Monday, December 27, 2010

Withholding or Withdrawing Purchasing System Approval

Last week, we discussed one of many important reasons for maintaining adequate purchasing systems – an approved system will facilitate the awarding of subcontracts. And a few weeks ago, we discussed the proposed DoD regulations that will require contracting officers to withhold billings whenever inadequacies are disclosed in certain internal control systems, including the purchasing system. Contractor purchasing systems are a big deal for the Government. An adequate purchasing system is one of the first lines of defense in ensuring the reasonableness of materials, purchased parts, and subcontracted items charged to Government contracts.

Today we want to address the process used by DoD to monitor and resolve purchasing system deficiencies. The process described is not dissimilar to that used by other agencies, however the DoD has taken the effort to formalize it in Part 244 of the DFARS (DoD FAR Supplement).

The ACO shall maintain a sufficient level of surveillance to ensure that the contractor is effectively managing its purchasing program. First of all, the administrative contracting officer (ACO) is solely responsible for initiating reviews of the contractor's purchasing systems, but other organizations may request that the ACO initiate such reviews. Those “other organizations” are often times DCAA (Defense Contract Audit Agency) or the PCO (Procuring Contracting Officer) or a PCO representative.

Whenever purchasing system weaknesses are identified, the ACO (or the purchasing system analyst (PSA) with the concurrence of the ACO) may initiate a special review of specific weaknesses. Weaknesses, according to PGI 244.304, may arise because of major changes in the contractor’s purchasing policies, procedures, or key personnel or changes in plant workload or type of work. Weaknesses may be discovered during reviews of subcontracts submitted under advance notification and consent or from information provided by Government personnel.

15, 10, and 10: At the conclusion of these reviews, regulatory timeframes kick in. The ACO is required to hold an exit conference with the contractor to present the review team’s recommendations and request the contractor submit a formal plan for correcting deficiencies or making improvements within 15 days. At this time, the ACO will not comment on the pending decision to grant or withhold approval of the purchasing system.

Once the corrective action plan is received from the contractor, the PSA (or whoever performed the review) has ten days to complete a report to the ACO. The ACO reviews the report and the contractor response before making any decision on granting, withholding, or withdrawing purchasing system approval. The ACO must notify the contractor within ten days of receiving the report.

When a contractor advises that it has corrected deficiencies that led the ACO to withhold or withdraw the purchasing system approval, the ACO will request the PSA to verify that the contractor has indeed corrected the deficiencies and implemented any other recommendations the ACO made. This is important for contractors to know. Contractors must initiate this phase whenever it has completed the corrective actions.


  1. If a purchasing system has yet to be approved, what does the Government call that system? If they call it disapproved, by what basis do they establish such disapproval? If it is called disapproved, isn't that like predisposition of a system? Assuming since no one have reviewed it, it must be or will be (on the first review) called "disapproved"? I hear that if DCMA goes in the first time there is a 90% chance of disapproval. A way to establish workload if you ask me. I've always used the term, "yet to be approved" to avoid the apparent misunderstanding of the government approval process. ;)

  2. If a purchasing system has not been reviewed, contractors do not receive the benefits coming from having an approved system. For example, all subcontracts over the threshold must have "consent" from the Government.

    On the flip side, if a purchasing system has not been reviewed, the Government has no basis to withhold billings due to a deficient system.

    We haven't seen any statistics on disapproval ratios. We sense that it is high but 90% seems too high. If you've ever been through a CPSR (Contractor Purchasing System Review), you know that the Government can find something if it is so inclined. Sometimes we feel that they do not consider risk or materiality.

    We like your term "yet to be approved". Maybe we will borrow that when the situation warrants.