[Federal Register Volume 76, Number 96 (Wednesday, May 18, 2011)]
[Rules and Regulations]
[Pages 28856-28879]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-11691]
[[Page 28855]]
Vol. 76
Wednesday,
No. 96
May 18, 2011
Part II
Department of Defense
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Defense Acquisition Regulations System
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48 CFR Parts 215, 234, 242 et al.
Defense Federal Acquisition Regulation Supplement; Business Systems--
Definition and Administration; Interim Rule
Federal Register / Vol. 76 , No. 96 / Wednesday, May 18, 2011 / Rules
and Regulations
[[Page 28856]]
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DEPARTMENT OF DEFENSE
Defense Acquisition Regulations System
48 CFR Parts 215, 234, 242, 244, 245, and 252
[DFARS Case 2009-D038]
RIN 0750-AG58
Defense Federal Acquisition Regulation Supplement; Business
Systems--Definition and Administration
AGENCY: Defense Acquisition Regulations System, Department of Defense
(DoD).
ACTION: Interim rule with request for comments.
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SUMMARY: DoD is amending the Defense Federal Acquisition Regulation
Supplement (DFARS) to improve the effectiveness of DoD oversight of
contractor business systems.
DATES: Effective date: May 18, 2011.
Comment date: Comments on the interim rule should be submitted in
writing to the address shown below on or before July 18, 2011, to be
considered in the formation of the final rule.
Applicability date: This rule applies to solicitations issued on or
after May 18, 2011. Contracting officers are encouraged, to the extent
feasible, to amend existing solicitations (including solicitations for
delivery orders and task orders) in accordance with FAR 1.108(d), in
order to include the clause at DFARS 252.242-7005, Contractor Business
Systems, as applicable, in contracts (including delivery orders and
task orders) to be awarded on or after May 18, 2011, and shall amend
existing solicitations (including delivery orders and task orders) in
accordance with FAR 1.108(d), in order to include the clause at DFARS
252.242-7005, Contractor Business Systems, as applicable, in contracts
to be awarded on or after August 16, 2011.
ADDRESSES: You may submit comments, identified by DFARS Case 2009-D038,
using any of the following methods:
[cir] Regulations.gov: http://www.regulations.gov. Submit comments
via the Federal eRulemaking portal by inputting ``DFARS Case 2009-
D038'' under the heading ``Enter keyword or ID'' and selecting
``Search.'' Select the link ``Submit a Comment'' that corresponds with
``DFARS Case 2009-D038.'' Follow the instructions provided at the
``Submit a Comment'' screen. Please include your name, company name (if
any), and ``DFARS Case 2009-D038'' on your attached document.
[cir] E-mail: [email protected]. Include DFARS Case 2009-D038 in the
subject line of the message.
[cir] Fax: 703-602-0350.
[cir] Mail: Defense Acquisition Regulations System, Attn: Mr. Mark
Gomersall, OUSD (AT&L) DPAP (DARS), Room 3B855, 3060 Defense Pentagon,
Washington, DC 20301-3060.
Comments received generally will be posted without change to http://www.regulations.gov, including any personal information provided. To
confirm receipt of your comment(s), please check http://www.regulations.gov approximately two to three days after submission to
verify posting (except allow 30 days for posting of comments submitted
by mail).
FOR FURTHER INFORMATION CONTACT: Mr. Mark Gomersall, 703-602-0302.
SUPPLEMENTARY INFORMATION:
I. Background
DoD published an initial proposed rule for Business Systems--
Definition and Administration (DFARS Case 2009-D038) in the Federal
Register on January 15, 2010 (75 FR 2457). Based on the comments
received and subsequent revisions to the proposed rule, DoD published a
second proposed rule on December 3, 2010 (75 FR 75550). The public
comment period closed January 10, 2011. On January 7, 2011, the Ike
Skelton National Defense Authorization Act (NDAA) for Fiscal Year (FY)
2011 was signed into law (Pub. L. 111-383). NDAA section 893,
Contractor Business Systems, set forth statutory requirements for the
improvement of contractor business systems to ensure that such systems
provide timely, reliable information for the management of DoD
programs. Based on the comments received, the requirements of the NDAA,
and subsequent revisions to the proposed rule, DoD is publishing this
interim rule with request for comments.
Contractor business systems and internal controls are the first
line of defense against waste, fraud, and abuse. Weak control systems
increase the risk of unallowable and unreasonable costs on Government
contracts. To improve the effectiveness of Defense Contract Management
Agency (DCMA) and Defense Contract Audit Agency (DCAA) oversight of
contractor business systems, DoD is clarifying the definition and
administration of contractor business systems as follows:
A. DoD is defining contractor business systems as accounting
systems, estimating systems, purchasing systems, earned value
management systems (EVMS), material management and accounting systems
(MMAS), and property management systems.
B. DoD is implementing compliance enforcement mechanisms in the
form of a business systems clause which includes payment withholding
that allows contracting officers to withhold a percentage of payments,
under certain conditions, when a contractor's business system contains
significant deficiencies. Payments could be withheld on--
Interim payments under--
[cir] Cost-reimbursement contracts;
[cir] Incentive type contracts;
[cir] Time-and-materials contracts;
[cir] Labor-hour contracts;
Progress payments; and
Performance-based payments.
II. Discussion and Analysis
A. Analysis of Public Comments
The comments received in response to the second proposed rule have
been analyzed and dispositioned as discussed below. The comments
received were grouped under 34 general topics. A summary of the
comments follows:
1. Business Systems
a. Earned Value Management Systems (EVMS)
The following comments were submitted concerning Earned Value
Management Systems (EVMS):
Comment: Some respondents expressed concern over disapproval of EVM
systems if the system is not validated within 16 months since DCMA is
not currently able to meet this timeline.
Response: The rule requires contracting officers to determine the
acceptability of the contractor's earned value management system in
consultation with the functional specialist and auditor. Contracting
officers are expected to consider all facts at their disposal when
making such determinations. However, circumstances outside of a
contractor's control may inhibit the initial validation of a
contractor's EVMS. Therefore, 234.201(7)(iii)(A)(2)(ii) has been
revised to state that the system will be disapproved ``when initial
validation is not successfully completed within the timeframe approved
by the contracting officer * * *''
Comment: Conditions for disapproval of an EVM system are
inconsistent where the definition of an acceptable EVMS means that the
system generally complies with system criteria while the identification
of a single deficiency can make a system unacceptable. Furthermore,
while some respondents expressed concern that EVM system deficiencies
are related to ill-defined
[[Page 28857]]
contractual requirements, other respondents indicated that criteria for
disapproval of an EVM system are too strict and should be more
subjective.
Response: The rule requires contracting officers to determine the
acceptability of the contractor`s earned value management system in
consultation with the functional specialist and auditor. Contracting
officers are expected to consider all facts at their disposal when
making such determinations. Section 893 of the FY11 NDAA requires
systems to be disapproved when there is a shortcoming in the system
that affects materially the ability of DoD officials to rely on
information produced by the system for management purposes. This
interim rule is consistent with this requirement. In the case of EVM
systems, this means the system has one or more significant deficiencies
due to the contractor's failure to comply with the system criteria in
the clause at 252.234-7002, Earned Value Management System. Since a
system will only be disapproved when a significant deficiency exists, a
system with deficiencies that do not materially affect the Government's
ability to rely on information produced by the system is considered an
acceptable system in accordance with the definition at 252.234-7002.
Therefore, this rule is not inconsistent with the definition of an
acceptable EVMS.
b. Estimating System
The following comments were submitted concerning estimating
systems:
Comment: The respondent indicated that it is unreasonable for an
acceptable estimating system to include controls for the contractor to
compare projected results to actual results and analyze the
differences. This is a major change in policy concerning fixed-price
contracts and will open the door to wholesale Government access to
contractor costs during fixed-price contract performance.
Response: This interim rule sets forth specific criteria for
maintaining an acceptable estimating system. It is not unreasonable for
a contractor to establish and maintain an acceptable estimating system
that would include controls for the contractor to compare projected
results to actual results and analyze any differences. Such controls
provide a valuable metric for demonstrating the accuracy of estimates
produced by the system. Systems that consistently produce accurate
estimates with a reasonable degree of confidence can significantly
reduce the number of Government resources required to review cost and
price proposals. Accurate estimates also provide substantial advantages
to the contractor by allowing a more accurate forecast of the projected
rate of return. This existing requirement was relocated from 215.407-5-
70 to the clause at 252.215-7002, Cost Estimating System Requirements.
c. Accounting Systems
The following comments were submitted regarding accounting systems:
Comment: The respondent recommended deleting the phrase ``or
functional specialist'' from 242.7502(d)(2)(ii)(C). The respondent
recommended that the 45 day period be extended to a 60 day period for a
contractor to correct a deficiency or submit a corrective action plan
as is currently in the DFARS. The policy at 242.7502(d)(2)(ii)(A)
should include a requirement that the contracting officer's
notification to the contractor include ``sufficient detail to allow the
contractor to understand the deficiencies and the potential impact to
the Government'' as is required in other system deficiency
notifications. Finally, the respondent recommended that DCAA focus on
the adequacy of a contractor's accounting system rather than the
adequacy of the contractor's control environment and overall accounting
system controls.
Response: The term functional specialist needs to be retained. When
specialized expertise is required, the interim rule requires
contracting officers to consult with auditors and other individuals
with specialized experience, as necessary, to ensure a full
understanding of issues. For example, certain issues relating to
forecasted costs may require the expertise of engineers, price
analysts, and others, to understand or evaluate the contractor's
business system. It is not necessary to extend the 45 day period to 60
days. The contractor will be notified formally of deficiencies at the
completion of the audit, and will be allowed 30 days to respond to the
contracting officer's initial determination. The contractor will be
well aware that a deficiency may need to be corrected and a corrective
action plan may be needed well before that 45 day period begins. For
clarity, the language pertaining to ``sufficient detail'' in a
contracting officer's notification has been revised to state that a
contracting officer's notification will provide ``a description of each
significant deficiency in sufficient detail to allow the contractor to
understand the deficiency.'' DCAA will be reporting significant
deficiencies in accordance with the new business systems rule.
Comment: The rule requires periodic monitoring of the accounting
system but does not provide a definition of what the expectation or
frequency of the accounting system reviews should be. Furthermore, the
rule fails to recognize leading practices implemented in industry
through continuous monitoring and exception reporting.
Response: The size and complexity of companies and their processes,
operations, and accounting systems capabilities vary. Therefore, it is
not feasible to establish specific requirements regarding the extent or
frequency of periodic monitoring.
Comment: The respondent expressed concern that immaterial audit
issues resulting from CAS 405 noncompliance audit reports will be
considered significant, resulting in payment withholding and disputes.
The respondent recommended eliminating accounting system criterion
number 12 from the rule since remedies already exist through the
application of the CAS administration clause as well as the Allowable
Cost and Payment clause at FAR 52.216-7.
Response: The rule establishes criteria for an acceptable
accounting system to provide reasonable assurance that applicable laws
and regulations are complied with, accounting system and cost data are
reliable, risk of misallocations and mischarges are minimized, and
contract allocations and charges are consistent with billing
procedures. An essential characteristic of an adequate accounting
system for Government contract costing is the ability of the system to
identify and exclude unallowable costs from costs charged to Government
contracts. The remedies provided in the CAS administration clause and
the Allowable Cost and Payment clause at FAR 52.216-7 do not replace
the need for this essential control within a contractor's accounting
system.
Comment: Accounting system criterion number 17 introduces the
subjective and undefined terms ``adequate'' and ``reliable'' with
regard to accounting systems providing data to be used to support
follow-on acquisitions. It is not appropriate to tie the basis of
estimates for proposals to the accounting system. Including this
criterion in the accounting system and estimating system criteria is
redundant.
Response: The variation and complexity of business systems is such
that it is not practical to eliminate subjective terms entirely. While
the terms ``adequate'' and ``reliable'' imply a degree of subjectivity,
they are sufficiently common to enable reasonable parties to agree on
the set of
[[Page 28858]]
necessary characteristics to meet each threshold given the unique set
of circumstances. It is not inappropriate to draw a connection between
the basis of estimates for proposals and the accounting system.
Achieving consistent and accurate estimates is dependent on obtaining
accurate and reliable information, which often includes reported
information about past results produced by the accounting system. The
weight assigned to past results in developing estimates will vary
depending on a variety of factors, including the similarity of past
circumstances and the anticipated circumstances for which the estimate
is being developed. In the case of a follow-on acquisition, as noted by
the respondent, the circumstances are often similar, and thus actual
results produced by the accounting system are likely to play a
prominent role in developing the estimate. Estimators will likely
improve accuracy when they consider the accounting system results
during the development of their bases of estimates whether or not the
acquisition is a follow-on acquisition.
Comment: Referencing 242.7502(g)(2)(v), which identifies reducing
the negotiation objective for profit or fee as a means to mitigate risk
of accounting system deficiencies, the respondent expressed concern
that such reductions would be punitive to contractors beyond other
measures in the rule. The respondent recommended removal of this
paragraph.
Response: This interim rule does not limit the contracting
officer's discretion to apply any and all regulatory measures, as
warranted by the circumstances, including mitigating the risk of
accounting system deficiencies by reducing the negotiation objective
for profit or fee.
d. Purchasing Systems
The following comments were submitted regarding purchasing systems:
Comment: DFARS 252.244-7001 requires purchasing policies that
``comply with the Federal Acquisition Regulation (FAR) and the Defense
FAR Supplement (DFARS).'' The respondent requested that the rule
clarify that requirements being imposed on contractors are done via
contract clauses.
Response: All contractual requirements are identified and
accomplished through contract clauses. There is no need to issue such a
clarifying statement in this rule.
Comment: The definitions of subcontracts and purchase orders should
be revised to exclude agreements with vendors that would normally be
applied to a contractor's G&A expenses or indirect costs.
Response: Because the Government reimburses contractors for its
applicable share of indirect expenses, it would be inappropriate to
revise the definitions of subcontracts and purchase orders to exclude
agreements with vendors that would normally be applied to a
contractor's G&A expenses or indirect costs.
Comment: Purchasing system criteria under items 252.244-7001(c)(2)
and (c)(19) in the purchasing system clause appear to be redundant.
Response: Purchasing system criteria under 252.244-7001(c)(2) and
(c)(19) are not redundant. The criterion under (c)(2) requires the
contractor to include all flowdown clauses, including terms and
conditions and any other clauses needed to carry out the requirements
of the prime contract, in all applicable purchase orders and
subcontracts, while the criterion under (c)(19) requires the contractor
to establish and maintain policies and procedures to ensure the
requirements of (c)(2) are accomplished.
Comment: The rule should establish a threshold under purchasing
system criterion (c)(4) for the documentation of purchase orders (e.g.,
$3,000).
Response: Since certain requirements should apply to all purchases,
no threshold has been added in (c)(4).
Comment: The purchasing system criterion under item (c)(8) should
be revised to be consistent with FAR part 15.
Response: This rule does not conflict with the extensive language
under FAR part 15. The wording in (c)(8) and FAR part 15 is not
inconsistent.
Comment: Purchasing system criteria under items (c)(10) and (c)(22)
appear to be redundant.
Response: Purchasing system criteria under 252.244-7001(c)(10) and
(c)(22) are not redundant. The criterion under (c)(10) requires the
contractor to perform timely and adequate cost or price analysis and
technical evaluation for each subcontractor and supplier proposal or
quote to ensure fair and reasonable subcontract prices, while the
criterion under (c)(22) requires the contractor to establish and
maintain procedures to ensure the requirements of (c)(10) are
accomplished.
Comment: Notification of subcontract awards that contain FAR and
DFARS clauses allowing for Government audits should not be required in
the purchasing system criterion under item (c)(16) since these clauses
are required flowdowns on all direct-funded subcontracts.
