```

[Federal Register Volume 76, Number 96 (Wednesday, May 18, 2011)]
[Rules and Regulations]
[Pages 28856-28879]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11691]

[[Page 28855]]

Vol. 76

Wednesday,

No. 96

May 18, 2011

Part II

Department of Defense

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Defense Acquisition Regulations System

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48 CFR Parts 215, 234, 242 et al.

Defense Federal Acquisition Regulation Supplement; Business Systems--
Definition and Administration; Interim Rule

Federal Register / Vol. 76 , No. 96 / Wednesday, May 18, 2011 / Rules 
and Regulations

[[Page 28856]]

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 215, 234, 242, 244, 245, and 252

[DFARS Case 2009-D038]
RIN 0750-AG58

Defense Federal Acquisition Regulation Supplement; Business 
Systems--Definition and Administration

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Interim rule with request for comments.

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SUMMARY: DoD is amending the Defense Federal Acquisition Regulation 
Supplement (DFARS) to improve the effectiveness of DoD oversight of 
contractor business systems.

DATES: Effective date: May 18, 2011.
    Comment date: Comments on the interim rule should be submitted in 
writing to the address shown below on or before July 18, 2011, to be 
considered in the formation of the final rule.
    Applicability date: This rule applies to solicitations issued on or 
after May 18, 2011. Contracting officers are encouraged, to the extent 
feasible, to amend existing solicitations (including solicitations for 
delivery orders and task orders) in accordance with FAR 1.108(d), in 
order to include the clause at DFARS 252.242-7005, Contractor Business 
Systems, as applicable, in contracts (including delivery orders and 
task orders) to be awarded on or after May 18, 2011, and shall amend 
existing solicitations (including delivery orders and task orders) in 
accordance with FAR 1.108(d), in order to include the clause at DFARS 
252.242-7005, Contractor Business Systems, as applicable, in contracts 
to be awarded on or after August 16, 2011.

ADDRESSES: You may submit comments, identified by DFARS Case 2009-D038, 
using any of the following methods:
    [cir] Regulations.gov: http://www.regulations.gov. Submit comments 
via the Federal eRulemaking portal by inputting ``DFARS Case 2009-
D038'' under the heading ``Enter keyword or ID'' and selecting 
``Search.'' Select the link ``Submit a Comment'' that corresponds with 
``DFARS Case 2009-D038.'' Follow the instructions provided at the 
``Submit a Comment'' screen. Please include your name, company name (if 
any), and ``DFARS Case 2009-D038'' on your attached document.
    [cir] E-mail: dfars@osd.mil. Include DFARS Case 2009-D038 in the 
subject line of the message.
    [cir] Fax: 703-602-0350.
    [cir] Mail: Defense Acquisition Regulations System, Attn: Mr. Mark 
Gomersall, OUSD (AT&L) DPAP (DARS), Room 3B855, 3060 Defense Pentagon, 
Washington, DC 20301-3060.
    Comments received generally will be posted without change to http://www.regulations.gov, including any personal information provided. To 
confirm receipt of your comment(s), please check http://www.regulations.gov approximately two to three days after submission to 
verify posting (except allow 30 days for posting of comments submitted 
by mail).

FOR FURTHER INFORMATION CONTACT: Mr. Mark Gomersall, 703-602-0302.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published an initial proposed rule for Business Systems--
Definition and Administration (DFARS Case 2009-D038) in the Federal 
Register on January 15, 2010 (75 FR 2457). Based on the comments 
received and subsequent revisions to the proposed rule, DoD published a 
second proposed rule on December 3, 2010 (75 FR 75550). The public 
comment period closed January 10, 2011. On January 7, 2011, the Ike 
Skelton National Defense Authorization Act (NDAA) for Fiscal Year (FY) 
2011 was signed into law (Pub. L. 111-383). NDAA section 893, 
Contractor Business Systems, set forth statutory requirements for the 
improvement of contractor business systems to ensure that such systems 
provide timely, reliable information for the management of DoD 
programs. Based on the comments received, the requirements of the NDAA, 
and subsequent revisions to the proposed rule, DoD is publishing this 
interim rule with request for comments.
    Contractor business systems and internal controls are the first 
line of defense against waste, fraud, and abuse. Weak control systems 
increase the risk of unallowable and unreasonable costs on Government 
contracts. To improve the effectiveness of Defense Contract Management 
Agency (DCMA) and Defense Contract Audit Agency (DCAA) oversight of 
contractor business systems, DoD is clarifying the definition and 
administration of contractor business systems as follows:
    A. DoD is defining contractor business systems as accounting 
systems, estimating systems, purchasing systems, earned value 
management systems (EVMS), material management and accounting systems 
(MMAS), and property management systems.
    B. DoD is implementing compliance enforcement mechanisms in the 
form of a business systems clause which includes payment withholding 
that allows contracting officers to withhold a percentage of payments, 
under certain conditions, when a contractor's business system contains 
significant deficiencies. Payments could be withheld on--
     Interim payments under--
    [cir] Cost-reimbursement contracts;
    [cir] Incentive type contracts;
    [cir] Time-and-materials contracts;
    [cir] Labor-hour contracts;
     Progress payments; and
     Performance-based payments.

II. Discussion and Analysis

A. Analysis of Public Comments

    The comments received in response to the second proposed rule have 
been analyzed and dispositioned as discussed below. The comments 
received were grouped under 34 general topics. A summary of the 
comments follows:
1. Business Systems
a. Earned Value Management Systems (EVMS)
    The following comments were submitted concerning Earned Value 
Management Systems (EVMS):
    Comment: Some respondents expressed concern over disapproval of EVM 
systems if the system is not validated within 16 months since DCMA is 
not currently able to meet this timeline.
    Response: The rule requires contracting officers to determine the 
acceptability of the contractor's earned value management system in 
consultation with the functional specialist and auditor. Contracting 
officers are expected to consider all facts at their disposal when 
making such determinations. However, circumstances outside of a 
contractor's control may inhibit the initial validation of a 
contractor's EVMS. Therefore, 234.201(7)(iii)(A)(2)(ii) has been 
revised to state that the system will be disapproved ``when initial 
validation is not successfully completed within the timeframe approved 
by the contracting officer * * *''
    Comment: Conditions for disapproval of an EVM system are 
inconsistent where the definition of an acceptable EVMS means that the 
system generally complies with system criteria while the identification 
of a single deficiency can make a system unacceptable. Furthermore, 
while some respondents expressed concern that EVM system deficiencies 
are related to ill-defined

[[Page 28857]]

contractual requirements, other respondents indicated that criteria for 
disapproval of an EVM system are too strict and should be more 
subjective.
    Response: The rule requires contracting officers to determine the 
acceptability of the contractor`s earned value management system in 
consultation with the functional specialist and auditor. Contracting 
officers are expected to consider all facts at their disposal when 
making such determinations. Section 893 of the FY11 NDAA requires 
systems to be disapproved when there is a shortcoming in the system 
that affects materially the ability of DoD officials to rely on 
information produced by the system for management purposes. This 
interim rule is consistent with this requirement. In the case of EVM 
systems, this means the system has one or more significant deficiencies 
due to the contractor's failure to comply with the system criteria in 
the clause at 252.234-7002, Earned Value Management System. Since a 
system will only be disapproved when a significant deficiency exists, a 
system with deficiencies that do not materially affect the Government's 
ability to rely on information produced by the system is considered an 
acceptable system in accordance with the definition at 252.234-7002. 
Therefore, this rule is not inconsistent with the definition of an 
acceptable EVMS.
b. Estimating System
    The following comments were submitted concerning estimating 
systems:
    Comment: The respondent indicated that it is unreasonable for an 
acceptable estimating system to include controls for the contractor to 
compare projected results to actual results and analyze the 
differences. This is a major change in policy concerning fixed-price 
contracts and will open the door to wholesale Government access to 
contractor costs during fixed-price contract performance.
    Response: This interim rule sets forth specific criteria for 
maintaining an acceptable estimating system. It is not unreasonable for 
a contractor to establish and maintain an acceptable estimating system 
that would include controls for the contractor to compare projected 
results to actual results and analyze any differences. Such controls 
provide a valuable metric for demonstrating the accuracy of estimates 
produced by the system. Systems that consistently produce accurate 
estimates with a reasonable degree of confidence can significantly 
reduce the number of Government resources required to review cost and 
price proposals. Accurate estimates also provide substantial advantages 
to the contractor by allowing a more accurate forecast of the projected 
rate of return. This existing requirement was relocated from 215.407-5-
70 to the clause at 252.215-7002, Cost Estimating System Requirements.
c. Accounting Systems
    The following comments were submitted regarding accounting systems:
    Comment: The respondent recommended deleting the phrase ``or 
functional specialist'' from 242.7502(d)(2)(ii)(C). The respondent 
recommended that the 45 day period be extended to a 60 day period for a 
contractor to correct a deficiency or submit a corrective action plan 
as is currently in the DFARS. The policy at 242.7502(d)(2)(ii)(A) 
should include a requirement that the contracting officer's 
notification to the contractor include ``sufficient detail to allow the 
contractor to understand the deficiencies and the potential impact to 
the Government'' as is required in other system deficiency 
notifications. Finally, the respondent recommended that DCAA focus on 
the adequacy of a contractor's accounting system rather than the 
adequacy of the contractor's control environment and overall accounting 
system controls.
    Response: The term functional specialist needs to be retained. When 
specialized expertise is required, the interim rule requires 
contracting officers to consult with auditors and other individuals 
with specialized experience, as necessary, to ensure a full 
understanding of issues. For example, certain issues relating to 
forecasted costs may require the expertise of engineers, price 
analysts, and others, to understand or evaluate the contractor's 
business system. It is not necessary to extend the 45 day period to 60 
days. The contractor will be notified formally of deficiencies at the 
completion of the audit, and will be allowed 30 days to respond to the 
contracting officer's initial determination. The contractor will be 
well aware that a deficiency may need to be corrected and a corrective 
action plan may be needed well before that 45 day period begins. For 
clarity, the language pertaining to ``sufficient detail'' in a 
contracting officer's notification has been revised to state that a 
contracting officer's notification will provide ``a description of each 
significant deficiency in sufficient detail to allow the contractor to 
understand the deficiency.'' DCAA will be reporting significant 
deficiencies in accordance with the new business systems rule.
    Comment: The rule requires periodic monitoring of the accounting 
system but does not provide a definition of what the expectation or 
frequency of the accounting system reviews should be. Furthermore, the 
rule fails to recognize leading practices implemented in industry 
through continuous monitoring and exception reporting.
    Response: The size and complexity of companies and their processes, 
operations, and accounting systems capabilities vary. Therefore, it is 
not feasible to establish specific requirements regarding the extent or 
frequency of periodic monitoring.
    Comment: The respondent expressed concern that immaterial audit 
issues resulting from CAS 405 noncompliance audit reports will be 
considered significant, resulting in payment withholding and disputes. 
The respondent recommended eliminating accounting system criterion 
number 12 from the rule since remedies already exist through the 
application of the CAS administration clause as well as the Allowable 
Cost and Payment clause at FAR 52.216-7.
    Response: The rule establishes criteria for an acceptable 
accounting system to provide reasonable assurance that applicable laws 
and regulations are complied with, accounting system and cost data are 
reliable, risk of misallocations and mischarges are minimized, and 
contract allocations and charges are consistent with billing 
procedures. An essential characteristic of an adequate accounting 
system for Government contract costing is the ability of the system to 
identify and exclude unallowable costs from costs charged to Government 
contracts. The remedies provided in the CAS administration clause and 
the Allowable Cost and Payment clause at FAR 52.216-7 do not replace 
the need for this essential control within a contractor's accounting 
system.
    Comment: Accounting system criterion number 17 introduces the 
subjective and undefined terms ``adequate'' and ``reliable'' with 
regard to accounting systems providing data to be used to support 
follow-on acquisitions. It is not appropriate to tie the basis of 
estimates for proposals to the accounting system. Including this 
criterion in the accounting system and estimating system criteria is 
redundant.
    Response: The variation and complexity of business systems is such 
that it is not practical to eliminate subjective terms entirely. While 
the terms ``adequate'' and ``reliable'' imply a degree of subjectivity, 
they are sufficiently common to enable reasonable parties to agree on 
the set of

[[Page 28858]]

necessary characteristics to meet each threshold given the unique set 
of circumstances. It is not inappropriate to draw a connection between 
the basis of estimates for proposals and the accounting system. 
Achieving consistent and accurate estimates is dependent on obtaining 
accurate and reliable information, which often includes reported 
information about past results produced by the accounting system. The 
weight assigned to past results in developing estimates will vary 
depending on a variety of factors, including the similarity of past 
circumstances and the anticipated circumstances for which the estimate 
is being developed. In the case of a follow-on acquisition, as noted by 
the respondent, the circumstances are often similar, and thus actual 
results produced by the accounting system are likely to play a 
prominent role in developing the estimate. Estimators will likely 
improve accuracy when they consider the accounting system results 
during the development of their bases of estimates whether or not the 
acquisition is a follow-on acquisition.
    Comment: Referencing 242.7502(g)(2)(v), which identifies reducing 
the negotiation objective for profit or fee as a means to mitigate risk 
of accounting system deficiencies, the respondent expressed concern 
that such reductions would be punitive to contractors beyond other 
measures in the rule. The respondent recommended removal of this 
paragraph.
    Response: This interim rule does not limit the contracting 
officer's discretion to apply any and all regulatory measures, as 
warranted by the circumstances, including mitigating the risk of 
accounting system deficiencies by reducing the negotiation objective 
for profit or fee.
d. Purchasing Systems
    The following comments were submitted regarding purchasing systems:
    Comment: DFARS 252.244-7001 requires purchasing policies that 
``comply with the Federal Acquisition Regulation (FAR) and the Defense 
FAR Supplement (DFARS).'' The respondent requested that the rule 
clarify that requirements being imposed on contractors are done via 
contract clauses.
    Response: All contractual requirements are identified and 
accomplished through contract clauses. There is no need to issue such a 
clarifying statement in this rule.
    Comment: The definitions of subcontracts and purchase orders should 
be revised to exclude agreements with vendors that would normally be 
applied to a contractor's G&A expenses or indirect costs.
    Response: Because the Government reimburses contractors for its 
applicable share of indirect expenses, it would be inappropriate to 
revise the definitions of subcontracts and purchase orders to exclude 
agreements with vendors that would normally be applied to a 
contractor's G&A expenses or indirect costs.
    Comment: Purchasing system criteria under items 252.244-7001(c)(2) 
and (c)(19) in the purchasing system clause appear to be redundant.
    Response: Purchasing system criteria under 252.244-7001(c)(2) and 
(c)(19) are not redundant. The criterion under (c)(2) requires the 
contractor to include all flowdown clauses, including terms and 
conditions and any other clauses needed to carry out the requirements 
of the prime contract, in all applicable purchase orders and 
subcontracts, while the criterion under (c)(19) requires the contractor 
to establish and maintain policies and procedures to ensure the 
requirements of (c)(2) are accomplished.
    Comment: The rule should establish a threshold under purchasing 
system criterion (c)(4) for the documentation of purchase orders (e.g., 
$3,000).
    Response: Since certain requirements should apply to all purchases, 
no threshold has been added in (c)(4).
    Comment: The purchasing system criterion under item (c)(8) should 
be revised to be consistent with FAR part 15.
    Response: This rule does not conflict with the extensive language 
under FAR part 15. The wording in (c)(8) and FAR part 15 is not 
inconsistent.
    Comment: Purchasing system criteria under items (c)(10) and (c)(22) 
appear to be redundant.
