75550 Federal Register / Vol. 75, No. 232 / Friday, December 3, 2010 / Proposed Rules 

DEPARTMENT OF DEFENSE 

Defense Acquisition Regulations 

System 

48 CFR Parts 215, 234, 242, 244, 245, 

and 252 

RIN 0750–AG58 

Defense Federal Acquisition 

Regulation Supplement; Business 

Systems—Definition and 

Administration (DFARS Case 2009– 

D038) 

AGENCY: Defense Acquisition 

Regulations System, Department of 

Defense. 

ACTION: Proposed rule with request for 

comments. 

SUMMARY: DoD is proposing to amend 

the Defense Federal Acquisition 

Regulation Supplement (DFARS) to 

improve the effectiveness of DoD 

oversight of contractor business 

systems. 

DATES: Comment Date: Interested parties 

should submit comments in writing to 

the address shown below on or before 

January 3, 2011. 

ADDRESSES: You may submit comments, 

identified by DFARS Case 2009–D038, 

using any of the following methods: 

Æ 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. 

E-mail: dfars@osd.mil. Include 

DFARS Case 2009–D038 in the subject 

line of the message. 

Fax: 703–602–0350. 

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, 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 a proposed rule for 

Business Systems—Definition and 

Administration (DFARS Case 2009– 

D038) in the Federal Register on 

January 15, 2010 (75 FR 2457). The 

public comment period closed 

March 16, 2010. Based on the comments 

received and subsequent revisions to the 

proposed rule, DoD is publishing this 

rule again as a proposed 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 considering a rule to 

clarify the definition and administration 

of contractor business systems as 

follows: 

1. DoD is proposing to define 

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. 

2. DoD is proposing to implement 

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 

deficiencies. Payments could be 

withheld on— 

• Interim payments under— 

Æ Cost-reimbursement contracts; 

Æ Incentive-type contracts; 

Æ Time-and-materials contracts; 

Æ Labor-hour contracts; 

Æ Construction contracts that include 

FAR clause 52.232–27, Prompt Payment 

for Construction Contracts. 

• Progress payments; and 

• Performance-based payments. 

II. Discussion and Analysis 

A. Analysis of Public Comments 

The 370 comments received from 25 

respondents have been dispositioned as 

discussed below. The comments 

received were grouped under 46 general 

topics. A summary of the comments 

follows: 

1. 100 Percent Withholds 

Comment: Respondents suggested that 

the proposed rule provides 

administrative contracting officers 

(ACOs) insufficient standards to make 

100 percent withhold determinations, 

and does not provide adequate 

provisions for contractor responses. 

Response: DoD notes the concerns 

expressed by the respondents, and has 

revised the rule to remove the language 

from clause 252.242–7XXX, which set 

forth procedures for withholding up to 

100 percent. 

2. Accounting System 

Comment: A number of respondents 

expressed concern about the criteria to 

be used to determine if a contractor has 

an acceptable accounting system. 

Response: The language at clause 

252.242–7YYY has been revised to 

clarify the criteria to be used to 

determine if a contractor has an 

acceptable accounting system and to 

delete vague criteria modifiers such as 

‘‘including but not limited to’’ and ‘‘as 

applicable.’’ 

3. Applicability of Rule 

Comment: A number of respondents 

questioned the application of this rule 

against certain cost-type contracts. 

Additionally, some respondents 

expressed concern about the application 

of the rule to commercial contracts. 

Other respondents suggested the rule be 

applied to only a single contract instead 

of against all contracts that are 

dependent upon the deficient business 

system, and that the rule establish a 

minimum dollar threshold for the rule 

to be applicable. 

Response: The Government may be at 

risk when a contractor’s business 

systems contain deficiencies, regardless 

of contract type. Accordingly, it is 

appropriate for the ACO 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 will result in 

application of a withhold against all 

contracts that contain the business 

system clause. However, DoD agrees 

with the recommendation for the 

establishment of a $50 million threshold 

for application of the business system 

clause. 

4. Arbitrary Withhold Percentages 

Comment: A number of respondents 

expressed concern that the rule invokes 

mandatory withholds on payments to 

Government contractors that are 

arbitrary and punitive and have no 

relationship with actual harm to the 

Government. 

Response: When contractors fail to 

maintain business systems, as is 

required by the terms and conditions of 


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their contracts, the withhold provisions 

help to protect the Government from the 

risks of overpayment, increased 

property losses, or nonconforming 

goods, among others, against which 

business systems are designed to ensure. 

The proposed 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 percentage withhold 

amount, not as a penalty for a 

deficiency, but as representing a goodfaith estimate of the potential loss that 

is at risk where the actual amounts are 

difficult to estimate or quantify. 

5. Assignment of Payments 

Comment: If the contractor has 

assigned the right to receive payments 

to a financial institution under the 

Assignment of Claims Act, will 

payments be withheld from the assignee 

financial institution? If so, this would 

severely hamper the ability of small- to 

medium-sized businesses from 

obtaining financing to bid on contracts. 

Response: This rule does not change 

any rights of the assignee of the 

assignment of claims provision at FAR 

subpart 32.8 or FAR clause 52.232–23. 

Assignees will continue to have the 

same rights and obligations that they 

had prior to the implementation of this 

rule. Therefore, if the contractor has 

assigned the right to receive payments, 

and deficiencies in the contractor’s 

business systems necessitate the 

implementation of withholds, in 

accordance with the contract, payments 

will be withheld from the assignee. The 

mitigation of the impact on small 

businesses is discussed under comment 

topic number 42. 

6. Audits 

Comment: A number of respondents 

expressed concern that DCAA lacks the 

resources to perform required audits 

timely and adequately; that the 

proposed rule does not establish a 

business system approval duration, 

which essentially declares perpetual 

open-season on all contractor business 

system internal controls, and that the 

DCAA follow-up audit is not limited or 

otherwise focused upon the previously 

identified specific deficiency and the 

specific corrective actions, and 

therefore, will result in an endless cycle 

of deficiency reports and follow-up 

audits; that DCAA audit guidance on the 

reporting of internal control 

deficiencies, which requires all 

deficiencies to be considered 

significant, effectively ensures that all 

contractor business systems subject to 

audit will be found inadequate; that 

audit reports are not informative enough 

to help the contracting officer make 

effective decisions, and that DCAA 

needs to expand its audit reports to go 

beyond rendering a pass/fail opinion, 

and include an analysis of the 

materiality of any deficiency. 

Response: DCAA has committed to 

making follow-up business system 

audits a priority. However, DCAA 

recognizes that resources are limited, 

and has taken steps to address staffing 

challenges. A business system approval 

duration and/or narrowly focused 

DCAA follow-up audit would not be 

appropriate since, at any time after 

approval, contractor conditions could 

change, rendering the previouslyreported opinion as not current. DCAA 

policy is to report only deficiencies 

determined to be significant deficiencies 

or material weaknesses in accordance 

with generally accepted Government 

auditing standards. The proposed rule 

language has been revised to state that 

‘‘the report shall describe the 

deficiencies in sufficient detail to allow 

the contracting officer to understand the 

deficiencies and potential adverse 

impact to the Government.’’ 

7. Breach of Contract 

Comment: One respondent believed 

that the failure of the United States 

Government to pay for goods and 

services provided could be a material 

breach of contract that would permit the 

contractor to stop work. The respondent 

stated that the requirement to 

compensate contractors for providing 

goods and services flows from the 

United States Constitution itself in the 

Fifth Amendment, and viewing failure 

to pay as a breach of contract has been 

recognized by the courts. 

Response: DoD does not agree that 

failure to pay amounts withheld would 

be a breach of contract, and that the 

Fifth Amendment to the Constitution is 

implicated. The proposed rule would 

create an explicit contract term, and 

withholding will be authorized 

pursuant to that term. Execution of that 

contract term would not be a breach of 

contract. Similarly, there is no ‘‘taking’’ 

of property that could implicate the 

Fifth Amendment when a contractor is 

paid the amount it is entitled to under 

the clear terms of a valid contract. 

8. Cash Flow 

Comment: A number of respondents 

were concerned that the withholds 

would negatively impact cash flow for 

contractors, and are also likely to 

remain in effect for periods long beyond 

completion of any corrective action 

performed by contractors. 

Response: The application of the 

payment withhold will impact and 

reduce a contractor’s cash flow. 

However, the proposed rule would 

protect the Government by temporarily 

reducing contract payments during 

performance in an amount sufficient to 

mitigate the Government’s risk when 

contractors fail to maintain business 

systems, as is required by the terms and 

conditions of their contracts. The 

revised language provides for the 

contracting officer, in consultation with 

the auditor or functional specialist, to 

discontinue withholding payments prior 

to audit verification if the contractor 

submits evidence that the deficiencies 

have been corrected. The sooner the 

contractor corrects the deficiencies, the 

sooner the cash flow will be restored. 

9. Compliance Criteria 

Comment: A number of respondents 

believe the compliance criteria in the 

proposed rule are subjective. These 

respondents believe that the proposed 

rule prematurely defines business 

systems without resolving the most 

critical component, which is the actual 

criteria against which contractor 

compliance will be measured, and that 

such criteria should be vetted with the 

public. The respondents assert that the 

proposed rule should define objective 

measurements by which to judge a 

system as deficient, and limit the 

criteria to a few well-defined metrics 

that cannot be embellished by subjective 

interpretation. 

Response: DoD partially agrees with 

the respondents. The rule incorporates 

criteria that are already used by the 

Government under existing authority to 

evaluate the adequacy of contractor 

business systems. Furthermore, to 

reduce the subjectivity of the criteria, 

phrases such as ‘‘including but not 

limited to’’ and ‘‘as applicable’’ have 

been removed. The public is encouraged 

to comment on these criteria. 

10. Consistency: Correction of All 

Deficiencies or Substantial Correction of 

Deficiencies 

Comment: A number of respondents 

pointed out that some sections of the 

proposed rule indicate that a finding of 

system noncompliance will be 

withdrawn when the contractor has 

‘‘substantially corrected’’ the system 

deficiencies. However, elsewhere, the 

proposed rule also states that the 

withhold will not be released until ‘‘all 

deficiencies have been corrected.’’ The 

respondents suggested that the proposed 

rule should be revised so that it is 

consistent. 

Response: DoD concurs with the 

respondents’ recommendation, and has 


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revised the rule to state that the 

withholds will not be released until ‘‘all 

deficiencies have been corrected.’’ 

11. Contracting Officer Discretion 

Comment: One respondent believed 

that the proposed rule inappropriately 

and unnecessarily limits the discretion 

of the contracting officer to make critical 

determinations about these systems 

specifically, and about the relationship 

of these systems determinations to 

overall contract performance generally. 

Response: The rule does not in any 

way limit the authority of contracting 

officers. Although the auditor is 

required to document the deficiencies in 

a report, the contracting officer has the 

authority to make all initial and final 

determinations of system deficiencies, 

implement and remove withholds, make 

determinations to approve, disapprove, 

and reapprove systems, and to take any 

other appropriate actions deemed in the 

best interests of the Government. 

12. Contractor Appeal 

Comment: A number of respondents 

expressed concern that there is no 

provision in the proposed rule to 

provide contractors with due process or 

alternative resolution, such as 

negotiation or alternate disputes 

resolution procedures, and that 

withholds are at the sole discretion of 

the ACO. 

Response: DoD agrees that the final 

deficiency determination is at the sole 

discretion of the contracting officer. 

However, DoD disagrees that additional 

due process remedies are necessary. 

Contractors are afforded an opportunity 

to respond in writing within 30 days to 

an initial determination of deficiencies 

from the ACO that identifies 

deficiencies in any of the contractor’s 

business systems. Furthermore, DoD 

does not believe there is a need, or is it 

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 disputes resolution remain 

available, and, in fact, are encouraged as 

alternative methods of resolving 

disputes. 

13. DCAA/DCMA Policies 

Comment: One respondent believed 

that the ultimate impact of this rule is 

dependent on current and future DCAA/ 

DCMA policies that are not subject to 

the public comment process. According 

to the respondent, because the DCMA 

and DCAA policies will have a 

significant cost or administrative impact 

on contractors, a strong argument can be 

made that such policies are not just 

internal agency policies, but policies 

that must be published for public 

comment, pursuant to the requirements 

of the Office of Federal Procurement 

Policy (OFPP) Act. Another respondent 

stated that DCAA’s current position on 

reporting system results is that if a 

system opinion is more than three years 

old, DCAA reports that there is ‘‘no 

audit on file,’’ and that DCAA has no 

opinion on the system. This respondent 

believed that procurement contracting 

officers and ACOs should be permitted 

to decide for themselves what they 

consider to be ‘‘too old’’ or ‘‘not relevant’’ 

for purposes of these system reviews, 

rather than permitting DCAA to simply 

avoid reporting on known information. 

