeping with the current thrust to eliminate procurement requirements that do not focus on the end product or service being procured. Such criteria or requirements have never been encouraged by government agency contract specialists and may lead to bid protests by excluded potential vendors which can delay or prevent contract award.

This is not to say that limiting standards can never be put in force. It is significant that the GSA has recently revised its procurement regulations to allow contractors to use ISO 9001 and 9002 quality standards under stated conditions as acceptable alternatives to inspection systems complying with Federal Standard 368.¹⁷ Furthermore, the decision to impose a contract requirement such as ISO 14000 certification will more likely be sustained if ISO certification becomes sufficiently widespread so that a large panoply of vendors can compete for the contract. The current concept, in the absence of a third-party registrar, is to allow self-certification of ISO 14000. This should help make it more attractive to small and mid-size companies to compete as ISO 14000 compliant vendors. As a policy matter, contract requirements that can only be met by large companies so as to limit competition to those companies are politically unpalatable. The more the requirement of ISO 14000 certification limits the pool of eligible vendors, the more the agency will be pressed to justify its "need" for the requirement in a contract protest or other forum.

Agency contract specifications regarding environmental requirements (e.g., products must contain a minimum recycled content or be free of ozone depleting chemicals) have been upheld in contract protest decisions.¹⁸ Such requirements are more easily (and likely) to be upheld by the General Accounting Office, an agency's board of contract appeals, or the courts when there is adequate competition among qualified vendors for a contract.¹⁹ They are less likely to be upheld when such restrictions seem to be a subterfuge for contracting with a specific contractor, or a limited number of contractors, so as to bypass the arduous Federal Acquisition Regulation requirements for limiting competition.²⁰

Many of the government's larger or more complex procurements are "negotiated," rather than sealed bid.²¹ For [27 ELR 10074] these contracts, FARA § 4103²² includes a provision that may provide some assistance in incorporating ISO 14000 certification as a contract requirement. This provision gives agencies flexibility in procurements involving competitive negotiations to limit the number of proposals in the "competitive range" to the greatest number that would permit efficient competition among the most highly rated competitors. Specific language included in an earlier version of the Act would have equated an adequate competitive range to three qualified offerors; however, this provision was eliminated in the final version. Three otherwise qualified proposals might nonetheless still satisfy the requirement for adequate competition under FARA's test.²³

If the government proceeded prudently with advance notice that ISO 14000 certification is to become a requirement for government contracting, it can be expected that a sizeable percentage of the vendor community would pursue certification in order to become eligible for government contracts. Therefore, if there was a sufficient number of ISO 14000 certified contractors to form the competitive range for "efficient competition" in a procurement, an award should be able to withstand a protest.

In another recent development under FARA, § 4301 would eliminate most currently required pre-award non-statutory contractor certifications and limit imposition of new certifications. Pre-award certification provisions have been contentious in the contracting community because they discourage otherwise qualified firms from bidding and they frequently do not relate to what is being procured or to the inherent structure of the procurement process itself. The new FARA provision will likely make it more difficult for a government agency to require that companies certify ISO 14000 compliance before contract award. It is not possible, however, to judge the effect of this new certification-limiting provision before its implementation in regulatory form. It may be the simple difference of a contractual requirement to perform the contract in a manner compliant with ISO 14000 as a "performance specification,"²⁴ as opposed to a pre-award certification of ISO 14000 compliance, in a procurement where a special standard or definitive criterion of responsibility is not otherwise justified based on minimum agency needs.

ISO 14000 as a Remedial Factor

There are several programs under which government contractors are denied the ability to win government contracts until they correct misdeeds. These programs include the traditional government contract methods of debarment and suspension²⁵ and the "listing" programs under the Clean Air Act (CAA) and the Federal Water Pollution Control Act (FWPCA).²⁶ Debarment and suspension deal with a contractor's business integrity. Suspensions normally accompany a contractor's indictment or are based on adequate evidence on charges related to a business integrity issue. Under suspension, a federal contractor is precluded from being awarded federal contracts until allegations warranting trial are resolved. Under debarment, evidence of a contractor's lack of business integrity based on conviction, civil judgment, or other factual information can preclude a contractor from being awarded government contracts for a fixed period of time, normally three to five years.