    Response: Purchasing system criteria under 252.244-7001(c)(10) and 
(c)(22) are not redundant. The criterion under (c)(10) requires the 
contractor to perform timely and adequate cost or price analysis and 
technical evaluation for each subcontractor and supplier proposal or 
quote to ensure fair and reasonable subcontract prices, while the 
criterion under (c)(22) requires the contractor to establish and 
maintain procedures to ensure the requirements of (c)(10) are 
accomplished.
    Comment: Notification of subcontract awards that contain FAR and 
DFARS clauses allowing for Government audits should not be required in 
the purchasing system criterion under item (c)(16) since these clauses 
are required flowdowns on all direct-funded subcontracts.
    Response: The notification requirement under purchasing system 
criterion (c)(16) is appropriate. This criterion does not require 
flowdown of FAR and DFARS clauses, but instead establishes the 
requirement that the contractor notify the Government of the award of 
all subcontracts that contain the FAR and DFARS flowdown clauses that 
allow for Government audit of those subcontracts, and ensure the 
performance of audits of those subcontracts.
    Comment: The purchasing system criterion under item (c)(23) should 
be clarified so that the requirements are applicable to first-tier 
subcontractors.
    Response: The suggested change to (c)(23) would make it 
inconsistent with the definition in FAR 44.101. Therefore, no change 
has been made.
e. Property Systems
    The following comments were submitted regarding property systems:
    Comment: Replace the phrase ``previously unapproved'' property 
management systems with the phrase ``disapproved'' for consistency.
    Response: The phrase ``previously unapproved property management 
system'' in 245.105(e) has been replaced with the phrase ``previously 
disapproved property management system'' for consistency.
    Comment: The proposed rule property system terminology is 
inconsistent with current FAR part 45. The proposed rule provides for 
``approval/disapproval'' of a system while FAR part 45 and FAR clause 
52.245-1 use the verbiage ``adequate/inadequate.''
    Response: The language in DFARS 245 supplements the FAR language, 
and is consistent with other business system sections as well as with 
section 893 of the NDAA.
    Comment: One respondent stated that it is unclear whether the 
proposed rule uses a two-step process for approval/disapproval of a 
property system where the Government property administrator initially 
determines if a deficiency exists that would make the system 
``inadequate'' and then works with the contracting officer to determine 
if the system is ``approved/disapproved'' and whether payment 
withholding is required, or if the Government property administrator is 
acting as an agent of the cognizant contracting officer using a one-
step process. Another respondent suggested that property administrators 
should have the authority to approve contractor property management 
systems, and report system deficiencies to the cognizant contracting 
officer recommending disapproval.

[[Page 28859]]

Disapproval authority should reside with the cognizant contracting 
officer.
    Response: DFARS 245.105 is clear that Government property 
administrators are responsible for providing recommendations and 
reporting system deficiencies to the cognizant contracting officer, 
including recommendations regarding contractor property management 
system approval or disapproval. However, system approval or disapproval 
authority shall remain with the cognizant contracting officer.
2. Resources and Resolution Timing
    Comment: DCMA and DCAA are under-resourced to execute the 
requirements of the rule. DCAA does not have resources to perform 
timely follow-up audits/system reviews or coordinate in a timely manner 
with contracting officers to remove payment withholdings, and 
contracting officers do not have the training to determine if a 
deficiency makes a system inadequate. There must be accountability 
within DCAA to conduct timely follow-up audits. Respondents recommended 
that contractors should be allowed to request follow-up audits when 
deficiencies are corrected; it should be mandated that DCAA and DCMA 
perform follow-up audits within 30 days of contractor notification that 
a deficiency has been corrected; and that the rule should permit 
qualified third party auditors to provide various accreditations and 
audits, as is the case with ISO standards or CMMI approvals.
    Response: The need to have effective oversight mechanisms is 
unrelated to resources. This rule does not add additional oversight 
responsibilities onto DCAA and DCMA; it merely provides provisions to 
help protect the Government from the contractor's failure to maintain 
business systems, as is required by the terms and conditions of their 
contracts. Contracting personnel will make appropriate determinations 
in accordance with this rule. DCMA and DCAA have been working closely 
to align their resources and ensure work is complementary. The 
increased cooperation and coordination between DCAA and DCMA will 
enable us to employ audit resources where they are needed. Further, the 
rule has been revised to require the contracting officer to reduce the 
payment withholding by at least 50 percent if the contracting officer 
has not made a determination whether the contractor has corrected all 
significant deficiencies as directed by the contracting officer's final 
determination, or has not made a determination whether there is a 
reasonable expectation that the corrective actions have been 
implemented.
3. Contractor Appeals
    Comment: DoD needs a contractor appeals process for implementing 
the payment withholding. The rule should be modified to require 
discussion with the PEO and/or SAE before any payment withholding 
action is taken. Due to the vague nature of the system criteria and 
subjective nature of the audit assessments, it will be difficult for 
contractors to challenge payment withholding determinations under the 
Contract Disputes Act.
    Response: The final deficiency determination is at the sole 
discretion of the contracting officer. However, prior to making a final 
deficiency determination, contractors are afforded an opportunity to 
respond in writing within 30 days to an initial determination of 
deficiencies from the contracting officer that identifies significant 
deficiencies in any of the contractor's business systems. It is not 
necessary or appropriate to develop a dispute resolution process beyond 
that which is already available by statute and regulation. 
Additionally, other avenues of dispute resolution outside of the 
Contract Disputes Act are available for resolving disputes that may 
arise over determinations of system deficiencies. The policy set forth 
in FAR 33.204 still applies, so that informal negotiation and alternate 
dispute resolution remain available, and, in fact, are encouraged as 
alternative methods of resolving disputes.
4. Risk of Harm and Materiality of Deficiencies
    Comment: ``Risk of harm'' must be substantiated and verified. The 
final rule should define the phrase ``potential risk of harm to the 
Government'' which incorporates a nexus between the amount withheld and 
the specific harm that may accrue to the Government based on the system 
deficiency, and require that a deficiency be ``material'' or 
``significant.'' It is impossible to determine whether the proposed 
controls and remedial actions of this rule are reasonable and 
commensurate with the Government's risks. Payment withholdings are 
liquidated damages in disguise and, if excessive to the Government's 
risk, will be viewed as punitive.
    Response: The intent of the rule is to authorize payment 
withholding when the contracting officer finds that there are one or 
more significant deficiencies due to the contractor's failure to meet 
one or more of the system criteria. The rule has been revised to 
consider significant deficiencies in determining the adequacy of a 
contractor's business system and potential payment withholding in 
accordance with section 893 of the FY11 NDAA. Contract terms explicitly 
require contractors to maintain the business systems in question as a 
condition of contracting responsibility and, in some cases, eligibility 
for award. Contract prices are negotiated on the basis that contractors 
will maintain such systems, so that the Government does not need to 
maintain far more extensive inspection and audit functions than it 
already does. Failure of the contractor to maintain acceptable systems 
during contract performance deprives the Government of assurances for 
which it pays fair value. While not ``deliverable'' services under 
specific contract line items, these business systems are material 
terms, performance of which is required to ensure contracts will be 
performed on time, within cost estimates, and with appropriate 
standards of quality. The payment withholding remedy provides a measure 
of the overall contract performance of which the Government is deprived 
during the performance period, and for which the contractor should not 
receive the full financing payments. DoD is relying on the temporary 
payment withholding amounts, not as a penalty for a deficiency, but as 
representing a good-faith estimate sufficient to mitigate the 
Government's risk where the actual amounts are difficult to estimate or 
quantify. Deficiencies that do not directly relate to unallowable or 
unreasonable costs still pose risks to the Government, and may lead to 
harm that may not be calculated readily when the deficiencies are 
discovered. In most cases, the financial impact of a system deficiency 
cannot be quantified because the system produces unreliable 
information. When the financial impact of a deficiency is quantifiable, 
DoD expects contracting officers to take appropriate actions to reduce 
fees, recoup unallowable costs, or take legal action if fraudulent 
activity is involved.
5. Definition of Deficiency
    Comment: The term ``deficiency'' is not clearly defined. The rule 
should define the terms ``deficiency,'' ``significant deficiency,'' and 
``material weakness.'' One respondent suggested these definitions be 
set forth in accordance with the definitions utilized by the Public 
Company Accounting Oversight Board (PCAOB).
    Response: The interim rule has been revised to implement payment 
withholding procedures only for ``significant deficiencies,'' 
therefore, it is not necessary to define ``deficiency''.

[[Page 28860]]

The rule is has been revised to define ``significant deficiency'' as a 
shortcoming in the business system that affects materially the ability 
of officials of the Department of Defense to rely upon information 
produced by the system that is needed for management purposes, in 
accordance with section 893 of the NDAA. DoD will use the definition of 
``significant deficiency'' in section 893 over the PCAOB definition. 
The term ``material weakness'' is not used in this rule.
6. System Approval Duration and Narrowly Focused Follow-up Audits
    Comment: The rule should implement an approval duration for each 
business system, and require follow-up audits to narrowly focus on 
previously-identified deficiencies.
    Response: While DCAA may perform a narrowly focused follow-up 
audit, imposing a required business system approval duration and/or 
specifically limiting the scope of the DCAA follow-up audit in this 
rule would not be appropriate since, at any time after approval, 
contractor conditions could change rendering the previously-reported 
opinion as not current. DCAA policy is to report only deficiencies 
determined to be significant deficiencies in accordance with the 
definition of significant deficiency set forth in this rule and 
generally accepted Government auditing standards.
7. Contracting Officer/ACO References
    Comment: The rule should reference ``ACO'' in lieu of ``contracting 
officer'' since ACOs will have the primary responsibility to approve 
contractor business systems.
    Response: The contract administration functions in FAR 42.302 are 
sometimes performed by procurement contracting offices. Since 
procurement contracting offices are sometimes responsible for the 
approval and disapproval of contractor business systems, the term 
``ACO'' has been replaced by ``contracting officer'' for accuracy.
8. Subjective Assessments and Vague Standards
    Comment: The revised proposed rule includes incomplete and 
ambiguous definitions of acceptable business systems, and fails to 
address the concern with subjective assessments and vague standards, 
which will lead to inconsistent treatment within DCAA and DCMA.
    Response: The rule incorporates criteria that are already used by 
the Government under existing authority to evaluate the adequacy of 
contractor business systems. For example, the criteria for estimating 
systems are currently located in the DFARS at 215.407-5-70(d)(2). Given 
that these system criteria have been used for many years to assess 
contractor business systems, a reasonable person should be able to 
easily interpret and understand what is required to maintain an 
acceptable system. Each significant deficiency must be determined on 
its own set of facts and ultimately decided by the contracting officer. 
Inconsistent treatment of deficiencies is speculative.
9. Approval To Withhold Payments
    Comment: The authority to order a payment withholding should be 
vested at a higher level than the contracting officer because many 
contracting officers do not have sufficient training or expertise in 
the full spectrum of business systems covered by the rule. Furthermore, 
contracting officers should be allowed to make independent business 
judgments without fear of DCAA elevating the matter to a formal 
disputes resolution board, unless the contracting officer has ignored 
or disregarded DCAA egregiously.
    Response: The contracting officer is the only person with the 
authority to enter into, administer, and/or terminate contracts and 
make related determinations and findings. DoD contracting personnel are 
skilled professionals. All contracting personnel are required by law to 
obtain a certification to ensure they have the requisite skills in 
contracting. When specialized expertise is required, contracting 
officers consult with auditors and other individuals with specialized 
experience, as necessary, to ensure a full understanding of issues. In 
fact, the interim rule requires such consultations. Accordingly, the 
contracting officer is the appropriate authority for making decisions 
regarding contractor business systems.
10. Other Remedies
    Comment: The DCAA audit report should recommend whether a payment 
withholding is necessary, and if not, what other protections are 
available. DoD already has numerous other contracting tools available 
to protect itself from any actual loss associated with business system 
deficiencies. The proposed clause should state that a payment 
withholding under the clause is in lieu of, and not in addition to, 
other sanctions and remedies.
    Response: The existing regulatory remedies are not an effective 
substitute for a contract clause that will mitigate the Government's 
risk while contractors correct business system deficiencies. The 
interim rule is required to supplement existing enforcement mechanisms 
and protect the Government's interests while the contractor completes 
correction of system deficiencies. DoD does not want to limit the 
contracting officer's discretion to apply any and all regulatory 
measures, as warranted by the circumstances. For example, if a 
contractor has a deficiency in its property management system, the 
contracting officer may implement a payment withholding to protect the 
Government's risk of the contractor failing to perform on the contract, 
and may also revoke the Government's assumption of liability to protect 
the Government from risk of loss of the Government's furnished 
property.
11. ``Inadequate in Part''
    Comment: The final rule should provide for ``inadequate in part'' 
determinations when minor system deficiencies will not affect the 
entire business system.
    Response: ``Inadequate in part'' determinations when minor system 
deficiencies are found are not necessary. Contractor business systems 
will only be disapproved when the contracting officer determines that 
one or more significant deficiencies materially affect the ability of 
officials of the Department of Defense to rely upon information 
produced by the system that is needed for management purposes.
12. Payment Withholdings Applied Per System or Per Deficiency
    Comment: The rule is unclear whether a 5% payment withholding is 
applied against a single deficient business system or can be applied 
for each deficiency within a single system.
    Response: Payment withholding procedures will be implemented on the 
basis of contractor business systems. While multiple payment 
withholdings may be implemented due to significant deficiencies in 
multiple contractor business systems, for clarity, the interim rule 
sets forth that the total percentage of payments withheld on amounts 
due under each progress payment, performance-based payment, or interim 
cost voucher, shall not exceed five percent for one or more significant 
deficiencies in any single contractor business system, and 10 percent 
for significant deficiencies in multiple contractor business systems.
13. DCAA/Functional Specialist Consultation
    Comment: It is unclear what is meant by ``consultation with the 
auditor or functional specialist'' in terms of a

[[Page 28861]]

contracting officer's determination to discontinue withholding payments 
prior to audit verification. The language in DFARS 242.70X1 and 
252.242-7XXX should explicitly state that the contracting officer may 
discontinue withholding payments without the need to wait for a final 
audit report from DCAA.
    Response: The contracting officer is the only person with the 
authority to enter into, administer, and/or terminate contracts and 
make related determinations and findings. However, when specialized 
expertise is required, the interim rule requires contracting officers 
to consult with auditors and other individuals with specialized 
experience, as necessary, to ensure a full understanding of issues. The 
interim rule explicitly states that prior to the receipt of 
verification, the contracting officer may discontinue withholding 
payments pending receipt of verification, and release any payments 
previously withheld, if the contractor submits evidence that the 
deficiencies have been corrected, and the contracting officer, in 
consultation with the auditor or functional specialist, determines that 
there is a reasonable expectation that the corrective actions have been 
implemented and that the deficiencies no longer affect materially the 
ability of the Government to rely upon information produced by the 
system.
14. Risk Management vs. Risk Avoidance
    Comment: The proposed rule's focus on risk avoidance rather than 
risk management has the potential of significantly increasing the cost 
of business systems without corresponding benefits. To make systems 
deficiency-proof in order to avoid significant payment withholdings, 
contractors may be forced to incur unnecessary costs that would be 
disproportionate to the incremental benefits of having near perfect 
systems. DoD has failed to consider the concept of causal or beneficial 
relationships between the costs to bring business systems into 
compliance with the rule, and the benefits of protecting the Government 
from perceived risk.
    Response: DoD will only withhold payments in cases where there are 
significant deficiencies in the contractor's business systems. In such 
cases, the ability of the contractor to manage risk is questionable and 
the potential risk of harm to the Government is increased. Under the 
rule, a contractor business system may contain deficiencies that do not 
affect materially the ability of DoD officials to rely on information 
produced by the system. Accordingly, the standard for withholding 
payments is commensurate with the risk of harm to the Government. In 
the long run, both the contractor's and Government's administrative 
costs should be reduced with the reliance on efficient contractor 
business systems.