Response: The notification requirement under purchasing system
criterion (c)(16) is appropriate. This criterion does not require
flowdown of FAR and DFARS clauses, but instead establishes the
requirement that the contractor notify the Government of the award of
all subcontracts that contain the FAR and DFARS flowdown clauses that
allow for Government audit of those subcontracts, and ensure the
performance of audits of those subcontracts.
Comment: The purchasing system criterion under item (c)(23) should
be clarified so that the requirements are applicable to first-tier
subcontractors.
Response: The suggested change to (c)(23) would make it
inconsistent with the definition in FAR 44.101. Therefore, no change
has been made.
e. Property Systems
The following comments were submitted regarding property systems:
Comment: Replace the phrase ``previously unapproved'' property
management systems with the phrase ``disapproved'' for consistency.
Response: The phrase ``previously unapproved property management
system'' in 245.105(e) has been replaced with the phrase ``previously
disapproved property management system'' for consistency.
Comment: The proposed rule property system terminology is
inconsistent with current FAR part 45. The proposed rule provides for
``approval/disapproval'' of a system while FAR part 45 and FAR clause
52.245-1 use the verbiage ``adequate/inadequate.''
Response: The language in DFARS 245 supplements the FAR language,
and is consistent with other business system sections as well as with
section 893 of the NDAA.
Comment: One respondent stated that it is unclear whether the
proposed rule uses a two-step process for approval/disapproval of a
property system where the Government property administrator initially
determines if a deficiency exists that would make the system
``inadequate'' and then works with the contracting officer to determine
if the system is ``approved/disapproved'' and whether payment
withholding is required, or if the Government property administrator is
acting as an agent of the cognizant contracting officer using a one-
step process. Another respondent suggested that property administrators
should have the authority to approve contractor property management
systems, and report system deficiencies to the cognizant contracting
officer recommending disapproval.
[[Page 28859]]
Disapproval authority should reside with the cognizant contracting
officer.
Response: DFARS 245.105 is clear that Government property
administrators are responsible for providing recommendations and
reporting system deficiencies to the cognizant contracting officer,
including recommendations regarding contractor property management
system approval or disapproval. However, system approval or disapproval
authority shall remain with the cognizant contracting officer.
2. Resources and Resolution Timing
Comment: DCMA and DCAA are under-resourced to execute the
requirements of the rule. DCAA does not have resources to perform
timely follow-up audits/system reviews or coordinate in a timely manner
with contracting officers to remove payment withholdings, and
contracting officers do not have the training to determine if a
deficiency makes a system inadequate. There must be accountability
within DCAA to conduct timely follow-up audits. Respondents recommended
that contractors should be allowed to request follow-up audits when
deficiencies are corrected; it should be mandated that DCAA and DCMA
perform follow-up audits within 30 days of contractor notification that
a deficiency has been corrected; and that the rule should permit
qualified third party auditors to provide various accreditations and
audits, as is the case with ISO standards or CMMI approvals.
Response: The need to have effective oversight mechanisms is
unrelated to resources. This rule does not add additional oversight
responsibilities onto DCAA and DCMA; it merely provides provisions to
help protect the Government from the contractor's failure to maintain
business systems, as is required by the terms and conditions of their
contracts. Contracting personnel will make appropriate determinations
in accordance with this rule. DCMA and DCAA have been working closely
to align their resources and ensure work is complementary. The
increased cooperation and coordination between DCAA and DCMA will
enable us to employ audit resources where they are needed. Further, the
rule has been revised to require the contracting officer to reduce the
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.
3. Contractor Appeals
Comment: DoD needs a contractor appeals process for implementing
the payment withholding. The rule should be modified to require
discussion with the PEO and/or SAE before any payment withholding
action is taken. Due to the vague nature of the system criteria and
subjective nature of the audit assessments, it will be difficult for
contractors to challenge payment withholding determinations under the
Contract Disputes Act.
Response: The final deficiency determination is at the sole
discretion of the contracting officer. However, prior to making a final
deficiency determination, contractors are afforded an opportunity to
respond in writing within 30 days to an initial determination of
deficiencies from the contracting officer that identifies significant
deficiencies in any of the contractor's business systems. It is not
necessary or appropriate to develop a dispute resolution process beyond
that which is already available by statute and regulation.
Additionally, other avenues of dispute resolution outside of the
Contract Disputes Act are available for resolving disputes that may
arise over determinations of system deficiencies. The policy set forth
in FAR 33.204 still applies, so that informal negotiation and alternate
dispute resolution remain available, and, in fact, are encouraged as
alternative methods of resolving disputes.
4. Risk of Harm and Materiality of Deficiencies
Comment: ``Risk of harm'' must be substantiated and verified. The
final rule should define the phrase ``potential risk of harm to the
Government'' which incorporates a nexus between the amount withheld and
the specific harm that may accrue to the Government based on the system
deficiency, and require that a deficiency be ``material'' or
``significant.'' It is impossible to determine whether the proposed
controls and remedial actions of this rule are reasonable and
commensurate with the Government's risks. Payment withholdings are
liquidated damages in disguise and, if excessive to the Government's
risk, will be viewed as punitive.
Response: The intent of the rule is to authorize payment
withholding when the contracting officer finds that there are one or
more significant deficiencies due to the contractor's failure to meet
one or more of the system criteria. The rule has been revised to
consider significant deficiencies in determining the adequacy of a
contractor's business system and potential payment withholding in
accordance with section 893 of the FY11 NDAA. Contract terms explicitly
require contractors to maintain the business systems in question as a
condition of contracting responsibility and, in some cases, eligibility
for award. Contract prices are negotiated on the basis that contractors
will maintain such systems, so that the Government does not need to
maintain far more extensive inspection and audit functions than it
already does. Failure of the contractor to maintain acceptable systems
during contract performance deprives the Government of assurances for
which it pays fair value. While not ``deliverable'' services under
specific contract line items, these business systems are material
terms, performance of which is required to ensure contracts will be
performed on time, within cost estimates, and with appropriate
standards of quality. The payment withholding remedy provides a measure
of the overall contract performance of which the Government is deprived
during the performance period, and for which the contractor should not
receive the full financing payments. DoD is relying on the temporary
payment withholding amounts, not as a penalty for a deficiency, but as
representing a good-faith estimate sufficient to mitigate the
Government's risk where the actual amounts are difficult to estimate or
quantify. Deficiencies that do not directly relate to unallowable or
unreasonable costs still pose risks to the Government, and may lead to
harm that may not be calculated readily when the deficiencies are
discovered. In most cases, the financial impact of a system deficiency
cannot be quantified because the system produces unreliable
information. When the financial impact of a deficiency is quantifiable,
DoD expects contracting officers to take appropriate actions to reduce
fees, recoup unallowable costs, or take legal action if fraudulent
activity is involved.
5. Definition of Deficiency
Comment: The term ``deficiency'' is not clearly defined. The rule
should define the terms ``deficiency,'' ``significant deficiency,'' and
``material weakness.'' One respondent suggested these definitions be
set forth in accordance with the definitions utilized by the Public
Company Accounting Oversight Board (PCAOB).
Response: The interim rule has been revised to implement payment
withholding procedures only for ``significant deficiencies,''
therefore, it is not necessary to define ``deficiency''.
[[Page 28860]]
The rule is has been revised to define ``significant deficiency'' as a
shortcoming in the business system that affects materially the ability
of officials of the Department of Defense to rely upon information
produced by the system that is needed for management purposes, in
accordance with section 893 of the NDAA. DoD will use the definition of
``significant deficiency'' in section 893 over the PCAOB definition.
The term ``material weakness'' is not used in this rule.
6. System Approval Duration and Narrowly Focused Follow-up Audits
Comment: The rule should implement an approval duration for each
business system, and require follow-up audits to narrowly focus on
previously-identified deficiencies.
Response: While DCAA may perform a narrowly focused follow-up
audit, imposing a required business system approval duration and/or
specifically limiting the scope of the DCAA follow-up audit in this
rule would not be appropriate since, at any time after approval,
contractor conditions could change rendering the previously-reported
opinion as not current. DCAA policy is to report only deficiencies
determined to be significant deficiencies in accordance with the
definition of significant deficiency set forth in this rule and
generally accepted Government auditing standards.
7. Contracting Officer/ACO References
Comment: The rule should reference ``ACO'' in lieu of ``contracting
officer'' since ACOs will have the primary responsibility to approve
contractor business systems.
Response: The contract administration functions in FAR 42.302 are
sometimes performed by procurement contracting offices. Since
procurement contracting offices are sometimes responsible for the
approval and disapproval of contractor business systems, the term
``ACO'' has been replaced by ``contracting officer'' for accuracy.
8. Subjective Assessments and Vague Standards
Comment: The revised proposed rule includes incomplete and
ambiguous definitions of acceptable business systems, and fails to
address the concern with subjective assessments and vague standards,
which will lead to inconsistent treatment within DCAA and DCMA.
Response: The rule incorporates criteria that are already used by
the Government under existing authority to evaluate the adequacy of
contractor business systems. For example, the criteria for estimating
systems are currently located in the DFARS at 215.407-5-70(d)(2). Given
that these system criteria have been used for many years to assess
contractor business systems, a reasonable person should be able to
easily interpret and understand what is required to maintain an
acceptable system. Each significant deficiency must be determined on
its own set of facts and ultimately decided by the contracting officer.
Inconsistent treatment of deficiencies is speculative.
9. Approval To Withhold Payments
Comment: The authority to order a payment withholding should be
vested at a higher level than the contracting officer because many
contracting officers do not have sufficient training or expertise in
the full spectrum of business systems covered by the rule. Furthermore,
contracting officers should be allowed to make independent business
judgments without fear of DCAA elevating the matter to a formal
disputes resolution board, unless the contracting officer has ignored
or disregarded DCAA egregiously.
Response: The contracting officer is the only person with the
authority to enter into, administer, and/or terminate contracts and
make related determinations and findings. DoD contracting personnel are
skilled professionals. All contracting personnel are required by law to
obtain a certification to ensure they have the requisite skills in
contracting. When specialized expertise is required, contracting
officers consult with auditors and other individuals with specialized
experience, as necessary, to ensure a full understanding of issues. In
fact, the interim rule requires such consultations. Accordingly, the
contracting officer is the appropriate authority for making decisions
regarding contractor business systems.
10. Other Remedies
Comment: The DCAA audit report should recommend whether a payment
withholding is necessary, and if not, what other protections are
available. DoD already has numerous other contracting tools available
to protect itself from any actual loss associated with business system
deficiencies. The proposed clause should state that a payment
withholding under the clause is in lieu of, and not in addition to,
other sanctions and remedies.
Response: The existing regulatory remedies are not an effective
substitute for a contract clause that will mitigate the Government's
risk while contractors correct business system deficiencies. The
interim rule is required to supplement existing enforcement mechanisms
and protect the Government's interests while the contractor completes
correction of system deficiencies. DoD does not want to limit the
contracting officer's discretion to apply any and all regulatory
measures, as warranted by the circumstances. For example, if a
contractor has a deficiency in its property management system, the
contracting officer may implement a payment withholding to protect the
Government's risk of the contractor failing to perform on the contract,
and may also revoke the Government's assumption of liability to protect
the Government from risk of loss of the Government's furnished
property.
11. ``Inadequate in Part''
Comment: The final rule should provide for ``inadequate in part''
determinations when minor system deficiencies will not affect the
entire business system.
Response: ``Inadequate in part'' determinations when minor system
deficiencies are found are not necessary. Contractor business systems
will only be disapproved when the contracting officer determines that
one or more significant deficiencies materially affect the ability of
officials of the Department of Defense to rely upon information
produced by the system that is needed for management purposes.
12. Payment Withholdings Applied Per System or Per Deficiency
Comment: The rule is unclear whether a 5% payment withholding is
applied against a single deficient business system or can be applied
for each deficiency within a single system.
Response: Payment withholding procedures will be implemented on the
basis of contractor business systems. While multiple payment
withholdings may be implemented due to significant deficiencies in
multiple contractor business systems, for clarity, the interim rule
sets forth that the total percentage of payments withheld on amounts
due under each progress payment, performance-based payment, or interim
cost voucher, shall not exceed five percent for one or more significant
deficiencies in any single contractor business system, and 10 percent
for significant deficiencies in multiple contractor business systems.
13. DCAA/Functional Specialist Consultation
Comment: It is unclear what is meant by ``consultation with the
auditor or functional specialist'' in terms of a
[[Page 28861]]
contracting officer's determination to discontinue withholding payments
prior to audit verification. The language in DFARS 242.70X1 and
252.242-7XXX should explicitly state that the contracting officer may
discontinue withholding payments without the need to wait for a final
audit report from DCAA.
Response: The contracting officer is the only person with the
authority to enter into, administer, and/or terminate contracts and
make related determinations and findings. However, when specialized
expertise is required, the interim rule requires contracting officers
to consult with auditors and other individuals with specialized
experience, as necessary, to ensure a full understanding of issues. The
interim rule explicitly states that prior to the receipt of
verification, the contracting officer may discontinue withholding
payments pending receipt of verification, and release any payments
previously withheld, if the contractor submits evidence that the
deficiencies have been corrected, and the contracting officer, in
consultation with the auditor or functional specialist, determines that
there is a reasonable expectation that the corrective actions have been
implemented and that the deficiencies no longer affect materially the
ability of the Government to rely upon information produced by the
system.
14. Risk Management vs. Risk Avoidance
Comment: The proposed rule's focus on risk avoidance rather than
risk management has the potential of significantly increasing the cost
of business systems without corresponding benefits. To make systems
deficiency-proof in order to avoid significant payment withholdings,
contractors may be forced to incur unnecessary costs that would be
disproportionate to the incremental benefits of having near perfect
systems. DoD has failed to consider the concept of causal or beneficial
relationships between the costs to bring business systems into
compliance with the rule, and the benefits of protecting the Government
from perceived risk.
Response: DoD will only withhold payments in cases where there are
significant deficiencies in the contractor's business systems. In such
cases, the ability of the contractor to manage risk is questionable and
the potential risk of harm to the Government is increased. Under the
rule, a contractor business system may contain deficiencies that do not
affect materially the ability of DoD officials to rely on information
produced by the system. Accordingly, the standard for withholding
payments is commensurate with the risk of harm to the Government. In
the long run, both the contractor's and Government's administrative
costs should be reduced with the reliance on efficient contractor
business systems.
15. Large Businesses
Comment: The revised rule improperly targets large businesses due
to the $50M dollar contract threshold.
Response: The $50 million contract threshold has been removed from
the interim rule. The threshold for application of the contractor
business systems clause is set forth in section 893 of the NDAA, which
defines a covered contractor as one that is subject to the Cost
Accounting Standards under 41 U.S.C. chapter 15, as implemented in
regulations found at 48 CFR 9903.201-1 (see the FAR Appendix).
16. DCAA Audit Standards
Comment: DCAA auditors apply a higher standard for identifying a
deficiency in an accounting system (``less than a remote possibility
that potential unallowable costs would be immaterial'') than set forth
in the rule. DCAA is not able to distinguish systemic errors or
significant deficiencies from normal human errors or minor
deficiencies. The rule may state that it is DCAA policy to report only
deficiencies determined to be significant deficiencies or material
weaknesses, however the DCAA December 19, 2008 MRD (titled Audit
Guidance on Significant Deficiencies/Material Weaknesses and Audit
Opinions on Internal Control Systems) instructs auditors that anything
which is subject to DCAA review should be considered significant.
Response: DCAA will report significant deficiencies in accordance
with the definition of significant deficiency in this rule, as set
forth in section 893 of the NDAA and the Generally Accepted Government
Auditing Standards (GAGAS). Based on the definition in GAGAS, a
significant deficiency is a deficiency, or combination of deficiencies,
that adversely affects the entity's ability to initiate, authorize,
record, process, or report data reliably. The GAGAS definition is
consistent with the definition of significant deficiency in the
contractor business systems clause. Additionally, contracting officers
will administer this rule according to the requirements in section 893
of the NDAA.
