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Income from Data Produced Under a Government Contract


ktr1999

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Over the years I've heard from a couple of experienced CO's and a Government legal advisor that contractors are prohibited from keeping "program income" generated under a Government contract – even for the purposes of reinvesting it in that contract – because the law requires that such income go back to the Treasury Department. For example, if the Government hires a contractor to provide a service for which users are charged a fee, then the user fees need to be returned to Treasury; they cannot be retained or reinvested in the service. While I have no reason to doubt this, I've never actually seen it in writing.

Situation:

I work for a prime contractor which hired a subcontractor to produce a website under a Government contract. Recently the sub (a small business) informed us that they would like to maintain the website beyond the life of the subcontract, and solicit donations from private sources to cover maintenance costs in the absence of Government support. The website would include some new content, but also some content originally produced under the contract.

Since the subcontract included 52.227-14 RIGHTS IN DATA – GENERAL (JUN 1987), the sub would presumably have the right to "use, release to others, reproduce, distribute, or publish any data first produced or specifically used by [them] in the performance of this contract…," but the Rights in Data clause is silent on the right to charge for such data, or the right to use it for the purpose of soliciting donations. Nor can I find anything about this elsewhere in the FAR.

So my questions are:

1. Given that nonprofit grantees are frequently permitted to retain program income generated by Federally funded projects, what is the legal or regulatory basis for prohibiting contractors from doing the same?

2. If a for-profit subcontractor (under the circumstances described above) is able to raise contributions to maintain a website first produced under a Government contract, is it entitled to keep those contributions and invest them in the website, rather than returning them to the Treasury Department?

3. Does it make any difference whether the funds are solicited before or after the subcontract end date? How about the prime contract end date, which is significantly later?

Any thoughts on this subject would be appreciated.

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Guest Vern Edwards

I work for a prime contractor which hired a subcontractor to produce a website under a Government contract. Recently the sub (a small business) informed us that they would like to maintain the website beyond the life of the subcontract, and solicit donations from private sources to cover maintenance costs in the absence of Government support. The website would include some new content, but also some content originally produced under the contract.

So the website would no longer be associated with the Government contract or program? It would be a privately owned and operated website? Is that right?

You simply want to know if the contractor can use a site developed at Government expense for its own purposes after the contract is completed. Is that right?

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Vern,

The website would be privately owned and operated, but as long as it included content developed under the Government contract it would be required to credit the funding agency, and arguably to use that agency's brandmark as well (agency branding of all communications products is a contract requirement). So in that sense you could say the website would continue to be associated with the Government.

The question is not only whether the sub can continue to use the website to post information -- I don't believe the Government would object to that -- but also whether they can use it to solicit donations from third parties, and then keep the donations.

Hope that clarifies it somewhat.

ktr1999

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Guest Vern Edwards

It's a good clarification, but I do not know the answer to your questions. There is a rule against agency augmentation of appropriations. You will find that discussed in the Government Accountability Office's "Redbook" (Principles of Federal Appropriations Law, Vol II), but I'm not sure that's what you would be doing. I would consult with the government about what must be done with the earnings and get something in writing. I am inclined to think that what you want to do is okay, but I just don't know.

Good luck.

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I believe that, as long as income is deposited to the Treasury under the "Miscellaneous Receipts" (General Fund) , then it is not considered augmentation of an agency's appropriation, because such receipts cannot be drawn out of the Treasury, except by an appropriation of law. (Source: Redbook, Volume II, Chapter 6, under discussion of Dispositions of Moneys Received, Miscellaneous Receipts).

However, that doesnt answer the question...

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Dear Vern and Joel,

Thanks very much to both of you for responding, I appreciate the feedback. Although I still have to puzzle out the answers to these questions, the knowledge that they've stumped two esteemed members of this forum makes me not feel so bad about being stumped myself. :)

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I believe that, as long as income is deposited to the Treasury under the "Miscellaneous Receipts" (General Fund) , then it is not considered augmentation of an agency's appropriation, because such receipts cannot be drawn out of the Treasury, except by an appropriation of law. (Source: Redbook, Volume II, Chapter 6, under discussion of Dispositions of Moneys Received, Miscellaneous Receipts).