15. Large Businesses
    Comment: The revised rule improperly targets large businesses due 
to the $50M dollar contract threshold.
    Response: The $50 million contract threshold has been removed from 
the interim rule. The threshold for application of the contractor 
business systems clause is set forth in section 893 of the NDAA, which 
defines a covered contractor as one that is subject to the Cost 
Accounting Standards under 41 U.S.C. chapter 15, as implemented in 
regulations found at 48 CFR 9903.201-1 (see the FAR Appendix).
16. DCAA Audit Standards
    Comment: DCAA auditors apply a higher standard for identifying a 
deficiency in an accounting system (``less than a remote possibility 
that potential unallowable costs would be immaterial'') than set forth 
in the rule. DCAA is not able to distinguish systemic errors or 
significant deficiencies from normal human errors or minor 
deficiencies. The rule may state that it is DCAA policy to report only 
deficiencies determined to be significant deficiencies or material 
weaknesses, however the DCAA December 19, 2008 MRD (titled Audit 
Guidance on Significant Deficiencies/Material Weaknesses and Audit 
Opinions on Internal Control Systems) instructs auditors that anything 
which is subject to DCAA review should be considered significant.
    Response: DCAA will report significant deficiencies in accordance 
with the definition of significant deficiency in this rule, as set 
forth in section 893 of the NDAA and the Generally Accepted Government 
Auditing Standards (GAGAS). Based on the definition in GAGAS, a 
significant deficiency is a deficiency, or combination of deficiencies, 
that adversely affects the entity's ability to initiate, authorize, 
record, process, or report data reliably. The GAGAS definition is 
consistent with the definition of significant deficiency in the 
contractor business systems clause. Additionally, contracting officers 
will administer this rule according to the requirements in section 893 
of the NDAA.
17. Arbitrary and Punitive Payment Withholdings
    Comment: The payment withholding percentages are punitive in nature 
and represent an arbitrary estimate based on pressure to incorporate 
business systems payment withholdings into the DFARS. The amount of the 
payment withholding should be commensurate with the level of risk to 
the Government and not set at arbitrary and punitive levels.
    Response: When contractors fail to maintain business systems, as is 
required by the terms and conditions of their contracts, the payment 
withholding provisions help to protect the Government from the risks of 
overpayment, increased property losses, or nonconforming goods, among 
others, against which contractor business systems are designed to 
ensure. The interim rule would protect the Government by reducing 
contract payments temporarily during performance in an amount 
sufficient to mitigate the Government's risk. DoD is relying on the 
payment withholding amounts, not as a penalty for a deficiency, but as 
representing a good-faith estimate of the potential loss that is at 
risk where the actual amounts are difficult to estimate or quantify. 
The percentage of progress payments, performance-based payments, and 
interim payments set forth in this rule is in accordance with section 
893 of the NDAA.
18. Release of Payment Withholdings
    Comment: DCAA does not issue audits addressing ``reasonable 
expectation that the corrective actions have been implemented.'' The 
only existing audit solution is to complete the entire follow-up audit, 
which will not be performed in a timely manner due to DCAA's backlog. 
Furthermore, the rule should provide guidance to avoid perpetual 
payment withholdings when deficiencies in multiple business systems 
overlap and the timing of corrective action plans differ.
    Response: There is no requirement that DCAA issue audits addressing 
``reasonable expectation that the corrective actions have been 
implemented.'' The interim rule explicitly states that prior to the 
receipt of verification, the contracting officer may discontinue 
withholding payments pending receipt of verification, and release any 
payments previously withheld, if the contractor submits evidence that 
the significant deficiencies have been corrected, and the contracting 
officer, in consultation with the auditor or functional specialist,

[[Page 28862]]

determines that there is a reasonable expectation that the corrective 
actions have been implemented. Since payment withholding procedures 
will be implemented on the basis of contractor business systems, if 
prior to the correction of one or more significant deficiencies, other 
significant deficiencies are identified in another business system, the 
contracting officer may revise the original final determination or 
issue a subsequent determination to disapprove the latter business 
system and implement additional payment withholdings. Contracting 
officers will provide direction in their determination(s), identify the 
significant deficiencies that need to be corrected in order to approve 
each disapproved business system, and discontinue the withholding of 
payments and release any payments previously withheld. If one 
previously disapproved contractor business system is approved, but 
significant deficiencies remain in another system, the contracting 
officer will continue to withhold payments relating to the remaining 
disapproved business system until the significant deficiencies relating 
to that business system have been determined to have been corrected.
19. Multiple Compliance Regimes
    Comment: The rule provides a different set of contractor business 
systems requirements for DoD and NASA contractors than are required for 
civilian contractors.
    Response: The business systems criteria contained in the business 
systems clauses have been used in practice for several decades by 
Government personnel to assess the reliability and accuracy of 
management information produced by the applicable system. Because they 
are designed to be consistent with GAGAS, which are based on standards 
developed by the American Institute of Certified Public Accountants 
(AICPA), the system criteria are applicable equally to DoD, NASA, and 
civilian contractors.
20. NDAA Compliance
    A number of respondents, citing section 893 of the NDAA, provided 
the following recommendations:
    Comment: Contractor business system disapproval should be based on 
``significant deficiencies'' as defined in section 893 of the NDAA, and 
the maximum cap should be reduced to 10 percent in accordance with the 
NDAA.
    Response: The interim rule has been revised to reflect the language 
in section 893 of the NDAA by incorporating the statutory language 
regarding ``significant deficiencies'' and reducing the cumulative 
payment withholding percentage from 20 percent to 10 percent.
    Comment: The proposed rule mandates payment withholdings on all 
contracts, including firm-fixed price contract types, while the NDAA 
language makes payment withholdings discretionary, and permits them to 
be applied only to CAS-covered contracts and not fixed-price contract 
types. The rule should be adjusted to exclude those contract types, 
including firm-fixed-price contracts that have been discretely excluded 
by the Authorization Act.
    Response: Section 893 requires the Secretary of Defense to develop 
and initiate a program for the improvement of contractor business 
systems to ensure that such systems provide timely, reliable 
information for the management of Department of Defense programs. 
Furthermore, the statute sets forth that an appropriate official of the 
Department of Defense may withhold up to 10 percent of progress 
payments, performance-based payments, and interim payments under 
covered contracts from a covered contractor, as needed, to protect the 
interests of the Department and ensure compliance, if one or more of 
the contractor business systems of the contractor has been disapproved. 
To comply with this requirement, under the mandated DoD program for the 
improvement of contractor business systems, which includes the 
implementation of this interim rule, DoD has interpreted the definition 
of ``covered contract'' to mean a contract that is subject to the Cost 
Accounting Standards under 41 U.S.C. chapter 15, as implemented in 
regulations found at 48 CFR 9903.201-1 (see the FAR Appendix), which 
includes CAS-covered fixed-price type contracts and performance-based 
contracts, as well as cost type contracts.
    Comment: In accordance with the NDAA, the rule should identify DoD 
officials who are responsible for the approval or disapproval of 
contractor business systems. Furthermore, DoD officials must be made 
available to work with the contractor to develop corrective action 
plans and schedules for implementation.
    Response: The interim rule continues to identify cognizant 
contracting officers as the DoD officials who are responsible for the 
approval or disapproval of contractor business systems.
21. Contract Applicability
    Comment: A number of respondents questioned the application of this 
rule against cost type contracts while other respondents questioned the 
application of this rule against fixed-price contracts. Additionally, 
some respondents expressed concern about the application of the rule to 
commercial contracts and construction contracts. Other respondents 
suggested that payment withholdings should only be applied to contracts 
which fall under the business system found to be deficient, and only to 
contracts administered by the contracting officer making the 
determination decision.
    Response: The Government is at risk when a contractor's business 
systems contain significant deficiencies, regardless of contract type. 
Accordingly, it is appropriate for the contracting officer to withhold 
payments to protect the interest of the Government. Contracts awarded 
under FAR part 12 regulations will generally be exempt from the 
requirements of this rule. A system deficiency may result in 
application of a payment withholding against all contracts that contain 
the business systems clause. The rule has been tailored to comply with 
section 893 of the FY11 NDAA. DoD has interpreted the definition of 
``covered contract'' to include CAS-covered cost type contracts as well 
as CAS-covered fixed-price type contracts and performance-based 
contracts since section 893 also allows up to 10 percent of progress 
payments and performance-based payments to be withheld. The interim 
rule provides the contracting officer with the sole discretion to 
withhold payments from one or more contracts containing the clause at 
252.242-7005, Contractor Business Systems. To ensure consistency, it is 
DoD policy that only one contracting officer, normally an ACO, has the 
responsibility and authority for approval, disapproval, and general 
oversight of contractor business systems. When the cognizant 
contracting officer renders a determination to approve or disapprove a 
system and withhold payments, all contracting officers with contracts 
affected by the determination are required to abide by the cognizant 
contracting officer's decision. The rule complies with this long-
established practice.
22. DCAA/DCMA Internal Policies
    Comment: By allowing DCMA/DCAA to determine the criteria by which 
contractor business systems will be measured through their internal 
policies and procedures, it should make those internal policies and 
procedures subject to the OFPP Act public comment process.
    Response: This rule does not contain references to DCAA/DCMA 
internal policies to determine the criteria by

[[Page 28863]]

which contractor business systems will be measured. Rather, as defined 
in each of the individual business system clauses in the rule, the 
definition of an acceptable system means a system that complies with 
the system criteria set forth in each clause, which have been published 
for public comment.
23. Cumulative Payment Withholdings
    Comment: The respondent questioned whether the 20 percent withhold 
in the proposed rule is in addition to other withholding remedies a 
contracting officer may assess.
    Response: In accordance with section 893 of the NDAA, the 
cumulative payment withholding percentage set forth under this interim 
rule is reduced from 20 percent to 10 percent. This interim rule does 
not limit the contracting officer's discretion to apply any and all 
regulatory measures, as warranted by the circumstances, including other 
applicable payment withholdings. The withholding of any amount or 
subsequent payment to the contractor shall not be construed as a waiver 
of any rights or remedies the Government has under this contract.
24. CAS
    Comment: The respondent expressed concern that there is no 
adjudication process prior to implementation of payment withholdings 
for disagreements or disputes regarding interpretation and 
implementation of CAS. Contractors should not be subject to payment 
withholdings on matters which await the decision of the judiciary.
    Response: The finding of a significant deficiency in a business 
system results in only a temporary withholding from certain payments to 
protect the Government from potential harm. This does not constitute a 
permanent contractual decrement stemming from a CAS noncompliance. A 
contractor is not precluded from challenging any underlying CAS or 
other determinations through the contract disputes or other resolution 
processes. An additional adjudication process is not warranted for this 
rule. Furthermore, a deficiency that causes a CAS noncompliance may 
impact other business systems.
25. Dollar Limitations
    Comment: The lack of dollar limitations at the contract level will 
lead to payment withholdings that exceed the amount required to protect 
the government. The value withheld at the contract level should be 
limited to $100,000 (and at subsequent thresholds of $250,000, 
$500,000, and $1,000,000) until authorization is received from DCMA 
headquarters. The approval of payment withholdings above the thresholds 
should be based on evidence that actual risk or harm in excess of the 
limit exists.
    Response: To ensure sufficient mitigation of the Government's risk, 
the interim rule provides the contracting officer with the sole 
discretion to withhold payments from one or more contracts containing 
the clause at 252.242-7005, Contractor Business Systems. Contracting 
officers will select one or more contracts from which payments will be 
withheld. In selecting the contract or contracts from which to withhold 
payments, the contracting officer shall ensure that the total amount of 
payment withholding does not exceed 10 percent of the total amount 
billed.
26. Standard of Risk
    Comment: The respondent recommended that any final rule establish a 
clear, simple, and uniform standard of risk to the Government in the 
procedures that are applicable across all of the business systems.
    Response: The definition of a significant deficiency establishes a 
uniform standard of risk. A significant deficiency is defined as a 
shortcoming in the system that materially affects the ability of 
officials of the Department of Defense to rely upon information 
produced by the system that is needed for management purposes.
27. Payment Withholding Process
    Comment: Respondents suggested that the final rule should require 
direct communication between the contracting officer, DCAA, and the 
contractor to allow discussion relating to an identified deficiency 
before payment is withheld. The proposed clause should provide 
sufficient time for the contracting officer and contractor to address 
potential system deficiencies. The respondents recommended that the 
rule require the contracting officer to work collaboratively with the 
contractor in determining whether deficiencies exist, whether there is 
a material risk of harm, and how to resolve the deficiencies without 
resorting to a payment withholding; and allow the contractor 90 days to 
address the potential deficiencies and submit a response documenting 
its position before the contracting officer can issue a final 
determination and impose a payment withholding. Otherwise, the rule 
denies a contractor due process by allowing the contracting officer to 
issue initial determinations prior to receiving all the facts from the 
contractor.
    Response: The rule provides adequate opportunities for 
communication between the contracting officer and the contractor prior 
to the implementation of payment withholdings. The contractor will be 
notified of a preliminary finding of a deficiency during the course of 
formal system reviews and audits. This occurs before the auditor or 
functional specialist releases a report to the contractor and 
contracting officer. After receiving a report, the contracting officer 
will promptly evaluate and issue an initial determination. The 
contractor is then allowed 30 days to respond to any significant 
deficiencies. Contractors are given ample opportunity to present their 
position during system reviews. Accordingly, the requirement for a 
contractor to respond within 30 days of an initial determination is 
adequate.
28. Simplify Administrative Burden
    Comment: The rule should simplify the administrative burden for the 
accounting for payment withholdings against numerous invoices.
    Response: The interim rule provides the contracting officer with 
the sole discretion to withhold payments from one or more contracts 
containing the clause at 252.242-7005, Contractor Business Systems. The 
administrative burden for the accounting for payment withholdings 
against numerous invoices is thus simplified by not mandating that 
payment withholdings be applied against all of a contractor's available 
contracts.
29. DCAA/DCMA Roles
    Comment: One respondent suggested that the wording in 215.407-5-
70(c)(3) should be revised to state ``the auditor, on behalf of the 
cognizant contracting officer, conducts estimating system reviews'' to 
establish that the contracting officer is the lead Federal official, 
not the auditor. Respondents questioned the ability of DCAA and DCMA to 
resolve audit recommendations, and further questioned the ability of 
DCAA and DCMA to execute their duties effectively in the absence of a 
procedure for resolving different judgments regarding a deficiency.
    Response: FAR 1.6 sets forth contracting officer authority and 
responsibilities. The addition of language to DFARS 215.407-5-70 
stating that the contracting officer is the lead Federal official is 
unnecessary. The DoD memorandum dated December 4, 2009, ``Resolving 
Contract Audit Recommendations,'' clearly defines the roles and 
responsibilities of DCAA and DCMA and provides procedures for 
adjudicating differences.

[[Page 28864]]

30. Functional Specialist
    Comment: Reference to a functional specialist under estimating 
systems should be deleted.
    Response: The contracting officer is the only person with the 
authority to enter into, administer, and/or terminate contracts and 
make related determinations and findings. However, when specialized 
expertise is required, the interim rule requires contracting officers 
to consult with auditors and other individuals with specialized 
experience, as necessary, to ensure a full understanding of issues. 
Certain issues relating to forecasted costs may require the expertise 
of engineers, price analysts, and others to understand or evaluate the 
contractor's estimating system.
31. Policies and Procedures
    Comment: The proposed rule contains inconsistent, ill-defined 
system criteria for policies and procedures. The requirement for 
policies and/or procedures is the same for all business systems and, 
therefore, the proposed rule should be consistent by using the terms 
``policies and procedures'' in all sections defining system criteria. 
The proposed rule should be revised to specify that a business system's 
criteria for policies and procedures should be in writing.