17. Arbitrary and Punitive Payment Withholdings
Comment: The payment withholding percentages are punitive in nature
and represent an arbitrary estimate based on pressure to incorporate
business systems payment withholdings into the DFARS. The amount of the
payment withholding should be commensurate with the level of risk to
the Government and not set at arbitrary and punitive levels.
Response: When contractors fail to maintain business systems, as is
required by the terms and conditions of their contracts, the payment
withholding provisions help to protect the Government from the risks of
overpayment, increased property losses, or nonconforming goods, among
others, against which contractor business systems are designed to
ensure. The interim rule would protect the Government by reducing
contract payments temporarily during performance in an amount
sufficient to mitigate the Government's risk. DoD is relying on the
payment withholding amounts, not as a penalty for a deficiency, but as
representing a good-faith estimate of the potential loss that is at
risk where the actual amounts are difficult to estimate or quantify.
The percentage of progress payments, performance-based payments, and
interim payments set forth in this rule is in accordance with section
893 of the NDAA.
18. Release of Payment Withholdings
Comment: DCAA does not issue audits addressing ``reasonable
expectation that the corrective actions have been implemented.'' The
only existing audit solution is to complete the entire follow-up audit,
which will not be performed in a timely manner due to DCAA's backlog.
Furthermore, the rule should provide guidance to avoid perpetual
payment withholdings when deficiencies in multiple business systems
overlap and the timing of corrective action plans differ.
Response: There is no requirement that DCAA issue audits addressing
``reasonable expectation that the corrective actions have been
implemented.'' The interim rule explicitly states that prior to the
receipt of verification, the contracting officer may discontinue
withholding payments pending receipt of verification, and release any
payments previously withheld, if the contractor submits evidence that
the significant deficiencies have been corrected, and the contracting
officer, in consultation with the auditor or functional specialist,
[[Page 28862]]
determines that there is a reasonable expectation that the corrective
actions have been implemented. Since payment withholding procedures
will be implemented on the basis of contractor business systems, if
prior to the correction of one or more significant deficiencies, other
significant deficiencies are identified in another business system, the
contracting officer may revise the original final determination or
issue a subsequent determination to disapprove the latter business
system and implement additional payment withholdings. Contracting
officers will provide direction in their determination(s), identify the
significant deficiencies that need to be corrected in order to approve
each disapproved business system, and discontinue the withholding of
payments and release any payments previously withheld. If one
previously disapproved contractor business system is approved, but
significant deficiencies remain in another system, the contracting
officer will continue to withhold payments relating to the remaining
disapproved business system until the significant deficiencies relating
to that business system have been determined to have been corrected.
19. Multiple Compliance Regimes
Comment: The rule provides a different set of contractor business
systems requirements for DoD and NASA contractors than are required for
civilian contractors.
Response: The business systems criteria contained in the business
systems clauses have been used in practice for several decades by
Government personnel to assess the reliability and accuracy of
management information produced by the applicable system. Because they
are designed to be consistent with GAGAS, which are based on standards
developed by the American Institute of Certified Public Accountants
(AICPA), the system criteria are applicable equally to DoD, NASA, and
civilian contractors.
20. NDAA Compliance
A number of respondents, citing section 893 of the NDAA, provided
the following recommendations:
Comment: Contractor business system disapproval should be based on
``significant deficiencies'' as defined in section 893 of the NDAA, and
the maximum cap should be reduced to 10 percent in accordance with the
NDAA.
Response: The interim rule has been revised to reflect the language
in section 893 of the NDAA by incorporating the statutory language
regarding ``significant deficiencies'' and reducing the cumulative
payment withholding percentage from 20 percent to 10 percent.
Comment: The proposed rule mandates payment withholdings on all
contracts, including firm-fixed price contract types, while the NDAA
language makes payment withholdings discretionary, and permits them to
be applied only to CAS-covered contracts and not fixed-price contract
types. The rule should be adjusted to exclude those contract types,
including firm-fixed-price contracts that have been discretely excluded
by the Authorization Act.
Response: Section 893 requires the Secretary of Defense to develop
and initiate a program for the improvement of contractor business
systems to ensure that such systems provide timely, reliable
information for the management of Department of Defense programs.
Furthermore, the statute sets forth that an appropriate official of the
Department of Defense may withhold up to 10 percent of progress
payments, performance-based payments, and interim payments under
covered contracts from a covered contractor, as needed, to protect the
interests of the Department and ensure compliance, if one or more of
the contractor business systems of the contractor has been disapproved.
To comply with this requirement, under the mandated DoD program for the
improvement of contractor business systems, which includes the
implementation of this interim rule, DoD has interpreted the definition
of ``covered contract'' to mean 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 9903.201-1 (see the FAR Appendix), which
includes CAS-covered fixed-price type contracts and performance-based
contracts, as well as cost type contracts.
Comment: In accordance with the NDAA, the rule should identify DoD
officials who are responsible for the approval or disapproval of
contractor business systems. Furthermore, DoD officials must be made
available to work with the contractor to develop corrective action
plans and schedules for implementation.
Response: The interim rule continues to identify cognizant
contracting officers as the DoD officials who are responsible for the
approval or disapproval of contractor business systems.
21. Contract Applicability
Comment: A number of respondents questioned the application of this
rule against cost type contracts while other respondents questioned the
application of this rule against fixed-price contracts. Additionally,
some respondents expressed concern about the application of the rule to
commercial contracts and construction contracts. Other respondents
suggested that payment withholdings should only be applied to contracts
which fall under the business system found to be deficient, and only to
contracts administered by the contracting officer making the
determination decision.
Response: The Government is at risk when a contractor's business
systems contain significant deficiencies, regardless of contract type.
Accordingly, it is appropriate for the contracting officer to withhold
payments to protect the interest of the Government. Contracts awarded
under FAR part 12 regulations will generally be exempt from the
requirements of this rule. A system deficiency may result in
application of a payment withholding against all contracts that contain
the business systems clause. The rule has been tailored to comply with
section 893 of the FY11 NDAA. DoD has interpreted the definition of
``covered contract'' to include CAS-covered cost type contracts as well
as CAS-covered fixed-price type contracts and performance-based
contracts since section 893 also allows up to 10 percent of progress
payments and performance-based payments to be withheld. The interim
rule provides the contracting officer with the sole discretion to
withhold payments from one or more contracts containing the clause at
252.242-7005, Contractor Business Systems. To ensure consistency, it is
DoD policy that only one contracting officer, normally an ACO, has the
responsibility and authority for approval, disapproval, and general
oversight of contractor business systems. When the cognizant
contracting officer renders a determination to approve or disapprove a
system and withhold payments, all contracting officers with contracts
affected by the determination are required to abide by the cognizant
contracting officer's decision. The rule complies with this long-
established practice.
22. DCAA/DCMA Internal Policies
Comment: By allowing DCMA/DCAA to determine the criteria by which
contractor business systems will be measured through their internal
policies and procedures, it should make those internal policies and
procedures subject to the OFPP Act public comment process.
Response: This rule does not contain references to DCAA/DCMA
internal policies to determine the criteria by
[[Page 28863]]
which contractor business systems will be measured. Rather, as defined
in each of the individual business system clauses in the rule, the
definition of an acceptable system means a system that complies with
the system criteria set forth in each clause, which have been published
for public comment.
23. Cumulative Payment Withholdings
Comment: The respondent questioned whether the 20 percent withhold
in the proposed rule is in addition to other withholding remedies a
contracting officer may assess.
Response: In accordance with section 893 of the NDAA, the
cumulative payment withholding percentage set forth under this interim
rule is reduced from 20 percent to 10 percent. This interim rule does
not limit the contracting officer's discretion to apply any and all
regulatory measures, as warranted by the circumstances, including other
applicable payment withholdings. The withholding of any amount or
subsequent payment to the contractor shall not be construed as a waiver
of any rights or remedies the Government has under this contract.
24. CAS
Comment: The respondent expressed concern that there is no
adjudication process prior to implementation of payment withholdings
for disagreements or disputes regarding interpretation and
implementation of CAS. Contractors should not be subject to payment
withholdings on matters which await the decision of the judiciary.
Response: The finding of a significant deficiency in a business
system results in only a temporary withholding from certain payments to
protect the Government from potential harm. This does not constitute a
permanent contractual decrement stemming from a CAS noncompliance. A
contractor is not precluded from challenging any underlying CAS or
other determinations through the contract disputes or other resolution
processes. An additional adjudication process is not warranted for this
rule. Furthermore, a deficiency that causes a CAS noncompliance may
impact other business systems.
25. Dollar Limitations
Comment: The lack of dollar limitations at the contract level will
lead to payment withholdings that exceed the amount required to protect
the government. The value withheld at the contract level should be
limited to $100,000 (and at subsequent thresholds of $250,000,
$500,000, and $1,000,000) until authorization is received from DCMA
headquarters. The approval of payment withholdings above the thresholds
should be based on evidence that actual risk or harm in excess of the
limit exists.
Response: To ensure sufficient mitigation of the Government's risk,
the interim rule provides the contracting officer with the sole
discretion to withhold payments from one or more contracts containing
the clause at 252.242-7005, Contractor Business Systems. Contracting
officers will select one or more contracts from which payments will be
withheld. In selecting the contract or contracts from which to withhold
payments, the contracting officer shall ensure that the total amount of
payment withholding does not exceed 10 percent of the total amount
billed.
26. Standard of Risk
Comment: The respondent recommended that any final rule establish a
clear, simple, and uniform standard of risk to the Government in the
procedures that are applicable across all of the business systems.
Response: The definition of a significant deficiency establishes a
uniform standard of risk. A 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.
27. Payment Withholding Process
Comment: Respondents suggested that the final rule should require
direct communication between the contracting officer, DCAA, and the
contractor to allow discussion relating to an identified deficiency
before payment is withheld. The proposed clause should provide
sufficient time for the contracting officer and contractor to address
potential system deficiencies. The respondents recommended that the
rule require the contracting officer to work collaboratively with the
contractor in determining whether deficiencies exist, whether there is
a material risk of harm, and how to resolve the deficiencies without
resorting to a payment withholding; and allow the contractor 90 days to
address the potential deficiencies and submit a response documenting
its position before the contracting officer can issue a final
determination and impose a payment withholding. Otherwise, the rule
denies a contractor due process by allowing the contracting officer to
issue initial determinations prior to receiving all the facts from the
contractor.
Response: The rule provides adequate opportunities for
communication between the contracting officer and the contractor prior
to the implementation of payment withholdings. The contractor will be
notified of a preliminary finding of a deficiency during the course of
formal system reviews and audits. This occurs before the auditor or
functional specialist releases a report to the contractor and
contracting officer. After receiving a report, the contracting officer
will promptly evaluate and issue an initial determination. The
contractor is then allowed 30 days to respond to any significant
deficiencies. Contractors are given ample opportunity to present their
position during system reviews. Accordingly, the requirement for a
contractor to respond within 30 days of an initial determination is
adequate.
28. Simplify Administrative Burden
Comment: The rule should simplify the administrative burden for the
accounting for payment withholdings against numerous invoices.
Response: The interim rule provides the contracting officer with
the sole discretion to withhold payments from one or more contracts
containing the clause at 252.242-7005, Contractor Business Systems. The
administrative burden for the accounting for payment withholdings
against numerous invoices is thus simplified by not mandating that
payment withholdings be applied against all of a contractor's available
contracts.
29. DCAA/DCMA Roles
Comment: One respondent suggested that the wording in 215.407-5-
70(c)(3) should be revised to state ``the auditor, on behalf of the
cognizant contracting officer, conducts estimating system reviews'' to
establish that the contracting officer is the lead Federal official,
not the auditor. Respondents questioned the ability of DCAA and DCMA to
resolve audit recommendations, and further questioned the ability of
DCAA and DCMA to execute their duties effectively in the absence of a
procedure for resolving different judgments regarding a deficiency.
Response: FAR 1.6 sets forth contracting officer authority and
responsibilities. The addition of language to DFARS 215.407-5-70
stating that the contracting officer is the lead Federal official is
unnecessary. The DoD memorandum dated December 4, 2009, ``Resolving
Contract Audit Recommendations,'' clearly defines the roles and
responsibilities of DCAA and DCMA and provides procedures for
adjudicating differences.
[[Page 28864]]
30. Functional Specialist
Comment: Reference to a functional specialist under estimating
systems should be deleted.
Response: The contracting officer is the only person with the
authority to enter into, administer, and/or terminate contracts and
make related determinations and findings. However, when specialized
expertise is required, the interim rule requires contracting officers
to consult with auditors and other individuals with specialized
experience, as necessary, to ensure a full understanding of issues.
Certain issues relating to forecasted costs may require the expertise
of engineers, price analysts, and others to understand or evaluate the
contractor's estimating system.
31. Policies and Procedures
Comment: The proposed rule contains inconsistent, ill-defined
system criteria for policies and procedures. The requirement for
policies and/or procedures is the same for all business systems and,
therefore, the proposed rule should be consistent by using the terms
``policies and procedures'' in all sections defining system criteria.
The proposed rule should be revised to specify that a business system's
criteria for policies and procedures should be in writing.
Response: System criteria are consistent with well-established
Government practices and procedures for assessing the contractor
business systems. For some business systems, the DFARS language
supplements established FAR criteria, while other business systems
criteria are established or revised by this interim rule. Therefore, it
would be inappropriate to attempt to force incorrect terminology into
business systems criteria for the sake of consistency. The systems
criteria contained in the business systems clauses have been used for
many years by Government personnel to assess the reliability and
accuracy of management information produced by the applicable system.
32. Impact to Industry
Comment: One respondent commented that the proposed payment
withholding regime will threaten the solvency of contractors and
preclude many companies from contracting with the Government. The
respondent indicated that the payment withholding regime will be
particularly harsh on small businesses.
Response: In the long run, both the contractor's and the
Government's administrative cost should be reduced with the reliance on
efficient contractor business systems. The rule has been revised to
exclude small businesses in accordance with section 893 of the FY2011
NDAA.
33. Effectiveness of This Rule
Comment: The respondent indicated that the proposed payment
withholding is not tailored reasonably to address the Department's
intended goal of preventing unallowable and unreasonable costs and
waste, fraud, and abuse and improving the effectiveness of DCAA and
DCMA.
Response: As noted by the respondent, contractor business systems
play an important role in preventing waste, fraud, and abuse.
Significant systems deficiencies place a substantial resource burden on
DCMA and DCAA due to the increased oversight needed to protect the
interests of the Government. The rule provides contracting officers
with an additional tool to mitigate the Government's risk while
contractors correct business systems deficiencies. Reliable contractor
business systems employ internal controls to prevent unallowable and
unreasonable costs, as well as waste, fraud, and abuse. Additionally,
it reduces burden on Government resources, thereby allowing DCMA and
DCAA resources to be employed more effectively.
34. Minor Corrections
Comment: For 252.215-7002, the lead-in reference to the
prescription should be 215.407-5-70.
Response: Referencing 215.407-5-70 as the prescription for the
clause at 252.215-7002 would be incorrect. DFARS 215.408(2) prescribes
the use of the clause at 252.215-7002.
Comment: For 252.215-7002(e) and 252.242-7004(e), change from ``on
any system deficiency'' to ``of any system deficiency.''
Response: Correction has been made in the interim rule.
Comment: The respondent recommended making the phrase
``consultation with the auditor or functional specialist'' consistent
throughout the rule.
Response: Where appropriate, the phrase ``consultation with the
auditor or functional specialist'' has been made consistent throughout
the rule.
Comment: The respondent recommended making the phrase ``all
findings and recommendations'' consistent throughout the rule.