Listing also precludes the award of government contracts for an extended period of time. Listing is normally based on specific violations of the CAA or the FWPCA. These statutes require U.S. Environmental Protection Agency (EPA) officials to list facilities or sites that are related to violations under the two Acts, and thereby deny contractors the ability to contract with the federal government. Contractors' sites are not removed from the list until EPA is satisfied that the causal factors leading to the violations have been remedied.²⁷

In both the debarment and suspension and listing programs, contractors may have their ability to contract with the government restored when the contractor demonstrates that it has cured its problems or improper activities. Normally, a contractor facing debarment negotiates with the contracting agency and attempts to prove that it has taken steps to cure its problems. In some cases, companies will proactively seek out agency suspension and debarment officials to explain their problematic circumstances and the curative actions they have implemented to avoid the imposition of suspension and debarment sanctions in the first instance. The curative measures have historically taken the form of firing errant employees, establishing training programs, installing conflict-of-interest programs and other programs related to procurement integrity, reimbursing the government for the costs of any civil or criminal liability, including administrative and investigatory costs.

Similarly, adherence with ISO 14000 standards could be adopted as the standard cure to restore a contractor's ability to obtain federal contracts when there are environmentally related activities or deficiencies involved. In other words, while there would be no requirement to be ISO 14000 certified up front in contracts, companies would be required to become so if they run into environmental problems that call into question their "business integrity" to do the government's work.

Affirmatively Rewarding Contractors

In the arena of environmental contracting, particularly involving federal-facility cleanup, the "award fee" contract has become popular. Under an award-fee formula, the agency determines the contractor's profit based on predetermined criteria in areas such as quality, timeliness, technical [27 ELR 10075] ingenuity, and cost-effective management.²⁸ ISO 14000 could be included as an award-fee criterion. Under such a scenario, a contractor that successfully maintained ISO 14000 management controls during the period of the contract would receive a greater profit.

False Claims, False Representations

To the extent a contractor falsely claims ISO 14000 compliance to win an award or maintain a contract, it can be punished under the law. A false representation that underpins a claim for reimbursement or other monetary reward could be a violation of the False Claims Act.²⁹ If no claim is involved, but there is a material misrepresentation, there may still be a violation of the False Statements Act.³⁰ So too may one transaction lead to violations under both Acts. For example, a contractor in a cost reimbursable contract that falsely claimed compliance costs related to ISO 14000 certification or falsely claimed ISO 14000 certification under an award-fee formula could be committing violations warranting both criminal and civil penalties.

Conclusion

While the world of government contract law looks stringent and foreboding to outsiders, it really has inherent flexibility to ensure that the government buys prudently. To the extent that recognition of ISO 14000 certification reflects prudent buying, it can be incorporated into government procurement without change to law or regulation in a wide range of ways, from making it an evaluation factor to an award-fee criterion. Incorporating 14000 into the federal procurement process further integrates the private and public sector, and would serve both the federal government and its contractors well.

1. Part 23 of the Federal Acquisition Regulation (FAR) prescribes acquisition policies and procedures for "improving the quality of the environment through pollution control, energy conservation, identification of hazardous material, and use of recovered materials." 48 C.F.R. pt. 23 (1995).

2. See, e.g., 10 U.S.C. § 2372(g)(6) (encouraging contractors to engage in the development and promotion of dual-use technologies); id. § 2511 (establishing partnerships with the Department of Defense in order to "encourage and provide for research, development, and application of dual-use technologies"). Dual-use technologies are those technologies that have both military and commercial or private application.

3. See, e.g., 48 C.F.R. § 552.246-70 (1995) (the GSA contract clause allowing substitution); 60 Fed. Reg. 46114 (Sept. 5, 1995) (announcing a proposed DOD and National Aeronautics and Space Administration (NASA) initiative to transition to common quality processes, such as ISO 9000, at contractors' facilities).

4. See Christopher L. Bell, ISO 14001: Application of International Environmental Management Systems Standards in the United States, 25 ELR 10678 (Dec. 1995).

