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DoD Finalizes Contractor Business Systems Rule

A Department of Defense interim rule ( 70,016.645), which revised the Defense Federal Acquisition Regulation Supplement to improve the effectiveness of DoD oversight of contractor business systems, has been finalized with changes. The interim rule, DFARS Case 2009-D038, followed two proposed rules ( 70,020.283 and 70,020.260) and the enactment of the Ike Skelton National Defense Authorization Act for Fiscal Year 2011 (PL 111-383). Section 893 of the Authorization Act, Contractor Business Systems, sets forth statutory requirements for the improvement of contractor business systems to ensure the systems provide timely, reliable information for the management of DoD programs. Contractor business systems are defined as systems for accounting, estimating, purchasing, earned value management, material management and accounting, and property management. According to DoD, contractor business systems and internal controls are the first line of defense against waste, fraud, and abuse; and weak control systems increase the risk of unallowable and unreasonable costs on government contracts.

Compliance Mechanisms

To improve the effectiveness of Defense Contract Management Agency and Defense Contract Audit Agency oversight of contractor business systems, DoD implemented compliance enforcement mechanisms in the form of the business systems clause, DFARS 252.242-7005, which allows contracting officers to withhold a percentage of payments, under certain conditions, when a contractor's business system contains a significant deficiency. As defined in the clause, a "significant deficiency" means a shortcoming in the contractor's system that materially affects the ability of DoD officials to rely on information produced by the system that is needed for management purposes. Payments can be withheld on interim payments under cost-reimbursement contracts, incentive type contracts, time-and-materials contracts, and labor-hour contracts. The CO can also withhold progress payments and performance-based payments. Pursuant to the clause as revised, the CO will discontinue payment withholding if the CO determines, based on the evidence submitted by the contractor, there is a reasonable expectation the contractor has taken corrective actions that are expected to correct significant deficiencies.

Final Rule Changes

As a result of public comments received in response to the interim rule, DoD has made the following changes:

l DFARS 215.407-5-70 (d) has been removed. The criteria for maintaining an acceptable estimating system have been relocated to the clause at DFARS 252.215-7002, Cost Estimating System Requirements;

l DFARS 232.503-15 has been revised to correct the reference to the system criteria at DFARS 252.242-7004 (d)(7);

l DFARS 242.302 (a)(4) has been deleted and an additional contract administration function to approve or disapprove contractor business systems has been added at DFARS 242.302 (a)(S-74);

l The term "cost" has been replaced by "cost-reimbursement," as appropriate, in DFARS 242.7000 (b)(1) and DFARS 252.242-7005 (e);

l The phrase "and are expected to correct the significant deficiencies" has been added to the end of DFARS 242.7000 (d)(2) for clarity;

l Under DFARS 242.7001, Contract clause, University Associated Research Centers has been added to the list of entities to which the clause at DFARS 252.242-7005 does not apply;

l DFARS 242.7502 (g)(2)(ii) and (iv) have been revised to remove specific examples of alternatives that COs should consider to mitigate the risk of accounting system deficiencies on proposals where the deficiency impacts negotiations;

l The term "cost or pricing data" has been replaced by "certified cost or pricing data," as appropriate, in DFARS 242.7502 (g)(3)(ii), DFARS 244.305-70 (f)(3)(ii), and DFARS 252.215-7002 (c)(1) and (2);

l The words "fixed-price" have been deleted from DFARS 242.7503 (b) for clarity;

l The words "compliance with" have been added at DFARS 252.215-7002 (d)(4)(xii) for clarity;

l The clause at DFARS 252.242-7005, Contractor Business Systems, has been amended to clarify that it applies only to awarded contracts subject to Cost Accounting Standards, because a CO is not likely to know if the resulting contract will be subject to CAS when drafting the solicitation. The clause has also been amended to clarify the language regarding CO determinations made based on the evidence submitted by the contractor, that there is a reasonable expectation that the contractor's corrective actions have been implemented and are expected to correct the significant deficiencies;

l The clause at DFARS 252.242-7006, Accounting System Administration, has been amended to delete the term "periodic monitoring" under paragraph (c)(8) and add additional language to clarify the intent of the system criterion; and

l The clause at DFARS 252.245-7003, Contractor Property Management System Administration, has been amended to delete from paragraph (f) the phrase "leading to a potential risk of harm to the Government."

The regulation table below lists all of the provisions impacted by this rule as well as the interim rule. The final rule is effective February 24, 2012. For the text of the rule, see 70,016.698.




(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )


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