Response: DoD does not agree. The 

OFPP Act (41 U.S.C. 418b) is applicable 

to procurement policy, regulation, 

procedure, or form relating to the 

expenditure of appropriated funds that 

has (1) a significant effect beyond the 

internal operating procedures of the 

agency issuing the procurement policy, 

et al., and (2) a significant increased cost 

or administrative impact on contractors 

or offerors. DCAA/DCMA internal 

policies and procedures that are 

referenced in this rule are internal 

policies and procedures and are not 

regulatory. Therefore, the OFPP Act 

public comment process is not 

applicable. DoD believes that 

contracting officers must rely on current 

and relevant information in order to 

make an appropriate determination as to 

whether to notify a contractor of a 

system deficiency and possible payment 

withhold. DoD does not believe that an 

audit report noting a deficiency that is 

in excess of three years old would 

constitute current information. 

14. DCMA/DCAA Oversight 

Comment: A number of respondents 

believe that the Commission on 

Wartime Contracting (CWC) hearings 

demonstrated that greater cooperation 

must be achieved between DCMA and 

DCAA to oversee Government 

contractors properly, and that this issue 

should be addressed before imposing 

more regulations on contractors, 

especially as severe and broad as those 

proposed. 

Response: DoD is currently taking 

measures to improve coordination 

between DCMA and DCAA. Concurrent 

with these measures, DoD is issuing this 

rule to further improve the effectiveness 

of DCMA and DCAA oversight of 

business systems as recommended by 

the Commission on Wartime 

Contracting. 

15. DCMA/DCAA Resources 

Comment: A couple of respondents 

suggested that DCMA and DCAA are 

under-resourced to execute the 

requirements of the rule, and that ACOs 

do not have the training to determine if 

a deficiency makes a system inadequate. 

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 risks of loss due 

to a contractor’s failure to maintain 

business systems, as is required by the 

terms and conditions of their contracts. 

DoD has confidence that contracting 

personnel will make appropriate 

determinations in accordance with this 

rule. 

16. Deficiency Correction 

Comment: A number of respondents 

expressed concern that the proposed 

rule provides incomplete guidance for 

ACOs to approve systems when 

deficiencies previously have been 

identified. These respondents question 

whether the ACO’s determination to 

reduce or discontinue the withholding 

of payments is discretionary, even if the 

contractor has corrected all deficiencies. 

One respondent is concerned that there 

is no measurable standard for the 

Government to decide to increase or 

decrease the payment withholds based 

on the monitoring of the contractor’s 

progress in correcting deficiencies. 

Response: The revised rule language 

states that the contracting officer shall 

discontinue the withholding of 

payments and release any payments 

previously withheld when the 

contracting officer determines that the 

contractor has corrected all system 

deficiencies after receipt of auditor or 

functional specialist verification. 

Furthermore, the revised language 

provides for the contracting officer, in 

consultation with the auditor or 

functional specialist, to discontinue 

withholding payments prior to audit 

verification if the contractor submits 

evidence that the deficiencies have been 

corrected. DoD relies on the judgment of 

the ACO to make determinations to 

decrease or subsequently increase the 

withholding of payments, in accordance 

with the rule language, on a case-bycase basis. 

17. Definition of Business System 

Comment: Two respondents requested 

that the rule include a precise definition 

of an acceptable business system. 


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Response: The definition of the term 

‘‘acceptable business systems’’ in clause 

252.242–7XXX has been revised for 

clarity. The precise criteria for 

determining the acceptability of the six 

business systems are contained in the 

individual business systems clauses. 

18. Definition of Deficiency 

Comment: A number of respondents 

encouraged DoD to provide a clear and 

precise definition of a ‘‘deficiency.’’ 

Response: The definition of 

‘‘deficiency’’ used throughout the rule 

means a failure to maintain one or more 

system criteria of an acceptable business 

system. The criteria for each business 

system have been revised to provide 

more specificity. 

19. Definition of Standards and System 

Requirements 

Comment: One respondent noted that 

242.7502 requires that the audit report 

contain sufficient information so that 

the ACO will be able to understand 

what the contractor must do to comply 

with the applicable ‘‘standard or system 

requirement.’’ The respondent was 

unsure what ‘‘standard’’ means in this 

context, since clause 252.242–7YYY 

(relating to accounting system 

administration) only refers to ‘‘system 

requirements,’’ and does not mention 

any standards. 

Response: The language in 242.7502 

has been revised to require the audit 

report to ‘‘describe the deficiencies in 

sufficient detail to allow the contracting 

officer to understand the deficiencies 

and the potential impact to the 

Government.’’ Additionally, the 

language in both 242.7502 and clause 

252.242–7YYY has been revised to refer 

to ‘‘system criteria’’ to be consistent. 

20. Estimating System 

Comment: A number of respondents 

questioned whether contracting officers 

had the authority to make 

determinations on whether system 

deficiencies warrant withholds and to 

consider the impact of deficiencies on 

contractor proposals. Other respondents 

expressed concern with the criteria 

against which contractor estimating 

system compliance will be measured. 

One respondent expressed concern with 

the requirements that the estimating 

system include comparisons of 

projected results to actual results and an 

analysis of any differences. 

Response: This rule is very clear that 

contracting officers have the authority to 

make determinations on whether system 

deficiencies warrant withholds and 

shall consider the impact of deficiencies 

on contractor proposals. This revised 

proposed rule sets forth specific criteria 

for maintaining an acceptable estimating 

system. DoD does not believe it is 

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. This existing 

requirement was relocated from 

215.407–5–70 into clause 252.215–7002. 

21. Earned Value Management System 

(EVMS) 

Comment: A number of respondents 

questioned how non-compliance with 

ANSI/EIA–748 fits into this rule because 

deficiencies in EVMS do not result in 

the billing of unallowable costs to the 

Government. 

Response: A key DoD concern is the 

reliability of the contractor’s EVMS 

monthly reports. Even though the EVMS 

system may not directly result in the 

billing of unallowable costs to the 

Government, it does provide important 

information to senior-level Government 

officials to use when making 

management decisions regarding major 

weapon systems. Consequently, EVMS 

was included in the rule to ensure that 

DoD is receiving accurate and reliable 

EVMS information used to identify 

current and potential cost overruns, etc.; 

and if there are deficiencies with the 

contractors’ EVMS, that they are 

promptly corrected. 

22. Failure To Follow Corrective Action 

Plan 

Comment: One respondent 

recommended that the contracting 

officer be given the discretion to 

increase the amount of the withhold 

under the contract if the contractor 

inexcusably fails to follow the corrective 

action plan accepted by the Government 

or an acceptable alternative to that plan. 

Response: The contracting officer has 

the discretion in determining whether 

the contractor is following its corrective 

action plan, and whether to increase the 

withholding percentage in accordance 

with clause 252.242–7XXX. The reason 

the contracting officer may decrease the 

withholding percentage from five 

percent to two percent (one percent for 

small businesses) is that an approved 

corrective action plan mitigates the 

Government’s risk by increasing the 

probability that system deficiencies will 

be corrected in a timely manner. 

Conversely, the reason for increasing the 

withhold back to five percent (two 

percent for small businesses) is to 

reinstate the appropriate protection for 

the Government, since the contractor 

has not adhered to its corrective action 

plan. The contracting officer has 

complete discretion to make these 

determinations. 

23. Financial Impact 

Comment: Several respondents 

expressed concern that the proposed 

rule will increase administrative costs 

(to correct deficiencies) significantly 

and destabilize contractor cash 

management, which could have such 

financial impacts as to affect how the 

industrial base can support the 

warfighter and national security. 

Response: DoD acknowledges that the 

application of the payment withhold 

will impact and reduce a contractor’s 

cash flow. Further, DoD acknowledges 

that the initial administrative costs to 

ensure business system compliance may 

increase. However, in the long run, both 

the contractor’s and Government’s 

administrative costs should be reduced 

with the reliance on efficient contractor 

business systems. Based on comments 

received, DoD has removed the 100 

percent withhold from the rule and 

lowered the compounding of deficiency 

percentages to a maximum of 20 

percent. However, DoD does not 

anticipate that the rule will cause longterm harm to the industrial base 

supporting our warfighter and national 

security. The intent of the proposed rule 

is to strengthen contractor business 

systems and provide a protection for the 

Government from the risks of deficient 

systems while contractors resolve their 

system deficiencies. 

24. Formatting of Rule Language 

Comment: A number of respondents 

believe the language of the proposed 

rule needs clarifying for more uniform 

application. 

Response: DoD acknowledges the 

respondents’ comment and has clarified 

the language of the rule in accordance 

with public comments received. 

25. General Agreement 

Comment: A number of respondents 

expressed agreement with the rule, 

citing the necessity for contractors to 

maintain adequate business systems. 

Response: DoD acknowledges the 

respondents’ support of the rule. 

26. General Disagreement 

Comment: A number of respondents 

expressed concern with the rule and 

requested it be withdrawn, citing claims 

that the rule (a) is biased against DoD 

contractors, (b) does not address 

problems with business system 

oversight with Government agencies, (c) 

will have unfavorable consequences to 

industry and Government agencies, and 

(d) is an unnecessary intrusion on the 

contractual relationship between 


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75554 Federal Register / Vol. 75, No. 232 / Friday, December 3, 2010 / Proposed Rules 

industry and Government. Specifically, 

respondents suggested that adequacy of 

business systems should be addressed 

as part of the preaward contracting 

phase rather than through payment 

withholds, and that many of the 

problems or deficiencies identified in 

supplier systems are traceable to illdefined contracts, unstable funding, and 

individual interpretations of policy or 

guidance by inexperienced audit 

personnel. Finally, one respondent was 

concerned that this proposed rule uses 

a broad-brush approach to what appears 

to be a narrow problem growing out of 

battlefield contingency contracting and 

that, contrary to its intended purpose, 

this proposed rule will do little or 

nothing to assist the Government in 

achieving its goal of reducing fraud, 

waste, and abuse. 

Response: DoD acknowledges the 

respondents’ concern with the rule. 

However, the need to mitigate the 

Government’s risk when contractors fail 

to comply with the terms and 

conditions of their contracts by failing 

to maintain adequate business systems 

necessitates this rule. DoD partially 

agrees that the adequacy of business 

systems should be addressed as part of 

the preaward contracting phase. 

However, this fact does not relieve the 

contractors’ contractual obligations to 

maintain adequate business systems 

throughout the life of the contract. DoD 

disagrees with the respondent that 

system deficiencies are traceable to illdefined contracts, unstable funding, and 

individual interpretations of policy or 

guidance. Business systems are 

company-wide or segment-wide systems 

with established policies and 

procedures that are applied across 

multiple contracts. This rule mitigates 

the Government’s risk when contractors 

fail to maintain adequate business 

systems after contract award. While DoD 

acknowledges that issues with 

contractor business systems were 

discovered through reviews of 

contractors involved with battlefield 

contingency contracting, DoD does not 

believe that these issues are strictly 

confined therein. However, DoD notes 

that contractors outside of the 

contingency contracting arena will not 

be impacted by withholds implemented 

under this rule if failure to maintain 

adequate business systems, in 

accordance with the terms and 

conditions of their Government 

contracts, is limited to being a narrow 

problem growing out of battlefield 

contingency contracting, as the 

respondent suggests. 

27. Impact on Government Systems 

Comment: One respondent believed 

that the proposed rule will require 

additional resources at Defense Finance 

and Accounting Service and 

modifications of the Mechanization of 

Contract Administration Services 

system because all payments for 

contracts with withholds must be 

processed manually. Furthermore, one 

respondent suggested that contracting 

officers be granted the authority to 

release withholds under situations 

where funds are at risk of expiring or 

being canceled, or the contract is being 

closed. 

Response: The Government is fully 

capable of modifying its automated 

systems to implement the rule. 

Contracting officers are the only ones 

granted the authority to release 

withholds. Withholds will be released 

once the system deficiency has been 

corrected, or a final audit has 

determined which costs are allowable 

under the contract. 

28. Increased Litigation 

Comment: A number of respondents 

believe the withholds will result in 

increased litigation that will drain the 

resources of both contractors and the 

Government, especially since the 

proposed rule states that Prompt 

Payment Act interest does not accrue on 

the withhold, and prudent contractors 

will immediately appeal the withhold 

pursuant to the Contract Disputes Act, 

where interest would accrue on the 

withhold if the Government’s position is 

not sustained. Furthermore, most of the 

issues with deficient business systems 

could be resolved through the exercise 

of reasonable contracting officer 

discretion if the rule allowed it. 

Response: DoD is uncertain whether 

the rule, in its final form, will lead to 

increased litigation. It would be 

unwieldy to establish a separate 

informal process for handling 

disagreements involving alleged system 

deficiencies, given that the Contract 

Disputes Act already is an established 

methodology for resolving 

disagreements, large and small. 

