Update on Proposed DoD Regulations on Contractor Business Systems

On January 15, 2010, DoD published proposed regulations that will require contracting officers to withhold billings when certain contractor business systems are found to be inadequate. The proposal covered six different business systems including:

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

The purpose of the proposed rule is good and noble. It acknowledges that contractor business systems and related internal controls are the first line of defense against waste, fraud, and abuse. Weak control systems increase the risk of unallowable and unreasonable costs getting charged to Government contracts. To many in the contracting community however, there seems to be no consequence for inadequate business systems and poor internal control systems. The proposed rule should, according to DoD, improve the effectiveness of Defense Contract Management Agency (DCMA) and Defense Contract Audit Agency (DCAA) oversight of contractor business systems.

The comment period on the proposed rule ended March 16, 2010. In all, 370 comments were received from 25 respondents. As a result of the comments received, DoD made significant changes to the proposed regulation and has reissued a revised proposed regulation. The comment period for the revised regulation ends January 11, 2011. 

We had a lot of reservations about the proposed regulation and have written extensively about it in this blog. Our main concerns were the subjectivity involved in determining whether a particular business system is adequate or not and the punitive withholding percentages which, if assessed, could adversely affect some contractors by disrupting cash flows. In reviewing the revised proposal, we still have those concerns.

Over the next few days, we will unpack and highlight the major changes in the revised 60 page proposal. To review earlier summaries and commentary on the initial proposal, read the following posts.

The Cost of Compliance is About to Increase
Withholds for Inadequate Business Systems
Inadequate System? How Much will the Government Withhold?
Business System Requirements - Purchasing
Business System Requirements - Accounting
Business System Requirements - Estimating
Business System Requirements - MMAS
Business System Requirements - Earned Value Management
Business System Requirements - Government Property