Revised Rule on Contractor Business Systems - Part II

Yesterday we began a discussion on the revised proposed regulation that requires defense contractors to maintain adequate business systems or face Government withholds of their billings. The initial proposal came out in January 2010. Public comment was extensive and largely critical of the proposed action. Based on the 370 comments received, DoD made significant changes to the proposed regulation and has now reissued it for a second round of public comment. Today and for the next few days, we will be discussing some of the major changes in the revised proposal. Although extensive, these changes do nothing to alter the fundamental requirements of the proposed rule.


The underlying presumption behind the proposed regulation is that the Government may be at risk when contractor business systems contain deficiencies. This holds true regardless of contract type. The proposed rule concludes that “…it is appropriate for the ACO to withhold payments to protect the interest of the Government." The only contracts exempt from this rule are those awarded under FAR Part 12 regulations (commercial items). Other than that one exemption, contracts with the “clause” (eventually that will be all of them) will be subject to withhold.

There is some good news on the withhold percentages. A number of respondents expressed concern over the percentages to be withheld. For example, a number of respondents claimed that cumulative withholds of up to 50 percent per contract are unreasonable and therefore inappropriate. A few also thought that a maximum dollar amount to be withheld should be established.

As a result of these comments, DoD revised the proposed rule to reduce the amount that can be withheld for business system deficiencies from ten percent to five percent (two percent for small businesses). If and when he contractor submits an acceptable corrective action plan, the contracting officer will reduce the withholding to two percent (one percent for small business). The contracting officer will authorize the contractor to bill for amounts previously withheld when the contracting officer determines all deficiencies have been corrected.

Additionally, DoD revised the rule to reduce the cumulative percentage of payments that can be withheld on one or more business systems from 50 to 20 percent (10 percent for small businesses). This limitation refers to the amount that can be withheld on any payment if deficiencies exist in one or more business systems.

DoD did not move on its refusal to establish a maximum dollar amount that could be withheld, calling that idea “inappropriate”.

We will continue our coverage of the contractor business system proposal tomorrow.