Furthermore, not every claim presented 

to the contracting officer under the 

Contract Disputes Act results in 

litigation. In fact, FAR 33.204 

establishes the Government’s policy to 

try to resolve all contractual issues in 

controversy by mutual agreement, even 

prior to the submission of a claim. The 

contracting officer has the authority to 

make all initial and final determinations 

of system deficiencies, implement and 

remove withholds, make determinations 

to approve, disapprove, and reapprove 

systems, and to take any other 

appropriate actions deemed in the best 

interests of the Government. 

29. Information Collection 

Comment: One respondent believed 

that the information collection estimate 

that DoD included with the proposed 

rule is understated substantially. 

Response: DoD does not agree with 

the respondent’s comment. DoD notes 

that the supporting data referenced by 

the respondent exceeds the information 

collection requirements established 

under this rule. DoD believes the 

Paperwork Reduction Act estimates 

published with the proposed rule 

accurately reflect the contractors’ costs 

to fulfill the information collection 

requirements of this rule. The hours and 

costs cited by the respondent with 

regard to EVMS do not reflect the 

Paperwork Reduction Act requirements 

of this rule. 

30. Interest on Withholds 

Comment: One respondent disagreed 

that the withholdings under clause 

252.242–7XXX, Business Systems, are 

not subject to the interest penalty 

provisions of the Prompt Payment Act. 

While contract financing payments are 

generally not subject to the interest 

penalty, the Prompt Payment Act 

specifically makes the interest penalty 

applicable to interim vouchers under 

cost–reimbursement contracts for 

services. This statutory provision is 

implemented in FAR 52.232–25, 

Alternate I. Similarly, FAR 52.232–7 

explicitly makes the interest penalty 

applicable to interim vouchers under 

time-and-materials and labor-hour 

contracts for services. Another 

respondent suggested that the rule allow 

for Prompt Payment Act interest on 

amounts withheld if later it is 

determined that the Government 

incorrectly applied the withhold. 

Response: FAR 52.232–25(a)(5)(ii) 

states ‘‘The prompt payment regulations 

at 5 CFR 1315.10(c) do not require the 

Government to pay interest penalties if 

payment delays are due to disagreement 

between the Government and the 

Contractor over the payment amount or 

other issues involving contract 

compliance, or on amounts temporarily 

withheld or retained in accordance with 

the terms of the contract.’’ Since 

amounts withheld pursuant to clause 

252.242–7XXX are temporarily withheld 

in accordance with the terms of the 

contract, they are not subject to the 

interest penalty provisions of the 

Prompt Payment Act. 


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31. Internal Audits and Management 

Reviews 

Comment: A number of respondents 

recommended that the Government be 

provided complete access to contractors’ 

internal control systems, including 

internal audit reports and management 

reviews, to ensure a contractor has 

implemented appropriate corrections in 

response to audits and reviews. Further, 

one respondent suggested that this 

requirement should be based on the 

comprehensive internal control 

framework of the Committee of 

Sponsoring Organizations of the 

Treadway Commission (COSO). 

Response: Auditors have access to 

contractors’ records, as provided for 

under the FAR, to ensure contractors 

have implemented internal audits and 

management reviews. DoD does not 

agree with implementing the COSO 

internal control framework since COSO 

is a voluntary private-sector 

organization. It would be inappropriate 

to tie Government regulations to the 

COSO internal control framework since 

such policies are not subject to the 

Government’s rulemaking process. 

32. Legality of Withholds 

Comment: Respondents believe the 

withholds set forth in the rule are 

arbitrary, punitive, contrary to public 

policy that requires the Government 

withholds to be reasonably related to 

Government risk, and could lead to a 

cessation of contract payments without 

any showing of actual harm to the 

Government. The respondents believe 

the rule would not survive legal 

challenge. 

Response: 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 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 percentage withhold 

amount, not as a penalty for a 

deficiency, but as representing a goodfaith estimate sufficient to mitigate the 

Government’s risk, where the actual 

amounts are difficult to estimate or 

quantify. 

33. Materiality of Deficiencies 

Comment: Some respondents believe 

the quality and utility of contractor 

business system information could be 

greatly enhanced by requiring a clear 

segregation between system conditions 

that relate solely to policy 

enhancements, especially when the 

contractor has agreed to the policy 

enhancements or has already made the 

policy enhancements but DCAA has not 

yet reviewed them, and those system 

conditions that relate to unallowable or 

unreasonable costs being charged to 

Government contracts. Other 

respondents are concerned that the 

proposed rule does not make a 

distinction between minor deficiencies 

that likely pose no threat of significant 

harm to the Government, and material 

deficiencies that potentially pose such a 

threat. These respondents are concerned 

that current DCAA guidance requires 

reporting of any perceived deficiency 

that could directly or indirectly result in 

any amount, no matter how small, of 

unallowable costs being charged to a 

contract. To avoid such circumstances, 

it is absolutely necessary to impose a 

materiality requirement in regard to 

system deficiencies. One respondent 

stated that, although the rule requires 

the auditor or other cognizant functional 

specialist to assess the potential 

magnitude of the risk to the Government 

posed by the deficiency, the rule fails to 

establish objective criteria for such an 

assessment, including the need for 

evidence demonstrating a logical nexus 

between the deficiency and the risk. 

Finally, one respondent suggested the 

rule should focus on risk management 

rather than risk avoidance. As such, the 

pass–or–fail assessment of business 

systems in the rule does not adequately 

address relative degrees of impact or 

risk. 

Response: DoD does not believe that 

it would be in the Government’s best 

interest to attempt to segregate between 

system deficiencies that relate solely to 

system policy and those system 

deficiencies that relate directly to 

unallowable or unreasonable costs. 

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. Furthermore, DoD 

disagrees with the assertion that 

business systems will be deemed 

inadequate and payments withheld for 

minor deficiencies. The intent of the 

rule is to withhold payments when a 

deficiency exists that impairs the 

Government’s ability to rely on the 

system’s outputs. DoD has revised the 

rule to set forth objective business 

system criteria. DoD believes there is a 

logical nexus between system 

deficiencies and risk to the Government. 

The intent of the rule is to withhold 

payments when a deficiency exists that 

impairs the Government’s ability to rely 

on the system’s outputs. A system must 

provide reasonable assurance that the 

relevant system criteria are satisfied and 

that the risk of material misstatements 

caused by error or fraud is low. The rule 

has been revised to clarify that the 

contracting officer has the discretion to 

determine whether withholding is 

warranted to protect the Government. 

Accordingly, DoD disagrees that the rule 

is based on pass–fail criteria. 

34. Material Management and 

Accounting System (MMAS) 

Comment: Three respondents 

questioned the language at clause 

252.242–7004 which requires a 

contractor’s MMAS to have adequate 

internal controls to ensure system and 

data integrity. The respondents contend 

that internal controls (i.e., policies and 

procedures) cannot provide absolute 

assurance as required here; the standard 

is reasonable assurance. The 

respondents cited the requirement that 

a contractor’s MMAS shall have 

adequate internal controls to ensure 

system and data integrity, and shall 

‘‘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.’’ The 

respondents question what is an 

adequate level. 

Response: The proposed rule does not 

require absolute assurance of 

compliance with any of the business 

system standards or criteria. The intent 

of the rule is to provide reasonable 

assurance that the system criteria are 

satisfied and that the risk of material 

misstatements caused by error or fraud 

is low. DoD further notes that this 

existing language in clause 252.242– 

7004 sets forth a desired 95 percent 

accuracy level. 

35. Multiple Withholdings 

Comment: The respondent stated that 

many of the contractor systems covered 

by this rule are, appropriately, 

implemented on a corporate-wide basis. 


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As a result, the respondent believed that 

that a deficiency finding would impact 

all proposals and contracts held by that 

company, including those that are not 

directly affected by the ‘‘deficient’’ 

system, and those that are outside DoD 

and not covered by this rule. 

Response: This payment withholding 

requirement set forth in this rule applies 

only to contracts that contain clause 

252.242–7XXX, Business Systems. The 

withholding is not necessarily limited to 

a single contract, but would apply to 

multiple contracts that are covered by 

clause 252.242–7XXX. A contractor’s 

respective business systems are relied 

upon by the Government for all 

contracts that contain the respective 

clauses pertaining to the individual 

business systems. Therefore, it is 

appropriate for withholds to be applied 

to multiple contracts that rely on the 

fidelity of the contractor’s respective 

business systems. 

36. Property Management System 

Comment: One respondent believed 

that withholding against all of a 

contractor’s financing payments would 

be grossly out of proportion with the 

damage because FAR also already 

protects the Government’s interest for 

deficiencies in a property management 

system by specifically addressing 

remediation for individual pieces of 

lost, damaged, destroyed, or stolen 

Government property. 

Response: FAR 45.105 provides that if 

the contractor does not correct property 

management system deficiencies, the 

contracting officer may revoke the 

Government’s assumption of risk for 

loss, damage, destruction, or theft; and/ 

or the exercise of other rights or 

remedies available to the contracting 

officer. However, these remedies do not 

mitigate the Government’s risk that the 

contractor could fail to perform on the 

contract. The proposed rule further 

mitigates the Government’s risk by 

withholding payments temporarily 

when the contractor’s property 

management system has deficiencies. 

37. Purchasing System 

Comment: A number of respondents 

expressed concern with the purchasing 

system criteria against which contractor 

compliance will be measured. A number 

of respondents questioned the criteria in 

the proposed rule that required a 

purchasing system that procures 

materials ‘‘at the most economical cost.’’ 

One respondent asserted that the DoD 

purchasing system requirement should 

be limited to verification that FAR/ 

DFARS required flow downs from the 

prime or higher-tier contract have been 

included in the purchase order or 

subcontract. One respondent questioned 

whether it is possible to grant system 

approval while corrective actions are 

being pursued, and whether withholds 

would apply in this circumstance. 

Response: This revised proposed rule 

sets forth specific criteria for 

maintaining an acceptable purchasing 

system. DoD has revised the language 

under clause 252.244–7XXX to require 

‘‘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,’’ consistent with current 

Federal acquisition policy. Compliance 

with the policy and procedures 

requirements in clause 252.244–7XXX is 

necessary to provide reasonable 

assurance to the contracting officer that 

the purchasing system does not contain 

any deficiencies. The contracting officer 

is responsible for determining whether 

all required flow-down clauses, 

including terms and conditions, and any 

other clauses needed to meet the 

requirements of the prime contract, are 

included in the contractor’s purchasing 

system policies and procedures for 

letting subcontracts. Additionally, the 

Government reviews the contractor’s 

purchasing system to ensure that 

subcontract clauses required under the 

contractor’s purchasing system policies 

are not contrary to Government law or 

regulation. Deficiencies that may result 

in a withhold may not be significant 

enough to result in a system 

disapproval. In a scenario in which a 

system has been disapproved and 

withholds have been implemented, all 

deficiencies must be corrected before 

the temporary withholds are 

discontinued. For system reapproval, 

the deficiencies must be corrected 

substantially in the judgment of the 

contracting officer. The contracting 

officer has the discretion to make both 

system approval and withhold 

determinations separately on a case-bycase basis. 

38. Resolution Timing 

Comment: Respondents believe that 

the Government should have a time 

limitation requirement to follow up on 

corrective actions, make system 

approval decisions, and remove 

withholds. 

Response: DoD acknowledges the 

respondents’ concern regarding the 

timing of follow-up audits. Therefore, 

the rule has been revised so that ‘‘If, 

prior to the receipt of verification, 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, the contracting 

officer may discontinue withholding 

payments pending receipt of verification 

and release any payments previously 

withheld.’’ 

39. Risk-based Withholding 

Comment: A number of respondents 

suggested that any reductions in 

payment should be in proportion to the 

potential damage/risk to the 

Government and should be imposed 

only after demonstrating a reasonable 

basis for the actual damage suffered by 

the Government. 

Response: The intent of the rule is to 

authorize payment withholding when 

the contracting officer determines there 

are one or more system deficiencies that 

adversely affect a contractor’s business 

system, leading to a potential risk of 

harm to the Government. The potential 

risk of harm may be a risk that cannot 

be quantified in terms of dollars, such 

as a deficiency that would compromise 

contract performance. 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 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 percentage withhold 

amount, not as a penalty for a 

deficiency, but as representing a goodfaith estimate sufficient to mitigate the 

Government’s risk where the actual 

amounts are difficult to estimate or 

quantify. 

40. Roles of DCAA/DCMA 

Comment: A number of respondents 

were concerned that most contracting 

officers will not have the requisite 

training and expertise to reach 

independent conclusions relative to 


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auditor/contractor disagreements over 

internal controls. The respondents 

expect contracting officers will, more 

often than not, simply concur with 

auditor conclusions out of expediency 

and safety to avoid being reported to the 

DoD IG for investigation, which will 

greatly endanger equity and fairness. 

