It’s not uncommon for organizations to face issues with contractors who fail to meet expectations, lack the necessary resources, or create compliance headaches. Often, these challenges are traced back to inadequate due diligence during the procurement process.

While ensuring that contracts are awarded only to responsible contractors has always been a cornerstone of federal procurement standards, the 2024 Uniform Guidance brings renewed emphasis on the need for thorough contractor evaluations. Fair labor, anti-trafficking, and cybersecurity practices take center stage as new additions.

In this article, I’ll walk you through contractor diligence requirements under the Uniform Guidance and highlight the three new areas of emphasis. I’ll also cover best practices for ensuring your due diligence process is comprehensive and risk-based, helping you avoid common pitfalls and ensuring compliance with the latest guidance.

What is Contractor Due Diligence?

At its core, contractor due diligence is the process of thoroughly vetting potential contractors to ensure they meet the necessary qualifications, integrity, and resources to fulfill the terms of a contract. Contractor due diligence is particularly important under the Uniform Guidance, as federal funds require higher scrutiny to ensure compliance with public policy, financial stability, and technical capacity.

Conducting due diligence isn’t just about meeting regulatory requirements—it’s a best practice for reducing risk and avoiding problems that can arise from working with unqualified or unethical contractors. It also ensures that your organization is taking a proactive approach to managing third-party relationships and mitigating potential issues before they escalate.

What Do the Regulations Require?

Contractor due diligence has always been an essential requirement under the Uniform Guidance, but the 2024 updates add new emphasis to certain areas of compliance. Let’s break down what was previously required and what’s new in the 2024 standards:

Previously Required

Before the 2024 updates, contractor due diligence already required recipients of federal funds to award contracts only to responsible contractors who demonstrated the ability to perform successfully under the contract’s terms and conditions. You were specifically required to evaluate:

• Contractor Integrity: Assessing whether contractors have a history of ethical behavior and avoiding conflicts of interest.
• Public Policy Compliance: Ensuring that contractors comply with applicable public policies, including environmental, labor, and other regulatory standards.
• Past Performance: Reviewing contractors’ past performance on similar contracts to ensure they have a proven track record of delivering quality results.
• Financial and Technical Resources: Verifying that contractors have the financial stability and technical capacity necessary to fulfill the contract’s requirements, minimizing the risk of non-performance.

New in the 2024 Guidance

The 2024 updates to the Uniform Guidance introduced additional requirements to reduce contractor risk and ensure compliance with federal policy, particularly in areas tied to labor practices, cybersecurity, and anti-trafficking compliance. These new responsibilities include:

• Employee Classification: The 2024 guidance requires diligence to confirm contractors are complying with the Fair Labor Standards Act (FLSA), aimed at preventing worker misclassification and ensuring proper payment of workers when federal funds are used.
• Anti-Trafficking Compliance: Under the new Part 175, organizations must ensure that contractors do not engage in severe forms of trafficking or acts that enable trafficking. This addition underscores a focus on ethical labor practices in federal contracting.
• Cybersecurity Controls: The updated guidance emphasizes cybersecurity controls, a key component of which is controls maintained by third parties who receive confidential information. It’s now essential to verify that any contractor receiving, processing or storing data has the measures in place to protect personally identifiable information (PII) and other sensitive data.

Best Practices for Contractor Due Diligence

Now that you understand the requirements, how do you put contractor due diligence into practice? Here are a few good practices to follow:

• Adopt a Risk-Based Approach: Tailor your due diligence efforts based on the risk level of the contract. Riskier contracts should have more extensive evaluations than lower-risk agreements.
• Document Your Due Diligence Efforts: Keeping a written record of your due diligence process is critical. Ensure that your documentation includes the criteria used for evaluating contractors, evidence of their financial stability, and any cybersecurity assessments you’ve conducted. Proper documentation not only ensures compliance but also provides an auditable trail in case of an issue down the road.
• Create Clear Evaluation and Remediation Processes: Establish a process for evaluating contractors, which includes steps for mitigating or remediating any risks identified during the due diligence phase. This process should be standardized across your organization to ensure consistency and completeness.
• Monitor Contractors Post-Award: Contractor due diligence doesn’t end once the contract is signed. It’s essential to continuously monitor contractor performance and compliance with contract terms, including their cybersecurity and data protection practices.

Final Thoughts

Contractor due diligence is more than a regulatory requirement—it’s a way to protect your organization from risk and ensure that federal funds are spent responsibly. The 2024 updates to the Uniform Guidance make it clear that thorough due diligence is expected for every procurement transaction, particularly regarding cybersecurity, employee classification, and anti-trafficking compliance. By adopting a risk-based approach, documenting your efforts, and setting clear evaluation procedures, you can not only ensure compliance but also safeguard the integrity and success of your contracts.

If you’re unsure where to start, a review of your due diligence process can help identify gaps and address them before they lead to performance or compliance issues. Contact us to learn how we can assist.