However, that doesnt answer the question...

The "miscellaneous receipts" statute (ch. 110, 9 Stat. 398), 31 U.S.C. § 3302( B) states:

"Except as provided in section 3718( B) of this title, an official or agent of the Government receiving money for the Government from any source shall deposit the money in the Treasury as soon as practicable without deduction for any charge or claim." [emphasis added.]

Do you think that in ktr1999's scenario, the company would be "receiving money for the Government"? It seems to me that the solicitation and receipt of funds would be conducted totally outside the scope of any government contract, so any monies received would not be considered "for the Government." But in any case, as Vern suggests, the best course of action is to consult with the government, advise them of your (or your subcontractor's) plans/desires, and see if they have any objection/concern with the planned solicitation and use of the funds.

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The website is government property and needs to be dispositioned. It could be sold, even for a dollar. It could be abandoned in place. Once dispositioned, the private enterprise can use it any (legal) way it wants to.

Now, the next question is, where's the UID tag?

Not entirely serious here, but not entire joking either.

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Do you think that in ktr1999's scenario, the company would be "receiving money for the Government"? It seems to me that the solicitation and receipt of funds would be conducted totally outside the scope of any government contract, so any monies received would not be considered "for the Government."

NC4, I assume that all depends upon what the government's continuing rights to the website and contents are. The prime contract under which it was produced is apparently still on-going, too. I don't know.

If legal and the parties agree on some arrangement, the subcontractor could turn over all a share or all of the monies received. The payment might go through a government office, which would then send it to the Treasury. I'm not familiar with the latest procedures for that, what with new fangled financial management systems, etc. Back "in the day", I received checks from contractors for various damages, made out to the Finance & Accounting Officer, who sent it on to the Treasury.

A couple of years ago, American Airlines destroyed my gov't laptop but would directly reimburse the government. The contract for carrier was with me (my ticket). After threatening to sue them and bluffing them with various claims of federal offenses, they wrote me a check for several thousand dollars to replace the computer, accessories and software. I endorsed it over to the F&A Officer, who (I assume) effected a transfer to the Treasury. I was hoping that the government could use it to buy a replacement for me but they said it had to go straight to the Treasury. I should have just cashed the darned check to buy a replacement, myself. My local Dell computer store was selling the upgraded model that replaced the one I had just gotten new about 5 months before the incident. uggh!

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Thanks to all for your responses. In response to Joel's comment above, the prime and sub contracts both include FAR 52.227-14 RIGHTS IN DATA – GENERAL (JUN 1987), and paragraph (B)(1) of that clause would give the Government essentially unlimited rights in any "data first produced in the performance of this contract," including the website. If the rights are unlimited, it seems logical to assume they would survive the contract -- though as the website evolves to include more privately-produced content, the Government's "continuing rights" become more ambiguous.

I think it's interesting that paragraph (B)(2) of the same clause gives the Contractor the right to "use, release to others, reproduce, distribute, or publish" data first produced under the contract, but never mentions the word "sell." Since selling things is what contractors normally do, this word seems conspicuous by its absence. I wonder whether it was omitted on purpose?

In this case, while the subcontractor is not trying to "sell" the website, they are proposing to use it to generate financial contributions (which in theory would be used only to support the website, but if required to bear their fair share of indirect costs, would still generate some net benefit for the company). It seems odd to me that a contractor would be allowed to keep what amounts to a windfall from an item produced at Government expense, without any benefit accruing to the Government. But stranger things have happened.

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It sounds like the Government contract did not anticipate such a scenario - but that would be the first place to look to make sure it doesn't already give guidance for the situation.

I have had contracts where we anticipated the contractor would take in revenue as a result of the contract work for the government, and we addressed it in the contract by spelling out how the government's price for the contract would be adjusted in relationship to the income the contractor received from other sources as a result of performing the contract.