These respondents suggested that DoD 

first addresses the adjudication process 

and the independence of DCAA. The 

respondent stated that DFARS must be 

absolutely clear with regard to the roles 

and authority of the ACO and the 

auditor. 

Response: The DoD memo dated 

December 4, 2009, ‘‘Resolving Contract 

Audit Recommendations,’’ clearly 

defines the roles and responsibilities of 

DCAA and DCMA and provides 

procedures for adjudicating differences. 

DoD has confidence that contracting 

officers possess the technical 

knowledge, skills, and experience 

necessary to reach independent 

determinations on business systems 

based on sound judgment as required by 

FAR 1.602–2, Responsibilities. 

41. Rule Application 

Comment: Two respondents suggested 

that since the information cited in the 

CWC testimony concerned companies 

that were involved with contingency 

contracting in Afghanistan and Iraq, that 

the proposed rule is overly broad and 

should be limited only to contingency 

contracting. 

Response: DoD notes that while the 

issues surrounding contractor business 

systems came to light under the findings 

of the CWC hearings, it is a longstanding 

DoD policy to rely upon effective and 

efficient contractor business systems 

beyond the realm of the contingency 

contracting arena. DoD does not believe 

that these issues are limited strictly to 

contingency contracting. 

42. Small Business Impact 

Comment: Several respondents 

commented that the proposed rule 

imposes potentially burdensome 

requirements on small businesses, since 

with the exception of EVMS and 

estimating system requirements, 

business system requirements apply to 

all contractors and contracts, regardless 

of size. Thus, small businesses would be 

required to implement and maintain the 

same business systems as those systems 

implemented by the largest contractors. 

The respondents recommended the rule 

impose reasonable limitations on the 

applicability of the requirements for 

contractor business systems based on 

the size of the contractor or contract. 

Response: DoD agrees that the rule 

could potentially have an adverse 

impact on small business and has 

established thresholds designed to limit 

the impact on small business. 

Additionally, the rule has been revised 

to reduce the percentage of payments 

withheld if a small business has a 

deficiency that poses a potential risk of 

harm to the Government. 

43. Withhold Alternatives 

Comment: A number of respondents 

believe the proposed rule is unnecessary 

because the Government already has a 

number of enforcement mechanisms to 

ensure that material deficiencies in 

contractor systems do not result in 

unchecked fraud, waste, or abuse in 

Government contracting and to provide 

contractors with appropriate incentives 

to quickly address any deficiencies. 

Some of the respondents recommended 

that the rule be revised to state that 

contracting officers should not impose 

duplicative remedies or sanctions. 

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 proposed 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 wish 

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 

withhold 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. 

44. Withhold Impacts 

Comment: Several respondents 

believe the proposed rule would have 

unintended consequences such as 

establishing a barrier to entry for new 

contractors, harming the cash flow of 

existing contractors and hurting their 

ability to obtain financing, prompting 

unnecessary administrative cost and 

improvements to business systems, 

adversely impacting financial 

performance metrics of return on 

investment and return on sales, and 

impacting the ability of contractors to 

attract debt and equity investment at 

beneficial rates. One respondent 

believed that the unintended 

consequences could directly result in 

loss of jobs and would be contrary to 

supporting our warfighters and our 

national security, both of which depend 

on a healthy industrial base. 

Response: DoD does not believe that 

the rule will cause long–term harm to 

the defense industrial base or national 

security. DoD recognizes that there may 

be a short-term financial impact on a 

contractor who fails to maintain 

adequate business systems in 

accordance with the terms of its 

contract. However, the Government has 

the responsibility to protect the 

taxpayers. DoD believes that contractors 

who maintain adequate systems will not 

be impacted by this rule and, in fact, 

will benefit from effective business 

systems. 

45. Withhold Impacts on Government 

Oversight Costs 

Comment: One respondent 

recommended that DoD abandon the 

proposed clause 252.242–7XXX because 

it will increase the Government’s 

oversight and enforcement costs. 

Response: DoD appreciates the 

respondent’s concern. However, 

acceptable contractor business systems 

are the first line of defense against 

fraud, waste, and abuse. As such, it is 

in the Government’s, and ultimately the 

taxpayers’, best interest to ensure 

contractors maintain adequate business 

systems. 

46. Withhold Percentages 

Comment: A number of respondents 

expressed concern over the percentages 

to be withheld, that the rule does not 

establish a maximum dollar amount that 

may be withheld, and that cumulative 

withholds of up to 50 percent per 

contract are inappropriate. 

Response: DoD appreciates the 

respondents’ concerns regarding the 

withhold percentages. Accordingly, the 

proposed rule has been revised to 

reduce the amount that can be withheld 

for business system deficiencies from 

ten percent to five percent (two percent 

for small business). If the Contractor 

submits an acceptable corrective action 

plan, the contracting officer will, as 

appropriate, reduce the withholding to 

two percent (one percent for small 

businesses). The contracting officer will 

authorize the contractor to bill for 

amounts previously withheld when the 

contracting officer determines all 

deficiencies have been corrected. 

Additionally, DoD has revised the rule 

to reduce the cumulative percentage of 

payments that can be withheld on one 

or more business systems to 20 percent 

(10 percent for small businesses). This 

limitation refers to the amount that can 

be withheld on any payment if 

deficiencies exist in one or more 

business systems. The establishment of 


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a maximum dollar amount that may be 

withheld across multiple contracts 

would be inappropriate. 

B. Summary of Proposed Rule Changes 

As a result of the public comments 

received, the following changes were 

made to the proposed rule: 

1. To the extent practicable, the rule 

has been reorganized to provide 

consistency across each of the business 

systems. Additionally, throughout the 

rule, the term ‘‘ACO’’ has been replaced 

by ‘‘contracting officer’’ for accuracy. 

2. The definition of ‘‘deficiency’’ used 

throughout the rule means a failure to 

maintain one or more system criteria of 

an acceptable business system. This 

definition has been set forth within each 

of the specific business system clauses 

252.215–7002, 252.234–7002, 252.242– 

7004, 252.242–7XXX, 252.242–7YYY, 

252.244–7XXX, and 252.245–7XXX. 

3. The system criteria for each of the 

business systems have been set forth in 

clause 252.242–7XXX, Business 

Systems, as well as in each of the 

individual business system clauses, 

252.215–7002, 252.234–7002, 252.242– 

7004, 252.242–7YYY, 252.244–7XXX, 

and 252.245–7XXX. 

4. In the ‘‘policy’’ paragraphs for each 

of the business systems, 215.407–5– 

70(c)(2), 234.201(5), 242.7203(c), 

242.7502(b), 244.305–70(a), and 

245.105(b), cognizant contracting 

officers, in consultation with the auditor 

and, where applicable, the functional 

specialist, shall determine the 

acceptability of the contractor’s business 

systems and approve or disapprove the 

system. 

5. The ‘‘disposition of findings’’ 

paragraphs for each of the business 

systems, 215.407–5–70(e)(2), 234.201(7), 

242.7203(c), 242.7502(d), 244.305–70(c), 

and 245.105(d), have been reorganized 

and revised to set forth procedures for 

reporting of findings, and making initial 

and final determinations as follows: 

(a) If there are system deficiencies, the 

auditor’s or functional specialist’s report 

to the contracting officer shall describe 

the deficiencies in sufficient detail to 

allow the contracting officer to 

understand the deficiencies and the 

potential adverse impact to the 

Government; and 

(b) Revised initial and final 

determination procedures have been set 

forth. 

6. The business system approval 

paragraphs, 215.407–5–70(f), 234.201(8), 

242.7203(d), 242.7502(e), 244.305– 

70(d), and 245.105(e), are established to 

provide procedures for contracting 

officers to promptly approve a 

previously unapproved business system 

and notify the contractor when the 

contracting officer determines, in 

consultation with the auditor and/or 

functional specialist, that the contractor 

has substantially corrected the system 

deficiencies, removing any potential 

risk of harm to the Government. 

7. The contracting officer notifications 

paragraphs, 215.407–5–70(g), 

234.201(9), 242.7203(e), 242.7502(f), 

244.305–70(e), and 245.105(f), are 

established to provide procedures for 

contracting officers to promptly 

distribute copies of a determination to 

withhold, remove withholds, and 

approve or disapprove a system to the 

auditor, payment office, contracting 

officers at the buying activities, and 

cognizant contracting officers in 

contract administration activities. 

8. Paragraphs 242.7502(g) and 

244.305–70(f), on mitigating risk of 

accounting system and purchasing 

system deficiencies on specific 

proposals, are established to provide 

contracting officers with procedures for 

evaluating whether a deficiency impacts 

the negotiations, and if so, what 

alternatives the contracting officer 

should consider. 

9. Section 245.105 is rewritten in its 

entirety as previously noted, and for 

consistency with the other business 

systems covered under this rule. 

10. Section 242.70X1 Business system 

deficiencies, has been revised in its 

entirety to set forth policy and 

procedures for contracting officers to 

make a determination to withhold 

payments; provide appropriate 

notifications; monitor and verify the 

correction of contractor deficiencies; 

and implement, reduce, increase, and 

discontinue payment withholding. 

11. Section 242.70X2 Contract clause, 

has been revised to set forth a $50 

million threshold and revise the 

companion clauses that set forth the 

requirements for the use of clause 

252.242–7XXX, Business Systems. 

12. In each of the clauses revised 

under this rule, 252.215–7002, 252.234– 

7002, 252.242–7004, 252.242–7YYY, 

and 252.244–7XXX, the language has 

been revised to replace the phrase and 

paragraph headings entitled ‘‘system 

requirements’’ with ‘‘system criteria,’’ 

and to delete from the clauses the 

phrases ‘‘but is not limited to’’ and ‘‘but 

not limited to.’’ 

13. The ‘‘System deficiencies’’ 

paragraphs in each of the individual 

business systems clauses, 252.215– 

7002(e), 252.234–7002(i), 252.242– 

7004(e), 252.242–7YYY(d), and 

252.244–7XXX(d), have been revised for 

consistency and clarity. 

14. In each of the individual business 

system clauses revised under this rule, 

the following language has been added 

under paragraphs 252.215–7002(f), 

252.234–7002(i)(4), 252.242–7004(f), 

252.242–7YYY(e), and 252.244– 

7XXX(e): ‘‘If the Contractor receives the 

Contracting Officer’s final determination 

of system deficiencies, the Contractor 

shall, 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.’’ 

15. In each of the individual business 

system clauses revised under this rule, 

the ‘‘Withholding payments’’ 

paragraphs, 252.215–7002(g), 252.234– 

7002(k), 252.242–7004(g), 252.242– 

7YYY(f), and 252.244–7XXX(f), are 

revised as follows: ‘‘If the Contracting 

Officer determines that there are one or 

more system deficiencies that adversely 

affect the Contractor’s purchasing 

system, leading to a potential risk of 

harm to the Government, and the 

contract includes the clause at 252.242– 

7XXX, Business Systems, the 

Contracting Officer will withhold 

payments in accordance with that 

clause.’’ 

16. Clause 252.215–7002 is revised as 

follows: 

(a) The definition of an ‘‘estimating 

system’’ has been revised to include the 

phrase ‘‘budgeting and planning 

controls,’’ and under subparagraph (5), 

to add the phrase ‘‘budgeting and 

planning’’ and the phrase ‘‘and budgets.’’ 

(b) Minor revisions to paragraph (d) 

system criteria, include the addition of 

the phrase ‘‘and budgets’’ in 

subparagraphs (i), (ii), and (v); the 

addition of the phrase ‘‘and budgeting’’ 

in subparagraphs (iii), (iv), and (xii); 

replacement of the word ‘‘appropriate’’ 

with ‘‘adequate’’ in subparagraph (v); 

deletion of the phrase ‘‘where 

appropriate’’ in subparagraph (xi); 

replacement of the phrase ‘‘comply with 

this regulation’’ with ‘‘ensure timely 

follow-up actions are taken on the 

management review recommendations’’ 

in subparagraph (xii); replacement of 

the phrase ‘‘the comparison’’ with 

‘‘budgetary data supporting indirect cost 

estimates and comparisons’’ in 

subparagraph (xiii); addition of the 

phrase ‘‘and notify the Contracting 

Officer’’ in subparagraph (xiv); deletion 

of subparagraph (xv) and its 

replacement with new subparagraphs 

(xv), (xvi), and (xvii). 

17. Clause 252.234–7002 is revised as 

follows: 

(a) Definitions of ‘‘acceptable earned 

value management system’’ and ‘‘earned 

value management system’’ are added. 

(b) Paragraph (c) is revised as follows: 

‘‘If this contract has a value of $50 

million or more, the Contractor shall use 


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an EVMS that has been determined to be 

acceptable by the cognizant Federal 

agency.’’ The phrase ‘‘to be in 

compliance with the EVMS guidelines 

as stated in paragraph (a)(1) of this 

clause’’ is hereby deleted. 