5. See, e.g., Federal Standard 368:MIL-Q-9358A (quality program requirements); Federal Standard MIL-I-45208A (inspection system requirements).

6. Each government procurement is overseen by a "warranted" contracting officer who is required to determine that the proposed contract recipient is a "responsible contractor" before making award. See, e.g., FAR § 9.103, 48 C.F.R. § 9.103 (1995).

7. GATT, opened for signature Oct. 30, 1947, 55 U.N.T.S. 187.

8. Obviously there is much confusion about international trade and the environment, with the World Trade Organization only now beginning to issue rulings in this area. How this may work out in fact will remain to be seen. Nonetheless, it does seem apparent that an internationally based environmental-management protocol would be less offensive to the principles of international trade than a U.S. government solicitation that prescribes a U.S. national approach that might limit competition among foreign sources.

9. 110 Stat. 642, Division D of the National Defense Authorization Act of 1996, Pub. L. 104-106, 110 Stat. 186.

10. From 1987-88, one of the authors was among a group of U.S. Air Force personnel who thought it would be useful to have an "environmental cost principle" that would specifically address when contractors' costs of environmental cleanup would and would not be reimbursed as a cost of doing business under government contracts. The Air Force made a proposal to start developing such a principle, and for the next two years or so, several drafting efforts were undertaken. A proposal was made to the Defense Acquisition Regulation (DAR) Council, but the NASA representative forced it to be tabled. Subsequently, the NASA representative changed and the environmental cost principle was rejuvenated. A draft then leaked to the press that would have all but eliminated any contractor recovery for cleanup costs under government contracts. A DOD official unaware of the thrust of the version until that point pulled it back and ordered another drafting effort. This time it was undertaken along with representatives of the Civilian Acquisition Council (CAC). A joint DAR/CAC draft working group agreed on a version that was on its way to approval by both the DAR Council and the CAC, which were necessary preliminary steps to full approval by the FAR Council, so that it could be issued as a proposed rule. Its progress was halted, however, when a moratorium on new regulations went into effect at the end of the Bush Administration only to be extended by the Clinton Administration and then caught up in reinventing government. Almost 10 years later there is still no specific FAR guidance on when contractor cleanup costs may and may not be reimbursed.

11. This area is also changing as more items come under the rubric of "commercial products." Federal acquisition rules under the Federal Acquisition Streamlining Act now allow agencies greater flexibility to buy commercial or "off the shelf" products. Federal Acquisition Streamlining Act of 1994, 41 U.S.C. § 251. This should give agencies more flexibility to informally favor items produced by ISO 14000 compliant companies as a policy matter. From the authors' experience, however, price is still a critical factor in government purchasing decisions and agency contracting personnel, left to their normal tendencies would likely not purchase ISO 14000 produced commercial products if it resulted in more than a very minimal price increase. For example, agency budget and procurement interests have historically defeated the U.S. Environmental Protection Agency's efforts to insert a cost preference in recovered material procurement guidelines for categories of items under the Resource Conservation and Recovery Act.

12. Comp. Gen. Dec. B-260953.4, 96-1 CPD Par. 235 (1995), 1995 WL 861604. See also Telos Field Eng'g, Comp. Gen. Dec. B-253492.6, 94-2 CPD Par. 240 (1994) (reference to the ISO 9001 standard was used as a subfactor under the Total Quality Program evaluation criterion).

13. See FAR § 11.002(a)(1)(ii), 48 C.F.R. § 11.002(a)(1)(ii) (1995).

14. See FAR § 9.104-2(a), 48 C.F.R. § 9.104-2(a) (1995).

15. One corollary principle to full and open competition, see infra note 16, is that the government should only contract for what it fundamentally needs, under the theory that ancillary "bells and whistles" on a product or service limit the number of contractors who can compete and perform on the contract.

16. A root principle in government contracts is that there should be "full and open competition," meaning that the process is improved when the greatest number of vendors may compete for a contract. See, e.g., 10 U.S.C. § 2304 and 41 U.S.C. § 253 (requiring full and open competition in the federal procurement process); 41 U.S.C. §§ 414, 418 (creating the Office of Federal Procurement Policy and agency competition advocates, respectively, so as to further the goals of competition for government contracts).