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ktr1999, You will want to make sure that you don't make the mistake of thinking that only one party (Government or Contractor) can have rights to the data -- both parties can have rights -- even if the Government has unlimited rights to use, disclose, et cetera, the Contractor can also have unlimited rights to use, release to others, et cetera (and YES, to charge a fee or sell for those). The key question is going to be your agency's attention to para. ( d )( 2 ) of the contract clause at FAR 52.227-14 -- did you expressly set forth elsewhere in the contract any limitations on the Contractor's right to use, release to others, et cetera?

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That's interesting, August, that the contractor was allowed to keep the revenue. In the past I've been told that this was prohibited.

In the case I posted about, I can say definitively that the Government contract did not anticipate this scenario.

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I don't have knowledge about data rights type scenarios, but I think the contracts that allow contractors to retain outside income generated by performing the government contract are becoming more common.

The examples I know of are: Court Reporter contracts wherein the contractor is allowed to sell the court transcripts to others; vessel charters for fisheries research in which the vessels can sell the fish caught; shredding contracts where the contractor sells the shredded paper to recycling facilities; and I've heard of "deconstruct" contracts (vs demolition contracts) where the contractor sells materials from the "deconstructed" building.

I've never heard of anything that proved a problem in the contractor accepting revenue, unless the government contract said they could not.

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ktr1999, You will want to make sure that you don't make the mistake of thinking that only one party (Government or Contractor) can have rights to the data -- both parties can have rights -- even if the Government has unlimited rights to use, disclose, et cetera, the Contractor can also have unlimited rights to use, release to others, et cetera (and YES, to charge a fee or sell for those). The key question is going to be your agency's attention to para. ( d )( 2 ) of the contract clause at FAR 52.227-14 -- did you expressly set forth elsewhere in the contract any limitations on the Contractor's right to use, release to others, et cetera?

ji20874: Thanks for pointing this out. There are no relevant limitations in the subcontract, though.

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I don't have knowledge about data rights type scenarios, but I think the contracts that allow contractors to retain outside income generated by performing the government contract are becoming more common.

The examples I know of are: Court Reporter contracts wherein the contractor is allowed to sell the court transcripts to others; vessel charters for fisheries research in which the vessels can sell the fish caught; shredding contracts where the contractor sells the shredded paper to recycling facilities; and I've heard of "deconstruct" contracts (vs demolition contracts) where the contractor sells materials from the "deconstructed" building.

I've never heard of anything that proved a problem in the contractor accepting revenue, unless the government contract said they could not.

Interesting! I guess the types of arrangements you describe could be a creative way of reducing the cost to the Government, if the contract price is negotiated downward in exchange for the chance to generate outside revenue. I wonder if the policy on this subject varies by agency?

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August,

It just occurred to me that perhaps the examples you gave fall under FAR 16.303:

16.303 Cost-sharing contracts.

( a ) Description. A cost-sharing contract is a cost-reimbursement contract in which the contractor receives no fee and is reimbursed only for an agreed-upon portion of its allowable costs.

( b ) Application. A cost-sharing contract may be used when the contractor agrees to absorb a portion of the costs, in the expectation of substantial compensating benefits.

( c ) Limitations. See 16.301-3.

If this is the case, then I guess the key factor would be whether the cost-absorption-in-exchange-for-benefits swap was negotiated into the contract from the beginning. (In our case, it wasn't.) Interesting angle, though -- will keep it in mind for future reference. Thanks for your feedback!

ktr1999

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The ones I've been involved in have not been cost-reimbursable, or cost-sharing - but that is another possibility.

We've either:

- set up a fixed price that was established with both parties anticipating there would be revenues the contractor would receive from others - no adjustment to price was made at the end, but the contractor and the government considered the anticipated reveunues in the price determination; or

-we've set an initial fixed price with a formula for how much of the revenue would deducted from the price in the end (we don't usually deduct 100% of the revenue or the contractor isn't motiviated to get as much revenue as possible);

-or the whole price has been a formula involving only the revenue - e.g. 70% to be retained by the contractor, and 30% will be paid to the government (and yes the payment to the government went to the Treasury), and there was no cost to the government.

But in any case, like you suggested, it needs to be spelled out in the contract.

