More on DoD's Proposed Regulations on Contractor Business Systems

We've written a few times about DoD's proposed rule on contractor business systems (e.g. purchasing, estimating, accounting, etc). We wrote several posts when the first proposal was issued about a year ago, more when the public comments to the proposal were published, and even more when DoD issued a revised proposed rule last December. If you care to read these prior posts, just click on the "Business Systems" topic under the "Labels" section on the right side of this screen). The comment period for the revised rule ended last Tuesday (January 11, 2011) and the public comments are now becoming available. These comments have a recurring theme, that while the revised proposed rules are significantly improved over the initial proposal, there are still many aspects of the rule that remain problematic. The Council of Defense and Space Industry Associations (CODSIA) wrote a very evened and comprehensive response on January 10, 2011. Bottom line, CODSIA identified a number of concerns with the "attributes" of the individual business systems and the withhold process. A lot of these concerns resonate with us and we will discuss a few of them following. If you would like to read the entire CODSIA report, click here.

Timeliness of DCAA followup processes.

There are a lot of well-founded concerns about whether DCAA can be nimble enough to perform follow-up reviews in a timely manner. Certainly, recent evidence suggests that it is not. And, for contractors with withholds waiting for DCAA to audit their corrective actions, cash flow could become a serious issue. CODSIA put it this way:

Over the past months, there have been numerous examples where DCAA’s audit rules and processes conflict with the department’s procurement objectives. Firms that “fail” the current binary adequate/inadequate regime are increasingly unable to get DCAA to conduct the necessary follow-up audits to validate that the company’s fixes have been made. While we appreciate the change made in this second proposed rule that provides authority for the contracting officer to reduce the ongoing withholds after a contractor has submitted a corrective action plan, existing withholds are not released because DCAA is unable to conduct a timely follow-up audit.

There is nothing in the proposed rule that will hold DCAA accountable for performing timely followup reviews. One solution proposed by CODSIA is to allow contractors to go out and get their own independent audits from qualified third-party auditors.

Cost impact related to deficiencies

There is nothing in DCAA guidance or the proposed rule that requires the auditor to estimate the cost impact (or potential impact) of a particular deficiency. The way it will work is when DCAA identifies a deficiency, boom, 10% withhold. That deficiency may or may not have a monetary impact on Government contracts. Neither the original nor revised rule require that DCAA identify evidence of the actual or potential cost impact of the system deficiencies it has identified prior to the imposition of a payment withhold. This leads to concerns that the amount withheld may be grossly disproportionate to the actual impact. CODSIA expressed this concern and recommended that the proposed rule require DCAA audit reports to include an assessment of audit risk and cost impact associated with each reported business system deficiency or to explain why it was not possible to include such an assessment.

Maybe the public outcry over the revised proposed rule will be sufficient for DoD to consider a third iteration before going final. We were once auditors so we fully understand the Government's concern. Too often in the past, valid concerns over the adequacy of one system or another were essentially ignored. There is no incentive for contractors to fix problems nor is there a consequence if they do not. The resolution process bogs down, the issue(s) go stale, Government personnel turn over, everyone losses interest, the system deficiency continues, and the Government is potentially harmed by increased contract costs and prices. The new withhold mechanism in the revised proposed rule provides incentive for contractors to fix issues in a timely manner. The question from a lot of people is whether the Government can keep up.