Response: Where appropriate, the phrase ``all findings and
recommendations'' has been made consistent throughout the rule.
Comment: The proposed rule intends to add new paragraphs (d) and
(e) to revised 242.7203, but the text of the additional paragraphs
denominates them at paragraphs (c) and (d).
Response: Correction has been made in the interim rule.
B. Summary of Proposed Rule Changes
As a result of public comments received in response to the revised
proposed rule and the requirements set forth under section 893 of the
NDAA, the following changes have been made to the interim rule:
1. The term ``significant deficiency'' is defined, in accordance
with section 893, 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. The definition of the term ``significant deficiency''
provides for associated changes to the rule as follows:
(a) The term ``significant deficiency'' is used in lieu of phrases
such as ``deficiency that adversely affects the system'' and
``deficiency that adversely affects the system, leading to a potential
risk of harm to the Government'' as the basis for business systems
disapprovals and payment withholdings.
(b) The phrases ``the potential adverse impact to the Government''
and ``its potential harm to the Government'' are no longer required to
describe the detail to which significant deficiencies are described by
auditors and functional specialists to contracting officers, and by
contracting officers to contractors.
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
[[Page 28865]]
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, in accordance
with section 893, 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 9903.201-1 (see the FAR Appendix). The definition of
the term ``covered contract'' provides for associated changes to the
rule as follows:
(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. In accordance with section 893, the term ``business system'' is
replaced with the term ``contractor business system.''
13. In accordance with section 893, 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).
III. Executive Order 12866 and Executive Order 13563
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility. This is a ``significant regulatory action'' and,
therefore, was subject to review under section 6(b) of Executive Order
12866, Regulatory Planning and Review, dated September 30, 1993. This
rule is not a major rule under 5 U.S.C. 804.
IV. Regulatory Flexibility Act
DoD has prepared an initial regulatory flexibility analysis
consistent with 5 U.S.C. 603. A copy of the analysis may be obtained
from the point of contact specified herein. The analysis is summarized
as follows:
The objective of the rule is to establish a definition for
contractor business systems and implement compliance mechanisms to
improve DoD oversight of those contractor business systems. The
requirements of the rule will apply to solicitations and contracts that
are subject to the Cost Accounting Standards under 41 U.S.C. chapter
15, as implemented in regulations found at 48 CFR 9903.201-1 (see the
FAR Appendix), other than in contracts with educational institutions or
Federally Funded Research and Development Centers (FFRDCs) operated by
educational institutions, and include one or more of the defined
contractor business systems.
Since contracts and subcontracts with small businesses are exempt
from CAS requirements, DoD estimates that this rule will have no impact
on small businesses. However, DoD invites comments from small business
concerns and other interested parties on the expected impact of this
rule on small entities.
DoD will also consider comments from small entities concerning the
existing regulations in subparts affected by this rule in accordance
with 5 U.S.C. 610. Interested parties must submit such comments
separately and should cite 5 U.S.C. 610 (DFARS Case 2009-D038) in
correspondence.
V. Paperwork Reduction Act
The Paperwork Reduction Act (44 U.S.C. chapter 35) applies because
this
[[Page 28866]]
interim rule contains information collection requirements requiring the
approval of the Office of Management and Budget. DoD invites comments
on the following aspects of the interim rule: (a) Whether the
collection of information is necessary for the proper performance of
the functions of DoD, including whether the information will have
practical utility; (b) the accuracy of the estimate of the burden of
the information collection; (c) ways to enhance the quality, utility,
and clarity of the information to be collected; and (d) ways to
minimize the burden of the information collection on respondents,
including the use of automated collection techniques or other forms of
information technology.
DoD received one comment regarding the information collection
estimate that was included with the initial proposed rule published on
January 15, 2010, at 75 FR 2457. The respondent asserted that DoD's
estimates were substantially understated. However, the supporting data
referenced by the respondent exceeded the information collection
requirements established under this rule. The hours and costs cited by
the respondent with regard to EVMS did not reflect the Paperwork
Reduction Act requirements of this rule. DoD received no comments
regarding the information collection estimate in response to the second
proposed rule published on December 3, 2010 at 75 FR 75550. With no
further specific Paperwork Reduction Act comments received, and no
further revisions in this interim rule to the information collection
requirements, DoD concludes that the estimates published with the
proposed rule accurately reflect the contractors' costs to fulfill the
information collection requirements of this rule. The following is a
summary of the information collection requirements.
The business systems clauses in this interim rule contain
requirements for contractors to respond to initial and final
determinations of deficiencies. The information contractors will be
required to submit to respond to deficiencies in four of the six
business systems defined in this rule have been approved by the Office
of Management and Budget as follows:
(1) Accounting Systems--OMB Clearance 9000-0011;
(2) Estimating Systems--OMB Clearance 0704-0232;
(3) Material Management and Accounting Systems--OMB Clearance 0704-
0250;
(4) Purchasing Systems- OMB Clearance 0704-0253;
(5) Earned Value Management Systems--OMB Control Number 0704-0479;
and
(6) Contractors Property Management System--OMB Control Number
0704-0480.
The information contractors will be required to submit to respond
to deficiencies in contractors' EVMS is estimated as follows:
Number of respondents--186.
Responses per respondent--48.
Annual responses--8,928.
Burden per response--40 hours.
Annual burden hours--357,120 hours.
The information contractors will be required to submit to respond
to deficiencies in contractors' property management systems is
estimated as follows:
Number of respondents: 2,646.
Responses per respondent: 1.
Annual responses: 2,646.
Average burden per response: 1.2 hours.
Annual burden hours: 3,200 hours.
Needs and Uses: DoD needs the information required by the business
systems clause in this interim rule to mitigate the risk of unallowable
and unreasonable costs on Government contracts when a contractor has
one or more deficiencies in a business system.
Affected public: The business systems clause will be used in
solicitations and contracts that include any of the following clauses:
(1) 252.215-7002, Cost Estimating System Requirements;
(2) 252.234-7002, Earned Value Management System;
(3) 252.242-7004, Material Management and Accounting System;
(4) 252.242-7006, Accounting System Administration;
(5) 252.244-7001, Contractor Purchasing System Administration;
(6) 252.245-7003, Contractor Property System Administration.
Frequency: On occasion.
VI. Determination To Issue an Interim Rule
A determination has been made under the authority of the Secretary
of Defense, that urgent and compelling reasons exist to publish an
interim rule prior to affording the public an opportunity to comment.
This interim rule implements section 893 of the Ike Skelton National
Defense Authorization Act for Fiscal Year 2011. Section 893 requires
the improvement of contractor business systems to ensure that such
systems provide timely, reliable information for the management of DoD
programs. Contractor business systems and internal controls are the
first line of defense against waste, fraud, and abuse. Weak control
systems increase the risk of unallowable and unreasonable costs on
Government contracts.
In implementing section 893, this rule will improve the
effectiveness of DoD oversight for contractor business systems. More
effective and efficient management of DoD programs is key to achieving
greater efficiency and productivity in defense spending. It is
essential that DoD immediately commence to require these improvements
to contractor business systems, and to undertake the enhanced oversight
necessary for expenditures of taxpayer dollars. Comments received in
response to this interim rule will be considered in the formation of
the final rule.
List of Subjects in 48 CFR Parts 215, 234, 242, 244, 245, and 252
Government procurement.
Ynette R. Shelkin,
Editor, Defense Acquisition Regulations System.
Therefore, 48 CFR parts 215, 234, 242, 244, 245, and 252 are
amended as follows:
0
1. The authority citation for 48 CFR parts 215, 234, 242, 244, 245, and
252 continues to read as follows:
Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.
PART 215--CONTRACTING BY NEGOTIATION
0
2. Amend section 215.407-5-70 by revising paragraphs (a)(4), (c), and
(e) through (g) to read as follows:
215.407-5-70 Disclosure, maintenance, and review requirements.
(a) * * *
(4) Significant deficiency is defined in the clause at 252.215-
7002, Cost Estimating System Requirements.
(c) Policy. (1) The contracting officer shall--
(i) Through use of the clause at 252.215-7002, Cost Estimating
System Requirements, apply the disclosure, maintenance, and review
requirements to large business contractors meeting the criteria in
paragraph (b)(2)(i) of this section;
(ii) Consider whether to apply the disclosure, maintenance, and
review requirements to large business contractors under paragraph
(b)(2)(ii) of this section; and
(iii) Not apply the disclosure, maintenance, and review
requirements to other than large business contractors.
(2) The cognizant contracting officer, in consultation with the
auditor, for
[[Page 28867]]
contractors subject to paragraph (b)(2) of this section, shall--
(i) Determine the acceptability of the disclosure and approve or
disapprove the system: and
(ii) Pursue correction of any deficiencies.
(3) The auditor conducts estimating system reviews.
(4) An acceptable system shall provide for the use of appropriate
source data, utilize sound estimating techniques and good judgment,
maintain a consistent approach, and adhere to established policies and
procedures.
(5) In evaluating the acceptability of a contractor's estimating
system, the contracting officer, in consultation with the auditor,
shall determine whether the contractor's estimating system complies
with the system criteria for an acceptable estimating system as
prescribed in the clause at 252.215-7002, Cost Estimating System
Requirements.
* * * * *
(e) Disposition of findings--(1) Reporting of findings. The auditor
shall document findings and recommendations in a report to the
contracting officer. If the auditor identifies any significant
estimating system deficiencies, the report shall describe the
deficiencies in sufficient detail to allow the contracting officer to
understand the deficiencies.
(2) Initial determination. (i) The contracting officer shall review
all findings and recommendations and, if there are no significant
deficiencies, shall promptly notify the contractor, in writing, that
the contractor's estimating system is acceptable and approved; or
(ii) If the contracting officer finds that there are one or more
significant deficiencies (as defined in the clause at 252.215-7002,
Cost Estimating System Requirements) due to the contractor's failure to
meet one or more of the estimating system criteria in the clause at
252.215-7002, the contracting officer shall--
(A) Promptly make an initial written determination on any
significant deficiencies and notify the contractor, in writing,
providing a description of each significant deficiency in sufficient
detail to allow the contractor to understand the deficiency;
(B) Request the contractor to respond in writing to the initial
determination within 30 days; and
(C) Promptly evaluate the contractor's responses to the initial
determination, in consultation with the auditor or functional
specialist, and make a final determination.
(3) Final determination. (i) The contracting officer shall make a
final determination and notify the contractor in writing that--
(A) The contractor's estimating system is acceptable and approved,
and no significant deficiencies remain, or
(B) Significant deficiencies remain. The notice shall identify any
remaining significant deficiencies, and indicate the adequacy of any
proposed or completed corrective action. The contracting officer
shall--
(1) Request that the contractor, within 45 days of receipt of the
final determination, either correct the deficiencies or submit an
acceptable corrective action plan showing milestones and actions to
eliminate the deficiencies;
(2) Disapprove the system in accordance with the clause at 252.215-
7002, Cost Estimating System Requirements; and
(3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the
contract.
(ii) Follow the procedures relating to monitoring a contractor's
corrective action and the correction of significant deficiencies in PGI
215.407-5-70(e).
(f) System approval. The contracting officer shall promptly approve
a previously disapproved estimating system and notify the contractor
when the contracting officer determines that there are no remaining
significant deficiencies.
(g) Contracting officer notifications. The cognizant contracting
officer shall promptly distribute copies of a determination to approve
a system, disapprove a system and withhold payments, or approve a
previously disapproved system and release withheld payments, to the
auditor; payment office; affected contracting officers at the buying
activities; and cognizant contracting officers in contract
administration activities.
PART 234--MAJOR SYSTEM ACQUISITION
0
3. Add section 234.001 to read as follows:
234.001 Definition.
As used in this subpart--
Acceptable earned value management system and earned value
management system are defined in the clause at 252.234-7002, Earned
Value Management System.
Significant deficiency is defined in the clause at 252.234-7002,
Earned Value Management System, and is synonymous with noncompliance.
0
4. Amend section 234.201 by adding paragraphs (5) through (9) to read
as follows:
234.201 Policy.
* * * * *
(5) The cognizant contracting officer, in consultation with the
functional specialist and auditor, shall--
(i) Determine the acceptability of the contractor's earned value
management system and approve or disapprove the system; and
(ii) Pursue correction of any deficiencies.
(6) In evaluating the acceptability of a contractor's earned value
management system, the contracting officer, in consultation with the
functional specialist and auditor, shall determine whether the
contractor's earned value management system complies with the system
criteria for an acceptable earned value management system as prescribed
in the clause at 252.234-7002, Earned Value Management System.
(7) Disposition of findings--(i) Reporting of findings. The
functional specialist or auditor shall document findings and
recommendations in a report to the contracting officer. If the
functional specialist or auditor identifies any significant
deficiencies in the contractor's earned value management system, the
report shall describe the deficiencies in sufficient detail to allow
the contracting officer to understand the deficiencies.
(ii) Initial determination. (A) The contracting officer shall
review all findings and recommendations and, if there are no
significant deficiencies, shall promptly notify the contractor, in
writing, that the contractor's earned value management system is
acceptable and approved; or
(B) If the contracting officer finds that there are one or more
significant deficiencies (as defined in the clause at 252.234-7002,
Earned Value Management System) due to the contractor's failure to meet
one or more of the earned value management system criteria in the
clause at 252.234-7002, the contracting officer shall--
(1) Promptly make an initial written determination on any
significant deficiencies and notify the contractor, in writing,
providing a description of each significant deficiency in sufficient
detail to allow the contractor to understand the deficiencies;
(2) Request the contractor to respond, in writing, to the initial
determination within 30 days; and
(3) Evaluate the contractor's response to the initial
determination, in consultation with the auditor or
[[Page 28868]]
functional specialist, and make a final determination.
(iii) Final determination. (A) The contracting officer shall make a
final determination and notify the contractor, in writing, that--
(1) The contractor's earned value management system is acceptable
and approved, and no significant deficiencies remain, or
(2) Significant deficiencies remain. The notice shall identify any
remaining significant deficiencies, and indicate the adequacy of any
proposed or completed corrective action. The contracting officer
shall--
(i) Request that the contractor, within 45 days of receipt of the
final determination, either correct the deficiencies or submit an
acceptable corrective action plan showing milestones and actions to
eliminate the deficiencies;
(ii) Disapprove the system in accordance with the clause at
252.234-7002, Earned Value Management System, when initial validation
is not successfully completed within the timeframe approved by the
contracting officer, or the contracting officer determines that the
existing earned value management system contains one or more
significant deficiencies in high-risk guidelines in ANSI/EIA-748
standards (guidelines 1, 3, 6, 7, 8, 9, 10, 12, 16, 21, 23, 26, 27, 28,
30, or 32). When the contracting officer determines that the existing
earned value management system contains one or more significant
deficiencies in one or more of the remaining 16 guidelines in ANSI/EIA-
748 standards, the contracting officer shall use discretion to
disapprove the system based on input received from functional
specialists and the auditor; and
(iii) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the
contract.
(B) Follow the procedures relating to monitoring a contractor's
corrective action and the correction of significant deficiencies at PGI
234.201(7).
(8) System approval. The contracting officer shall promptly approve
a previously disapproved earned value management system and notify the
contractor when the contracting officer determines that there are no
remaining significant deficiencies.
(9) Contracting officer notifications. The cognizant contracting
officer shall promptly distribute copies of a determination to approve
a system, disapprove a system and withhold payments, or approve a
previously disapproved system and release withheld payments to the
auditor; payment office; affected contracting officers at the buying
activities; and cognizant contracting officers in contract
administration activities.
PART 242--CONTRACT ADMINISTRATION AND AUDIT SERVICES
0
5. Add subpart 242.70 to read as follows:
SUBPART 242.70--CONTRACTOR BUSINESS SYSTEMS
Sec.