    Response: System criteria are consistent with well-established 
Government practices and procedures for assessing the contractor 
business systems. For some business systems, the DFARS language 
supplements established FAR criteria, while other business systems 
criteria are established or revised by this interim rule. Therefore, it 
would be inappropriate to attempt to force incorrect terminology into 
business systems criteria for the sake of consistency. The systems 
criteria contained in the business systems clauses have been used for 
many years by Government personnel to assess the reliability and 
accuracy of management information produced by the applicable system.
32. Impact to Industry
    Comment: One respondent commented that the proposed payment 
withholding regime will threaten the solvency of contractors and 
preclude many companies from contracting with the Government. The 
respondent indicated that the payment withholding regime will be 
particularly harsh on small businesses.
    Response: In the long run, both the contractor's and the 
Government's administrative cost should be reduced with the reliance on 
efficient contractor business systems. The rule has been revised to 
exclude small businesses in accordance with section 893 of the FY2011 
NDAA.
33. Effectiveness of This Rule
    Comment: The respondent indicated that the proposed payment 
withholding is not tailored reasonably to address the Department's 
intended goal of preventing unallowable and unreasonable costs and 
waste, fraud, and abuse and improving the effectiveness of DCAA and 
DCMA.
    Response: As noted by the respondent, contractor business systems 
play an important role in preventing waste, fraud, and abuse. 
Significant systems deficiencies place a substantial resource burden on 
DCMA and DCAA due to the increased oversight needed to protect the 
interests of the Government. The rule provides contracting officers 
with an additional tool to mitigate the Government's risk while 
contractors correct business systems deficiencies. Reliable contractor 
business systems employ internal controls to prevent unallowable and 
unreasonable costs, as well as waste, fraud, and abuse. Additionally, 
it reduces burden on Government resources, thereby allowing DCMA and 
DCAA resources to be employed more effectively.
34. Minor Corrections
    Comment: For 252.215-7002, the lead-in reference to the 
prescription should be 215.407-5-70.
    Response: Referencing 215.407-5-70 as the prescription for the 
clause at 252.215-7002 would be incorrect. DFARS 215.408(2) prescribes 
the use of the clause at 252.215-7002.
    Comment: For 252.215-7002(e) and 252.242-7004(e), change from ``on 
any system deficiency'' to ``of any system deficiency.''
    Response: Correction has been made in the interim rule.
    Comment: The respondent recommended making the phrase 
``consultation with the auditor or functional specialist'' consistent 
throughout the rule.
    Response: Where appropriate, the phrase ``consultation with the 
auditor or functional specialist'' has been made consistent throughout 
the rule.
    Comment: The respondent recommended making the phrase ``all 
findings and recommendations'' consistent throughout the rule.
    Response: Where appropriate, the phrase ``all findings and 
recommendations'' has been made consistent throughout the rule.
    Comment: The proposed rule intends to add new paragraphs (d) and 
(e) to revised 242.7203, but the text of the additional paragraphs 
denominates them at paragraphs (c) and (d).
    Response: Correction has been made in the interim rule.

B. Summary of Proposed Rule Changes

    As a result of public comments received in response to the revised 
proposed rule and the requirements set forth under section 893 of the 
NDAA, the following changes have been made to the interim rule:
    1. The term ``significant deficiency'' is defined, in accordance 
with section 893, as a shortcoming in the system that materially 
affects the ability of officials of the Department of Defense to rely 
upon information produced by the system that is needed for management 
purposes. The definition of the term ``significant deficiency'' 
provides for associated changes to the rule as follows:
    (a) The term ``significant deficiency'' is used in lieu of phrases 
such as ``deficiency that adversely affects the system'' and 
``deficiency that adversely affects the system, leading to a potential 
risk of harm to the Government'' as the basis for business systems 
disapprovals and payment withholdings.
    (b) The phrases ``the potential adverse impact to the Government'' 
and ``its potential harm to the Government'' are no longer required to 
describe the detail to which significant deficiencies are described by 
auditors and functional specialists to contracting officers, and by 
contracting officers to contractors.
    2. While the proposed rule allowed for the implementation of 
payment withholdings with or without disapproval of system deficiencies 
that adversely affect the contractor's business systems, this interim 
rule sets forth requirements that a contracting officer's final 
determination shall include a disapproval of the contractor's business 
system and the implementation of payment withholdings if a significant 
deficiency still exists after the contracting officer's evaluation of 
the contractor's response to the initial significant deficiency 
determination.
    3. Where the proposed rule allowed for system approval after the 
contracting officer determines that the contractor has substantially 
corrected the system deficiencies removing the potential risk of harm 
to the Government, this interim rule requires that there are no 
remaining significant deficiencies before a system is approved.
    4. The contracting officer will be required to reduce a payment

[[Page 28865]]

withholding by at least 50 percent if the contracting officer has not 
made a determination whether the contractor has corrected all 
significant deficiencies as directed by the contracting officer's final 
determination, or has not made a determination whether there is a 
reasonable expectation that the corrective actions have been 
implemented.
    5. The 16-month timeframe for completion of a contractor's initial 
Earned Value Management System validation has been revised to allow for 
a timeframe that is approved by the contracting officer to allow for 
flexibility in the initial validation process.
    6. The term ``covered contract'' has been defined, in accordance 
with section 893, as a contract that is subject to the Cost Accounting 
Standards under 41 U.S.C. chapter 15, as implemented in regulations 
found at 48 CFR 9903.201-1 (see the FAR Appendix). The definition of 
the term ``covered contract'' provides for associated changes to the 
rule as follows:
    (a) The clause prescription for the clause at 252.242-7005, 
Contractor Business Systems, requires that the resulting contract will 
be a ``covered contract,'' which exempts small business contracts. 
Consequently, all language pertaining to payment withholdings for small 
business has been struck from the rule.
    (b) While the proposed rule set forth a $50 million contract 
threshold for the incorporation of the clause at 252.242-7005, 
Contractor Business Systems, this interim rule prescribes the 
incorporation of the clause for covered contracts in accordance with 
the established definition.
    7. The proposed rule applied payment withholdings against all 
contracts that contained the clause at 252.242-7005, Contractor 
Business Systems. This interim rule allows the contracting officer the 
discretion to withhold payments from one or more contracts containing 
the clause.
    8. This rule revises procedures for the implementation of payment 
withholdings by replacing the requirement for contracting officers to 
issue unilateral modifications with the requirement to issue written 
notifications. Therefore, references to unilateral modifications for 
payment withholding as well as the sample language for the unilateral 
modifications have been deleted from this rule.
    9. The clause prescription at 242.7002 for the clause at 252.242-
7005, Contractor Business Systems, is revised to exempt contracts with 
educational institutions or Federally Funded Research and Development 
Centers (FFRDCs) operated by educational institutions.
    10. The references to construction contracts that include the 
clause at FAR 52.232-27, Prompt Payment for Construction Contracts, 
under 242.7502(a), 242.7503, and 252.242-7005 have been removed as 
unnecessary.
    11. The initial written determination language under 
242.7502(d)(2)(ii)(A) has been revised to provide a description of each 
significant deficiency in sufficient detail to allow the contractor to 
understand the deficiency.
    12. In accordance with section 893, the term ``business system'' is 
replaced with the term ``contractor business system.''
    13. In accordance with section 893, the total percentage of 
payments that may be withheld on a contract shall not exceed 10 
percent. Additionally, while multiple payment withholdings may be 
implemented due to significant deficiencies in multiple contractor 
business systems, for clarity, the interim rule limits the total 
percentage of payments withheld to five percent for one or more 
significant deficiencies in any single contractor business system.
    14. The accounting system criteria under 252.242-7006(a)(1) has 
been revised to delete the unnecessary phrase ``that is adequate for 
producing accounting data that is reliable and costs that are recorded, 
accumulated, and billed on Government contracts in accordance with 
contract terms.''
    15. The purchasing system criteria under paragraph (c) of the 
clause at 252.244-7001, Contractor Purchasing System Administration, 
has been revised to add paragraph (24) requiring contractors to 
establish and maintain procedures to notify the Contracting Officer in 
writing if--
    (a) The Contractor changes the amount of subcontract effort after 
award such that it exceeds 70 percent of the total cost of work to be 
performed under the contract, task order, or delivery order. The 
notification shall identify the revised cost of the subcontract effort 
and shall include verification that the Contractor will provide added 
value; or
    (b) Any subcontractor changes the amount of lower-tier 
subcontractor effort after award such that it exceeds 70 percent of the 
total cost of the work to be performed under its subcontract. The 
notification shall identify the revised cost of the subcontract effort 
and shall include verification that the subcontractor will provide 
added value as related to the work to be performed by the lower-tier 
subcontractor(s).

III. Executive Order 12866 and Executive Order 13563

    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. This is a ``significant regulatory action'' and, 
therefore, was subject to review under section 6(b) of Executive Order 
12866, Regulatory Planning and Review, dated September 30, 1993. This 
rule is not a major rule under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

    DoD has prepared an initial regulatory flexibility analysis 
consistent with 5 U.S.C. 603. A copy of the analysis may be obtained 
from the point of contact specified herein. The analysis is summarized 
as follows:
    The objective of the rule is to establish a definition for 
contractor business systems and implement compliance mechanisms to 
improve DoD oversight of those contractor business systems. The 
requirements of the rule will apply to solicitations and contracts that 
are subject to the Cost Accounting Standards under 41 U.S.C. chapter 
15, as implemented in regulations found at 48 CFR 9903.201-1 (see the 
FAR Appendix), other than in contracts with educational institutions or 
Federally Funded Research and Development Centers (FFRDCs) operated by 
educational institutions, and include one or more of the defined 
contractor business systems.
    Since contracts and subcontracts with small businesses are exempt 
from CAS requirements, DoD estimates that this rule will have no impact 
on small businesses. However, DoD invites comments from small business 
concerns and other interested parties on the expected impact of this 
rule on small entities.
    DoD will also consider comments from small entities concerning the 
existing regulations in subparts affected by this rule in accordance 
with 5 U.S.C. 610. Interested parties must submit such comments 
separately and should cite 5 U.S.C. 610 (DFARS Case 2009-D038) in 
correspondence.

V. Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. chapter 35) applies because 
this

[[Page 28866]]

interim rule contains information collection requirements requiring the 
approval of the Office of Management and Budget. DoD invites comments 
on the following aspects of the interim rule: (a) Whether the 
collection of information is necessary for the proper performance of 
the functions of DoD, including whether the information will have 
practical utility; (b) the accuracy of the estimate of the burden of 
the information collection; (c) ways to enhance the quality, utility, 
and clarity of the information to be collected; and (d) ways to 
minimize the burden of the information collection on respondents, 
including the use of automated collection techniques or other forms of 
information technology.
    DoD received one comment regarding the information collection 
estimate that was included with the initial proposed rule published on 
January 15, 2010, at 75 FR 2457. The respondent asserted that DoD's 
estimates were substantially understated. However, the supporting data 
referenced by the respondent exceeded the information collection 
requirements established under this rule. The hours and costs cited by 
the respondent with regard to EVMS did not reflect the Paperwork 
Reduction Act requirements of this rule. DoD received no comments 
regarding the information collection estimate in response to the second 
proposed rule published on December 3, 2010 at 75 FR 75550. With no 
further specific Paperwork Reduction Act comments received, and no 
further revisions in this interim rule to the information collection 
requirements, DoD concludes that the estimates published with the 
proposed rule accurately reflect the contractors' costs to fulfill the 
information collection requirements of this rule. The following is a 
summary of the information collection requirements.
    The business systems clauses in this interim rule contain 
requirements for contractors to respond to initial and final 
determinations of deficiencies. The information contractors will be 
required to submit to respond to deficiencies in four of the six 
business systems defined in this rule have been approved by the Office 
of Management and Budget as follows:
    (1) Accounting Systems--OMB Clearance 9000-0011;
    (2) Estimating Systems--OMB Clearance 0704-0232;
    (3) Material Management and Accounting Systems--OMB Clearance 0704-
0250;
    (4) Purchasing Systems- OMB Clearance 0704-0253;
    (5) Earned Value Management Systems--OMB Control Number 0704-0479; 
and
    (6) Contractors Property Management System--OMB Control Number 
0704-0480.
    The information contractors will be required to submit to respond 
to deficiencies in contractors' EVMS is estimated as follows:
    Number of respondents--186.
    Responses per respondent--48.
    Annual responses--8,928.
    Burden per response--40 hours.
    Annual burden hours--357,120 hours.
    The information contractors will be required to submit to respond 
to deficiencies in contractors' property management systems is 
estimated as follows:
    Number of respondents: 2,646.
    Responses per respondent: 1.
    Annual responses: 2,646.
    Average burden per response: 1.2 hours.
    Annual burden hours: 3,200 hours.
    Needs and Uses: DoD needs the information required by the business 
systems clause in this interim rule to mitigate the risk of unallowable 
and unreasonable costs on Government contracts when a contractor has 
one or more deficiencies in a business system.
    Affected public: The business systems clause will be used in 
solicitations and contracts that include any of the following clauses:
    (1) 252.215-7002, Cost Estimating System Requirements;
    (2) 252.234-7002, Earned Value Management System;
    (3) 252.242-7004, Material Management and Accounting System;
    (4) 252.242-7006, Accounting System Administration;
    (5) 252.244-7001, Contractor Purchasing System Administration;
    (6) 252.245-7003, Contractor Property System Administration.
    Frequency: On occasion.

VI. Determination To Issue an Interim Rule

    A determination has been made under the authority of the Secretary 
of Defense, that urgent and compelling reasons exist to publish an 
interim rule prior to affording the public an opportunity to comment. 
This interim rule implements section 893 of the Ike Skelton National 
Defense Authorization Act for Fiscal Year 2011. Section 893 requires 
the improvement of contractor business systems to ensure that such 
systems provide timely, reliable information for the management of DoD 
programs. Contractor business systems and internal controls are the 
first line of defense against waste, fraud, and abuse. Weak control 
systems increase the risk of unallowable and unreasonable costs on 
Government contracts.
    In implementing section 893, this rule will improve the 
effectiveness of DoD oversight for contractor business systems. More 
effective and efficient management of DoD programs is key to achieving 
greater efficiency and productivity in defense spending. It is 
essential that DoD immediately commence to require these improvements 
to contractor business systems, and to undertake the enhanced oversight 
necessary for expenditures of taxpayer dollars. Comments received in 
response to this interim rule will be considered in the formation of 
the final rule.

List of Subjects in 48 CFR Parts 215, 234, 242, 244, 245, and 252

    Government procurement.

Ynette R. Shelkin,
Editor, Defense Acquisition Regulations System.

    Therefore, 48 CFR parts 215, 234, 242, 244, 245, and 252 are 
amended as follows:

0
1. The authority citation for 48 CFR parts 215, 234, 242, 244, 245, and 
252 continues to read as follows:

    Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

PART 215--CONTRACTING BY NEGOTIATION

0
2. Amend section 215.407-5-70 by revising paragraphs (a)(4), (c), and 
(e) through (g) to read as follows:

215.407-5-70   Disclosure, maintenance, and review requirements.

    (a) * * *
    (4) Significant deficiency is defined in the clause at 252.215-
7002, Cost Estimating System Requirements.
    (c) Policy. (1) The contracting officer shall--
    (i) Through use of the clause at 252.215-7002, Cost Estimating 
System Requirements, apply the disclosure, maintenance, and review 
requirements to large business contractors meeting the criteria in 
paragraph (b)(2)(i) of this section;
    (ii) Consider whether to apply the disclosure, maintenance, and 
review requirements to large business contractors under paragraph 
(b)(2)(ii) of this section; and
    (iii) Not apply the disclosure, maintenance, and review 
requirements to other than large business contractors.