(c) Paragraphs (c) and (g) are revised 

to replace the references to paragraph 

(a)(1) with references to paragraph 

(b)(1). 

(d) Paragraph (j), System disapproval, 

is hereby added to set forth when a 

contracting officer will disapprove a 

contractor’s EVMS. 

(e) Paragraph (h) is renumbered as 

paragraph (l) and is revised to provide 

the following qualifying phrase: ‘‘With 

the exception of paragraphs (i) through 

(k) of this clause * * *’’ Additionally, 

the reference to paragraph (b) is 

replaced by a reference to paragraph (c). 

18. Clause 252.242–7002 is revised to 

add the definition of ‘‘acceptable 

material management and accounting 

system.’’ 

19. Clause 252.242–7XXX is revised 

as follows: 

(a) The definition of ‘‘acceptable 

business systems’’ has been revised to 

delete the words ‘‘this contract’’ such 

that acceptable business systems ‘‘means 

business systems that comply with the 

terms and conditions of the applicable 

business system clauses listed in the 

definition of ‘‘business systems’’ in this 

clause.’’ 

(b) The definition of ‘‘business 

systems’’ has been revised to update the 

references to the applicable clauses for 

the property management system, 

252.245–7XXX, Contractor Property 

Management System Administration, 

and purchasing system, 252.244–7XXX, 

Contractor Purchasing System 

Administration. 

(c) Paragraph (c), System deficiencies, 

has been revised for clarity to state 

under subparagraph (1) that ‘‘The 

Contractor shall respond in writing 

within 30 days to an initial 

determination that there are one or more 

system deficiencies that adversely affect 

the Contractor’s business system leading 

to a potential risk of harm to the 

Government.’’ Furthermore, the phrase 

‘‘that adversely affect the Contractor’s 

business system leading to a potential 

risk of harm to the Government’’ is also 

added for clarity. 

(d) Paragraph (d) is revised for clarity, 

as well, to— 

(i) Reduce the withhold percentage 

from 10 percent to five percent (two 

percent for small businesses) and from 

five percent to two percent (one percent 

for small businesses) if the Contractor 

submits an acceptable corrective action 

plan within 45 days of a notice of the 

Contracting Officer’s intent to withhold 

payments; 

(ii) Set forth procedures for 

Contracting Officers to withhold 

payments from progress payments and 

performance-based payments, or issue a 

contract modification requiring the 

Contractor to implement the 

withholding on interim cost vouchers 

on cost, labor-hour, and time-andmaterials contracts; 

(iii) Reduce the cumulative 

percentage of payments withheld on one 

or more business systems from 50 

percent to 20 percent (10 percent for 

small businesses); 

(iv) Delete the potential 100 percent 

withhold for deficiencies that are highly 

likely to lead to improper contract 

payments or represent an unacceptable 

risk of loss to the Government; 

(v) Add construction contracts that 

include FAR clause 52.232–27 to the list 

of interim payments applicable to this 

clause; and 

(vi) Add subparagraph (5) to set forth 

that ‘‘Payment withholding shall not 

apply to payments on fixed-price line 

items where performance is complete 

and the items were accepted by the 

Government.’’ 

(e) Paragraph (e) is revised for clarity, 

as well, to— 

(i) Revise procedures for Contracting 

Officers to discontinue withhold 

payments from progress payments and 

performance-based payments, and 

unilaterally issue a contract 

modification to discontinue the 

payment withholding from billings on 

interim cost vouchers, and authorize the 

Contractor to appropriately bill for any 

monies previously withheld if the 

Contracting Officer determines the 

Contractor has corrected all deficiencies 

in a business system; and 

(ii) Revise procedures for Contracting 

Officers to continue to withhold 

payments from progress payments and 

performance-based payments, or require 

the Contractor to continue the 

withholding from its billings on interim 

cost vouchers if the Contracting Officer 

determines the Contractor has not 

corrected all deficiencies in a business 

system. 

20. Clause 252.242–7YYY is revised 

as follows: 

(a) The definition of ‘‘acceptable 

accounting system’’ is revised to replace 

the phrase ‘‘requirements under’’ with 

the phrase ‘‘system criteria in,’’ and 

replace the word ‘‘invoice’’ with the 

word ‘‘billing.’’ 

(b) The definition of ‘‘accounting 

system’’ is revised to replace ‘‘reporting 

data’’ with ‘‘reporting’’ and to add the 

phrase ‘‘and may include subsystems for 

specific areas such as indirect and other 

direct costs, compensation, billing, 

labor, and general information 

technology.’’ 

(c) Paragraph (b), General, is revised 

to clarify that ‘‘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 252.242–7XXX, 

Business Systems, and also may result 

in disapproval of the system.’’ 

21. Clause 252.244–7XXX is revised 

as follows: 

(a) The definition of an ‘‘acceptable 

purchasing system’’ is added. 

(b) The definition of ‘‘purchasing 

system’’ is revised to delete the 

purchasing system criteria language in 

subparagraphs (1) through (6), which 

has been relocated to the system criteria 

paragraph (c). 

22. New clause 252.245–7XXX, 

Contractor Property System 

Administration, has been added for 

consistency with the other business 

system clauses, 252.215–7002, 252.234– 

7002, 252.242–7004, 252.242–7YYY, 

and 252.244–7XXX. 

III. Executive Order 12866 

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 entities 

contractually required to maintain one 

or more of the defined contractor 

business systems. While DoD did not 

receive comments with specific impacts 

on small businesses, based on 

comments received, DoD has revised the 

proposed rule to establish a $50 million 

threshold designed to limit the impact 

on small business. Additionally, the 

rule has been revised to reduce the 

percentage of payment withholding if a 

small business has a deficiency that 

poses a potential risk of harm to the 

Government. 

At this time, DoD is unable to 

estimate the number of small entities to 

which this rule will apply. Therefore, 

DoD invites comments from small 


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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 the 

proposed rule contains information 

collection requirements. In accordance 

with 5 CFR 1320.8, DoD invited 

comments regarding the information 

collection estimate that DoD included 

with the initial proposed rule published 

on January 15, 2010, at 75 FR 2457. In 

response, DoD received one comment. 

The respondent asserted that DoD’s 

estimates are substantially understated. 

However, the supporting data 

referenced by the respondent exceeds 

the information collection requirements 

established under this rule. The hours 

and costs cited by the respondent with 

regard to EVMS do not reflect the 

Paperwork Reduction Act requirements 

of this rule. With no further specific 

Paperwork Reduction Act comments 

received, and no further revisions in 

this proposed rule to the information 

collection requirements, DoD believes 

the estimates published with the 

proposed rule accurately reflect the 

contractors’ costs to fulfill the 

information collection requirements of 

this rule. 

Written comments and 

recommendations on the proposed 

information collection should be sent to 

Ms. Jasmeet Seehra at the Office of 

Management and Budget, Desk Officer 

for DoD, Room 10236, New Executive 

Office Building, Washington, DC 20503, 

or e-mail 

Jasmeet_K._Seehra@omb.eop.gov, with a 

copy to the Defense Acquisition 

Regulations System, Attn: Mr. Mark 

Gomersall, OUSD(AT&L)DPAP/DARS, 

Room 3B855, 3060 Defense Pentagon, 

Washington, DC 20301–3060. 

Comments can be received from 30 to 60 

days after the date of this notice, but 

comments to OMB will be most useful 

if received by OMB within 30 days after 

the date of this notice. 

To request more information on this 

proposed information collection or to 

obtain a copy of the proposal and 

associated collection instruments, 

please write to the Defense Acquisition 

Regulations System, Attn: Mr. Mark 

Gomersall, OUSD(AT&L)DPAP/DARS, 

Room 3B855, 3060 Defense Pentagon, 

Washington, DC 20301–3060, or e-mail 

dfars@osd.mil. Include DFARS Case 

2009–D038 in the subject line of the 

message. 

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, DoD proposes to amend 48 

CFR parts 215, 234, 242, 244, 245, and 

252 as follows: 

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. 421 and 48 CFR 

chapter 1. 

PART 215—CONTRACTING BY 

NEGOTIATION 

2. Amend section 215.407–5–70 by: 

a. Adding introductory text to 

paragraph (a); 

b. Revising paragraph (a)(4); 

c. Revising the heading of paragraph 

(c); 

d. Revising paragraphs (c)(2) and 

(c)(3); 

e. Removing paragraph (c)(4); 

f. Redesignating paragraphs (d)(1), 

(d)(2), and (d)(3) as paragraphs (c)(4), 

(c)(5), and (c)(6); 

g. Revising newly designated 

paragraphs (c)(4) and (c)(5); 

h. Removing the heading of paragraph 

(d); 

i. Removing paragraphs (e), and (f); 

j. Redesignating paragraph (g) as 

paragraph (d); and 

k. Adding new paragraphs (e) through 

(g) to read as follows: 

215.407–5–70 Disclosure, maintenance, 

and review requirements. 

(a) Definitions. As used in this 

subsection— 

* * * * * 

(4) Deficiency is defined in 252.215– 

7002, Cost Estimating System 

Requirements. 

(b) * * * 

(c) Policy. 

* * * * * 

(2) The cognizant contracting officer, 

in consultation with the auditor, for 

contractors subject to paragraph (b)(2) of 

this subsection 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 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 estimating system 

deficiencies, the report shall describe 

the deficiencies in sufficient detail to 

allow the contracting officer to 

understand the deficiencies and the 

potential adverse impact to the 

Government. 

(2) Initial determination. (i) The 

contracting officer shall review all 

findings and recommendations and, if 

there are no deficiencies that adversely 

affect the system, shall promptly notify 

the contractor in writing that the 

contractor’s estimating system is 

acceptable and approved; or 

(ii) If the contracting officer 

determines that there are one or more 

system deficiencies that adversely affect 

the contractor’s estimating system, 

leading to a potential risk of harm to the 

Government, the contracting officer 

shall—— 

(A) Promptly make an initial 

determination on any system 

deficiencies and notify the contractor, in 

writing, providing a description of the 

deficiency in sufficient detail to allow 

the contractor to understand the 

deficiency and its potential harm to the 

Government; 

(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, or 

(B) System deficiencies still remain. 

The notice shall indicate the adequacy 

of any proposed or completed corrective 

action. The contracting officer shall— 


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(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 252.215–7002, Cost 

Estimating System Requirements, if the 

contracting officer determines that one 

or more deficiencies warrant system 

disapproval based on the risk to the 

Government; and 

(3) Withhold payments in accordance 

with 252.242–7XXX, Business Systems, 

if the clause is included in the contract 

and the contracting officer determines 

that there are one or more system 

deficiencies that adversely affect the 

contractor’s estimating system, leading 

to a potential risk of harm to the 

Government. 

(ii) Follow the procedures relating to 

a correction of system deficiencies in 

PGI 215.407–5–70(e)(3). 

(f) System approval. The contracting 

officer shall promptly approve a 

previously disapproved estimating 

system and notify the contractor when 

the contracting officer determines that 

the contractor has substantially 

corrected the system deficiencies 

removing the potential risk of harm to 

the Government. 

(g) Contracting officer notifications. 

The cognizant contracting officer shall 

promptly distribute copies of a 

determination to withhold, remove 

withholds, and approve or disapprove a 

system 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 

2A. 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 252.234–7002, 

Earned Value Management System. 

Deficiency is defined in 252.234– 

7002, Earned Value Management 

System, and is synonymous with 

noncompliance. 

3. 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 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 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 and the potential adverse 

impact to the Government. 

(ii) Initial determination. (A) The 

contracting officer shall review all 

findings and recommendations and, if 

there are no deficiencies that adversely 

affect the system, 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 

determines that there are one or more 

system deficiencies that adversely affect 

the contractor’s earned value 

management system, leading to a 

potential risk of harm to the 

Government, the contracting officer 

shall— 

(1) Promptly make an initial 

determination on any system 

deficiencies and notify the contractor, in 

writing, providing a description of the 

deficiency in sufficient detail to allow 

the contractor to understand the 

deficiencies and the potential adverse 

impact to the Government; 

(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 

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, or 

(2) Systems deficiencies still remain. 

The notice shall 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 252.234–7002, Earned 

Value Management System, when initial 

validation is not successfully completed 

within a 16 month period from contract 

award, or the existing earned value 

management system contains one or 

more 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). For 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 252.242–7XXX, Business Systems, 

if the clause is included in the contract 

and the contracting officer determines 

that there are one or more system 

deficiencies that adversely affect the 

contractor’s earned value management 

system, leading to a potential risk of 

harm to the Government. 

(B) Follow the procedures relating to 

correction of system deficiencies at PGI 

234.201(7)(iii). 