17. See 48 C.F.R. § 552.246-70 (1995). Federal Standard 368 has traditionally been the standard that contractors' quality assurance programs must comply with.

18. See American Management Enters., Inc., Comp. Gen. Dec. B-238134, 90-1 CPD Par. 234 (1990) (upholding Government Printing Office paper solicitation requiring a minimum 50 percent recovered materials content); Trilectron Indus., Comp. Gen. Dec. B-248475, 92-2 CPD Par. 130 (1992), (upholding an Air Force specification requiring a more expensive zero ozone-depleting chemical (ODC), notwithstanding that the cheaper R-22 (a class II ODC) was permissible for use until Jan. 1, 2015).

19. American Management Enters., Inc., Comp. Gen. Dec. B-238134 at 3 ("We point out in this regard that competition was not unduly restricted as evidenced by the fact that a total of 12 firms submitted bids.").

20. See FAR § 6.302, 48 C.F.R. § 6.302 (1995); Bardex Corp., Comp. Gen. Dec. B-252208, 93-1 CPD Par. 4601 (1993) (holding that specification that was arguably limited so as to avoid environmental risk of hydraulic oil leak exceeded agency's minimum needs).

21. Sealed-bid procurements are more frequently used but represent a comparatively small dollar volume of government contracts. In sealed-bid procurement an "invitation for bid" is issued that specifically describes the goods or services sought by the government. Bids are received and an award is made to the "responsible contractor" based only on price and price-related factors. In negotiated procurements, vendors are invited to submit proposals and the government will typically engage in negotiations to pick its preferred vendor. There are restraints on the nature and extent of these negotiations under government contract law.

22. See supra note 9.

23. See, e.g., Proposed FAR Rule Would Allow Contracting Officers to Limit Size of Competitive Range, 66 Fed. Cont. Rep. (BNA) No. 6, at 115 (Aug. 5, 1996).

24. See 48 C.F.R. § 552.246-70 (1995).

25. See FAR subpt. 9.4, 48 C.F.R. subpt. 9.4 (1995).

26. 33 U.S.C. § 1368, ELR STAT. FWPCA § 508; 42 U.S.C. § 7606, ELR STAT. CAA § 306. See generally 40 C.F.R. § 32.105 (1995); FAR subpt. 23.1, 48 C.F.R. subpt. 23.1 (1995); W. Jay DeVecchio & Devon Engle, EPA Suspension, Debarment, and Listing: What EPA Contractors Can Learn From the Defense Industry (and Vice Versa), 22 PUB. CONT. L.J. 55 (1992).

27. EPA has attempted to address the more subjective aspects of a contractor's "worthiness" to again do business with the U.S. government in its guidance, EPA POLICY REGARDING THE ROLE OF CORPORATE ATTITUDE, POLICIES, PRACTICES, AND PROCEDURES, IN DETERMINING WHETHER TO REMOVE A FACILITY FROM THE EPA LIST OF VIOLATING FACILITIES FOLLOWING A CRIMINAL CONVICTION, 56 Fed. Reg. 64785 (Dec. 12, 1991), ELR ADMIN. MAT. I 35411.

28. See, e.g., FAR § 16.404-2, 48 C.F.R. § 16.404-2 (1995) (discussing cost plus award-fee contracts). In addition, other agencies have FAR supplements that have other uses and formulas for award fees. See 48 C.F.R. § 970.1509-1 (1995) (the Department of Energy's fee policy).

29. False Claims Act, 31 U.S.C. § 3729 (civil); False Claims Act, 18 U.S.C. § 287 (criminal).

30. 18 U.S.C. § 1001. This is broader than the False Claims Act as no "claim" need be presented. It has been held to include written and oral statements, sworn or unsworn subject to a test of materiality. RALPH C. NASH JR. & STEVEN L. SCHOONER, THE GOVERNMENT CONTRACTS REFERENCE BOOK (1992).