    (2) The cognizant contracting officer, in consultation with the 
auditor, for

[[Page 28867]]

contractors subject to paragraph (b)(2) of this section, shall--
    (i) Determine the acceptability of the disclosure and approve or 
disapprove the system: and
    (ii) Pursue correction of any deficiencies.
    (3) The auditor conducts estimating system reviews.
    (4) An acceptable system shall provide for the use of appropriate 
source data, utilize sound estimating techniques and good judgment, 
maintain a consistent approach, and adhere to established policies and 
procedures.
    (5) In evaluating the acceptability of a contractor's estimating 
system, the contracting officer, in consultation with the auditor, 
shall determine whether the contractor's estimating system complies 
with the system criteria for an acceptable estimating system as 
prescribed in the clause at 252.215-7002, Cost Estimating System 
Requirements.
* * * * *
    (e) Disposition of findings--(1) Reporting of findings. The auditor 
shall document findings and recommendations in a report to the 
contracting officer. If the auditor identifies any significant 
estimating system deficiencies, the report shall describe the 
deficiencies in sufficient detail to allow the contracting officer to 
understand the deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
all findings and recommendations and, if there are no significant 
deficiencies, shall promptly notify the contractor, in writing, that 
the contractor's estimating system is acceptable and approved; or
    (ii) If the contracting officer finds that there are one or more 
significant deficiencies (as defined in the clause at 252.215-7002, 
Cost Estimating System Requirements) due to the contractor's failure to 
meet one or more of the estimating system criteria in the clause at 
252.215-7002, the contracting officer shall--
    (A) Promptly make an initial written determination on any 
significant deficiencies and notify the contractor, in writing, 
providing a description of each significant deficiency in sufficient 
detail to allow the contractor to understand the deficiency;
    (B) Request the contractor to respond in writing to the initial 
determination within 30 days; and
    (C) Promptly evaluate the contractor's responses to the initial 
determination, in consultation with the auditor or functional 
specialist, and make a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor in writing that--
    (A) The contractor's estimating system is acceptable and approved, 
and no significant deficiencies remain, or
    (B) Significant deficiencies remain. The notice shall identify any 
remaining significant deficiencies, and indicate the adequacy of any 
proposed or completed corrective action. The contracting officer 
shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies;
    (2) Disapprove the system in accordance with the clause at 252.215-
7002, Cost Estimating System Requirements; and
    (3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of significant deficiencies in PGI 
215.407-5-70(e).
    (f) System approval. The contracting officer shall promptly approve 
a previously disapproved estimating system and notify the contractor 
when the contracting officer determines that there are no remaining 
significant deficiencies.
    (g) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to approve 
a system, disapprove a system and withhold payments, or approve a 
previously disapproved system and release withheld payments, to the 
auditor; payment office; affected contracting officers at the buying 
activities; and cognizant contracting officers in contract 
administration activities.

PART 234--MAJOR SYSTEM ACQUISITION

0
3. Add section 234.001 to read as follows:

234.001   Definition.

    As used in this subpart--
    Acceptable earned value management system and earned value 
management system are defined in the clause at 252.234-7002, Earned 
Value Management System.
    Significant deficiency is defined in the clause at 252.234-7002, 
Earned Value Management System, and is synonymous with noncompliance.

0
4. Amend section 234.201 by adding paragraphs (5) through (9) to read 
as follows:

234.201   Policy.

* * * * *
    (5) The cognizant contracting officer, in consultation with the 
functional specialist and auditor, shall--
    (i) Determine the acceptability of the contractor's earned value 
management system and approve or disapprove the system; and
    (ii) Pursue correction of any deficiencies.
    (6) In evaluating the acceptability of a contractor's earned value 
management system, the contracting officer, in consultation with the 
functional specialist and auditor, shall determine whether the 
contractor's earned value management system complies with the system 
criteria for an acceptable earned value management system as prescribed 
in the clause at 252.234-7002, Earned Value Management System.
    (7) Disposition of findings--(i) Reporting of findings. The 
functional specialist or auditor shall document findings and 
recommendations in a report to the contracting officer. If the 
functional specialist or auditor identifies any significant 
deficiencies in the contractor's earned value management system, the 
report shall describe the deficiencies in sufficient detail to allow 
the contracting officer to understand the deficiencies.
    (ii) Initial determination. (A) The contracting officer shall 
review all findings and recommendations and, if there are no 
significant deficiencies, shall promptly notify the contractor, in 
writing, that the contractor's earned value management system is 
acceptable and approved; or
    (B) If the contracting officer finds that there are one or more 
significant deficiencies (as defined in the clause at 252.234-7002, 
Earned Value Management System) due to the contractor's failure to meet 
one or more of the earned value management system criteria in the 
clause at 252.234-7002, the contracting officer shall--
    (1) Promptly make an initial written determination on any 
significant deficiencies and notify the contractor, in writing, 
providing a description of each significant deficiency in sufficient 
detail to allow the contractor to understand the deficiencies;
    (2) Request the contractor to respond, in writing, to the initial 
determination within 30 days; and
    (3) Evaluate the contractor's response to the initial 
determination, in consultation with the auditor or

[[Page 28868]]

functional specialist, and make a final determination.
    (iii) Final determination. (A) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (1) The contractor's earned value management system is acceptable 
and approved, and no significant deficiencies remain, or
    (2) Significant deficiencies remain. The notice shall identify any 
remaining significant deficiencies, and indicate the adequacy of any 
proposed or completed corrective action. The contracting officer 
shall--
    (i) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies;
    (ii) Disapprove the system in accordance with the clause at 
252.234-7002, Earned Value Management System, when initial validation 
is not successfully completed within the timeframe approved by the 
contracting officer, or the contracting officer determines that the 
existing earned value management system contains one or more 
significant deficiencies in high-risk guidelines in ANSI/EIA-748 
standards (guidelines 1, 3, 6, 7, 8, 9, 10, 12, 16, 21, 23, 26, 27, 28, 
30, or 32). When the contracting officer determines that the existing 
earned value management system contains one or more significant 
deficiencies in one or more of the remaining 16 guidelines in ANSI/EIA-
748 standards, the contracting officer shall use discretion to 
disapprove the system based on input received from functional 
specialists and the auditor; and
    (iii) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (B) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of significant deficiencies at PGI 
234.201(7).
    (8) System approval. The contracting officer shall promptly approve 
a previously disapproved earned value management system and notify the 
contractor when the contracting officer determines that there are no 
remaining significant deficiencies.
    (9) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to approve 
a system, disapprove a system and withhold payments, or approve a 
previously disapproved system and release withheld payments to the 
auditor; payment office; affected contracting officers at the buying 
activities; and cognizant contracting officers in contract 
administration activities.

PART 242--CONTRACT ADMINISTRATION AND AUDIT SERVICES

0
5. Add subpart 242.70 to read as follows:
SUBPART 242.70--CONTRACTOR BUSINESS SYSTEMS
Sec.
242.7000 Contractor business system deficiencies.
242.7001 Contract clause.

SUBPART 242.70--CONTRACTOR BUSINESS SYSTEMS

242.7000  Contractor business system deficiencies.

    (a) Definitions. As used in this subpart--
    Acceptable contractor business systems and contractor business 
systems are defined in the clause at 252.242-7005, Contractor Business 
Systems.
    Covered contract means a contract that is subject to the Cost 
Accounting Standards under 41 U.S.C. chapter 15, as implemented in 
regulations found at 48 CFR 9903.201-1 (see the FAR Appendix).
    Significant deficiency is defined in the clause at 252.242-7005, 
Contractor Business Systems.
    (b) Determination to withhold payments. If the contracting officer 
makes a final determination to disapprove a contractor's business 
system in accordance with the clause at 252.242-7005, Contractor 
Business Systems, the contracting officer shall--
    (1) In accordance with agency procedures, identify one or more 
covered contracts containing the clause at 252.242-7005, Contractor 
Business Systems, from which payments will be withheld. When 
identifying the covered contracts from which to withhold payments, the 
contracting officer shall ensure that the total amount of payment 
withholding under 252.242-7005, does not exceed 10 percent of progress 
payments, performance-based payments, and interim payments under cost, 
labor-hour, and time-and-materials contracts billed under each of the 
identified covered contracts. Similarly, the contracting officer shall 
ensure that the total amount of payment withholding under the clause at 
252.242-7005, Contractor Business Systems, for each business system 
does not exceed five percent of progress payments, performance-based 
payments, and interim payments under cost, labor-hour, and time-and-
materials contracts billed under each of the identified covered 
contracts. The contracting officer has the sole discretion to identify 
the covered contracts from which to withhold payments.
    (2) Promptly notify the contractor, in writing, of the contracting 
officer's determination to implement payment withholding in accordance 
with the clause at 252.242-7005, Contractor Business Systems. The 
notice of payment withholding shall be included in the contracting 
officer's written final determination for the contractor business 
system and shall inform the contractor that--
    (i) Payments shall be withheld from the contract or contracts 
identified in the written determination in accordance with the clause 
at 252.242-7005, Contractor Business Systems, until the contracting 
officer determines that there are no remaining significant 
deficiencies; and
    (ii) The contracting officer reserves the right to take other 
actions within the terms and conditions of the contract.
    (3) Provide all contracting officers administering the selected 
contracts from which payments will be withheld, a copy of the 
determination. The contracting officer shall also provide a copy of the 
determination to the auditor; payment office; affected contracting 
officers at the buying activities; and cognizant contracting officers 
in contract administration activities.
    (c) Monitoring contractor's corrective action. The contracting 
officer, in consultation with the auditor or functional specialist, 
shall monitor the contractor's progress in correcting the deficiencies. 
The contracting officer shall notify the contractor of any decision to 
decrease or increase the amount of payment withholding in accordance 
with the clause at 252.242-7005, Contractor Business Systems.
    (d) Correction of significant deficiencies. (1) If the contractor 
notifies the contracting officer that the contractor has corrected the 
significant deficiencies, the contracting officer shall request the 
auditor or functional specialist to review the correction to verify 
that the deficiencies have been corrected. If, after receipt of 
verification, the contracting officer determines that the contractor 
has corrected all significant deficiencies as directed by the 
contracting officer's final determination, the contracting officer 
shall discontinue the withholding of payments, release any payments 
previously withheld, and approve the system, unless other significant 
deficiencies remain.

[[Page 28869]]

    (2) Prior to the receipt of verification, the contracting officer 
may discontinue withholding payments pending receipt of verification, 
and release any payments previously withheld, if the contractor submits 
evidence that the significant deficiencies have been corrected, and the 
contracting officer, in consultation with the auditor or functional 
specialist, determines that there is a reasonable expectation that the 
corrective actions have been implemented.
    (3) Within 90 days of receipt of the contractor notification that 
the contractor has corrected the significant deficiencies, the 
contracting officer shall--
    (i) Make a determination that--
    (A) The contractor has corrected all significant deficiencies as 
directed by the contracting officer's final determination in accordance 
with paragraph (d)(1) of this section;
    (B) There is a reasonable expectation that the corrective actions 
have been implemented in accordance with paragraph (d)(2) of this 
section; or
    (C) The contractor has not corrected all significant deficiencies 
as directed by the contracting officer's final determination in 
accordance with paragraph (d)(1) of this section, or there is not a 
reasonable expectation that the corrective actions have been 
implemented in accordance with paragraph (d)(2) of this section; or
    (ii) Reduce withholding directly related to the significant 
deficiencies covered under the corrective action plan by at least 50 
percent of the amount being withheld from progress payments and 
performance-based payments, and direct the contractor, in writing, to 
reduce the percentage withheld on interim cost vouchers by at least 50 
percent, until the contracting officer makes a determination in 
accordance with paragraph (d)(3)(i) of this section.
    (4) If, at any time, the contracting officer determines that the 
contractor has failed to correct the significant deficiencies 
identified in the contractor's notification, the contracting officer 
will continue, reinstate, or increase withholding from progress 
payments and performance-based payments, and direct the contractor, in 
writing, to continue, reinstate, or increase the percentage withheld on 
interim cost vouchers to the percentage initially withheld, until the 
contracting officer determines that the contractor has corrected all 
significant deficiencies as directed by the contracting officer's final 
determination.
    (e) For sample formats for written notifications of contracting 
officer determinations to initiate payment withholding, reduce payment 
withholding, and discontinue payment withholding in accordance with the 
clause at DFARS 252.242-7005, Contractor Business Systems, see PGI 
242.7000.

242.7001  Contract clause.

    Use the clause at 252.242-7005, Contractor Business Systems, in 
solicitations and contracts (other than in contracts with educational 
institutions or Federally Funded Research and Development Centers 
(FFRDCs) operated by educational institutions) when--
    (a) The resulting contract will be a covered contract as defined in 
242.7000(a); and
    (b) The solicitation or contract includes any of the following 
clauses:
    (1) 252.215-7002, Cost Estimating System Requirements.
    (2) 252.234-7002, Earned Value Management System.
    (3) 252.242-7004, Material Management and Accounting System.
    (4) 252.242-7006, Accounting System Administration.
    (5) 252.244-7001, Contractor Purchasing System Administration.
    (6) 252.245-7003, Contractor Property Management System 
Administration.

0
6. Revise sections 242.7201 and 242.7202 to read as follows:

242.7201  Definitions.

    Acceptable material management and accounting system, material 
management and accounting system, and valid time-phased requirements 
are defined in the clause at 252.242-7004, Material Management and 
Accounting System.
    Significant deficiency is defined in the clause at 252.242.7004, 
Material Management and Accounting System.

242.7202  Policy.

    (a) DoD policy is for its contractors to have an MMAS that conforms 
to the standards in paragraph (e) of the clause at 252.242-7004, 
Material Management and Accounting System, so that the system--
    (1) Reasonably forecasts material requirements;
    (2) Ensures the costs of purchased and fabricated material charged 
or allocated to a contract are based on valid time-phased requirements; 
and
    (3) Maintains a consistent, equitable, and unbiased logic for 
costing of material transactions.
    (b) The cognizant contracting officer, in consultation with the 
auditor and functional specialist, if appropriate, shall--
    (1) Determine the acceptability of the contractor's MMAS and 
approve or disapprove the system; and
    (2) Pursue correction of any deficiencies.
    (c) In evaluating the acceptability of the contractor's MMAS, the 
contracting officer, in consultation with the auditor and functional 
specialist, if appropriate, shall determine whether the contractor's 
MMAS complies with the system criteria for an acceptable MMAS as 
prescribed in the clause at 252.242-7004, Material Management and 
Accounting System.

0
7. Amend section 242.7203 by revising paragraphs (c) and (d) and adding 
paragraph (e) to read as follows:

242.7203  Review procedures.

* * * * *
    (c) Disposition of findings--(1) Reporting of findings. The auditor 
or functional specialist shall document findings and recommendations in 
a report to the contracting officer. If the auditor or functional 
specialist identifies any significant MMAS deficiencies, the report 
shall describe the deficiencies in sufficient detail to allow the 
contracting officer to understand the deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
findings and recommendations and, if there are no significant 
deficiencies, shall promptly notify the contractor, in writing, that 
the contractor's MMAS is acceptable and approved; or
    (ii) If the contracting officer finds that there are one or more 
significant deficiencies (as defined in the clause at 252.242-7004, 
Material Management and Accounting System) due to the contractor's 
failure to meet one or more of the MMAS system criteria in the clause 
at 252.242-7004, Material Management and Accounting System, the 
contracting officer shall--
    (A) Promptly make an initial written determination on any 
significant deficiencies and notify the contractor, in writing, 
providing a description of each significant deficiency in sufficient 
detail to allow the contractor to understand the deficiency;
    (B) Request the contractor to respond, in writing, to the initial 
determination within 30 days; and
    (C) Promptly evaluate the contractor's response to the initial 
determination in consultation with the auditor or functional 
specialist, and make a final determination.