(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 the contractor has 

substantially corrected the system 

deficiencies, removing the potential risk 

of harm to the Government. 

(9) Contracting officer notifications. 

The cognizant contracting officer shall 

promptly distribute copies of a 

determination to withhold, remove 

withholds, and approve or disapprove a 

system 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 

4. Add subpart 242.70 to read as 

follows: 


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Subpart 242.70—Business Systems 

Sec. 

242.70X1 Business system deficiencies. 

242.70X2 Contract clause. 

Subpart 242.70—Business Systems 

242.70X1 Business system deficiencies. 

(a) Definition. As used in this 

subpart—— 

Acceptable business systems and 

business systems are defined in 

252.242–7XXX, Business Systems. 

Deficiency is defined in 252.242– 

7XXX, Business Systems. 

(b) Determination to withhold 

payments. If the contracting officer 

determines that one or more system 

deficiencies adversely affect the 

contractor’s business systems included 

in 252.242–7XXX, Business Systems, 

that lead to a potential risk of harm to 

the Government, the contracting officer 

will— 

(1) Promptly notify the contractor, in 

writing, of the contracting officer’s 

determination to implement payment 

withholding in accordance with 

252.242–7XXX, Business Systems. The 

notice of payment withhold shall be 

included in the contracting officer’s 

written final determination for the 

business system and shall inform the 

contractor that— 

(i) Payments shall be withheld in 

accordance with 252.242–7XXX, 

Business Systems, until the contracting 

officer determines that all system 

deficiencies have been corrected; and 

(ii) The contracting officer reserves 

the right to take other actions within the 

terms and conditions of the contract. 

(2) Provide all contracting officers 

administering contracts containing 

252.242–7XXX, Business Systems, a 

copy of the determination and 

instructions for issuing unilateral 

contract modifications to withhold 

payments on those contracts, and 

reducing progress payments and 

performance-based payments, as 

applicable. 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. 

(3) Contracting officers shall use a 

format substantially the same as the 

following for unilateral modifications 

for making an initial payment 

withholding, reducing the payment 

withholding, and discontinuing the 

payment withholding in accordance 

with 252.242–7XXX, Business Systems: 

(i) Use this format for unilateral 

modifications for implementing 

payment withholding: 

Payment Withholding 

(A) The purpose of this unilateral 

modification is to implement a payment 

withholding per the terms of 252.242– 

7XXX, Business Systems, and as a result 

of the Contracting Officer’s 

determination, dated YYYY/MM/DD, 

with respect to the deficiencies found in 

the Contractor’s system(s). 

(B) Effective immediately, five percent 

(two percent for small businesses) of 

each request for payment under this 

contract will be withheld as described 

below. Upon receipt of an acceptable 

corrective action plan from the 

Contractor, a determination will be 

made with respect to reducing the 

percentage being withheld to two 

percent (one percent for small 

businesses) until the Contracting Officer 

determines that the Contractor has 

corrected all system deficiencies, as 

identified in the Contracting Officer’s 

determination. Failure to follow the 

accepted corrective action plan will 

result in an increase in the percentage 

withheld against each payment under 

this contract to five percent (two percent 

for small businesses). Such reduction or 

increase will be made by contract 

modification. 

(C) For payments under cost, laborhour, or time-and-materials contracts: 

The Contractor shall apply a five 

percent (two percent for small 

businesses) withhold to the amount 

being billed and prepare a cost voucher 

in Wide Area WorkFlow (WAWF) for 

the net amount due. The Contractor 

shall show the amount withheld on the 

current billing, as well as the 

cumulative amount withheld to date on 

this contract in accordance with 

252.242–7XXX, in the Comments block 

of the Miscellaneous Info Tab in 

WAWF. 

(D) For progress payments: The 

Contractor shall prepare the request in 

WAWF without applying any withhold 

percentage. The Contracting Officer will 

reduce the approved amount by five 

percent (two percent for small 

businesses) and record the amount 

being withheld on the progress payment 

request, as well as the cumulative 

amount withheld on this contract in 

accordance with 252.242–7XXX, in the 

Comments block of the Miscellaneous 

Info Tab in WAWF. 

(E) For performance-based payments: 

The Contractor shall prepare the request 

in WAWF without applying any 

withhold percentage to the 

performance-based payment event 

schedule amounts. The Contracting 

Officer will reduce the amount 

approved by five percent (two percent 

for small businesses)and record the 

amount being withheld on the 

performance-based payment, as well as 

the cumulative amount withheld on this 

contract, in accordance with 252.242– 

7XXX, in the Comments block of the of 

the Miscellaneous Info Tab in WAWF. 

(F) These payment withhold amounts 

will not be recorded in Mechanization 

of Contract Administration Services as 

withholds and there is no ACTION 

required on the part of the payment 

office to effect the withhold. 

(ii) Use this format for unilateral 

modifications for reducing payment 

withholding: 

Reduction of Temporary Payment 

Withholding 

(A) The purpose of this unilateral 

modification is to reduce the payment 

withholding percentage per the terms of 

252.242–7XXX, Business Systems, as a 

result of receiving an acceptable 

corrective action plan from the 

contractor, dated YYYY/MM/DD, for 

resolving deficiencies in its system(s) as 

identified in the Contracting Officer’s 

determination, dated YYYY/MM/DD. 

This reduction is prospective and 

previous amounts withheld will not be 

reduced or released at this time. 

(B) Effective immediately, two percent 

(one percent for small businesses) of 

each request for payment under this 

contract will be withheld as described 

below. The two percent (one percent for 

small businesses) being withheld will 

remain in effect until the Contracting 

Officer determines that the Contractor 

has corrected all system deficiencies as 

identified in the Contracting Officer’s 

determination. Failure to follow the 

accepted corrective action plan will 

result in an increase in the percentage 

withheld against each payment under 

this contract to five percent (two percent 

for small businesses). Such increase will 

be made by contract modification. 

(C) For payments under cost, laborhour, or time-and-materials contracts: 

The Contractor shall apply a two 

percent (one percent for small 

businesses) withhold to the amount 

being billed and prepare a cost voucher 

in Wide Area WorkFlow (WAWF) for 

the net amount due. The Contractor 

shall show the amount withheld on the 

current billing, as well as the 

cumulative amount withheld to date on 

this contract in accordance with 

252.242–7XXX, in the Comments block 

of the Miscellaneous Info Tab in 

WAWF. 

(D) For progress payments: The 

Contractor shall prepare the request in 

WAWF without applying any withhold 

percentage. The Contracting Officer will 

reduce the approved amount by two 

percent (one percent for small 


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businesses) and record the amount 

being withheld on the progress payment 

request, as well as the cumulative 

amount withheld on this contract, in 

accordance with 252.242–7XXX, in the 

Comments block of the Miscellaneous 

Info Tab in WAWF. 

(E) For performance-based payments: 

The Contractor shall prepare the request 

in WAWF without applying any 

withhold percentage to the 

performance-based payment event 

schedule amounts. The Contracting 

Officer will reduce the amount 

approved by two percent (one percent 

for small businesses) and record the 

amount being withheld on the 

performance-based payment, as well as 

the cumulative amount withheld on this 

contract, in accordance with 252.242– 

7XXX, in the Comments block of the of 

the Miscellaneous Info Tab in WAWF. 

(F) These payment withhold amounts 

will not be recorded in Mechanization 

of Contract Administration Services as 

withholds and there is no ACTION 

required on the part of the payment 

office to effect the withhold. 

(iii) Use the format below if payment 

withholding is discontinued pending 

receipt of auditor or functional 

specialist verification and based on 

evidence that the contractor has 

corrected all system deficiencies, in 

accordance with 252.242–7XXX, 

Business Systems: 

Discontinuation of Payment 

Withholding 

(A) The purpose of this unilateral 

modification is to discontinue the 

payment withhold as identified in 

Modification XXXXX and release 

previous amounts withheld on this 

contract, in accordance with 252.242– 

7XXX, Business Systems. 

(B) The discontinuation of the 

payment withhold is made pending 

receipt of verification and based on 

evidence submitted by the Contractor 

that all the Contractor’s system(s) 

deficiencies identified in the 

Contracting Officer’s determination, 

dated YYYY/MM/DD, have been 

corrected. 

(C) The Contractor is authorized to 

submit a bill in the amount of 

$XXXXXXXX. The billed amount 

should be submitted on the same type 

of invoice as the withhold was 

originally taken, as appropriate. 

(iv) Use the format below if payment 

withholding is discontinued after 

auditor or functional specialist 

verification that the contractor has 

corrected all system deficiencies, in 

accordance with 252.242–7XXX, 

Business Systems: 

Discontinuation of Payment 

Withholding 

(A) The purpose of this unilateral 

modification is to discontinue the 

payment withhold as identified in 

Modification XXXXX and release 

previous amounts withheld on this 

contract, in accordance with 252.242– 

7XXX, Business Systems. 

(B) The discontinuation of the 

payment withhold is made based on 

verification that all the contractor’s 

system(s) deficiencies identified in the 

Contracting Officer’s final 

determination, dated YYYY/MM/DD, 

have been corrected. 

(C) The Contractor is authorized to 

submit a bill in the amount of 

$XXXXXXXX. The billed amount 

should be submitted on the same type 

of invoice as the withhold was 

originally taken, as appropriate. 

(c) If the contracting officer 

determines that none of the system 

deficiencies adversely affect any of the 

contractor’s business systems included 

in 252.242–7XXX, Business Systems, 

that lead to potential risk of harm to the 

Government, the contracting officer 

shall promptly notify the contractor in 

writing of the contracting officer’s 

determination not to implement 

payment withholds in accordance with 

252.242–7XXX, Business Systems. 

(d) 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 252.242–7XXX, 

Business Systems. 

(e) Correction of system deficiencies. 

(1) If the contractor notifies the 

contracting officer that the contractor 

has corrected the system 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 system 

deficiencies, the contracting officer shall 

discontinue the withholding of 

payments and release any payments 

previously withheld. 

(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 

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. 

242.70X2 Contract clause. 

Use the clause at 252.242–7XXX, 

Business Systems, in solicitations and 

contracts when the expected contract 

value is equal to or greater than $50 

million, and when the solicitation or 

contract includes any of the following 

clauses: 

(a) 252.215–7002, Cost Estimating 

System Requirements. 

(b) 252.234–7002, Earned Value 

Management System. 

(c) 252.242–7004, Material 

Management and Accounting System. 

(d) 252.242–7YYY, Accounting 

System Administration. 

(e) 252.244–7XXX, Contractor 

Purchasing System Administration. 

(f) 252.245–7XXX, Contractor 

Property Management System 

Administration. 

5. Revise section 242.7201 to read as 

follows: 

242.7201 Definitions. 

As used in this subpart— 

Acceptable material management and 

accounting system, material 

management and accounting system, 

and valid time-phased requirements are 

defined in 252.242.7004, Material 

Management and Accounting System. 

Deficiency is defined in 252.242.7004, 

Material Management and Accounting 

System. 

6. Amend section 242.7202 by: 

a. Redesignating the introductory text 

as paragraph (a); 

b. Redesignating existing paragraphs 

(a) through (c) as paragraphs (a)(1) 

through (a)(3), respectively; and 

c. Adding new paragraphs (b) and (c) 

to read as follows: 

242.7202 Policy. 

* * * * * 

(b) The cognizant contracting officer, 

in consultation with the auditor and 

functional specialist, 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, shall 

determine whether the contractor’s 

MMAS complies with the system 

criteria for an acceptable MMAS as 

prescribed in 252.242–7004, Material 

Management and Accounting System. 

7. Amend section 242.7203 by: 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
75564 Federal Register / Vol. 75, No. 232 / Friday, December 3, 2010 / Proposed Rules 

a. Removing paragraph (c); 

b. Redesignating paragraph (d) as 

paragraph (c); 

c. Revising newly designated 

paragraph (c); and 

d. Adding new paragraphs (d) and (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 MMAS deficiencies, the 

report shall describe the deficiencies in 

sufficient detail to allow the contracting 

officer to understand the deficiencies 

and the potential adverse impact to the 

Government. 

(2) Initial determination. (i) The 

contracting officer shall review findings 

and recommendations and if there are 

no deficiencies that adversely affect the 

system, shall promptly notify the 

contractor, in writing, that the 

contractor’s MMAS is acceptable and 

approved; or 

(ii) If the contracting officer 

determines that there are one or more 

system deficiencies that adversely affect 

the contractor’s MMAS, leading to a 

potential risk of harm to the 

Government, the contracting officer 

shall— 

(A) Promptly make an initial 

determination on any system 

deficiencies and notify the contractor, in 

writing, providing a description of 

deficiencies in sufficient detail to allow 

the contractor to understand the 

deficiencies and the potential adverse 

impact to the Government; 

(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 specialists, and make a final 

determination. 