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Guest Vern Edwards

I wonder if the original questions have been lost in all this chatter:

1. Given that nonprofit grantees are frequently permitted to retain program income generated by Federally funded projects, what is the legal or regulatory basis for prohibiting contractors from doing the same?

2. If a for-profit subcontractor (under the circumstances described above) is able to raise contributions to maintain a website first produced under a Government contract, is it entitled to keep those contributions and invest them in the website, rather than returning them to the Treasury Department?

3. Does it make any difference whether the funds are solicited before or after the subcontract end date? How about the prime contract end date, which is significantly later?

Has anybody answered any of those, or even tried? I still don't know the answers. ktr1999, have you given up on those?

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Vern,

On my first question, based on August's posts and on FAR 16.303, it sounds like there's no "blanket" prohibition on contractors retaining program income after all. But I'd still like to know what prohibitions are out there (if any), so I can better understand where they apply and where they don't.

On the other two questions, I've pretty much concluded that my company's best course of action is to recommend that the subcontractor consult with its own legal counsel and leave us out of it. But since the decision's not up to me, I'll probably end up having to deal with this, and I'd certainly welcome further advice if anyone's got any.

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Guest Vern Edwards

ktr1999:

Some thoughts:

1. You have twice mentioned “program income.” I am confused about what “program income” means. In your very first post you said, “program income generated under a Government contract.” Yet in your second post you said that the website through which the income would be generated would be privately owned and operated.

Why do you call the income “program" income? Why do you say it would be generated “under a Government contract”? “Program income" generated "under a Government contract” sounds like income earned as a direct result of work that would be done for the Government and for which the Government would be paying. Yet you say the website would be “privately owned and operated.”

I’m confused. What, exactly, does “privately owned” mean under those circumstances? Are you talking about ownership of the domain name? Who would own it? Your company? The subcontractor? How did they come to own it if it was created for the Government at the Government’s expense.

2. If the income is “program income,” which would be generated “under a Government contract,” then how could you say the “subcontractor” should leave your company out of it? Why wouldn’t your company be liable for any acts or omissions of your subcontractor operating “under” your contract with the Government, even if your sub owns the domain name??

3. You wrote that the website would be “privately owned and operated,” but that as long as it included content developed “under the Government contract” it would “be required” to credit the funding agency, "arguably" to use that agency's "brandmark" and that agency branding must be given to all communications products. You said that those are contract requirements.

If contractual requirements would apply to the operation of the website, which presumably would flow to the subcontractor through your company and which only your company could enforce, since there would be no privity between the Government and your subcontractor, then how is it that the “subcontractor” should leave your company out of it? How is it that the “program income” would be generated “under a Government contract” on a website operated by your “subcontractor” and yet your company would not be responsible for the subcontractor’s actions?

I do not want responses to any of the above, because even if you provided them to me, I don't think that I know enough to answer your questions. But I urge you to think about what I have asked.

My advice: Sign off Wifcon and go see your company’s attorney.

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Vern Edwards said: "My advice: Sign off Wifcon and go see your company's attorney" .

Good advice,

We don't know all the contract requirements or all the facts. As to the language of the clause 52.227-14 RIGHTS IN DATA – GENERAL (JUN 1987), it, by itself, doesn't prohibit the contractor from "using" the information for its own purposes.See 27.403 for policy requiring the contract to describe terms defining the rights of government and contractor.

If the government intends to restrict the rights of the contractor to use something developed under the contract, it should use additional clauses or contract language to do that.

As an example, our design-build construction contracts generally include the DFARS clause 252.227-7022 Government Rights (Unlimited), to allow the government to re-use the designs furnished under the contract. However, if we want exclusive rights to a special design, such as a monument or other unique works, we would use 252.227-7023 Drawings and Other Data to Become Property of Government. Under that clause, the contractor agrees not to assert or authorize others to assert any rights nor establish any claim under the design patent or copyright laws. I believe that we would also use separate language to make it clear that the contractor can't otherwise re-use the design, but I'd have to discuss that with our attornies to see if the clause accomplishes that, by itself.

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