Business Systems Rules - Summary of Changes

Last week we reported that DoD had issued an interim rule in its FAR Supplement designed to improve the effectiveness of DoD oversight of contractor business systems (i.e. withhold contract funds until contractors fix their systems). We've watch these rules evolve through two iterations of proposed rules very closely and so did a lot of people judging by the extraordinary number of responses submitted to DoD. Comments certainly matter because there were many changes between the first and second proposed rules and the second and this interim rule. There is also a comment period for the interim rule that runs through July 18, 2011.

You can read our previous coverage on business systems by using the search box to your right. Just search on the term "business systems". 

Within the results you will find the criteria of what constitutes an adequate system for each of the six business systems covered by this interim rule; accounting, estimating, purchasing, EVMS, MMAS, and property management.

Following is a summary of the rule changes from the previous draft. 

1. The term ``significant deficiency'' is defined as a shortcoming in the system that materially affects the ability of officials of the Department of Defense to rely upon information produced by the system that is needed for management purposes.

2. While the proposed rule allowed for the implementation of payment withholdings with or without disapproval of system deficiencies that adversely affect the contractor's business systems, this interim rule sets forth requirements that a contracting officer's final determination shall include a disapproval of the contractor's business system and the implementation of payment withholdings if a significant deficiency still exists after the contracting officer's evaluation of the contractor's response to the initial significant deficiency determination.

3. Where the proposed rule allowed for system approval after the contracting officer determines that the contractor has substantially corrected the system deficiencies removing the potential risk of harm to the Government, this interim rule requires that there are no remaining significant deficiencies before a system is approved.

4. The contracting officer will be required to reduce a payment withholding by at least 50 percent if the contracting officer has not made a determination whether the contractor has corrected all significant deficiencies as directed by the contracting officer's final determination, or has not made a determination whether there is a reasonable expectation that the corrective actions have been implemented.

5. The 16-month timeframe for completion of a contractor's initial Earned Value Management System validation has been revised to allow for a timeframe that is approved by the contracting officer to allow for flexibility in the initial validation process.

6. The term ``covered contract'' has been defined as a contract that is subject to the Cost Accounting Standards under 41 U.S.C. chapter 15, as implemented in regulations found at 48 CFR

       (a) The clause prescription for the clause at 252.242-7005, Contractor Business Systems, requires that the resulting contract will be a ``covered contract,'' which exempts small business contracts. Consequently, all language pertaining to payment withholdings for small business has been struck from the rule.

       (b) While the proposed rule set forth a $50 million contract threshold for the incorporation of the clause at 252.242-7005, Contractor Business Systems, this interim rule prescribes the incorporation of the clause for covered contracts in accordance with the established definition.

7. The proposed rule applied payment withholdings against all contracts that contained the clause at 252.242-7005, Contractor Business Systems. This interim rule allows the contracting officer the discretion to withhold payments from one or more contracts containing the clause.

8. This rule revises procedures for the implementation of payment withholdings by replacing the requirement for contracting officers to issue unilateral modifications with the requirement to issue written notifications. Therefore, references to unilateral modifications for payment withholding as well as the sample language for the unilateral modifications have been deleted from this rule.

9. The clause prescription at 242.7002 for the clause at 252.242-7005, Contractor Business Systems, is revised to exempt contracts with educational institutions or Federally Funded Research and Development Centers (FFRDCs) operated by educational institutions.

10. The references to construction contracts that include the clause at FAR 52.232-27, Prompt Payment for Construction Contracts, under 242.7502(a), 242.7503, and 252.242-7005 have been removed as unnecessary.

11. The initial written determination language under 242.7502(d)(2)(ii)(A) has been revised to provide a description of each significant deficiency in sufficient detail to allow the contractor to understand the deficiency.

12. The term ``business system'' is replaced with the term ``contractor business system.''

13. The total percentage of payments that may be withheld on a contract shall not exceed 10 percent. Additionally, while multiple payment withholdings may be implemented due to significant deficiencies in multiple contractor business systems, for clarity, the interim rule limits the total percentage of payments withheld to five percent for one or more significant deficiencies in any single contractor business system.

14. The accounting system criteria under 252.242-7006(a)(1) has been revised to delete the unnecessary phrase ``that is adequate for producing accounting data that is reliable and costs that are recorded, accumulated, and billed on Government contracts in accordance with contract terms.''

15. The purchasing system criteria under paragraph (c) of the clause at 252.244-7001, Contractor Purchasing System Administration, has been revised to add paragraph (24) requiring contractors to establish and maintain procedures to notify the Contracting Officer in writing if--

     (a) The Contractor changes the amount of subcontract effort after award such that it exceeds 70 percent of the total cost of work to be performed under the contract, task order, or delivery order. The notification shall identify the revised cost of the subcontract effort and shall include verification that the Contractor will provide added value; or

     (b) Any subcontractor changes the amount of lower-tier subcontractor effort after award such that it exceeds 70 percent of the total cost of the work to be performed under its subcontract. The notification shall identify the revised cost of the subcontract effort and shall include verification that the subcontractor will provide added value as related to the work to be performed by the lower-tier subcontractor(s).