A business or organization seeking to work with the United States government must understand the definition of a federal contractor. This status is not merely a label but a trigger for a comprehensive set of legal and regulatory obligations that govern a company’s operations. Understanding this definition is paramount for any entity, as it directly dictates the compliance requirements necessary to participate in federal procurement. The distinction is legally significant because a federal contractor is subject to oversight by agencies like the Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) regarding labor standards, non-discrimination, and affirmative action practices.
Defining the Federal Contractor Status
A federal contractor is defined as a business or organization that enters into a direct contractual relationship with an executive agency of the federal government. The purpose of this formal agreement is for the government to obtain specific supplies or services for its direct use or benefit. This procurement contract is awarded through a process where the government acts as the buyer and the contractor acts as the seller.
The existence of this direct contract is the sole determinant of status, regardless of the entity’s size, profit status, or industry. A company becomes a “prime” federal contractor the moment it signs a legally binding agreement to furnish property or services to the government. This designation subjects the company to the Federal Acquisition Regulation (FAR) and other agency-specific regulations governing how the work must be performed and managed.
How Subcontractors Become Federal Contractors
Federal contractor status extends indirectly to businesses that support a prime contractor’s work, known as subcontractors. Subcontractors acquire compliance obligations through a mechanism called a “flow-down clause.” This clause is a provision in the prime contract requiring the prime contractor to include government-mandated terms and conditions in agreements with lower-tier suppliers.
These clauses legally transfer specific compliance mandates, such as those related to labor standards and affirmative action, from the government to the prime contractor and down to the subcontractor. The prime contractor must ensure all mandatory clauses are incorporated into the subcontract, legally binding the subcontractor to the federal regulatory framework. This extension can apply to subcontractors at multiple tiers, meaning a second- or third-tier supplier may also be considered a federal contractor if the appropriate clauses are flowed down.
The Essential Trigger: Contractual Thresholds and Coverage
While holding a contract confers the status of a federal contractor, specific legal burdens are determined by the contract’s monetary value, known as the contractual threshold. A business may be a contractor but not be subject to every compliance requirement unless the contract meets a certain dollar amount. For example, non-discrimination requirements generally apply to most contracts over a minimal threshold, often $10,000.
The requirement to develop and maintain a formal, written Affirmative Action Plan (AAP) is triggered by higher, separate thresholds. For instance, affirmative action requirements regarding individuals with disabilities under Section 503 of the Rehabilitation Act apply to contracts of $15,000 or more. The written AAP requirement typically applies at $50,000 or more for contractors with 50 or more employees. Similarly, the Vietnam Era Veterans’ Readjustment Assistance Act (VEVRAA) sets its AAP threshold at $150,000 or more for contractors with 50 or more employees. This illustrates how compliance is segmented based on contract value.
Critical Distinction Between Contracts and Grants
The difference between a federal contract and a federal grant is a common area of confusion, as they carry fundamentally different legal implications for contractor status. A federal contract is a procurement instrument where the government’s primary purpose is to acquire property or services for its direct benefit or use. The relationship is one of buyer and seller, with the government expecting a specific deliverable in exchange for payment, making the performing entity a federal contractor.
Conversely, a federal grant or cooperative agreement is a financial assistance instrument intended to transfer value to the recipient to support a public purpose. The government is financially assisting the recipient to stimulate an activity that benefits the public, such as research or community development. Because grants do not involve the government’s procurement of a service for its direct benefit, they generally do not confer federal contractor status under primary compliance regulations like those enforced by the OFCCP.
Common Types of Exemptions and Exclusions
Several circumstances and entity types are exempt from the definition of a federal contractor or from specific compliance requirements. Contracts below the micro-purchase threshold (currently $10,000) are typically exempt from many regulatory burdens. Additionally, contracts for work performed exclusively outside the territorial United States are often excluded from many labor and non-discrimination requirements.
Certain entities are also treated differently, such as state and local governments, institutions of higher education, and federally recognized Indian tribes, which may have limited compliance obligations. Specific regulatory exemptions can apply to contracts for commercial items, although these exemptions are often narrowly defined. These are generally exemptions from specific compliance rules, such as the requirement to use the E-Verify system or develop an AAP, rather than an exemption from the status of being a federal contractor entirely.