    (3) Final determination. (i) The ACO shall make a final 
determination and notify the contractor that--

[[Page 28870]]

    (A) The contractor's MMAS is acceptable and approved, and no 
deficiencies remain, or
    (B) Significant deficiencies remain. The notice shall identify any 
remaining significant deficiencies, and indicate the adequacy of any 
proposed or completed corrective action. The contracting officer 
shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies;
    (2) Disapprove the system in accordance with the clause at 252.242-
7004, Material Management and Accounting System; and
    (3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of significant deficiencies in PGI 
242.7203.
    (d) System approval. The contracting officer shall promptly approve 
a previously disapproved MMAS and notify the contractor when the 
contracting officer determines that there are no remaining significant 
deficiencies.
    (e) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to approve 
a system, disapprove a system and withhold payments, or approve a 
previously disapproved system and release withheld payments to the 
auditor; payment office; affected contracting officers at the buying 
activities; and cognizant contracting officers in contract 
administration activities.

0
8. Revise subpart 242.75 to read as follows:
Subpart 242.75--Contractor Accounting Systems and Related Controls
Sec.
242.7501 Definitions.
242.7502 Policy.
242.7503 Contract clause.

Subpart 242.75--Contractor Accounting Systems and Related Controls

242.7501  Definitions.

    As used in this subpart--
    Acceptable accounting system, and accounting system are defined in 
the clause at 252.242-7006, Accounting System Administration.
    Significant deficiency is defined in the clause at 252.242-7006, 
Accounting System Administration.

242.7502  Policy.

    (a) Contractors receiving cost-reimbursement, incentive type, time-
and-materials, or labor-hour contracts, or contracts which provide for 
progress payments based on costs or on a percentage or stage of 
completion, shall maintain an accounting system.
    (b) The cognizant contracting officer, in consultation with the 
auditor or functional specialist, shall--
    (1) Determine the acceptability of a contractor's accounting system 
and approve or disapprove the system; and
    (2) Pursue correction of any deficiencies.
    (c) In evaluating the acceptability of a contractor's accounting 
system, the contracting officer, in consultation with the auditor or 
functional specialist, shall determine whether the contractor's 
accounting system complies with the system criteria for an acceptable 
accounting system as prescribed in the clause at 252.242-7006, 
Accounting System Administration.
    (d) Disposition of findings-- (1) Reporting of findings. The 
auditor shall document findings and recommendations in a report to the 
contracting officer. If the auditor identifies any significant 
accounting system deficiencies, the report shall describe the 
deficiencies in sufficient detail to allow the contracting officer to 
understand the deficiencies. Follow the procedures at PGI 242.7502 for 
reporting of deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
findings and recommendations and, if there are no significant 
deficiencies, shall promptly notify the contractor, in writing, that 
the contractor's accounting system is acceptable and approved; or
    (ii) If the contracting officer finds that there are one or more 
significant deficiencies (as defined in the clause at 252.242-7006, 
Accounting System Administration) due to the contractor's failure to 
meet one or more of the accounting system criteria in the clause at 
252.242-7006, the contracting officer shall--
    (A) Promptly make an initial written determination on any 
significant deficiencies and notify the contractor, in writing, 
providing a description of each significant deficiency in sufficient 
detail to allow the contractor to understand the deficiency;
    (B) Request the contractor to respond, in writing, to the initial 
determination within 30 days; and
    (C) Promptly evaluate the contractor`s response to the initial 
determination, in consultation with the auditor or functional 
specialist, and make a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (A) The contractor's accounting system is acceptable and approved, 
and no significant deficiencies remain, or
    (B) Significant deficiencies remain. The notice shall identify any 
remaining significant deficiencies, and indicate the adequacy of any 
proposed or completed corrective action. The contracting officer 
shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies;
    (2) Make a determination to disapprove the system in accordance 
with the clause at 252.242-7006, Accounting System Administration; and
    (3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of significant deficiencies in PGI 
242.7502.
    (e) System approval. The contracting officer shall promptly approve 
a previously disapproved accounting system and notify the contractor 
when the contracting officer determines that there are no remaining 
significant deficiencies.
    (f) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to approve 
a system, disapprove a system and withhold payments, or approve a 
previously disapproved system and release withheld payments to the 
auditor; payment office; affected contracting officers at the buying 
activities; and cognizant contracting officers in contract 
administration activities.
    (g) Mitigating the risk of accounting system deficiencies on 
specific proposals.
    (1) Field pricing teams shall discuss identified accounting system 
deficiencies and their impact in all reports on contractor proposals 
until the deficiencies are resolved. (2) The contracting officer 
responsible for negotiation of a proposal generated by an accounting 
system with an identified deficiency shall evaluate whether the 
deficiency impacts the negotiations. If it does not, the contracting 
officer should proceed with negotiations. If it does, the contracting 
officer should consider other alternatives, e.g.--

[[Page 28871]]

    (i) Allowing the contractor additional time to correct the 
accounting system deficiency and submit a corrected proposal;
    (ii) Considering another type of contract, e.g., a fixed-price 
incentive (firm target) contract instead of a firm-fixed-price;
    (iii) Using additional cost analysis techniques to determine the 
reasonableness of the cost elements affected by the accounting system's 
deficiency;
    (iv) Segregating the questionable areas as a cost-reimbursable line 
item;
    (v) Reducing the negotiation objective for profit or fee; or
    (vi) Including a contract (reopener) clause that provides for 
adjustment of the contract amount after award.
    (3) The contracting officer who incorporates a reopener clause into 
the contract is responsible for negotiating price adjustments required 
by the clause. Any reopener clause necessitated by an accounting system 
deficiency should--
    (i) Clearly identify the amounts and items that are in question at 
the time of negotiation;
    (ii) Indicate a specific time or subsequent event by which the 
contractor will submit a supplemental proposal, including cost or 
pricing data, identifying the cost impact adjustment necessitated by 
the deficient accounting system;
    (iii) Provide for the contracting officer to adjust the contract 
price unilaterally if the contractor fails to submit the supplemental 
proposal; and
    (iv) Provide that failure of the Government and the contractor to 
agree to the price adjustment shall be a dispute under the Disputes 
clause.

242.7503   Contract clause.

    Use the clause at 252.242-7006, Accounting System Administration, 
in solicitations and contracts when contemplating--
    (a) A cost-reimbursement, incentive type, time-and-materials, or 
labor-hour contract;
    (b) A fixed-price contract with progress payments made on the basis 
of costs incurred by the contractor or on a percentage or stage of 
completion.

PART 244--SUBCONTRACTING POLICIES AND PROCEDURES

0
9. Add subpart 244.1 to read as follows:
SUBPART 244.1--GENERAL
Sec.
244.101 Definitions

SUBPART 244.1--GENERAL

244.101   Definitions.

    As used in this subpart----
    Acceptable purchasing system and purchasing system are defined in 
the clause at 252.244-7001, Contractor Purchasing System 
Administration.
    Significant deficiency is defined in the clause at 252.244-7001, 
Contractor Purchasing System Administration.

244.304   [Removed]

0
10. Remove section 244.304.

0
11. Revise section 244.305 to read as follows:

244.305   Granting, withholding, or withdrawing approval.

244.305-70   Policy.

    Use this subsection instead of FAR 44.305-2(c) and 44.305-3(b).
    (a) The cognizant contracting officer, in consultation with the 
purchasing system analyst or auditor, shall--
    (1) Determine the acceptability of the contractor's purchasing 
system and approve or disapprove the system; and
    (2) Pursue correction of any deficiencies.
    (b) In evaluating the acceptability of the contractor's purchasing 
system, the contracting officer, in consultation with the purchasing 
system analyst or auditor, shall determine whether the contractor's 
purchasing system complies with the system criteria for an acceptable 
purchasing system as prescribed in the clause at 252.244-7001, 
Contractor Purchasing System Administration.
    (c) Disposition of findings--(1) Reporting of findings. The 
purchasing system analyst or auditor shall document findings and 
recommendations in a report to the contracting officer. If the auditor 
or purchasing system analyst identifies any significant purchasing 
system deficiencies, the report shall describe the deficiencies in 
sufficient detail to allow the contracting officer to understand the 
deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
all findings and recommendations and, if there are no significant 
deficiencies, shall promptly notify the contractor that the 
contractor's purchasing system is acceptable and approved; or
    (ii) If the contracting officer finds that there are one or more 
significant deficiencies (as defined in the clause at 252.244-7001, 
Contractor Purchasing System Administration) due to the contractor's 
failure to meet one or more of the purchasing system criteria in the 
clause at 252.244-7001, the contracting officer shall--
    (A) Promptly make an initial written determination on any 
significant deficiencies and notify the contractor, in writing, 
providing a description of each significant deficiency in sufficient 
detail to allow the contractor to understand the deficiency;
    (B) Request the contractor to respond, in writing, to the initial 
determination within 30 days; and
    (C) Evaluate the contractor's response to the initial determination 
in consultation with the auditor or purchasing system analyst, and make 
a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (A) The contractor's purchasing system is acceptable and approved, 
and no significant deficiencies remain, or
    (B) Significant deficiencies remain. The notice shall identify any 
remaining significant deficiencies, and indicate the adequacy of any 
proposed or completed corrective action. The contracting officer 
shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies;
    (2) Disapprove the system in accordance with the clause at 252.244-
7001, Contractor Purchasing System Administration; and
    (3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of significant deficiencies in PGI 
244.305-70.
    (d) System approval. The contracting officer shall promptly approve 
a previously disapproved purchasing system and notify the contractor 
when the contracting officer determines that there are no remaining 
significant deficiencies.
    (e) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to approve 
a system, disapprove a system and withhold payments, or approve a 
previously disapproved system and release withheld payments to the 
auditor; payment office; affected contracting officers at the buying 
activities; and cognizant contracting officers in contract 
administration activities.
    (f) Mitigating the risk of purchasing system deficiencies on 
specific proposals.

[[Page 28872]]

    (1) Source selection evaluation teams shall discuss identified 
purchasing system deficiencies and their impact in all reports on 
contractor proposals until the deficiencies are resolved.
    (2) The contracting officer responsible for negotiation of a 
proposal generated by a purchasing system with an identified deficiency 
shall evaluate whether the deficiency impacts the negotiations. If it 
does not, the contracting officer should proceed with negotiations. If 
it does, the contracting officer should consider other alternatives, 
e.g.--
    (i) Allowing the contractor additional time to correct the 
purchasing system deficiency and submit a corrected proposal;
    (ii) Considering another type of contract, e.g., a fixed-price 
incentive (firm target) contract instead of firm-fixed-price;
    (iii) Using additional cost analysis techniques to determine the 
reasonableness of the cost elements affected by the purchasing system's 
deficiency;
    (iv) Segregating the questionable areas as a cost-reimbursable line 
item;
    (v) Reducing the negotiation objective for profit or fee; or
    (vi) Including a contract (reopener) clause that provides for 
adjustment of the contract amount after award.
    (3) The contracting officer who incorporates a reopener clause into 
the contract is responsible for negotiating price adjustments required 
by the clause. Any reopener clause necessitated by a purchasing system 
deficiency should--
    (i) Clearly identify the amounts and items that are in question at 
the time of negotiation;
    (ii) Indicate a specific time or subsequent event by which the 
contractor will submit a supplemental proposal, including cost or 
pricing data, identifying the cost impact adjustment necessitated by 
the deficient purchasing system;
    (iii) Provide for the contracting officer to adjust the contract 
price unilaterally if the contractor fails to submit the supplemental 
proposal; and
    (iv) Provide that failure of the Government and the contractor to 
agree to the price adjustment shall be a dispute under the Disputes 
clause.

244.305-71   Contract clause.

    Use the clause at 252.244-7001, Contractor Purchasing System 
Administration, in solicitations and contracts containing the clause at 
FAR 52.244-2, Subcontracts.

PART 245--GOVERNMENT PROPERTY

0
12. Revise section 245.105 to read as follows:

245.105   Contractors' property management system compliance.

    (a) Definitions--
    (1) Acceptable property management system and property management 
system are defined in the clause at 252.245-7003, Contractor Property 
Management System Administration.
    (2) Significant deficiency is defined in the clause at 252.245-
7003, Contractor Property Management System Administration.
    (b) Policy. The cognizant contracting officer, in consultation with 
the property administrator, shall--
    (1) Determine the acceptability of the system and approve or 
disapprove the system; and
    (2) Pursue correction of any deficiencies.
    (c) In evaluating the acceptability of a contractor's property 
management system, the contracting officer, in consultation with the 
property administrator, shall determine whether the contractor's 
property management system complies with the system criteria for an 
acceptable property management system as prescribed in the clause at 
252.245-7003, Contractor Property Management System Administration.
    (d) Disposition of findings--(1) Reporting of findings. The 
property administrator shall document findings and recommendations in a 
report to the contracting officer. If the property administrator 
identifies any significant property system deficiencies, the report 
shall describe the deficiencies in sufficient detail to allow the 
contracting officer to understand the deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
findings and recommendations and, if there are no significant 
deficiencies, shall promptly notify the contractor, in writing, that 
the contractor's property management system is acceptable and approved; 
or
    (ii) If the contracting officer finds that there are one or more 
significant deficiencies (as defined in the clause at 252.245-7003, 
Contractor Property Management System Administration) due to the 
contractor's failure to meet one or more of the property management 
system criteria in the clause at 252.245-7003, the contracting officer 
shall--
    (A) Promptly make an initial written determination on any 
significant deficiencies and notify the contractor, in writing, 
providing a description of each significant deficiency in sufficient 
detail to allow the contractor to understand the deficiency;
    (B) Request the contractor to respond, in writing, to the initial 
determination within 30 days and;
    (C) Evaluate the contractor's response to the initial 
determination, in consultation with the property administrator, and 
make a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (A) The contractor's property management system is acceptable and 
approved, and no significant deficiencies remain, or
    (B) Significant deficiencies remain. The notice shall identify any 
remaining significant deficiencies, and indicate the adequacy of any 
proposed or completed corrective action. The contracting officer 
shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies;
    (2) Disapprove the system in accordance with the clause at 252.245-
7003, Contractor Property Management System Administration; and
    (3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of significant deficiencies in PGI 
245.105.
    (e) System approval. The contracting officer shall promptly approve 
a previously disapproved property management system and notify the 
contractor when the contracting officer determines, in consultation 
with the property administrator, that there are no remaining 
significant deficiencies.
    (f) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to approve 
a system, disapprove a system and withhold payments, or approve a 
previously disapproved system and release withheld payments to the 
auditor; payment office; affected contracting officers at the buying 
activities; and cognizant contracting officers in contract 
administration activities.

0
13. Amend section 245.107 by adding paragraph (d) to read as follows:

245.107   Contract clauses.

* * * * *

[[Page 28873]]

    (d) Use the clause at 252.245-7003, Contractor Property Management 
System Administration, in solicitations and contracts containing the 
clause at FAR 52.245-1, Government Property.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
14. Revise section 252.215-7002 to read as follows:

252.215-7002   Cost Estimating System Requirements.

    As prescribed in 215.408(2), use the following clause:

Cost Estimating System Requirements (May 2011)

    (a) Definitions.
    Acceptable estimating system means an estimating system complies 
with the system criteria in paragraph (d) of this clause, and 
provides for a system that--
    (1) Is maintained, reliable, and consistently applied;
    (2) Produces verifiable, supportable, documented, and timely 
cost estimates that are an acceptable basis for negotiation of fair 
and reasonable prices;
    (3) Is consistent with and integrated with the Contractor's 
related management systems; and
    (4) Is subject to applicable financial control systems.
    Estimating system means the Contractor's policies, procedures, 
and practices for budgeting and planning controls, and generating 
estimates of costs and other data included in proposals submitted to 
customers in the expectation of receiving contract awards. 