(3) Final determination. (i) The ACO 

shall make a final determination and 

notify the contractor that— 

(A) The contractor’s MMAS is 

acceptable and approved, or 

(B) System deficiencies still remain. 

The notice shall 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 252.242–7004, Material 

Management and Accounting System, if 

the contracting officer determines that 

one or more deficiencies warrant system 

disapproval based on the risk to the 

Government; and 

(3) Withhold payments in accordance 

with 252.242–7XXX, Business Systems, 

if the clause is included in the contract 

and the contracting officer determines 

that there are one or more system 

deficiencies that adversely affect the 

contractor’s MMAS, leading to a 

potential risk of harm to the 

Government. 

(ii) Follow the procedures relating to 

correction of system 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 the 

contractor has substantially corrected 

the system deficiencies, removing the 

potential risk of harm to the 

Government. 

(e) Contracting officer notifications. 

The cognizant contracting officer shall 

promptly distribute copies of a 

determination to withhold, remove 

withholds, and approve or disapprove a 

system to the auditor; payment office; 

affected contracting officers at the 

buying activities; and cognizant 

contracting officers in contract 

administration activities. 

8. Revise subpart 242.75 to read as 

follows: 

Subpart 242.75—Contractor Accounting 

Systems 

Sec. 

242.7501 Definitions. 

242.7502 Policy. 

242.7503 Contract clause. 

Subpart 242.75—Contractor 

Accounting Systems 

242.7501 Definitions. 

As used in this subpart— 

Acceptable accounting system, and 

accounting system are defined in 

252.242–7YYY, Accounting System 

Administration. 

Deficiency is defined in 252.242– 

7YYY, Accounting System 

Administration. 

242.7502 Policy. 

(a) Contractors receiving costreimbursement, incentive-type, timeand-materials, or labor-hour contracts, 

contracts which provide for progress 

payments based on costs or on a 

percentage or stage of completion, or 

construction contracts that include the 

clause at FAR 52.232–27, Prompt 

Payment for Construction Contracts, 

shall maintain an acceptable accounting 

system. 

(b) The cognizant contracting officer, 

in consultation with the auditor, 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, shall determine whether the 

contractor’s accounting system complies 

with the system criteria for an 

acceptable accounting system as 

prescribed in 252.242–7YYY, 

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 accounting system 

deficiencies, the report shall describe 

the deficiencies in sufficient detail to 

allow the contracting officer to 

understand the deficiencies and the 

potential adverse impact to the 

Government. Follow the procedures at 

PGI 242.70X1(b) for reporting of 

deficiencies. 

(2) Initial determination. (i) The 

contracting officer shall review findings 

and recommendations and, if there are 

no deficiencies that adversely affect the 

system, shall promptly notify the 

contractor, in writing, that the 

contractor’s accounting system is 

acceptable and approved; or 

(ii) If the contracting officer 

determines that there are one or more 

system deficiencies that adversely affect 

the contractor’s accounting system, 

leading to a potential risk of harm to the 

Government, the contracting officer 

shall— 

(A) Promptly make an initial 

determination on any system 

deficiencies and notify the contractor, in 

writing; 

(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 

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, or 

(B) System deficiencies still remain. 

The notice shall indicate the adequacy 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 232 / Friday, December 3, 2010 / Proposed Rules 75565 

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 252.242–7YYY, Accounting 

System Administration, if the 

contracting officer determines that one 

or more deficiencies warrant system 

disapproval based on the risk to the 

Government; and 

(3) Withhold payments in accordance 

with 252.242–7XXX, Business Systems, 

if the clause is included in the contract 

and the contracting officer determines 

that there are one or more system 

deficiencies that adversely affect the 

contractor’s accounting system, leading 

to a potential risk of harm to the 

Government. 

(ii) Follow the procedures relating to 

correction of system 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 

the contractor has substantially 

corrected the system deficiencies, 

removing the potential risk of harm to 

the Government. 

(f) Contracting officer notifications. 

The cognizant contracting officer shall 

promptly distribute copies of a 

determination to withhold, remove 

withholds, and approve or disapprove a 

system 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.— 

(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 firmfixed 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 unilaterally adjust the contract price 

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 252.242–7YYY, 

Accounting System Administration, in 

solicitations and contracts when 

contemplating— 

(a) A cost-reimbursement, incentivetype, 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; or 

(c) A construction contract that 

includes the clause at FAR 52.232–27, 

Prompt Payment for Construction 

Contracts. 

PART 244—SUBCONTRACTING 

POLICIES AND PROCEDURES 

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 

252.244–7XXX, Purchasing System 

Administration. 

Deficiency is defined in 252.244– 

7XXX, Purchasing System 

Administration. 

10. Revise section 244.305–70 to read 

as follows: 

244.305–70 Policy. 

Use the procedures of 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 and 

auditor, shall determine whether the 

contractor’s purchasing system complies 

with the system criteria for an 

acceptable purchasing system as 

prescribed in 252.244–7XXX, 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 purchasing 

system analyst or auditor identifies any 

purchasing system deficiencies, the 

report shall describe the deficiencies in 

sufficient detail to allow the contracting 

officer to understand the deficiencies 

and the potential adverse impact to the 

Government. 

(2) Initial determination. (i) The 

contracting officer shall review all 

findings and recommendations and, if 

there are no deficiencies that adversely 

affect the system, shall promptly notify 

the contractor that the contractor’s 

purchasing system is acceptable and 

approved; or 

(ii) If the contracting officer 

determines that there are one or more 

system deficiencies that adversely affect 

the contractor’s purchasing system, 

leading to a potential risk of harm to the 

Government, the contracting officer 

shall— 

(A) Promptly make an initial 

determination on any system 

deficiencies and notify the contractor, in 

writing, providing a description of the 

deficiencies in sufficient detail to allow 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
75566 Federal Register / Vol. 75, No. 232 / Friday, December 3, 2010 / Proposed Rules 

the contractor to understand the 

deficiencies and the potential adverse 

impact to the Government; 

(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 

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 purchasing 

system is acceptable and approved, or 

(B) System deficiencies still remain. 

The notice shall 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 252.244–7XXX, Contractor 

Purchasing System Administration, if 

the contracting officer determines that 

one or more deficiencies warrant system 

disapproval based on the risk to the 

Government; and 

(3) Withhold payments in accordance 

with 252.242–7XXX, Business Systems, 

if the clause is included in the contract 

and the contracting officer determines 

that there are one or more system 

deficiencies that adversely affect the 

contractor’s purchasing system, leading 

to a potential risk of harm to the 

Government. 

(ii) Follow the procedures in 

accordance with 252.244–7XXX, 

Contractor Purchasing System 

Administration, and PGI 244.305–70 for 

disposition of report findings. 

(d) System approval. The contracting 

officer shall promptly approve a 

previously disapproved purchasing 

system and notify the contractor when 

the contracting officer determines that 

the contractor has substantially 

corrected the system deficiencies, 

removing the potential risk of harm to 

the Government. 

(e) Contracting officer notifications. 

The cognizant contracting officer shall 

promptly distribute copies of a 

determination to withhold, remove 

withholds, and approve or disapprove a 

system 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. (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 firmfixed 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 unilaterally adjust the contract price 

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. 

11. Add new section 244.305–7X to 

read as follows: 

244.305–7X Contract clause. 

Use the clause at 252.244–7XXX, 

Contractor Purchasing System 

Administration, in solicitations and 

contracts containing the clause at FAR 

52.244–2, Subcontracts. 

PART 245—GOVERNMENT PROPERTY 

12. Revise section 245.105 to read as 

follows: 

245.105 Contractor’s property 

management system compliance. 

(a) Definitions—(1) Acceptable 

property management system and 

property management system are 

defined in 252.242–7XXX, Contractor 

Property Management System 

Administration. 

(2) Deficiency is defined in 252.242– 

7XXX, 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 

252.242–7XXX, 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 property 

system deficiencies, the report shall 

describe the deficiencies in sufficient 

detail to allow the contracting officer to 

understand the deficiencies and the 

potential adverse impact to the 

Government. 

(2) Initial determination. (i) The 

contracting officer shall review findings 

and recommendations and, if there are 

no deficiencies that adversely affect the 

system, shall promptly notify the 

contractor, in writing, that the 

contractor’s property management 

system is acceptable and approved; or 

(ii) If the contracting officer 

determines that there are one or more 

system deficiencies that adversely affect 

the contractor’s property management 

system, leading to a potential risk of 

harm to the Government, the contracting 

officer shall— 

(A) Promptly make an initial 

determination on any system 

deficiencies and notify the contractor, in 

writing, providing a description of 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 232 / Friday, December 3, 2010 / Proposed Rules 75567 

deficiencies in sufficient detail to allow 

the contractor to understand the 

deficiencies and the potential adverse 

impact to the Government; 

(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, or 

(B) System deficiencies still remain. 

The notice shall 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) Promptly make a determination to 

disapprove the system if the contracting 

officer determines that one or more 

deficiencies warrant the system 

disapproval based on the risk to the 

Government; and 

(3) Withhold payments in accordance 

with 252.242–7XXX, Business Systems, 

if the clause is included in the contract 

and the contracting officer determines 

that there are one or more system 

deficiencies that adversely affect the 

contractor’s property system, leading to 

a potential risk of harm to the 

Government. 

(ii) Follow the procedures in PGI 

245.105 for disposition of report 

findings. 

(e) System Approval. The contracting 

officer shall promptly approve a 

previously unapproved property 

management system and notify the 

contractor when the contracting officer 

determines, in consultation with the 

property administrator, that the 

contractor has substantially corrected 

the system deficiencies, removing the 

potential risk of harm to the 

Government. 

(f) Contracting officer notifications. 

The cognizant contracting officer shall 

promptly distribute copies of a 

determination to withhold, remove 

withholds, and approve or disapprove a 

system to the auditor; payment office; 

affected contracting officers at the 

buying activities; and cognizant 

contracting officers in contract 

administration activities. 

12A. Add new section 245.105–7X to 

read as follows: 

245.105–7X Contract clause. 

Use the clause at 252.245–7XXX, 

Contractor Property System 

Administration, in solicitations and 

contracts containing the clause at FAR 

52.245–1, Government Property. 

PART 252—SOLICITATION 

PROVISIONS AND CONTRACT 

CLAUSES 

13. 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 (DATE) 

(a) Definitions. As used in this clause— 

Acceptable estimating system means an 

estimating system that 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, and 

documented 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. 

Deficiency means a failure to meet one or 

more system criteria of an acceptable 

estimating system. 

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, and estimating 

methods, techniques, accumulation of 

historical costs, and other analyses used to 

generate cost estimates and budgets. 

(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 criteria. (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; 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
75568 Federal Register / Vol. 75, No. 232 / Friday, December 3, 2010 / Proposed Rules 

(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; 

(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) System deficiencies. (1) The Contracting 

Officer will provide an initial determination 

to the Contractor, in writing, on any system 

deficiencies. The initial determination will 

describe the deficiency in sufficient detail to 

allow the Contractor to understand the 

deficiency and its potential harm to the 

Government. 

(2) The Contractor shall respond within 30 

days to a written initial determination from 

the Contracting Officer that identifies 

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 deficiencies; 

(ii) The adequacy of any proposed or 

completed corrective action; and 

(iii) System disapproval, if the Contracting 

Officer determines that one or more 

deficiencies warrant system disapproval 

based on the risk to the Government. 

(f) If the Contractor receives the 

Contracting Officer’s final determination of 

system deficiencies, the Contractor shall, 

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. 

(g) Withholding payments. If the 

Contracting Officer determines that there are 

one or more system deficiencies that 

adversely affect the Contractor’s estimating 

system, leading to a potential risk of harm to 

the Government, and the contract includes 

252.242–7XXX, Business Systems, the 

Contracting Officer will withhold payments 

in accordance with that clause. 

(End of clause) 

14. 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: 

EARNED VALUE MANAGEMENT SYSTEM 

(DATE) 

(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. 

Deficiency means a failure to meet one or 

more system criteria of an acceptable earned 

value management system. 

Earned value management system means 

an earned value management system that 

complies with the earned value management 

system guidelines in the ANSI/EIA–748. 

(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. 

If, at the time of award, the Contractor’s 

EVMS has not been determined by the 

cognizant Federal agency 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 cognizant 

Federal agency 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 cognizant Federal agency. If 

this contract has a value of $50 million or 

more, unless a waiver is granted by the 

cognizant Federal agency, any EVMS changes 

proposed by the Contractor require approval 

of the cognizant Federal agency prior to 

implementation. The cognizant Federal 

agency 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 cognizant Federal 

agency waives the advance approval 

requirements, the Contractor shall disclose 

EVMS changes to the cognizant Federal 

agency 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 contract award, the exercise of 

significant contract options, and 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) System deficiencies. (1) The Contracting 

Officer will provide an initial determination 

to the Contractor, in writing, on any system 

deficiencies. The initial determination will 

describe the deficiency in sufficient detail to 

allow the Contractor to understand the 

deficiency and its potential harm to the 

Government. 

