The term "unsatisfactory condition" has no definition in the Federal Acquisition Regulations and could refer to almost anything that the contracting officer or contract auditor disapproves of. It is commonly used in connection with poor internal control systems or failure to consistently follow good accounting or internal control practices.
The DCAA (Defense Contract Audit Agency) audit manual provides a few examples of unsatisfactory practices (see CAM 4-803.1(b)) including (but not limited to):
- An estimating system and related practices so deficient that price proposals are consistently unreliable, resulting in widespread defective pricing.
- Significant and chronic violations of Cost Accounting Standards.
- Internal control weaknesses of a magnitude that could cause significant monetary loss to the contractor and excessive cost to the Government.
- Excessive or premature contractor reimbursement because of inappropriate applications or review of economic price adjustment provisions.
- Failure to pay the minimum wages required by the Davis-Bacon Act, Walsh Healey, Public Contract Act, or the Service Contract Act.
The Government's primary objective when unsatisfactory conditions are encountered is to resolve them quickly and at the lowest level possible. Where local resolution is not possible, there are procedures in place to elevate them - even as high as Headquarters level. Of course, no contractor should allow things to progress that far - where both sides dig in their heels and refuse to compromise. There are very few situations where unsatisfactory conditions identified by a branch of the Government doesn't have some merit. And contractors should be willing to take whatever remedial action is necessary to satisfy or allay the Government's concerns. Government officials are generally reasonable people and even if their recommendations seem onerous at first, they are usually amenable to a resolution that is commensurate with the perceived risk to the Government.