Estimating system includes the Contractor's--
    (1) Organizational structure;
    (2) Established lines of authority, duties, and 
responsibilities;
    (3) Internal controls and managerial reviews;
    (4) Flow of work, coordination, and communication; and
    (5) Budgeting, planning, estimating methods, techniques, 
accumulation of historical costs, and other analyses used to 
generate cost estimates.
    Significant deficiency means a shortcoming in the system that 
materially affects the ability of officials of the Department of 
Defense to rely upon information produced by the system that is 
needed for management purposes.
    (b) General. The Contractor shall establish, maintain, and 
comply with an acceptable estimating system.
    (c) Applicability. Paragraphs (d) and (e) of this clause apply 
if the Contractor is a large business and either--
    (1) In its fiscal year preceding award of this contract, 
received Department of Defense (DoD) prime contracts or 
subcontracts, totaling $50 million or more for which cost or pricing 
data were required; or
    (2) In its fiscal year preceding award of this contract--
    (i) Received DoD prime contracts or subcontracts totaling $10 
million or more (but less than $50 million) for which cost or 
pricing data were required; and
    (ii) Was notified, in writing, by the Contracting Officer that 
paragraphs (d) and (e) of this clause apply.
    (d) System requirements. (1) The Contractor shall disclose its 
estimating system to the Administrative Contracting Officer (ACO), 
in writing. If the Contractor wishes the Government to protect the 
information as privileged or confidential, the Contractor must mark 
the documents with the appropriate legends before submission.
    (2) An estimating system disclosure is acceptable when the 
Contractor has provided the ACO with documentation that--
    (i) Accurately describes those policies, procedures, and 
practices that the Contractor currently uses in preparing cost 
proposals; and
    (ii) Provides sufficient detail for the Government to reasonably 
make an informed judgment regarding the acceptability of the 
Contractor's estimating practices.
    (3) The Contractor shall--
    (i) Comply with its disclosed estimating system; and
    (ii) Disclose significant changes to the cost estimating system 
to the ACO on a timely basis.
    (4) The Contractor's estimating system shall provide for the use 
of appropriate source data, utilize sound estimating techniques and 
good judgment, maintain a consistent approach, and adhere to 
established policies and procedures. An acceptable estimating system 
shall accomplish the following functions:
    (i) Establish clear responsibility for preparation, review, and 
approval of cost estimates and budgets;
    (ii) Provide a written description of the organization and 
duties of the personnel responsible for preparing, reviewing, and 
approving cost estimates and budgets;
    (iii) Ensure that relevant personnel have sufficient training, 
experience, and guidance to perform estimating and budgeting tasks 
in accordance with the Contractor's established procedures;
    (iv) Identify and document the sources of data and the 
estimating methods and rationale used in developing cost estimates 
and budgets;
    (v) Provide for adequate supervision throughout the estimating 
and budgeting process;
    (vi) Provide for consistent application of estimating and 
budgeting techniques;
    (vii) Provide for detection and timely correction of errors;
    (viii) Protect against cost duplication and omissions;
    (ix) Provide for the use of historical experience, including 
historical vendor pricing information, where appropriate;
    (x) Require use of appropriate analytical methods;
    (xi) Integrate information available from other management 
systems;
    (xii) Require management review, including verification of the 
company's estimating and budgeting policies, procedures, and 
practices;
    (xiii) Provide for internal review of, and accountability for, 
the acceptability of the estimating system, including the budgetary 
data supporting indirect cost estimates and comparisons of projected 
results to actual results, and an analysis of any differences;
    (xiv) Provide procedures to update cost estimates and notify the 
Contracting Officer in a timely manner throughout the negotiation 
process;
    (xv) Provide procedures that ensure subcontract prices are 
reasonable based on a documented review and analysis provided with 
the prime proposal, when practicable;
    (xvi) Provide estimating and budgeting practices that 
consistently generate sound proposals that are compliant with the 
provisions of the solicitation and are adequate to serve as a basis 
to reach a fair and reasonable price; and
    (xvii) Have an adequate system description, including policies, 
procedures, and estimating and budgeting practices, that comply with 
the Federal Acquisition Regulation and Defense Federal Acquisition 
Regulation Supplement.
    (e) Significant deficiencies. (1) The Contracting Officer will 
provide an initial determination to the Contractor, in writing, of 
any significant deficiencies. The initial determination will 
describe the deficiency in sufficient detail to allow the Contractor 
to understand the deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
significant deficiencies in the Contractor's estimating system. If 
the Contractor disagrees with the initial determination, the 
Contractor shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the Contracting 
Officer's final determination concerning--
    (i) Remaining significant deficiencies;
    (ii) The adequacy of any proposed or completed corrective 
action; and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more significant deficiencies remain.
    (f) If the Contractor receives the Contracting Officer's final 
determination of significant deficiencies, the Contractor shall, 
within 45 days of receipt of the final determination, either correct 
the significant deficiencies or submit an acceptable corrective 
action plan showing milestones and actions to eliminate the 
significant deficiencies.
    (g) Withholding payments. If the Contracting Officer makes a 
final determination to disapprove the Contractor's estimating 
system, and the contract includes the clause at 252.242-7005, 
Contractor Business Systems, the Contracting Officer will withhold 
payments in accordance with that clause.

(End of clause)

0
16. Revise section 252.234-7002 to read as follows:

252.234-7002  Earned Value Management System.

    As prescribed in 234.203(2), use the following clause:

[[Page 28874]]

EARNED VALUE MANAGEMENT SYSTEM (MAY 2011)

    (a) Definitions. As used in this clause--
    Acceptable earned value management system means an earned value 
management system that generally complies with system criteria in 
paragraph (b) of this clause.
    Earned value management system means an earned value management 
system that complies with the earned value management system 
guidelines in the ANSI/EIA-748.
    Significant deficiency means a shortcoming in the system that 
materially affects the ability of officials of the Department of 
Defense to rely upon information produced by the system that is 
needed for management purposes.
    (b) System criteria. In the performance of this contract, the 
Contractor shall use--
    (1) An Earned Value Management System (EVMS) that complies with 
the EVMS guidelines in the American National Standards Institute/
Electronic Industries Alliance Standard 748, Earned Value Management 
Systems (ANSI/EIA-748); and
    (2) Management procedures that provide for generation of timely, 
reliable, and verifiable information for the Contract Performance 
Report (CPR) and the Integrated Master Schedule (IMS) required by 
the CPR and IMS data items of this contract.
    (c) If this contract has a value of $50 million or more, the 
Contractor shall use an EVMS that has been determined to be 
acceptable by the Cognizant Federal Agency (CFA). If, at the time of 
award, the Contractor's EVMS has not been determined by the CFA to 
be in compliance with the EVMS guidelines as stated in paragraph 
(b)(1) of this clause, the Contractor shall apply its current system 
to the contract and shall take necessary actions to meet the 
milestones in the Contractor's EVMS plan.
    (d) If this contract has a value of less than $50 million, the 
Government will not make a formal determination that the 
Contractor's EVMS complies with the EVMS guidelines in ANSI/EIA-748 
with respect to the contract. The use of the Contractor's EVMS for 
this contract does not imply a Government determination of the 
Contractor's compliance with the EVMS guidelines in ANSI/EIA-748 for 
application to future contracts. The Government will allow the use 
of a Contractor's EVMS that has been formally reviewed and 
determined by the CFA to be in compliance with the EVMS guidelines 
in ANSI/EIA-748.
    (e) The Contractor shall submit notification of any proposed 
substantive changes to the EVMS procedures and the impact of those 
changes to the CFA. If this contract has a value of $50 million or 
more, unless a waiver is granted by the CFA, any EVMS changes 
proposed by the Contractor require approval of the CFA prior to 
implementation. The CFA will advise the Contractor of the 
acceptability of such changes as soon as practicable (generally 
within 30 calendar days) after receipt of the Contractor's notice of 
proposed changes. If the CFA waives the advance approval 
requirements, the Contractor shall disclose EVMS changes to the CFA 
at least 14 calendar days prior to the effective date of 
implementation.
    (f) The Government will schedule integrated baseline reviews as 
early as practicable, and the review process will be conducted not 
later than 180 calendar days after--
    (1) Contract award;
    (2) The exercise of significant contract options; and
    (3) The incorporation of major modifications.

During such reviews, the Government and the Contractor will jointly 
assess the Contractor's baseline to be used for performance 
measurement to ensure complete coverage of the statement of work, 
logical scheduling of the work activities, adequate resourcing, and 
identification of inherent risks.
    (g) The Contractor shall provide access to all pertinent records 
and data requested by the Contracting Officer or duly authorized 
representative as necessary to permit Government surveillance to 
ensure that the EVMS complies, and continues to comply, with the 
performance criteria referenced in paragraph (b) of this clause.
    (h) When indicated by contract performance, the Contractor shall 
submit a request for approval to initiate an over-target baseline or 
over-target schedule to the Contracting Officer. The request shall 
include a top-level projection of cost and/or schedule growth, a 
determination of whether or not performance variances will be 
retained, and a schedule of implementation for the rebaselining. The 
Government will acknowledge receipt of the request in a timely 
manner (generally within 30 calendar days).
    (i) Significant deficiencies. (1) The Contracting Officer will 
provide an initial determination to the Contractor, in writing, on 
any significant deficiencies. The initial determination will 
describe the deficiency in sufficient detail to allow the Contractor 
to understand the deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
significant deficiencies in the Contractor's EVMS. If the Contractor 
disagrees with the initial determination, the Contractor shall 
state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the Contracting 
Officer's final determination concerning--
    (i) Remaining significant deficiencies;
    (ii) The adequacy of any proposed or completed corrective 
action;
    (iii) System noncompliance, when the Contractor's existing EVMS 
fails to comply with the earned value management system guidelines 
in the ANSI/EIA-748; and
    (iv) System disapproval, if initial EVMS validation is not 
successfully completed within the timeframe approved by the 
Contracting Officer, or if the Contracting Officer determines that 
the Contractor's earned value management system contains one or more 
significant deficiencies in high-risk guidelines in ANSI/EIA-748 
standards (guidelines 1, 3, 6, 7, 8, 9, 10, 12, 16, 21, 23, 26, 27, 
28, 30, or 32). When the Contracting Officer determines that the 
existing earned value management system contains one or more 
significant deficiencies in one or more of the remaining 16 
guidelines in ANSI/EIA-748 standards, the contracting officer will 
use discretion to disapprove the system based on input received from 
functional specialists and the auditor.
    (4) If the Contractor receives the Contracting Officer's final 
determination of significant deficiencies, the Contractor shall, 
within 45 days of receipt of the final determination, either correct 
the significant deficiencies or submit an acceptable corrective 
action plan showing milestones and actions to eliminate the 
significant deficiencies.
    (j) Withholding payments. If the Contracting Officer makes a 
final determination to disapprove the Contractor's EVMS, and the 
contract includes the clause at 252.242-7005, Contractor Business 
Systems, the Contracting Officer will withhold payments in 
accordance with that clause.
    (k) With the exception of paragraphs (i) and (j) of this clause, 
the Contractor shall require its subcontractors to comply with EVMS 
requirements as follows:
    (1) For subcontracts valued at $50 million or more, the 
following subcontractors shall comply with the requirements of this 
clause:
    [Contracting Officer to insert names of subcontractors (or 
subcontracted effort if subcontractors have not been selected) 
designated for application of the EVMS requirements of this clause.]

-----------------------------------------------------------------------

-----------------------------------------------------------------------

-----------------------------------------------------------------------

-----------------------------------------------------------------------

     (2) For subcontracts valued at less than $50 million, the 
following subcontractors shall comply with the requirements of this 
clause, excluding the requirements of paragraph (c) of this clause:
    [Contracting Officer to insert names of subcontractors (or 
subcontracted effort if subcontractors have not been selected) 
designated for application of the EVMS requirements of this clause.]

-----------------------------------------------------------------------

-----------------------------------------------------------------------

-----------------------------------------------------------------------

-----------------------------------------------------------------------

(End of clause)

0
17. Revise section 252.242-7004 to read as follows:

252.242-7004  Material Management and Accounting System.

    As prescribed in 242.7204, use the following clause:

MATERIAL MANAGEMENT AND ACCOUNTING SYSTEM (MAY 2011)

    (a) Definitions. As used in this clause--
    (1) Material management and accounting system (MMAS) means the 
Contractor's system or systems for planning, controlling, and 
accounting for the acquisition, use, issuing, and disposition of 
material. Material management and accounting systems may be manual 
or automated. They may be stand-

[[Page 28875]]

alone systems or they may be integrated with planning, engineering, 
estimating, purchasing, inventory, accounting, or other systems.
    (2) Valid time-phased requirements means material that is--
    (i) Needed to fulfill the production plan, including reasonable 
quantities for scrap, shrinkage, yield, etc.; and
    (ii) Charged/billed to contracts or other cost objectives in a 
manner consistent with the need to fulfill the production plan.
    (3) Contractor means a business unit as defined in section 
31.001 of the Federal Acquisition Regulation (FAR).
    (4) Acceptable material management and accounting system means a 
MMAS that generally complies with the system criteria in paragraph 
(d) of this clause.
    (5) Significant deficiency means a shortcoming in the system 
that materially affects the ability of officials of the Department 
of Defense to rely upon information produced by the system that is 
needed for management purposes.
    (b) General. The Contractor shall--
    (1) Maintain an MMAS that--
    (i) Reasonably forecasts material requirements;
    (ii) Ensures that costs of purchased and fabricated material 
charged or allocated to a contract are based on valid time-phased 
requirements; and
    (iii) Maintains a consistent, equitable, and unbiased logic for 
costing of material transactions; and
    (2) Assess its MMAS and take reasonable action to comply with 
the MMAS standards in paragraph (e) of this clause.
    (c) Disclosure and maintenance requirements. The Contractor 
shall--
    (1) Have policies, procedures, and operating instructions that 
adequately describe its MMAS;
    (2) Provide to the Administrative Contracting Officer (ACO), 
upon request, the results of internal reviews that it has conducted 
to ensure compliance with established MMAS policies, procedures, and 
operating instructions; and
    (3) Disclose significant changes in its MMAS to the ACO at least 
30 days prior to implementation.
    (d) System criteria. The MMAS shall have adequate internal 
controls to ensure system and data integrity, and shall--
    (1) Have an adequate system description including policies, 
procedures, and operating instructions that comply with the Federal 
Acquisition Regulation and Defense Federal Acquisition Regulation 
Supplement;
    (2) Ensure that costs of purchased and fabricated material 
charged or allocated to a contract are based on valid time-phased 
requirements as impacted by minimum/economic order quantity 
restrictions.
    (i) A 98 percent bill of material accuracy and a 95 percent 
master production schedule accuracy are desirable as a goal in order 
to ensure that requirements are both valid and appropriately time-
phased.
    (ii) If systems have accuracy levels below these, the Contractor 
shall provide adequate evidence that--
    (A) There is no material harm to the Government due to lower 
accuracy levels; and
    (B) The cost to meet the accuracy goals is excessive in relation 
to the impact on the Government;
    (3) Provide a mechanism to identify, report, and resolve system 
control weaknesses and manual override. Systems should identify 
operational exceptions, such as excess/residual inventory, as soon 
as known;
    (4) Provide audit trails and maintain records (manual and those 
in machine-readable form) necessary to evaluate system logic and to 
verify through transaction testing that the system is operating as 
desired;
    (5) Establish and maintain adequate levels of record accuracy, 
and include reconciliation of recorded inventory quantities to 
physical inventory by part number on a periodic basis. A 95 percent 
accuracy level is desirable. If systems have an accuracy level below 
95 percent, the Contractor shall provide adequate evidence that--
    (i) There is no material harm to the Government due to lower 
accuracy levels; and
    (ii) The cost to meet the accuracy goal is excessive in relation 
to the impact on the Government;
    (6) Provide detailed descriptions of circumstances that will 
result in manual or system generated transfers of parts;
    (7) Maintain a consistent, equitable, and unbiased logic for 
costing of material transactions as follows:
    (i) The Contractor shall maintain and disclose written policies 
describing the transfer methodology and the loan/pay-back technique.