(2) The Contractor shall respond within 30 

days to a written initial determination from 

the Contracting Officer that identifies 

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 deficiencies; 

(ii) The adequacy of any proposed or 

completed corrective action; and 

(iii) System non-compliance, when the 

Contractor’s existing EVMS contains one or 

more deficiencies in any of the 32 

foundational guidelines in ANSI/EIA–748. 

(4) If the Contractor receives the 

Contracting Officer’s final determination of 

system deficiencies, the Contractor shall, 

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. 

(j) System disapproval. The Contracting 

Officer will disapprove the Contractor’s 

EVMS when— 

(1) Initial validation is not successfully 

completed within a 16 month period from 

contract award; or 

(2) The existing EVMS contains one or 

more deficiencies in high-risk guidelines in 

ANSI/EIA–748 standards (guidelines 1, 3, 6, 


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7, 8, 9, 10, 12, 16, 21, 23, 26, 27, 28, 30 or 

32). For 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. 

(k) Withholding payments. If the 

Contracting Officer determines that there are 

one or more system deficiencies that 

adversely affect the Contractor’s EVMS, 

leading to a potential risk of harm to the 

Government, and the contract includes 

252.242–7XXX, Business Systems, the 

Contracting Officer will withhold payments 

in accordance with that clause.] 

(l) With the exception of paragraphs (i) 

through (k) 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.] 

lllllllllllllllllllll

lllllllllllllllllllll

lllllllllllllllllllll

lllllllllllllllllllll

(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.] 

lllllllllllllllllllll

lllllllllllllllllllll

lllllllllllllllllllll

lllllllllllllllllllll

(End of clause) 

15. Amend section 252.242–7004 by: 

a. Revising the section heading, clause 

title, and the clause date; 

b. Adding paragraphs (a)(4) and (a)(5); 

c. Removing paragraph (d); 

d. Redesignating existing paragraph 

(e) as paragraph (d); and 

e. Adding new paragraphs (e) through 

(g) to read as follows: 

252.242–7004 Material management and 

accounting system (MMAS). 

* * * * * 

MATERIAL MANAGEMENT AND 

ACCOUNTING SYSTEM (MMAS) (DATE) 

(a) * * * 

(4) Acceptable material management and 

accounting system means a MMAS that 

generally complies with the system criteria in 

paragraph (d) of this clause. 

(5) Deficiency means a failure to meet one 

or more system criteria of an acceptable 

material management and accounting system. 

* * * * * 

(e) System deficiencies. (1) The Contracting 

Officer will provide an initial determination 

to the Contractor, in writing, on any system 

deficiencies. The initial determination will 

describe the deficiency in sufficient detail to 

allow the Contractor to understand the 

deficiency and its potential harm to the 

Government. 

(2) The Contractor shall respond within 30 

days to a written initial determination from 

the Contracting Officer that identifies 

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 deficiencies; 

(ii) The adequacy of any proposed or 

completed corrective action; and 

(iii) System disapproval if the Contracting 

Officer determines that one or more 

deficiencies warrants system disapproval 

based on the risk to the Government. 

(f) If the Contractor receives the 

Contracting Officer’s final determination of 

system deficiencies, the Contractor shall, 

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. 

(g) Withholding payments. If the 

Contracting Officer determines that there are 

one or more system deficiencies that 

adversely affect the Contractor’s MMAS, 

leading to a potential risk of harm to the 

Government, and the contract includes 

252.242–7XXX, Business Systems, the 

Contracting Officer will withhold payments 

in accordance with that clause. 

(End of clause) 

16. Add section 252.242–7XXX to 

read as follows: 

252.242–7XXX Business systems. 

As prescribed in 242.70X2, use the 

following clause: 

BUSINESS SYSTEMS (DATE) 

(a) Definitions. As used in this clause— 

Acceptable business systems means 

business systems that comply with the terms 

and conditions of the applicable business 

system clauses listed in the definition of 

‘‘Business Systems’’ in this clause. 

Business systems means— 

(1) Accounting system, if this contract 

includes 252.242–7YYY, Accounting System 

Administration; 

(2) Earned value management system, if 

this contract includes 252.234–7002, Earned 

Value Management System; 

(3) Estimating system, if this contract 

includes 252.215–7002, Cost Estimating 

System Requirements; 

(4) Material management and accounting 

system, if this contract includes 252.242– 

7004, Material Management and Accounting 

System; 

(5) Property management system, if this 

contract includes 252.245–7XXX, Contractor 

Property System Administration; and 

(6) Purchasing system, if this contract 

includes 252.244–7XXX, Contractor 

Purchasing System Administration. 

Deficiency means a failure to meet one or 

more system criteria of an acceptable 

business system. 

(b) General. The Contractor shall establish 

and maintain acceptable business systems in 

accordance with the terms and conditions of 

this contract. 

(c) System deficiencies. (1) The Contractor 

shall respond, in writing, within 30 days to 

an initial determination that there are one or 

more system deficiencies that adversely 

affect the Contractor’s business system 

leading to a potential risk of harm to the 

Government. 

(2) The Contracting Officer will evaluate 

the Contractor’s response and notify the 

Contractor, in writing, of the final 

determination as to whether the business 

system contains deficiencies that adversely 

affect the Contractor’s business system 

leading to a potential risk of harm to the 

Government. If the Contracting Officer 

determines that the Contractor’s business 

system contains such deficiencies, the final 

determination will include a notice to 

withhold payments. 

(d) Withholding of payments. (1) If the 

Contracting Officer issues the final 

determination with a notice to withhold 

payments for deficiencies in a business 

system required under this contract, the 

Contracting Officer will, as applicable, 

withhold five percent (two percent for small 

businesses) of amounts due from progress 

payments and performance-based payments, 

and unilaterally issue a contract modification 

requiring the Contractor to withhold five 

percent (two percent for small businesses) 

from its billings on interim cost vouchers on 

cost, labor-hour, and time-and-materials 

contracts until all deficiencies have been 

corrected. 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, the Contracting 

Officer will, as appropriate, reduce 

withholding to two percent (one percent for 

small businesses) from progress payments 

and performance-based payments, and issue 

a unilateral modification to reduce the 

percentage withheld on interim cost 

vouchers to two percent (one percent for 

small businesses) until the Contracting 

Officer determines that the Contractor has 

corrected all deficiencies identified in the 

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 issue a unilateral modification to 

increase the percentage withheld to the 

percentage initially withheld, until the 

Contracting Officer determines that the 

Contractor has corrected all deficiencies 

identified in the final determination. 

(3) The total percentage of payments 

withheld on amounts due under each 

progress payment, performance-based 

payment, or interim cost voucher, for 

deficiencies on one or more business 

systems, shall not exceed 20 percent (10 

percent for small businesses) on this contract. 


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(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; 

(E) Construction contracts that include the 

clause at Federal Acquisition Regulation 

52.232–27, Prompt Payment for Construction 

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 interestpenalty 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 shall 

take one of the following actions: 

(i) If the Contracting Officer determines the 

Contractor has corrected all deficiencies in a 

business system, the Contracting Officer will, 

as appropriate, discontinue the withholding 

of progress payments and performance-based 

payments, and unilaterally issue a contract 

modification to discontinue the payment 

withholding from billings on interim cost 

vouchers under this contract associated with 

that business system, and authorize the 

contractor to bill for any monies previously 

withheld that are not also being withheld due 

to deficiencies on other business systems 

under this contract. Any payment 

withholding in effect on other business 

systems under this contract will remain in 

effect until the deficiencies for those business 

systems are corrected. 

(ii) If the Contracting Officer determines 

the Contractor has not corrected all system 

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. 

(End of clause) 

17. Add section 252.242–7YYY to 

read as follows: 

252.242–7YYY Accounting system 

administration. 

As prescribed in 242.7503, use the 

following clause: 

ACCOUNTING SYSTEM ADMINISTRATION 

(DATE) 

(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) Deficiency means a failure to meet one 

or more system criteria of an acceptable 

accounting system. 

(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 252.242–7XXX, 

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 

and accounting framework and 

organizational structure 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; 

(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 

on payments (FAR 52.216–16), 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) System deficiencies. (1) The Contracting 

Officer will provide an initial determination 

to the Contractor, in writing, on any system 

deficiencies. The initial determination will 

describe the deficiency in sufficient detail to 

allow the Contractor to understand the 

deficiency and its potential harm to the 

Government. 

(2) The Contractor shall respond within 30 

days to a written initial determination from 

the Contracting Officer that identifies 

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 deficiencies; 

(ii) The adequacy of any proposed or 

completed corrective action; and 

(iii) System disapproval, if the Contracting 

Officer determines that one or more 

deficiencies warrant system disapproval 

based on the risk to the Government. 

(e) If the Contractor receives the 

Contracting Officer’s final determination of 

system deficiencies, the Contractor shall, 

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. 

(f) Withholding payments. If the 

Contracting Officer determines that there are 

one or more system deficiencies that 

adversely affect the Contractor’s accounting 

system, leading to a potential risk of harm to 

the Government, and the contract includes 

252.242–7XXX, Business Systems, the 

Contracting Officer shall withhold payments 

in accordance with that clause. 

(End of clause) 

18. Add section 252.244–7XXX to 

read as follows: 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
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252.244–7XXX Contractor purchasing 

system administration. 

As prescribed in 244.305–7X, insert 

the following clause: 

CONTRACTOR PURCHASING SYSTEM 

ADMINISTRATION (DATE) 

(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. 

Deficiency means a failure to meet one or 

more system criteria of an acceptable 

purchasing system. 

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. 

(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 FAR 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; 

(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 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-plusa-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 flow-down 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 flow-down 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) Ensure performance of adequate price 

or cost analysis on purchasing actions; and 

(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. 

(d) System deficiencies. (1) The Contracting 

Officer will provide notification of initial 

determination to the Contractor, in writing, 

of any system deficiencies. The initial 

determination will describe the deficiency in 

sufficient detail to allow the Contractor to 

understand the deficiency and its potential 

harm to the Government. 

(2) The Contractor shall respond within 30 

days to a written initial determination from 

the Contracting Officer that identifies 

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 deficiencies; 

(ii) The adequacy of any proposed or 

completed corrective action; and 

(iii) System disapproval, if the Contracting 

Officer determines that one or more 

deficiencies warrant system disapproval 

based on the risk to the Government. 

(e) If the Contractor receives the 

Contracting Officer’s final determination of 

system deficiencies, the Contractor shall, 

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. 

(f) Withholding payments. If the 

Contracting Officer determines that there are 

one or more system deficiencies that 

adversely affect the Contractor’s purchasing 

system, leading to a potential risk of harm to 

the Government, and the contract includes 

252.242–7XXX, Business Systems, the 

Contracting Officer will withhold payments 

in accordance with that clause. 

(End of clause) 

19. Add section 252.245–7XXX to 

read as follows: 

252.245–7XXX Contractor property 

management system administration. 

As prescribed in 245.105–7X, insert 

the following clause: 

CONTRACTOR PROPERTY MANAGEMENT 

SYSTEM ADMINISTRATION (DATE) 

(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. 

Deficiency means a failure to meet one or 

more system criteria of an acceptable 

property management system. 

Property management system means the 

Contractor’s system or systems for managing 

and controlling Government property. 

(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) System deficiencies. (1) The Contracting 

Officer will provide an initial determination 

to the Contractor, in writing, of any system 

deficiencies. The initial determination will 

describe the deficiency in sufficient detail to 

allow the Contractor to understand the 

deficiency and its potential harm to the 

Government. 

(2) The Contractor shall respond within 30 

days to a written initial determination from 

the Contracting Officer that identifies 

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. 


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75572 Federal Register / Vol. 75, No. 232 / Friday, December 3, 2010 / Proposed Rules 

(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 deficiencies; 

(ii) The adequacy of any proposed or 

completed corrective action; and 

(iii) System disapproval, if the Contracting 

Officer determines that one or more 

deficiencies warrant system disapproval 

based on the risk to the Government. 

(e) If the Contractor receives the 

Contracting Officer’s final determination of 

system deficiencies, the Contractor shall, 

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. 

(f) Withholding payments. If the 

Contracting Officer determines that there are 

one or more system deficiencies that 

adversely affect the Contractor’s property 

management system, leading to a potential 

risk of harm to the Government, and the 

contract includes 252.242–7XXX, Business 

Systems, the Contracting Officer will 

withhold payments in accordance with that 

clause. 

(End of clause) 

[FR Doc. 2010–30072 Filed 12–2–10; 8:45 am] 

BILLING CODE 5001–08–P 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2