DoD Proposal on Withholding Billings for Inadequate Contractor Business Systems

Back in late January, we ran a series of posts discussing DoD's proposal to require contracting officers to withhold billings when contractor business systems are found to be inadequate. This proposal affects six different business systems including;

• Accounting
• Estimating
• Purchasing
• EVMS (Earned Value Management System)
• MMAS (Material Managment and Accounting System), and
• Government Property

The new regulations, if enacted, will affect all Defense contractors to varying degrees. As a general rule, the requirements for Accounting, Estimating, and Purchasing will apply to all contractors. EVMS applies to cost-type contracts greater than $20 million but Contracting Officers have discretion in adding the requirement to contracts lower than that. MMAS generally applies to a manufacturing environment. Government propoerty applies if there is Government furnished property under the contract.

The regulations require Contracting Officers to withhold 10 percent of billings for each of the six systems found to be deficient up to a maximum withhold of 50 percent.

There were a dozen or so comments submitted to the FAR councils responding to the proposed rule. Surprisingly, there were not many more comments - given the potential for this rule to significantly impact a contractor's cash flow. Understandably, comments received from Governmental Agencies were generally supportive of the rule while comments received from private companies and industry groups were not. We will spend the next several posts discussing these comments. There are some recurring themes among those opposed to the new rule. These include the lack of a clear definition of what a "deficiency" is, the punative withholding amount, and the existence of current tools that accomplish the same thing.

TechAmerica calls itself the leading voice for the U.S. technology industry, which is the driving force behind productivity growth and jobs creation in the United States and the foundation of the global innovation economy. Representing approximately 1,500 member companies of all sizes from the public and commercial sectors of the economy, it is the industry's largest advocacy organization and is dedicated to helping members' top and bottom lines. TechAmerica was formed by the merger of other industry organizations including AeA, ITAA, GEIA, and the Cyber Security Industry Alliance.

TechAmerica is opposed to the proposed regulation.

TechAmerica believes that "... DoD should focus on improving the effectiveness of DCMA and DCAA in performing their existing responsibilities, rather than imposing an inflexible regulatory regime that will usurp the ACO's role and impose potenetially draconian costs and risks on contractors." TechAmerica further believes " ... the Proposed Rule is unnecessary, overly burdensome, and counterproductive and that the concerns that led to the issuance of the rule - including minimizing the risk of unallowable costs and improving DCMA and DCAA - would be better addressed through other means." TechAmerica made the following points:

• The arbitrary withholds are unrelated to risks to the Government
• Mandatory withholding would threaten contractor solvency (and reduce competition and weaken industrial base)
• Mandatory withholding is unnecessary as the Government already possesses adequate contractual and regulatory mechanisms to address deficiencies in contractor business systems
• Mandatory withholding is not reasonably tailored to address the concerns that DoD intends to address through the proposed rule.

TechAmerica wants DoD to abandon the proposal. But, if for some reason DoD persists, TechAmerica believes the following changes to the proposed rule are necessary:

• Withholding should not be mandatory. ACOs should retain discretion.
• Withholds should be released if ACO does not make a final decision within 30 days.
• DoD should clarigy the definitions of an acceptable system and of a system deficiency
• DoD should clarify other ambiguous aspects of the rule

Tomorrow, we will summarize comments made by the American Bar Association, Section of Public Contract Law.