242.7000 Contractor business system deficiencies.
242.7001 Contract clause.
SUBPART 242.70--CONTRACTOR BUSINESS SYSTEMS
242.7000 Contractor business system deficiencies.
(a) Definitions. As used in this subpart--
Acceptable contractor business systems and contractor business
systems are defined in the clause at 252.242-7005, Contractor Business
Systems.
Covered contract means 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 9903.201-1 (see the FAR Appendix).
Significant deficiency is defined in the clause at 252.242-7005,
Contractor Business Systems.
(b) Determination to withhold payments. If the contracting officer
makes a final determination to disapprove a contractor's business
system in accordance with the clause at 252.242-7005, Contractor
Business Systems, the contracting officer shall--
(1) In accordance with agency procedures, identify one or more
covered contracts containing the clause at 252.242-7005, Contractor
Business Systems, from which payments will be withheld. When
identifying the covered contracts from which to withhold payments, the
contracting officer shall ensure that the total amount of payment
withholding under 252.242-7005, does not exceed 10 percent of progress
payments, performance-based payments, and interim payments under cost,
labor-hour, and time-and-materials contracts billed under each of the
identified covered contracts. Similarly, the contracting officer shall
ensure that the total amount of payment withholding under the clause at
252.242-7005, Contractor Business Systems, for each business system
does not exceed five percent of progress payments, performance-based
payments, and interim payments under cost, labor-hour, and time-and-
materials contracts billed under each of the identified covered
contracts. The contracting officer has the sole discretion to identify
the covered contracts from which to withhold payments.
(2) Promptly notify the contractor, in writing, of the contracting
officer's determination to implement payment withholding in accordance
with the clause at 252.242-7005, Contractor Business Systems. The
notice of payment withholding shall be included in the contracting
officer's written final determination for the contractor business
system and shall inform the contractor that--
(i) Payments shall be withheld from the contract or contracts
identified in the written determination in accordance with the clause
at 252.242-7005, Contractor Business Systems, until the contracting
officer determines that there are no remaining significant
deficiencies; and
(ii) The contracting officer reserves the right to take other
actions within the terms and conditions of the contract.
(3) Provide all contracting officers administering the selected
contracts from which payments will be withheld, a copy of the
determination. The contracting officer shall also provide a copy of the
determination to the auditor; payment office; affected contracting
officers at the buying activities; and cognizant contracting officers
in contract administration activities.
(c) Monitoring contractor's corrective action. The contracting
officer, in consultation with the auditor or functional specialist,
shall monitor the contractor's progress in correcting the deficiencies.
The contracting officer shall notify the contractor of any decision to
decrease or increase the amount of payment withholding in accordance
with the clause at 252.242-7005, Contractor Business Systems.
(d) Correction of significant deficiencies. (1) If the contractor
notifies the contracting officer that the contractor has corrected the
significant deficiencies, the contracting officer shall request the
auditor or functional specialist to review the correction to verify
that the deficiencies have been corrected. If, after receipt of
verification, the contracting officer determines that the contractor
has corrected all significant deficiencies as directed by the
contracting officer's final determination, the contracting officer
shall discontinue the withholding of payments, release any payments
previously withheld, and approve the system, unless other significant
deficiencies remain.
[[Page 28869]]
(2) Prior to the receipt of verification, the contracting officer
may discontinue withholding payments pending receipt of verification,
and release any payments previously withheld, if the contractor submits
evidence that the significant deficiencies have been corrected, and the
contracting officer, in consultation with the auditor or functional
specialist, determines that there is a reasonable expectation that the
corrective actions have been implemented.
(3) Within 90 days of receipt of the contractor notification that
the contractor has corrected the significant deficiencies, the
contracting officer shall--
(i) Make a determination that--
(A) The contractor has corrected all significant deficiencies as
directed by the contracting officer's final determination in accordance
with paragraph (d)(1) of this section;
(B) There is a reasonable expectation that the corrective actions
have been implemented in accordance with paragraph (d)(2) of this
section; or
(C) The contractor has not corrected all significant deficiencies
as directed by the contracting officer's final determination in
accordance with paragraph (d)(1) of this section, or there is not a
reasonable expectation that the corrective actions have been
implemented in accordance with paragraph (d)(2) of this section; or
(ii) Reduce withholding directly related to the significant
deficiencies covered under the corrective action plan by at least 50
percent of the amount being withheld from progress payments and
performance-based payments, and direct the contractor, in writing, to
reduce the percentage withheld on interim cost vouchers by at least 50
percent, until the contracting officer makes a determination in
accordance with paragraph (d)(3)(i) of this section.
(4) If, at any time, the contracting officer determines that the
contractor has failed to correct the significant deficiencies
identified in the contractor's notification, the contracting officer
will continue, reinstate, or increase withholding from progress
payments and performance-based payments, and direct the contractor, in
writing, to continue, reinstate, or increase the percentage withheld on
interim cost vouchers to the percentage initially withheld, until the
contracting officer determines that the contractor has corrected all
significant deficiencies as directed by the contracting officer's final
determination.
(e) For sample formats for written notifications of contracting
officer determinations to initiate payment withholding, reduce payment
withholding, and discontinue payment withholding in accordance with the
clause at DFARS 252.242-7005, Contractor Business Systems, see PGI
242.7000.
242.7001 Contract clause.
Use the clause at 252.242-7005, Contractor Business Systems, in
solicitations and contracts (other than in contracts with educational
institutions or Federally Funded Research and Development Centers
(FFRDCs) operated by educational institutions) when--
(a) The resulting contract will be a covered contract as defined in
242.7000(a); and
(b) The solicitation or contract includes any of the following
clauses:
(1) 252.215-7002, Cost Estimating System Requirements.
(2) 252.234-7002, Earned Value Management System.
(3) 252.242-7004, Material Management and Accounting System.
(4) 252.242-7006, Accounting System Administration.
(5) 252.244-7001, Contractor Purchasing System Administration.
(6) 252.245-7003, Contractor Property Management System
Administration.
0
6. Revise sections 242.7201 and 242.7202 to read as follows:
242.7201 Definitions.
Acceptable material management and accounting system, material
management and accounting system, and valid time-phased requirements
are defined in the clause at 252.242-7004, Material Management and
Accounting System.
Significant deficiency is defined in the clause at 252.242.7004,
Material Management and Accounting System.
242.7202 Policy.
(a) DoD policy is for its contractors to have an MMAS that conforms
to the standards in paragraph (e) of the clause at 252.242-7004,
Material Management and Accounting System, so that the system--
(1) Reasonably forecasts material requirements;
(2) Ensures the costs of purchased and fabricated material charged
or allocated to a contract are based on valid time-phased requirements;
and
(3) Maintains a consistent, equitable, and unbiased logic for
costing of material transactions.
(b) The cognizant contracting officer, in consultation with the
auditor and functional specialist, if appropriate, shall--
(1) Determine the acceptability of the contractor's MMAS and
approve or disapprove the system; and
(2) Pursue correction of any deficiencies.
(c) In evaluating the acceptability of the contractor's MMAS, the
contracting officer, in consultation with the auditor and functional
specialist, if appropriate, shall determine whether the contractor's
MMAS complies with the system criteria for an acceptable MMAS as
prescribed in the clause at 252.242-7004, Material Management and
Accounting System.
0
7. Amend section 242.7203 by revising paragraphs (c) and (d) and adding
paragraph (e) to read as follows:
242.7203 Review procedures.
* * * * *
(c) Disposition of findings--(1) Reporting of findings. The auditor
or functional specialist shall document findings and recommendations in
a report to the contracting officer. If the auditor or functional
specialist identifies any significant MMAS deficiencies, the report
shall describe the deficiencies in sufficient detail to allow the
contracting officer to understand the deficiencies.
(2) Initial determination. (i) The contracting officer shall review
findings and recommendations and, if there are no significant
deficiencies, shall promptly notify the contractor, in writing, that
the contractor's MMAS is acceptable and approved; or
(ii) If the contracting officer finds that there are one or more
significant deficiencies (as defined in the clause at 252.242-7004,
Material Management and Accounting System) due to the contractor's
failure to meet one or more of the MMAS system criteria in the clause
at 252.242-7004, Material Management and Accounting System, the
contracting officer shall--
(A) Promptly make an initial written determination on any
significant deficiencies and notify the contractor, in writing,
providing a description of each significant deficiency in sufficient
detail to allow the contractor to understand the deficiency;
(B) Request the contractor to respond, in writing, to the initial
determination within 30 days; and
(C) Promptly evaluate the contractor's response to the initial
determination in consultation with the auditor or functional
specialist, and make a final determination.
(3) Final determination. (i) The ACO shall make a final
determination and notify the contractor that--
[[Page 28870]]
(A) The contractor's MMAS is acceptable and approved, and no
deficiencies remain, or
(B) Significant deficiencies remain. The notice shall identify any
remaining significant deficiencies, and indicate the adequacy of any
proposed or completed corrective action. The contracting officer
shall--
(1) Request that the contractor, within 45 days of receipt of the
final determination, either correct the deficiencies or submit an
acceptable corrective action plan showing milestones and actions to
eliminate the deficiencies;
(2) Disapprove the system in accordance with the clause at 252.242-
7004, Material Management and Accounting System; and
(3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the
contract.
(ii) Follow the procedures relating to monitoring a contractor's
corrective action and the correction of significant deficiencies in PGI
242.7203.
(d) System approval. The contracting officer shall promptly approve
a previously disapproved MMAS and notify the contractor when the
contracting officer determines that there are no remaining significant
deficiencies.
(e) Contracting officer notifications. The cognizant contracting
officer shall promptly distribute copies of a determination to approve
a system, disapprove a system and withhold payments, or approve a
previously disapproved system and release withheld payments to the
auditor; payment office; affected contracting officers at the buying
activities; and cognizant contracting officers in contract
administration activities.
0
8. Revise subpart 242.75 to read as follows:
Subpart 242.75--Contractor Accounting Systems and Related Controls
Sec.
242.7501 Definitions.
242.7502 Policy.
242.7503 Contract clause.
Subpart 242.75--Contractor Accounting Systems and Related Controls
242.7501 Definitions.
As used in this subpart--
Acceptable accounting system, and accounting system are defined in
the clause at 252.242-7006, Accounting System Administration.
Significant deficiency is defined in the clause at 252.242-7006,
Accounting System Administration.
242.7502 Policy.
(a) Contractors receiving cost-reimbursement, incentive type, time-
and-materials, or labor-hour contracts, or contracts which provide for
progress payments based on costs or on a percentage or stage of
completion, shall maintain an accounting system.
(b) The cognizant contracting officer, in consultation with the
auditor or functional specialist, shall--
(1) Determine the acceptability of a contractor's accounting system
and approve or disapprove the system; and
(2) Pursue correction of any deficiencies.
(c) In evaluating the acceptability of a contractor's accounting
system, the contracting officer, in consultation with the auditor or
functional specialist, shall determine whether the contractor's
accounting system complies with the system criteria for an acceptable
accounting system as prescribed in the clause at 252.242-7006,
Accounting System Administration.
(d) Disposition of findings-- (1) Reporting of findings. The
auditor shall document findings and recommendations in a report to the
contracting officer. If the auditor identifies any significant
accounting system deficiencies, the report shall describe the
deficiencies in sufficient detail to allow the contracting officer to
understand the deficiencies. Follow the procedures at PGI 242.7502 for
reporting of deficiencies.
(2) Initial determination. (i) The contracting officer shall review
findings and recommendations and, if there are no significant
deficiencies, shall promptly notify the contractor, in writing, that
the contractor's accounting system is acceptable and approved; or
(ii) If the contracting officer finds that there are one or more
significant deficiencies (as defined in the clause at 252.242-7006,
Accounting System Administration) due to the contractor's failure to
meet one or more of the accounting system criteria in the clause at
252.242-7006, the contracting officer shall--
(A) Promptly make an initial written determination on any
significant deficiencies and notify the contractor, in writing,
providing a description of each significant deficiency in sufficient
detail to allow the contractor to understand the deficiency;
(B) Request the contractor to respond, in writing, to the initial
determination within 30 days; and
(C) Promptly evaluate the contractor`s response to the initial
determination, in consultation with the auditor or functional
specialist, and make a final determination.
(3) Final determination. (i) The contracting officer shall make a
final determination and notify the contractor, in writing, that--
(A) The contractor's accounting system is acceptable and approved,
and no significant deficiencies remain, or
(B) Significant deficiencies remain. The notice shall identify any
remaining significant deficiencies, and indicate the adequacy of any
proposed or completed corrective action. The contracting officer
shall--
(1) Request that the contractor, within 45 days of receipt of the
final determination, either correct the deficiencies or submit an
acceptable corrective action plan showing milestones and actions to
eliminate the deficiencies;
(2) Make a determination to disapprove the system in accordance
with the clause at 252.242-7006, Accounting System Administration; and
(3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the
contract.
(ii) Follow the procedures relating to monitoring a contractor's
corrective action and the correction of significant deficiencies in PGI
242.7502.
(e) System approval. The contracting officer shall promptly approve
a previously disapproved accounting system and notify the contractor
when the contracting officer determines that there are no remaining
significant deficiencies.
(f) Contracting officer notifications. The cognizant contracting
officer shall promptly distribute copies of a determination to approve
a system, disapprove a system and withhold payments, or approve a
previously disapproved system and release withheld payments to the
auditor; payment office; affected contracting officers at the buying
activities; and cognizant contracting officers in contract
administration activities.
(g) Mitigating the risk of accounting system deficiencies on
specific proposals.
(1) Field pricing teams shall discuss identified accounting system
deficiencies and their impact in all reports on contractor proposals
until the deficiencies are resolved. (2) The contracting officer
responsible for negotiation of a proposal generated by an accounting
system with an identified deficiency shall evaluate whether the
deficiency impacts the negotiations. If it does not, the contracting
officer should proceed with negotiations. If it does, the contracting
officer should consider other alternatives, e.g.--
[[Page 28871]]
(i) Allowing the contractor additional time to correct the
accounting system deficiency and submit a corrected proposal;
(ii) Considering another type of contract, e.g., a fixed-price
incentive (firm target) contract instead of a firm-fixed-price;
(iii) Using additional cost analysis techniques to determine the
reasonableness of the cost elements affected by the accounting system's
deficiency;
(iv) Segregating the questionable areas as a cost-reimbursable line
item;
(v) Reducing the negotiation objective for profit or fee; or
(vi) Including a contract (reopener) clause that provides for
adjustment of the contract amount after award.
(3) The contracting officer who incorporates a reopener clause into
the contract is responsible for negotiating price adjustments required
by the clause. Any reopener clause necessitated by an accounting system
deficiency should--
(i) Clearly identify the amounts and items that are in question at
the time of negotiation;
(ii) Indicate a specific time or subsequent event by which the
contractor will submit a supplemental proposal, including cost or
pricing data, identifying the cost impact adjustment necessitated by
the deficient accounting system;
(iii) Provide for the contracting officer to adjust the contract
price unilaterally if the contractor fails to submit the supplemental
proposal; and
(iv) Provide that failure of the Government and the contractor to
agree to the price adjustment shall be a dispute under the Disputes
clause.
242.7503 Contract clause.
Use the clause at 252.242-7006, Accounting System Administration,
in solicitations and contracts when contemplating--
(a) A cost-reimbursement, incentive type, time-and-materials, or
labor-hour contract;
(b) A fixed-price contract with progress payments made on the basis
of costs incurred by the contractor or on a percentage or stage of
completion.
PART 244--SUBCONTRACTING POLICIES AND PROCEDURES
0
9. Add subpart 244.1 to read as follows:
SUBPART 244.1--GENERAL
Sec.
244.101 Definitions
SUBPART 244.1--GENERAL
244.101 Definitions.
As used in this subpart----
Acceptable purchasing system and purchasing system are defined in
the clause at 252.244-7001, Contractor Purchasing System
Administration.
