Tuesday, March 30, 2010

More Comments on DoD's Business Systems Proposal

Today we continue our coverage of the public comments submitted in response to DoD's proposal to withhold payments for contractors whose business systems have been found to be inadequate. Yesterday, we reported on a response submitted by an industry trade group representing many Defense contractors. To read that post, click here. Today we continue the coverage by looking at the comments submitted by the American Bar Association, Section of Public Contract Law.

First, here is what The Section of Public Contract Law writes about itself. The Section consists of attorneys and associated professionals in private practice, industry, and Government service. The Section's governing Council and substantive committees have members representing these three segments, to ensure that all points of view are considered. By presenting a consensus view, the Section seeks to improve the process of public contracting for needed supplies, services, and public works.

In summary, the Section believes that the proposed rule is not tailored to protect the Government from the risk of unallowable and unreasonable costs resulting from contractor business system deficiencies. It believes that the proposed rule is open to legal challenge and is likely to lead to increased litigation and compliance costs. We can't really opine on whether the rule, as proposed, will result in increased litigation, but we certainly share their concern about the cost of compliance. In fact we wrote about that here back in January.

The Section believes that the ten percent withholding system for each deficient business system is punitive. It treats all alleged business system deficiencies the same and fails to recognize that every business system deficiency is unique in terms of the potential risk to the Government. Under the proposed rule, the Government withhold is not reasonably related to the Government's potential harm.

The Section also addressed the numerous other contractual tools available to the Government to protect itself from any actual loss associated with business system deficiencies. FAR already limits payments to amounts determined allowable and can withhold payment until an audit is completed. There is protection built into the process of reviewing and approving provisional billing rates and final indirect expense rates. There are existing requirements with respect to maintaining adequate estimating systems. And, there is the Truth-in-Negotiation Act which acts as both a deterrent and a remedy.

Other points made by the Section include:
  • The proposed rule includes incomplete definitions of acceptable business systems
  • The proposed rule provides inadequate contractor processes for ACO 100 percent withholds based on elevated Government risk and inadequate guidance for ACO's to make 100 percent withhold determinations
  • The proposed rule provides incomplete guidance for ACOs to approve systems when deficiencies previously have been identified
  • The proposed rule should clarify an appeals process
  • Any rule should allow for ACO discretion to apply or not apply a withhold
  • The rule imposes potential burdensome requirements on small and mid-sized contractors.

Tomorrow we will summarize comments submitted by other responders to the proposed rule.

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