Contractor Business Systems - Interim Rule

DoD amended its FAR Supplement yesterday by adding an interim rule to "improve the effectiveness of DoD oversight of contractor business systems". This "improve the effectiveness" language is a euphemism for withholding contract payments if a particular business system does not meet their idea of what an adequate system should look like.

We've been following this rule making process, and have written extensively about it, since the initial proposal was published in January 2010. A second proposal was published last December. This time, its an interim rule with a request for comments meaning that it is effective right now but that the final rule could look a little different based on comments received.

Business systems covered by this new rule include

1. Accounting systems
2. Estimating systems
3. Purchasing systems
4. Earned value management systems (EVMS)
5. Material management and accounting systems (MMAS)
6. Property management (with emphasis on Government property)

Payments could be withheld on most types of contracts including

• Interim payments under
• cost reimbursement contracts
• incentive type contracts
• time and materials contracts
• labor hour contracts
• Progress payments
• Performance-based payments

One of the most significant changes in the interim rule over the previous proposals relates to its applicability. Whereas the interim rules were somewhat vague regarding thresholds for applicability, the interim rule applies only to CAS covered contractors. That feature alone significantly limits the applicability of this interim rule. CAS coverage requires at least a $50 million contract but there are also many exemptions available such as to small businesses, commercial items, contracts performed overseas, etc.

We will be discussing aspects of the business system rules further as we have time to review and comprehend the 23 Federal Register pages that comprise the new rule.