Significant deficiency is defined in the clause at 252.244-7001,
Contractor Purchasing System Administration.
244.304 [Removed]
0
10. Remove section 244.304.
0
11. Revise section 244.305 to read as follows:
244.305 Granting, withholding, or withdrawing approval.
244.305-70 Policy.
Use this subsection instead of FAR 44.305-2(c) and 44.305-3(b).
(a) The cognizant contracting officer, in consultation with the
purchasing system analyst or auditor, shall--
(1) Determine the acceptability of the contractor's purchasing
system and approve or disapprove the system; and
(2) Pursue correction of any deficiencies.
(b) In evaluating the acceptability of the contractor's purchasing
system, the contracting officer, in consultation with the purchasing
system analyst or auditor, shall determine whether the contractor's
purchasing system complies with the system criteria for an acceptable
purchasing system as prescribed in the clause at 252.244-7001,
Contractor Purchasing System Administration.
(c) Disposition of findings--(1) Reporting of findings. The
purchasing system analyst or auditor shall document findings and
recommendations in a report to the contracting officer. If the auditor
or purchasing system analyst identifies any significant purchasing
system deficiencies, the report shall describe the deficiencies in
sufficient detail to allow the contracting officer to understand the
deficiencies.
(2) Initial determination. (i) The contracting officer shall review
all findings and recommendations and, if there are no significant
deficiencies, shall promptly notify the contractor that the
contractor's purchasing system is acceptable and approved; or
(ii) If the contracting officer finds that there are one or more
significant deficiencies (as defined in the clause at 252.244-7001,
Contractor Purchasing System Administration) due to the contractor's
failure to meet one or more of the purchasing system criteria in the
clause at 252.244-7001, the contracting officer shall--
(A) Promptly make an initial written determination on any
significant deficiencies and notify the contractor, in writing,
providing a description of each significant deficiency in sufficient
detail to allow the contractor to understand the deficiency;
(B) Request the contractor to respond, in writing, to the initial
determination within 30 days; and
(C) Evaluate the contractor's response to the initial determination
in consultation with the auditor or purchasing system analyst, and make
a final determination.
(3) Final determination. (i) The contracting officer shall make a
final determination and notify the contractor, in writing, that--
(A) The contractor's purchasing system is acceptable and approved,
and no significant deficiencies remain, or
(B) Significant deficiencies remain. The notice shall identify any
remaining significant deficiencies, and indicate the adequacy of any
proposed or completed corrective action. The contracting officer
shall--
(1) Request that the contractor, within 45 days of receipt of the
final determination, either correct the deficiencies or submit an
acceptable corrective action plan showing milestones and actions to
eliminate the deficiencies;
(2) Disapprove the system in accordance with the clause at 252.244-
7001, Contractor Purchasing System Administration; and
(3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the
contract.
(ii) Follow the procedures relating to monitoring a contractor's
corrective action and the correction of significant deficiencies in PGI
244.305-70.
(d) System approval. The contracting officer shall promptly approve
a previously disapproved purchasing system and notify the contractor
when the contracting officer determines that there are no remaining
significant deficiencies.
(e) Contracting officer notifications. The cognizant contracting
officer shall promptly distribute copies of a determination to approve
a system, disapprove a system and withhold payments, or approve a
previously disapproved system and release withheld payments to the
auditor; payment office; affected contracting officers at the buying
activities; and cognizant contracting officers in contract
administration activities.
(f) Mitigating the risk of purchasing system deficiencies on
specific proposals.
[[Page 28872]]
(1) Source selection evaluation teams shall discuss identified
purchasing system deficiencies and their impact in all reports on
contractor proposals until the deficiencies are resolved.
(2) The contracting officer responsible for negotiation of a
proposal generated by a purchasing system with an identified deficiency
shall evaluate whether the deficiency impacts the negotiations. If it
does not, the contracting officer should proceed with negotiations. If
it does, the contracting officer should consider other alternatives,
e.g.--
(i) Allowing the contractor additional time to correct the
purchasing system deficiency and submit a corrected proposal;
(ii) Considering another type of contract, e.g., a fixed-price
incentive (firm target) contract instead of firm-fixed-price;
(iii) Using additional cost analysis techniques to determine the
reasonableness of the cost elements affected by the purchasing system's
deficiency;
(iv) Segregating the questionable areas as a cost-reimbursable line
item;
(v) Reducing the negotiation objective for profit or fee; or
(vi) Including a contract (reopener) clause that provides for
adjustment of the contract amount after award.
(3) The contracting officer who incorporates a reopener clause into
the contract is responsible for negotiating price adjustments required
by the clause. Any reopener clause necessitated by a purchasing system
deficiency should--
(i) Clearly identify the amounts and items that are in question at
the time of negotiation;
(ii) Indicate a specific time or subsequent event by which the
contractor will submit a supplemental proposal, including cost or
pricing data, identifying the cost impact adjustment necessitated by
the deficient purchasing system;
(iii) Provide for the contracting officer to adjust the contract
price unilaterally if the contractor fails to submit the supplemental
proposal; and
(iv) Provide that failure of the Government and the contractor to
agree to the price adjustment shall be a dispute under the Disputes
clause.
244.305-71 Contract clause.
Use the clause at 252.244-7001, Contractor Purchasing System
Administration, in solicitations and contracts containing the clause at
FAR 52.244-2, Subcontracts.
PART 245--GOVERNMENT PROPERTY
0
12. Revise section 245.105 to read as follows:
245.105 Contractors' property management system compliance.
(a) Definitions--
(1) Acceptable property management system and property management
system are defined in the clause at 252.245-7003, Contractor Property
Management System Administration.
(2) Significant deficiency is defined in the clause at 252.245-
7003, Contractor Property Management System Administration.
(b) Policy. The cognizant contracting officer, in consultation with
the property administrator, shall--
(1) Determine the acceptability of the system and approve or
disapprove the system; and
(2) Pursue correction of any deficiencies.
(c) In evaluating the acceptability of a contractor's property
management system, the contracting officer, in consultation with the
property administrator, shall determine whether the contractor's
property management system complies with the system criteria for an
acceptable property management system as prescribed in the clause at
252.245-7003, Contractor Property Management System Administration.
(d) Disposition of findings--(1) Reporting of findings. The
property administrator shall document findings and recommendations in a
report to the contracting officer. If the property administrator
identifies any significant property system deficiencies, the report
shall describe the deficiencies in sufficient detail to allow the
contracting officer to understand the deficiencies.
(2) Initial determination. (i) The contracting officer shall review
findings and recommendations and, if there are no significant
deficiencies, shall promptly notify the contractor, in writing, that
the contractor's property management system is acceptable and approved;
or
(ii) If the contracting officer finds that there are one or more
significant deficiencies (as defined in the clause at 252.245-7003,
Contractor Property Management System Administration) due to the
contractor's failure to meet one or more of the property management
system criteria in the clause at 252.245-7003, the contracting officer
shall--
(A) Promptly make an initial written determination on any
significant deficiencies and notify the contractor, in writing,
providing a description of each significant deficiency in sufficient
detail to allow the contractor to understand the deficiency;
(B) Request the contractor to respond, in writing, to the initial
determination within 30 days and;
(C) Evaluate the contractor's response to the initial
determination, in consultation with the property administrator, and
make a final determination.
(3) Final determination. (i) The contracting officer shall make a
final determination and notify the contractor, in writing, that--
(A) The contractor's property management system is acceptable and
approved, and no significant deficiencies remain, or
(B) Significant deficiencies remain. The notice shall identify any
remaining significant deficiencies, and indicate the adequacy of any
proposed or completed corrective action. The contracting officer
shall--
(1) Request that the contractor, within 45 days of receipt of the
final determination, either correct the deficiencies or submit an
acceptable corrective action plan showing milestones and actions to
eliminate the deficiencies;
(2) Disapprove the system in accordance with the clause at 252.245-
7003, Contractor Property Management System Administration; and
(3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the
contract.
(ii) Follow the procedures relating to monitoring a contractor's
corrective action and the correction of significant deficiencies in PGI
245.105.
(e) System approval. The contracting officer shall promptly approve
a previously disapproved property management system and notify the
contractor when the contracting officer determines, in consultation
with the property administrator, that there are no remaining
significant deficiencies.
(f) Contracting officer notifications. The cognizant contracting
officer shall promptly distribute copies of a determination to approve
a system, disapprove a system and withhold payments, or approve a
previously disapproved system and release withheld payments to the
auditor; payment office; affected contracting officers at the buying
activities; and cognizant contracting officers in contract
administration activities.
0
13. Amend section 245.107 by adding paragraph (d) to read as follows:
245.107 Contract clauses.
* * * * *
[[Page 28873]]
(d) Use the clause at 252.245-7003, Contractor Property Management
System Administration, in solicitations and contracts containing the
clause at FAR 52.245-1, Government Property.
PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
0
14. Revise section 252.215-7002 to read as follows:
252.215-7002 Cost Estimating System Requirements.
As prescribed in 215.408(2), use the following clause:
Cost Estimating System Requirements (May 2011)
(a) Definitions.
Acceptable estimating system means an estimating system complies
with the system criteria in paragraph (d) of this clause, and
provides for a system that--
(1) Is maintained, reliable, and consistently applied;
(2) Produces verifiable, supportable, documented, and timely
cost estimates that are an acceptable basis for negotiation of fair
and reasonable prices;
(3) Is consistent with and integrated with the Contractor's
related management systems; and
(4) Is subject to applicable financial control systems.
Estimating system means the Contractor's policies, procedures,
and practices for budgeting and planning controls, and generating
estimates of costs and other data included in proposals submitted to
customers in the expectation of receiving contract awards.
Estimating system includes the Contractor's--
(1) Organizational structure;
(2) Established lines of authority, duties, and
responsibilities;
(3) Internal controls and managerial reviews;
(4) Flow of work, coordination, and communication; and
(5) Budgeting, planning, estimating methods, techniques,
accumulation of historical costs, and other analyses used to
generate cost estimates.
Significant deficiency means 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.
(b) General. The Contractor shall establish, maintain, and
comply with an acceptable estimating system.
(c) Applicability. Paragraphs (d) and (e) of this clause apply
if the Contractor is a large business and either--
(1) In its fiscal year preceding award of this contract,
received Department of Defense (DoD) prime contracts or
subcontracts, totaling $50 million or more for which cost or pricing
data were required; or
(2) In its fiscal year preceding award of this contract--
(i) Received DoD prime contracts or subcontracts totaling $10
million or more (but less than $50 million) for which cost or
pricing data were required; and
(ii) Was notified, in writing, by the Contracting Officer that
paragraphs (d) and (e) of this clause apply.
(d) System requirements. (1) The Contractor shall disclose its
estimating system to the Administrative Contracting Officer (ACO),
in writing. If the Contractor wishes the Government to protect the
information as privileged or confidential, the Contractor must mark
the documents with the appropriate legends before submission.
(2) An estimating system disclosure is acceptable when the
Contractor has provided the ACO with documentation that--
(i) Accurately describes those policies, procedures, and
practices that the Contractor currently uses in preparing cost
proposals; and
(ii) Provides sufficient detail for the Government to reasonably
make an informed judgment regarding the acceptability of the
Contractor's estimating practices.
(3) The Contractor shall--
(i) Comply with its disclosed estimating system; and
(ii) Disclose significant changes to the cost estimating system
to the ACO on a timely basis.
(4) The Contractor's estimating system shall provide for the use
of appropriate source data, utilize sound estimating techniques and
good judgment, maintain a consistent approach, and adhere to
established policies and procedures. An acceptable estimating system
shall accomplish the following functions:
(i) Establish clear responsibility for preparation, review, and
approval of cost estimates and budgets;
(ii) Provide a written description of the organization and
duties of the personnel responsible for preparing, reviewing, and
approving cost estimates and budgets;
(iii) Ensure that relevant personnel have sufficient training,
experience, and guidance to perform estimating and budgeting tasks
in accordance with the Contractor's established procedures;
(iv) Identify and document the sources of data and the
estimating methods and rationale used in developing cost estimates
and budgets;
(v) Provide for adequate supervision throughout the estimating
and budgeting process;
(vi) Provide for consistent application of estimating and
budgeting techniques;
(vii) Provide for detection and timely correction of errors;
(viii) Protect against cost duplication and omissions;
(ix) Provide for the use of historical experience, including
historical vendor pricing information, where appropriate;
(x) Require use of appropriate analytical methods;
(xi) Integrate information available from other management
systems;
(xii) Require management review, including verification of the
company's estimating and budgeting policies, procedures, and
practices;
(xiii) Provide for internal review of, and accountability for,
the acceptability of the estimating system, including the budgetary
data supporting indirect cost estimates and comparisons of projected
results to actual results, and an analysis of any differences;
(xiv) Provide procedures to update cost estimates and notify the
Contracting Officer in a timely manner throughout the negotiation
process;
(xv) Provide procedures that ensure subcontract prices are
reasonable based on a documented review and analysis provided with
the prime proposal, when practicable;
(xvi) Provide estimating and budgeting practices that
consistently generate sound proposals that are compliant with the
provisions of the solicitation and are adequate to serve as a basis
to reach a fair and reasonable price; and
(xvii) Have an adequate system description, including policies,
procedures, and estimating and budgeting practices, that comply with
the Federal Acquisition Regulation and Defense Federal Acquisition
Regulation Supplement.
(e) Significant deficiencies. (1) The Contracting Officer will
provide an initial determination to the Contractor, in writing, of
any significant deficiencies. The initial determination will
describe the deficiency in sufficient detail to allow the Contractor
to understand the deficiency.
(2) The Contractor shall respond within 30 days to a written
initial determination from the Contracting Officer that identifies
significant deficiencies in the Contractor's estimating system. If
the Contractor disagrees with the initial determination, the
Contractor shall state, in writing, its rationale for disagreeing.
(3) The Contracting Officer will evaluate the Contractor's
response and notify the Contractor, in writing, of the Contracting
Officer's final determination concerning--
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or completed corrective
action; and
(iii) System disapproval, if the Contracting Officer determines
that one or more significant deficiencies remain.
(f) If the Contractor receives the Contracting Officer's final
determination of significant deficiencies, the Contractor shall,
within 45 days of receipt of the final determination, either correct
the significant deficiencies or submit an acceptable corrective
action plan showing milestones and actions to eliminate the
significant deficiencies.
(g) Withholding payments. If the Contracting Officer makes a
final determination to disapprove the Contractor's estimating
system, and the contract includes the clause at 252.242-7005,
Contractor Business Systems, the Contracting Officer will withhold
payments in accordance with that clause.
(End of clause)
0
16. Revise section 252.234-7002 to read as follows:
252.234-7002 Earned Value Management System.
As prescribed in 234.203(2), use the following clause:
[[Page 28874]]
EARNED VALUE MANAGEMENT SYSTEM (MAY 2011)
(a) Definitions. As used in this clause--
Acceptable earned value management system means an earned value
management system that generally complies with system criteria in
paragraph (b) of this clause.
Earned value management system means an earned value management
system that complies with the earned value management system
guidelines in the ANSI/EIA-748.
Significant deficiency means 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.
(b) System criteria. In the performance of this contract, the
Contractor shall use--
(1) An Earned Value Management System (EVMS) that complies with
the EVMS guidelines in the American National Standards Institute/
Electronic Industries Alliance Standard 748, Earned Value Management
Systems (ANSI/EIA-748); and
(2) Management procedures that provide for generation of timely,
reliable, and verifiable information for the Contract Performance
Report (CPR) and the Integrated Master Schedule (IMS) required by
the CPR and IMS data items of this contract.
(c) If this contract has a value of $50 million or more, the
Contractor shall use an EVMS that has been determined to be
acceptable by the Cognizant Federal Agency (CFA). If, at the time of
award, the Contractor's EVMS has not been determined by the CFA to
be in compliance with the EVMS guidelines as stated in paragraph
(b)(1) of this clause, the Contractor shall apply its current system
to the contract and shall take necessary actions to meet the
milestones in the Contractor's EVMS plan.
(d) If this contract has a value of less than $50 million, the
Government will not make a formal determination that the
Contractor's EVMS complies with the EVMS guidelines in ANSI/EIA-748
with respect to the contract. The use of the Contractor's EVMS for
this contract does not imply a Government determination of the
Contractor's compliance with the EVMS guidelines in ANSI/EIA-748 for
application to future contracts. The Government will allow the use
of a Contractor's EVMS that has been formally reviewed and
determined by the CFA to be in compliance with the EVMS guidelines
in ANSI/EIA-748.
(e) The Contractor shall submit notification of any proposed
substantive changes to the EVMS procedures and the impact of those
changes to the CFA. If this contract has a value of $50 million or
more, unless a waiver is granted by the CFA, any EVMS changes
proposed by the Contractor require approval of the CFA prior to
implementation. The CFA will advise the Contractor of the
acceptability of such changes as soon as practicable (generally
within 30 calendar days) after receipt of the Contractor's notice of
proposed changes. If the CFA waives the advance approval
requirements, the Contractor shall disclose EVMS changes to the CFA
at least 14 calendar days prior to the effective date of
implementation.
(f) The Government will schedule integrated baseline reviews as
early as practicable, and the review process will be conducted not
later than 180 calendar days after--
(1) Contract award;
(2) The exercise of significant contract options; and
(3) The incorporation of major modifications.
During such reviews, the Government and the Contractor will jointly
assess the Contractor's baseline to be used for performance
measurement to ensure complete coverage of the statement of work,
logical scheduling of the work activities, adequate resourcing, and
identification of inherent risks.
(g) The Contractor shall provide access to all pertinent records
and data requested by the Contracting Officer or duly authorized
representative as necessary to permit Government surveillance to
ensure that the EVMS complies, and continues to comply, with the
performance criteria referenced in paragraph (b) of this clause.
(h) When indicated by contract performance, the Contractor shall
submit a request for approval to initiate an over-target baseline or
over-target schedule to the Contracting Officer. The request shall
include a top-level projection of cost and/or schedule growth, a
determination of whether or not performance variances will be
retained, and a schedule of implementation for the rebaselining. The
Government will acknowledge receipt of the request in a timely
manner (generally within 30 calendar days).
(i) Significant deficiencies. (1) The Contracting Officer will
provide an initial determination to the Contractor, in writing, on
any significant deficiencies. The initial determination will
describe the deficiency in sufficient detail to allow the Contractor
to understand the deficiency.
(2) The Contractor shall respond within 30 days to a written
initial determination from the Contracting Officer that identifies
significant deficiencies in the Contractor's EVMS. If the Contractor
disagrees with the initial determination, the Contractor shall
state, in writing, its rationale for disagreeing.
(3) The Contracting Officer will evaluate the Contractor's
response and notify the Contractor, in writing, of the Contracting
Officer's final determination concerning--
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or completed corrective
action;
(iii) System noncompliance, when the Contractor's existing EVMS
fails to comply with the earned value management system guidelines
in the ANSI/EIA-748; and
(iv) System disapproval, if initial EVMS validation is not
successfully completed within the timeframe approved by the
Contracting Officer, or if the Contracting Officer determines that
the Contractor's earned value management system contains one or more
significant deficiencies in high-risk guidelines in ANSI/EIA-748
standards (guidelines 1, 3, 6, 7, 8, 9, 10, 12, 16, 21, 23, 26, 27,
28, 30, or 32). When the Contracting Officer determines that the
existing earned value management system contains one or more
significant deficiencies in one or more of the remaining 16
guidelines in ANSI/EIA-748 standards, the contracting officer will
use discretion to disapprove the system based on input received from
functional specialists and the auditor.
(4) If the Contractor receives the Contracting Officer's final
determination of significant deficiencies, the Contractor shall,
within 45 days of receipt of the final determination, either correct
the significant deficiencies or submit an acceptable corrective
action plan showing milestones and actions to eliminate the
significant deficiencies.
(j) Withholding payments. If the Contracting Officer makes a
final determination to disapprove the Contractor's EVMS, and the
contract includes the clause at 252.242-7005, Contractor Business
Systems, the Contracting Officer will withhold payments in
accordance with that clause.
(k) With the exception of paragraphs (i) and (j) of this clause,
the Contractor shall require its subcontractors to comply with EVMS
requirements as follows:
(1) For subcontracts valued at $50 million or more, the
following subcontractors shall comply with the requirements of this
clause:
[Contracting Officer to insert names of subcontractors (or
subcontracted effort if subcontractors have not been selected)
designated for application of the EVMS requirements of this clause.]
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(2) For subcontracts valued at less than $50 million, the
following subcontractors shall comply with the requirements of this
clause, excluding the requirements of paragraph (c) of this clause:
[Contracting Officer to insert names of subcontractors (or
subcontracted effort if subcontractors have not been selected)
designated for application of the EVMS requirements of this clause.]
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(End of clause)
0
17. Revise section 252.242-7004 to read as follows:
252.242-7004 Material Management and Accounting System.
As prescribed in 242.7204, use the following clause:
MATERIAL MANAGEMENT AND ACCOUNTING SYSTEM (MAY 2011)
(a) Definitions. As used in this clause--
(1) Material management and accounting system (MMAS) means the
Contractor's system or systems for planning, controlling, and
accounting for the acquisition, use, issuing, and disposition of
material. Material management and accounting systems may be manual
or automated. They may be stand-
[[Page 28875]]
alone systems or they may be integrated with planning, engineering,
estimating, purchasing, inventory, accounting, or other systems.
(2) Valid time-phased requirements means material that is--
(i) Needed to fulfill the production plan, including reasonable
quantities for scrap, shrinkage, yield, etc.; and
(ii) Charged/billed to contracts or other cost objectives in a
manner consistent with the need to fulfill the production plan.
(3) Contractor means a business unit as defined in section
31.001 of the Federal Acquisition Regulation (FAR).
(4) Acceptable material management and accounting system means a
MMAS that generally complies with the system criteria in paragraph
(d) of this clause.
(5) Significant deficiency means 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.
(b) General. The Contractor shall--
(1) Maintain an MMAS that--
(i) Reasonably forecasts material requirements;
(ii) Ensures that costs of purchased and fabricated material
charged or allocated to a contract are based on valid time-phased
requirements; and
(iii) Maintains a consistent, equitable, and unbiased logic for
costing of material transactions; and
(2) Assess its MMAS and take reasonable action to comply with
the MMAS standards in paragraph (e) of this clause.
(c) Disclosure and maintenance requirements. The Contractor
shall--
(1) Have policies, procedures, and operating instructions that
adequately describe its MMAS;
(2) Provide to the Administrative Contracting Officer (ACO),
upon request, the results of internal reviews that it has conducted
to ensure compliance with established MMAS policies, procedures, and
operating instructions; and
(3) Disclose significant changes in its MMAS to the ACO at least
30 days prior to implementation.
(d) System criteria. The MMAS shall have adequate internal
controls to ensure system and data integrity, and shall--
(1) Have an adequate system description including policies,
procedures, and operating instructions that comply with the Federal
Acquisition Regulation and Defense Federal Acquisition Regulation
Supplement;
(2) Ensure that costs of purchased and fabricated material
charged or allocated to a contract are based on valid time-phased
requirements as impacted by minimum/economic order quantity
restrictions.
(i) A 98 percent bill of material accuracy and a 95 percent
master production schedule accuracy are desirable as a goal in order
to ensure that requirements are both valid and appropriately time-
phased.
(ii) If systems have accuracy levels below these, the Contractor
shall provide adequate evidence that--
(A) There is no material harm to the Government due to lower
accuracy levels; and
(B) The cost to meet the accuracy goals is excessive in relation
to the impact on the Government;
(3) Provide a mechanism to identify, report, and resolve system
control weaknesses and manual override. Systems should identify
operational exceptions, such as excess/residual inventory, as soon
as known;
(4) Provide audit trails and maintain records (manual and those
in machine-readable form) necessary to evaluate system logic and to
verify through transaction testing that the system is operating as
desired;
(5) Establish and maintain adequate levels of record accuracy,
and include reconciliation of recorded inventory quantities to
physical inventory by part number on a periodic basis. A 95 percent
accuracy level is desirable. If systems have an accuracy level below
95 percent, the Contractor shall provide adequate evidence that--
(i) There is no material harm to the Government due to lower
accuracy levels; and
(ii) The cost to meet the accuracy goal is excessive in relation
to the impact on the Government;
(6) Provide detailed descriptions of circumstances that will
result in manual or system generated transfers of parts;
(7) Maintain a consistent, equitable, and unbiased logic for
costing of material transactions as follows:
(i) The Contractor shall maintain and disclose written policies
describing the transfer methodology and the loan/pay-back technique.
(ii) The costing methodology may be standard or actual cost, or
any of the inventory costing methods in 48 CFR 9904.411-50(b). The
Contractor shall maintain consistency across all contract and
customer types, and from accounting period to accounting period for
initial charging and transfer charging.
(iii) The system should transfer parts and associated costs
within the same billing period. In the few instances where this may
not be appropriate, the Contractor may accomplish the material
transaction using a loan/pay-back technique. The ``loan/pay-back
technique'' means that the physical part is moved temporarily from
the contract, but the cost of the part remains on the contract. The
procedures for the loan/pay-back technique must be approved by the
ACO. When the technique is used, the Contractor shall have controls
to ensure--
(A) Parts are paid back expeditiously;
(B) Procedures and controls are in place to correct any
overbilling that might occur;
(C) Monthly, at a minimum, identification of the borrowing
contract and the date the part was borrowed; and
(D) The cost of the replacement part is charged to the borrowing
contract;
(8) Where allocations from common inventory accounts are used,
have controls (in addition to those in paragraphs (d)(2) and (7) of
this clause) to ensure that--
(i) Reallocations and any credit due are processed no less
frequently than the routine billing cycle;
(ii) Inventories retained for requirements that are not under
contract are not allocated to contracts; and
(iii) Algorithms are maintained based on valid and current data;
(9) Have adequate controls to ensure that physically commingled
inventories that may include material for which costs are charged or
allocated to fixed-price, cost-reimbursement, and commercial
contracts do not compromise requirements of any of the standards in
paragraphs (d)(1) through (8) of this clause. Government-furnished
material shall not be--
(i) Physically commingled with other material; or
(ii) Used on commercial work; and
(10) Be subjected to periodic internal reviews to ensure
compliance with established policies and procedures.
(e) Significant deficiencies. (1) The Contracting Officer will
provide an initial determination to the Contractor, in writing, of
any significant deficiencies. The initial determination will
describe the deficiency in sufficient detail to allow the Contractor
to understand the deficiency.
(2) The Contractor shall respond within 30 days to a written
initial determination from the Contracting Officer that identifies
significant deficiencies in the Contractor's MMAS. If the Contractor
disagrees with the initial determination, the Contractor shall
state, in writing, its rationale for disagreeing.
(3) The Contracting Officer will evaluate the Contractor's
response and notify the Contractor, in writing, of the Contracting
Officer's final determination concerning--
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or completed corrective
action; and
(iii) System disapproval if the Contracting Officer determines
that one or more significant deficiencies remain.
(f) If the Contractor receives the Contracting Officer's final
determination of significant deficiencies, the Contractor shall,
within 45 days of receipt of the final determination, either correct
the significant deficiencies or submit an acceptable corrective
action plan showing milestones and actions to eliminate the
significant deficiencies.
(g) Withholding payments. If the Contracting Officer makes a
final determination to disapprove the Contractor's MMAS, and the
contract includes the clause at 252.242-7005, Contractor Business
Systems, the Contracting Officer will withhold payments in
accordance with that clause.
(End of clause)
0
18. Add section 252.242-7005 to read as follows
252.242-7005 Contractor Business Systems.
As prescribed in 242.7001, use the following clause:
CONTRACTOR BUSINESS SYSTEMS (MAY 2011)
(a) Definitions. As used in this clause--
Acceptable contractor business systems means contractor business
systems that
[[Page 28876]]
comply with the terms and conditions of the applicable business
system clauses listed in the definition of ``contractor business
systems'' in this clause.
Contractor business systems means--
(1) Accounting system, if this contract includes the clause at
252.242-7006, Accounting System Administration;
(2) Earned value management system, if this contract includes
the clause at 252.234-7002, Earned Value Management System;
(3) Estimating system, if this contract includes the clause at
252.215-7002, Cost Estimating System Requirements;
(4) Material management and accounting system, if this contract
includes the clause at 252.242-7004, Material Management and
Accounting System;
(5) Property management system, if this contract includes the
clause at 252.245-7003, Contractor Property Management System
Administration; and
(6) Purchasing system, if this contract includes the clause at
252.244-7001, Contractor Purchasing System Administration.
Significant deficiency, in the case of a contractor business
system, means 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.
(b) General. The Contractor shall establish and maintain
acceptable business systems in accordance with the terms and
conditions of this contract.
(c) Significant deficiencies. (1) The Contractor shall respond,
in writing, within 30 days to an initial determination that there
are one or more significant deficiencies in one or more of the
Contractor's business systems.
(2) The Contracting Officer will evaluate the Contractor's
response and notify the Contractor, in writing, of the final
determination as to whether the Contractor's business system
contains significant deficiencies. If the Contracting Officer
determines that the Contractor's business system contains
significant deficiencies, the final determination will include a
notice to withhold payments.
(d) Withholding payments. (1) If the Contracting Officer issues
the final determination with a notice to withhold payments for
significant deficiencies in a contractor business system required
under this contract, the Contracting Officer will withhold five
percent of amounts due from progress payments and performance-based
payments, and direct the Contractor, in writing, to withhold five
percent from its billings on interim cost vouchers on cost, labor-
hour, and time-and-materials contracts until the Contracting Officer
has determined that the Contractor has corrected all significant
deficiencies as directed by the contracting officer's final
determination. The Contractor shall, within 45 days of receipt of
the notice, either correct the deficiencies or submit an acceptable
corrective action plan showing milestones and actions to eliminate
the deficiencies.
(2) If the Contractor submits an acceptable corrective action
plan within 45 days of receipt of a notice of the Contracting
Officer's intent to withhold payments, and the Contracting Officer,
in consultation with the auditor or functional specialist,
determines that the Contractor is effectively implementing such
plan, the Contracting Officer will reduce withholding directly
related to the significant deficiencies covered under the corrective
action plan, to two percent from progress payments and performance-
based payments, and direct the Contractor, in writing, to reduce the
percentage withheld on interim cost vouchers to two percent until
the Contracting Officer determines the Contractor has corrected all
significant deficiencies as directed by the Contracting Officer's
final determination. However, if at any time, the Contracting
Officer determines that the Contractor has failed to follow the
accepted corrective action plan, the Contracting Officer will
increase withholding from progress payments and performance-based
payments, and direct the Contractor, in writing, to increase the
percentage withheld on interim cost vouchers to the percentage
initially withheld, until the Contracting Officer determines that
the Contractor has corrected all significant deficiencies as
directed by the Contracting Officer's final determination.
(3) Payment withhold percentage limits.
(i) The total percentage of payments withheld on amounts due
under each progress payment, performance-based payment, or interim
cost voucher, on this contract shall not exceed--
(A) Five percent for one or more significant deficiencies in any
single contractor business system; and
(B) Ten percent for significant deficiencies in multiple
contractor business systems.
(ii) If this contract contains pre-existing withholds, and the
application of any subsequent payment withholds will cause
withholding under this clause to exceed the payment withhold
percentage limits in paragraph (d)(3)(i) of this clause, the
Contracting Officer will reduce the payment withhold percentage in
the final determination to an amount that will not exceed the
payment withhold percentage limits.
(4) For the purpose of this clause, payment means any of the
following payments authorized under this contract:
(i) Interim payments under--
(A) Cost-reimbursement contracts;
(B) Incentive type contracts;
(C) Time-and-materials contracts;
(D) Labor-hour contracts.
(ii) Progress payments.
(iii) Performance-based payments.
(5) Payment withholding shall not apply to payments on fixed-
price line items where performance is complete and the items were
accepted by the Government.
(6) The withholding of any amount or subsequent payment to the
Contractor shall not be construed as a waiver of any rights or
remedies the Government has under this contract.
(7) Notwithstanding the provisions of any clause in this
contract providing for interim, partial, or other payment
withholding on any basis, the Contracting Officer may withhold
payment in accordance with the provisions of this clause.
(8) The payment withholding authorized in this clause is not
subject to the interest-penalty provisions of the Prompt Payment
Act.
(e) Correction of deficiencies. (1) The Contractor shall notify
the Contracting Officer, in writing, when the Contractor has
corrected the business system's deficiencies.
(2) Once the Contractor has notified the Contracting Officer
that all deficiencies have been corrected, the Contracting Officer
will take one of the following actions:
(i) If the Contracting Officer determines that the Contractor
has corrected all significant deficiencies as directed by the
Contracting Officer's final determination, the Contracting Officer
will, as appropriate, discontinue the withholding of progress
payments and performance-based payments, and direct the Contractor,
in writing, to discontinue the payment withholding from billings on
interim cost vouchers under this contract associated with the
Contracting Officer's final determination, and authorize the
Contractor to bill for any monies previously withheld that are not
also being withheld due to other significant deficiencies. Any
payment withholding under this contract due to other significant
deficiencies, will remain in effect until the Contracting Officer
determines that those significant deficiencies are corrected.
(ii) If the Contracting Officer determines that the Contractor
still has significant deficiencies, the Contracting Officer will
continue the withholding of progress payments and performance-based
payments, and the Contractor shall continue withholding amounts from
its billings on interim cost vouchers in accordance with paragraph
(d) of this clause, and not bill for any monies previously withheld.
(iii) If, within 90 days of receipt of the Contractor
notification that the Contractor has corrected the significant
deficiencies, 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, the Contracting
Officer will reduce withholding directly related to the significant
deficiencies covered under the corrective action plan by at least 50
percent of the amount being withheld from progress payments and
performance-based payments, and direct the Contractor, in writing,
to reduce the percentage withheld on interim cost vouchers by at
least 50 percent, until the Contracting Officer makes a
determination whether the Contractor has corrected all significant
deficiencies as directed by the Contracting Officer's final
determination, or has made a determination whether there is a
reasonable expectation that the corrective actions have been
implemented.
(iv) At any time after the Contracting Officer reduces or
discontinues the withholding of progress payments and performance-
based payments, or directs the Contractor to reduce or discontinue
the payment withholding from billings on
[[Page 28877]]
interim cost vouchers under this contract, if the Contracting
Officer determines that the Contractor has failed to correct the
significant deficiencies identified in the Contractor's
notification, the Contracting Officer will reinstate or increase
withholding from progress payments and performance-based payments,
and direct the Contractor, in writing, to reinstate or increase the
percentage withheld on interim cost vouchers to the percentage
initially withheld, until the Contracting Officer determines that
the Contractor has corrected all significant deficiencies as
directed by the Contracting Officer's final determination.
(End of clause)
0
19. Add section 252.242-7006 to read as follows:
252.242-7006 Accounting System Administration.
As prescribed in 242.7503, use the following clause:
ACCOUNTING SYSTEM ADMINISTRATION (MAY 2011)
(a) Definitions. As used in this clause--
(1) Acceptable accounting system means a system that complies
with the system criteria in paragraph (c) of this clause to provide
reasonable assurance that--
(i) Applicable laws and regulations are complied with;
(ii) The accounting system and cost data are reliable;
(iii) Risk of misallocations and mischarges are minimized; and
(iv) Contract allocations and charges are consistent with
billing procedures.
(2) Accounting system means the Contractor's system or systems
for accounting methods, procedures, and controls established to
gather, record, classify, analyze, summarize, interpret, and present
accurate and timely financial data for reporting in compliance with
applicable laws, regulations, and management decisions, and may
include subsystems for specific areas such as indirect and other
direct costs, compensation, billing, labor, and general information
technology.
(3) Significant deficiency means 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.
(b) General. The Contractor shall establish and maintain an
acceptable accounting system. Failure to maintain an acceptable
accounting system, as defined in this clause, shall result in the
withholding of payments if the contract includes the clause at
252.242-7005, Contractor Business Systems, and also may result in
disapproval of the system.
(c) System criteria. The Contractor's accounting system shall
provide for--
(1) A sound internal control environment, accounting framework,
and organizational structure;
(2) Proper segregation of direct costs from indirect costs;
(3) Identification and accumulation of direct costs by contract;
(4) A logical and consistent method for the accumulation and
allocation of indirect costs to intermediate and final cost
objectives;
(5) Accumulation of costs under general ledger control;
(6) Reconciliation of subsidiary cost ledgers and cost
objectives to general ledger;
(7) Approval and documentation of adjusting entries;
(8) Periodic monitoring of the system;
(9) A timekeeping system that identifies employees' labor by
intermediate or final cost objectives;
(10) A labor distribution system that charges direct and
indirect labor to the appropriate cost objectives;
(11) Interim (at least monthly) determination of costs charged
to a contract through routine posting of books of account;
(12) Exclusion from costs charged to Government contracts of
amounts which are not allowable in terms of Federal Acquisition
Regulation (FAR) part 31, Contract Cost Principles and Procedures,
and other contract provisions;
(13) Identification of costs by contract line item and by units
(as if each unit or line item were a separate contract), if required
by the contract;
(14) Segregation of preproduction costs from production costs,
as applicable;
(15) Cost accounting information, as required--
(i) By contract clauses concerning limitation of cost (FAR
52.232-20), limitation of funds (FAR 52.232-22), or allowable cost
and payment (FAR 52.216-7); and
(ii) To readily calculate indirect cost rates from the books of
accounts;
(16) Billings that can be reconciled to the cost accounts for
both current and cumulative amounts claimed and comply with contract
terms;
(17) Adequate, reliable data for use in pricing follow-on
acquisitions; and
(18) Accounting practices in accordance with standards
promulgated by the Cost Accounting Standards Board, if applicable,
otherwise, Generally Accepted Accounting Principles.
(d) Significant deficiencies. (1) The Contracting Officer will
provide an initial determination to the Contractor, in writing, on
any significant deficiencies. The initial determination will
describe the deficiency in sufficient detail to allow the Contractor
to understand the deficiency.
(2) The Contractor shall respond within 30 days to a written
initial determination from the Contracting Officer that identifies
significant deficiencies in the Contractor's accounting system. If
the Contractor disagrees with the initial determination, the
Contractor shall state, in writing, its rationale for disagreeing.
(3) The Contracting Officer will evaluate the Contractor's
response and notify the Contractor, in writing, of the Contracting
Officer's final determination concerning--
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or completed corrective
action; and
(iii) System disapproval, if the Contracting Officer determines
that one or more significant deficiencies remain.
(e) If the Contractor receives the Contracting Officer's final
determination of significant deficiencies, the Contractor shall,
within 45 days of receipt of the final determination, either correct
the significant deficiencies or submit an acceptable corrective
action plan showing milestones and actions to eliminate the
significant deficiencies.
(f) Withholding payments. If the Contracting Officer makes a
final determination to disapprove the Contractor's accounting
system, and the contract includes the clause at 252.242-7005,
Contractor Business Systems, the Contracting Officer will withhold
payments in accordance with that clause.
(End of clause)
0
20. Add section 252.244-7001 to read as follows:
252.244-7001 Contractor Purchasing System Administration.
As prescribed in 244.305-71, insert the following clause:
CONTRACTOR PURCHASING SYSTEM ADMINISTRATION (MAY 2011)
(a) Definitions. As used in this clause--
Acceptable purchasing system means a purchasing system that
complies with the system criteria in paragraph (c) of this clause.
Purchasing system means the Contractor's system or systems for
purchasing and subcontracting, including make-or-buy decisions, the
selection of vendors, analysis of quoted prices, negotiation of
prices with vendors, placing and administering of orders, and
expediting delivery of materials.
Significant deficiency means 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.
(b) General. The Contractor shall establish and maintain an
acceptable purchasing system. Failure to maintain an acceptable
purchasing system, as defined in this clause, may result in
disapproval of the system by the Contracting Officer and/or
withholding of payments.
(c) System criteria. The Contractor's purchasing system shall--
(1) Have an adequate system description including policies,
procedures, and purchasing practices that comply with the Federal
Acquisition Regulation (FAR) and the Defense Federal Acquisition
Regulation Supplement (DFARS);
(2) Ensure that all applicable purchase orders and subcontracts
contain all flowdown clauses, including terms and conditions and any
other clauses needed to carry out the requirements of the prime
contract;
(3) Maintain an organization plan that establishes clear lines
of authority and responsibility;
(4) Ensure all purchase orders are based on authorized
requisitions and include a complete and accurate history of purchase
transactions to support vendor selected, price paid, and document
the subcontract/purchase order files which are subject to Government
review;
[[Page 28878]]
(5) Establish and maintain adequate documentation to provide a
complete and accurate history of purchase transactions to support
vendors selected and prices paid;
(6) Apply a consistent make-or-buy policy that is in the best
interest of the Government;
(7) Use competitive sourcing to the maximum extent practicable,
and ensure debarred or suspended contractors are properly excluded
from contract award;
(8) Evaluate price, quality, delivery, technical capabilities,
and financial capabilities of competing vendors to ensure fair and
reasonable prices;
(9) Require management level justification and adequate cost or
price analysis, as applicable, for any sole or single source award;
(10) Perform timely and adequate cost or price analysis and
technical evaluation for each subcontractor and supplier proposal or
quote to ensure fair and reasonable subcontract prices;
(11) Document negotiations in accordance with FAR 15.406-3;
(12) Seek, take, and document economically feasible purchase
discounts, including cash discounts, trade discounts, quantity
discounts, rebates, freight allowances, and company-wide volume
discounts;
(13) Ensure proper type of contract selection and prohibit
issuance of cost-plus-a-percentage-of-cost subcontracts;
(14) Maintain subcontract surveillance to ensure timely delivery
of an acceptable product and procedures to notify the Government of
potential subcontract problems that may impact delivery, quantity,
or price;
(15) Document and justify reasons for subcontract changes that
affect cost or price;
(16) Notify the Government of the award of all subcontracts that
contain the FAR and DFARS flowdown clauses that allow for Government
audit of those subcontracts, and ensure the performance of audits of
those subcontracts;
(17) Enforce adequate policies on conflict of interest, gifts,
and gratuities, including the requirements of the Anti-Kickback Act;
(18) Perform internal audits or management reviews, training,
and maintain policies and procedures for the purchasing department
to ensure the integrity of the purchasing system;
(19) Establish and maintain policies and procedures to ensure
purchase orders and subcontracts contain mandatory and applicable
flowdown clauses, as required by the FAR and DFARS, including terms
and conditions required by the prime contract and any clauses
required to carry out the requirements of the prime contract;
(20) Provide for an organizational and administrative structure
that ensures effective and efficient procurement of required quality
materials and parts at the best value from responsible and reliable
sources;
(21) Establish and maintain selection processes to ensure the
most responsive and responsible sources for furnishing required
quality parts and materials and to promote competitive sourcing
among dependable suppliers so that purchases are reasonably priced
and from sources that meet contractor quality requirements;
(22) Establish and maintain procedures to ensure performance of
adequate price or cost analysis on purchasing actions;
(23) Establish and maintain procedures to ensure that proper
types of subcontracts are selected, and that there are controls over
subcontracting, including oversight and surveillance of
subcontracted effort; and
(24) Establish and maintain procedures to timely notify the
Contracting Officer, in writing, if--
(i) The Contractor changes the amount of subcontract effort
after award such that it exceeds 70 percent of the total cost of the
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
(ii) 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).
(d) Significant deficiencies. (1) The Contracting Officer will
provide notification of initial determination to the Contractor, in
writing, of any significant deficiencies. The initial determination
will describe the deficiency in sufficient detail to allow the
Contractor to understand the deficiency.
(2) The Contractor shall respond within 30 days to a written
initial determination from the Contracting Officer that identifies
significant deficiencies in the Contractor's purchasing system. If
the Contractor disagrees with the initial determination, the
Contractor shall state, in writing, its rationale for disagreeing.
(3) The Contracting Officer will evaluate the Contractor's
response and notify the Contractor, in writing, of the Contracting
Officer's final determination concerning--
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or completed corrective
action; and
(iii) System disapproval, if the Contracting Officer determines
that one or more significant deficiencies remain.
(e) If the Contractor receives the Contracting Officer's final
determination of significant deficiencies, the Contractor shall,
within 45 days of receipt of the final determination, either correct
the significant deficiencies or submit an acceptable corrective
action plan showing milestones and actions to eliminate the
deficiencies.
(f) Withholding payments. If the Contracting Officer makes a
final determination to disapprove the Contractor's purchasing
system, and the contract includes the clause at 252.242-7005,
Contractor Business Systems, the Contracting Officer will withhold
payments in accordance with that clause.
(End of clause)
0
21. Add section 252.245-7003 to read as follows:
252.245-7003 Contractor Property Management System Administration.
As prescribed in 245.107, insert the following clause:
CONTRACTOR PROPERTY MANAGEMENT SYSTEM ADMINISTRATION (MAY 2011)
(a) Definitions. As used in this clause--
Acceptable property management system means a property system
that complies with the system criteria in paragraph (c) of this
clause.
Property management system means the Contractor's system or
systems for managing and controlling Government property.
Significant deficiency means 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.
(b) General. The Contractor shall establish and maintain an
acceptable property management system. Failure to maintain an
acceptable property management system, as defined in this clause,
may result in disapproval of the system by the Contracting Officer
and/or withholding of payments.
(c) System criteria. The Contractor's property management system
shall be in accordance with paragraph (f) of the contract clause at
Federal Acquisition Regulation 52.245-1.
(d) Significant deficiencies. (1) The Contracting Officer will
provide an initial determination to the Contractor, in writing, of
any significant deficiencies. The initial determination will
describe the deficiency in sufficient detail to allow the Contractor
to understand the deficiency.
(2) The Contractor shall respond within 30 days to a written
initial determination from the Contracting Officer that identifies
significant deficiencies in the Contractor's property management
system. If the Contractor disagrees with the initial determination,
the Contractor shall state, in writing, its rationale for
disagreeing.
(3) The Contracting Officer will evaluate the Contractor's
response and notify the Contractor, in writing, of the Contracting
Officer's final determination concerning--
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or completed corrective
action; and
(iii) System disapproval, if the Contracting Officer determines
that one or more significant deficiencies remain.
(e) If the Contractor receives the Contracting Officer's final
determination of significant deficiencies, the Contractor shall,
within 45 days of receipt of the final determination, either correct
the significant deficiencies or submit an acceptable corrective
action plan showing milestones and actions to eliminate the
significant deficiencies.
(f) Withholding payments. If the Contracting Officer makes a
final determination to disapprove the Contractor's property
management system, leading to a potential risk of harm to the
Government, and the contract includes the clause at 252.242-7005,
Contractor Business Systems,
[[Page 28879]]
the Contracting Officer will withhold payments in accordance with
that clause.
(End of clause)
[FR Doc. 2011-11691 Filed 5-17-11; 8:45 am]
BILLING CODE 5001-08-P