    (ii) The costing methodology may be standard or actual cost, or 
any of the inventory costing methods in 48 CFR 9904.411-50(b). The 
Contractor shall maintain consistency across all contract and 
customer types, and from accounting period to accounting period for 
initial charging and transfer charging.
    (iii) The system should transfer parts and associated costs 
within the same billing period. In the few instances where this may 
not be appropriate, the Contractor may accomplish the material 
transaction using a loan/pay-back technique. The ``loan/pay-back 
technique'' means that the physical part is moved temporarily from 
the contract, but the cost of the part remains on the contract. The 
procedures for the loan/pay-back technique must be approved by the 
ACO. When the technique is used, the Contractor shall have controls 
to ensure--
    (A) Parts are paid back expeditiously;
    (B) Procedures and controls are in place to correct any 
overbilling that might occur;
    (C) Monthly, at a minimum, identification of the borrowing 
contract and the date the part was borrowed; and
    (D) The cost of the replacement part is charged to the borrowing 
contract;
    (8) Where allocations from common inventory accounts are used, 
have controls (in addition to those in paragraphs (d)(2) and (7) of 
this clause) to ensure that--
    (i) Reallocations and any credit due are processed no less 
frequently than the routine billing cycle;
    (ii) Inventories retained for requirements that are not under 
contract are not allocated to contracts; and
    (iii) Algorithms are maintained based on valid and current data;
    (9) Have adequate controls to ensure that physically commingled 
inventories that may include material for which costs are charged or 
allocated to fixed-price, cost-reimbursement, and commercial 
contracts do not compromise requirements of any of the standards in 
paragraphs (d)(1) through (8) of this clause. Government-furnished 
material shall not be--
    (i) Physically commingled with other material; or
    (ii) Used on commercial work; and
    (10) Be subjected to periodic internal reviews to ensure 
compliance with established policies and procedures.
    (e) Significant deficiencies. (1) The Contracting Officer will 
provide an initial determination to the Contractor, in writing, of 
any significant deficiencies. The initial determination will 
describe the deficiency in sufficient detail to allow the Contractor 
to understand the deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
significant deficiencies in the Contractor's MMAS. If the Contractor 
disagrees with the initial determination, the Contractor shall 
state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the Contracting 
Officer's final determination concerning--
    (i) Remaining significant deficiencies;
    (ii) The adequacy of any proposed or completed corrective 
action; and
    (iii) System disapproval if the Contracting Officer determines 
that one or more significant deficiencies remain.
    (f) If the Contractor receives the Contracting Officer's final 
determination of significant deficiencies, the Contractor shall, 
within 45 days of receipt of the final determination, either correct 
the significant deficiencies or submit an acceptable corrective 
action plan showing milestones and actions to eliminate the 
significant deficiencies.
    (g) Withholding payments. If the Contracting Officer makes a 
final determination to disapprove the Contractor's MMAS, and the 
contract includes the clause at 252.242-7005, Contractor Business 
Systems, the Contracting Officer will withhold payments in 
accordance with that clause.

(End of clause)

0
18. Add section 252.242-7005 to read as follows

252.242-7005  Contractor Business Systems.

    As prescribed in 242.7001, use the following clause:

CONTRACTOR BUSINESS SYSTEMS (MAY 2011)

    (a) Definitions. As used in this clause--
    Acceptable contractor business systems means contractor business 
systems that

[[Page 28876]]

comply with the terms and conditions of the applicable business 
system clauses listed in the definition of ``contractor business 
systems'' in this clause.
    Contractor business systems means--
    (1) Accounting system, if this contract includes the clause at 
252.242-7006, Accounting System Administration;
    (2) Earned value management system, if this contract includes 
the clause at 252.234-7002, Earned Value Management System;
    (3) Estimating system, if this contract includes the clause at 
252.215-7002, Cost Estimating System Requirements;
    (4) Material management and accounting system, if this contract 
includes the clause at 252.242-7004, Material Management and 
Accounting System;
    (5) Property management system, if this contract includes the 
clause at 252.245-7003, Contractor Property Management System 
Administration; and
    (6) Purchasing system, if this contract includes the clause at 
252.244-7001, Contractor Purchasing System Administration.
    Significant deficiency, in the case of a contractor business 
system, means a shortcoming in the system that materially affects 
the ability of officials of the Department of Defense to rely upon 
information produced by the system that is needed for management 
purposes.
    (b) General. The Contractor shall establish and maintain 
acceptable business systems in accordance with the terms and 
conditions of this contract.
    (c) Significant deficiencies. (1) The Contractor shall respond, 
in writing, within 30 days to an initial determination that there 
are one or more significant deficiencies in one or more of the 
Contractor's business systems.
    (2) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the final 
determination as to whether the Contractor's business system 
contains significant deficiencies. If the Contracting Officer 
determines that the Contractor's business system contains 
significant deficiencies, the final determination will include a 
notice to withhold payments.
    (d) Withholding payments. (1) If the Contracting Officer issues 
the final determination with a notice to withhold payments for 
significant deficiencies in a contractor business system required 
under this contract, the Contracting Officer will withhold five 
percent of amounts due from progress payments and performance-based 
payments, and direct the Contractor, in writing, to withhold five 
percent from its billings on interim cost vouchers on cost, labor-
hour, and time-and-materials contracts until the Contracting Officer 
has determined that the Contractor has corrected all significant 
deficiencies as directed by the contracting officer's final 
determination. The Contractor shall, within 45 days of receipt of 
the notice, either correct the deficiencies or submit an acceptable 
corrective action plan showing milestones and actions to eliminate 
the deficiencies.
    (2) If the Contractor submits an acceptable corrective action 
plan within 45 days of receipt of a notice of the Contracting 
Officer's intent to withhold payments, and the Contracting Officer, 
in consultation with the auditor or functional specialist, 
determines that the Contractor is effectively implementing such 
plan, the Contracting Officer will reduce withholding directly 
related to the significant deficiencies covered under the corrective 
action plan, to two percent from progress payments and performance-
based payments, and direct the Contractor, in writing, to reduce the 
percentage withheld on interim cost vouchers to two percent until 
the Contracting Officer determines the Contractor has corrected all 
significant deficiencies as directed by the Contracting Officer's 
final determination. However, if at any time, the Contracting 
Officer determines that the Contractor has failed to follow the 
accepted corrective action plan, the Contracting Officer will 
increase withholding from progress payments and performance-based 
payments, and direct the Contractor, in writing, to increase the 
percentage withheld on interim cost vouchers to the percentage 
initially withheld, until the Contracting Officer determines that 
the Contractor has corrected all significant deficiencies as 
directed by the Contracting Officer's final determination.
    (3) Payment withhold percentage limits.
    (i) The total percentage of payments withheld on amounts due 
under each progress payment, performance-based payment, or interim 
cost voucher, on this contract shall not exceed--
    (A) Five percent for one or more significant deficiencies in any 
single contractor business system; and
    (B) Ten percent for significant deficiencies in multiple 
contractor business systems.
    (ii) If this contract contains pre-existing withholds, and the 
application of any subsequent payment withholds will cause 
withholding under this clause to exceed the payment withhold 
percentage limits in paragraph (d)(3)(i) of this clause, the 
Contracting Officer will reduce the payment withhold percentage in 
the final determination to an amount that will not exceed the 
payment withhold percentage limits.
    (4) For the purpose of this clause, payment means any of the 
following payments authorized under this contract:
    (i) Interim payments under--
    (A) Cost-reimbursement contracts;
    (B) Incentive type contracts;
    (C) Time-and-materials contracts;
    (D) Labor-hour contracts.
    (ii) Progress payments.
    (iii) Performance-based payments.
    (5) Payment withholding shall not apply to payments on fixed-
price line items where performance is complete and the items were 
accepted by the Government.
    (6) The withholding of any amount or subsequent payment to the 
Contractor shall not be construed as a waiver of any rights or 
remedies the Government has under this contract.
    (7) Notwithstanding the provisions of any clause in this 
contract providing for interim, partial, or other payment 
withholding on any basis, the Contracting Officer may withhold 
payment in accordance with the provisions of this clause.
    (8) The payment withholding authorized in this clause is not 
subject to the interest-penalty provisions of the Prompt Payment 
Act.
    (e) Correction of deficiencies. (1) The Contractor shall notify 
the Contracting Officer, in writing, when the Contractor has 
corrected the business system's deficiencies.
    (2) Once the Contractor has notified the Contracting Officer 
that all deficiencies have been corrected, the Contracting Officer 
will take one of the following actions:
    (i) If the Contracting Officer determines that the Contractor 
has corrected all significant deficiencies as directed by the 
Contracting Officer's final determination, the Contracting Officer 
will, as appropriate, discontinue the withholding of progress 
payments and performance-based payments, and direct the Contractor, 
in writing, to discontinue the payment withholding from billings on 
interim cost vouchers under this contract associated with the 
Contracting Officer's final determination, and authorize the 
Contractor to bill for any monies previously withheld that are not 
also being withheld due to other significant deficiencies. Any 
payment withholding under this contract due to other significant 
deficiencies, will remain in effect until the Contracting Officer 
determines that those significant deficiencies are corrected.
    (ii) If the Contracting Officer determines that the Contractor 
still has significant deficiencies, the Contracting Officer will 
continue the withholding of progress payments and performance-based 
payments, and the Contractor shall continue withholding amounts from 
its billings on interim cost vouchers in accordance with paragraph 
(d) of this clause, and not bill for any monies previously withheld.
    (iii) If, within 90 days of receipt of the Contractor 
notification that the Contractor has corrected the significant 
deficiencies, the Contracting Officer has not made a determination 
whether the Contractor has corrected all significant deficiencies as 
directed by the Contracting Officer's final determination, or has 
not made a determination whether there is a reasonable expectation 
that the corrective actions have been implemented, the Contracting 
Officer will reduce withholding directly related to the significant 
deficiencies covered under the corrective action plan by at least 50 
percent of the amount being withheld from progress payments and 
performance-based payments, and direct the Contractor, in writing, 
to reduce the percentage withheld on interim cost vouchers by at 
least 50 percent, until the Contracting Officer makes a 
determination whether the Contractor has corrected all significant 
deficiencies as directed by the Contracting Officer's final 
determination, or has made a determination whether there is a 
reasonable expectation that the corrective actions have been 
implemented.
    (iv) At any time after the Contracting Officer reduces or 
discontinues the withholding of progress payments and performance-
based payments, or directs the Contractor to reduce or discontinue 
the payment withholding from billings on

[[Page 28877]]

interim cost vouchers under this contract, if the Contracting 
Officer determines that the Contractor has failed to correct the 
significant deficiencies identified in the Contractor's 
notification, the Contracting Officer will reinstate or increase 
withholding from progress payments and performance-based payments, 
and direct the Contractor, in writing, to reinstate or increase the 
percentage withheld on interim cost vouchers to the percentage 
initially withheld, until the Contracting Officer determines that 
the Contractor has corrected all significant deficiencies as 
directed by the Contracting Officer's final determination.

(End of clause)

0
19. Add section 252.242-7006 to read as follows:

252.242-7006  Accounting System Administration.

    As prescribed in 242.7503, use the following clause:

ACCOUNTING SYSTEM ADMINISTRATION (MAY 2011)

    (a) Definitions. As used in this clause--
    (1) Acceptable accounting system means a system that complies 
with the system criteria in paragraph (c) of this clause to provide 
reasonable assurance that--
    (i) Applicable laws and regulations are complied with;
    (ii) The accounting system and cost data are reliable;
    (iii) Risk of misallocations and mischarges are minimized; and
    (iv) Contract allocations and charges are consistent with 
billing procedures.
    (2) Accounting system means the Contractor's system or systems 
for accounting methods, procedures, and controls established to 
gather, record, classify, analyze, summarize, interpret, and present 
accurate and timely financial data for reporting in compliance with 
applicable laws, regulations, and management decisions, and may 
include subsystems for specific areas such as indirect and other 
direct costs, compensation, billing, labor, and general information 
technology.
    (3) Significant deficiency means a shortcoming in the system 
that materially affects the ability of officials of the Department 
of Defense to rely upon information produced by the system that is 
needed for management purposes.
    (b) General. The Contractor shall establish and maintain an 
acceptable accounting system. Failure to maintain an acceptable 
accounting system, as defined in this clause, shall result in the 
withholding of payments if the contract includes the clause at 
252.242-7005, Contractor Business Systems, and also may result in 
disapproval of the system.
    (c) System criteria. The Contractor's accounting system shall 
provide for--
    (1) A sound internal control environment, accounting framework, 
and organizational structure;
    (2) Proper segregation of direct costs from indirect costs;
    (3) Identification and accumulation of direct costs by contract;
    (4) A logical and consistent method for the accumulation and 
allocation of indirect costs to intermediate and final cost 
objectives;
    (5) Accumulation of costs under general ledger control;
    (6) Reconciliation of subsidiary cost ledgers and cost 
objectives to general ledger;
    (7) Approval and documentation of adjusting entries;
    (8) Periodic monitoring of the system;
    (9) A timekeeping system that identifies employees' labor by 
intermediate or final cost objectives;
    (10) A labor distribution system that charges direct and 
indirect labor to the appropriate cost objectives;
    (11) Interim (at least monthly) determination of costs charged 
to a contract through routine posting of books of account;
    (12) Exclusion from costs charged to Government contracts of 
amounts which are not allowable in terms of Federal Acquisition 
Regulation (FAR) part 31, Contract Cost Principles and Procedures, 
and other contract provisions;
    (13) Identification of costs by contract line item and by units 
(as if each unit or line item were a separate contract), if required 
by the contract;
    (14) Segregation of preproduction costs from production costs, 
as applicable;
    (15) Cost accounting information, as required--
    (i) By contract clauses concerning limitation of cost (FAR 
52.232-20), limitation of funds (FAR 52.232-22), or allowable cost 
and payment (FAR 52.216-7); and
    (ii) To readily calculate indirect cost rates from the books of 
accounts;
    (16) Billings that can be reconciled to the cost accounts for 
both current and cumulative amounts claimed and comply with contract 
terms;
    (17) Adequate, reliable data for use in pricing follow-on 
acquisitions; and
    (18) Accounting practices in accordance with standards 
promulgated by the Cost Accounting Standards Board, if applicable, 
otherwise, Generally Accepted Accounting Principles.
    (d) Significant deficiencies. (1) The Contracting Officer will 
provide an initial determination to the Contractor, in writing, on 
any significant deficiencies. The initial determination will 
describe the deficiency in sufficient detail to allow the Contractor 
to understand the deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
significant deficiencies in the Contractor's accounting system. If 
the Contractor disagrees with the initial determination, the 
Contractor shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the Contracting 
Officer's final determination concerning--
    (i) Remaining significant deficiencies;
    (ii) The adequacy of any proposed or completed corrective 
action; and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more significant deficiencies remain.
    (e) If the Contractor receives the Contracting Officer's final 
determination of significant deficiencies, the Contractor shall, 
within 45 days of receipt of the final determination, either correct 
the significant deficiencies or submit an acceptable corrective 
action plan showing milestones and actions to eliminate the 
significant deficiencies.
    (f) Withholding payments. If the Contracting Officer makes a 
final determination to disapprove the Contractor's accounting 
system, and the contract includes the clause at 252.242-7005, 
Contractor Business Systems, the Contracting Officer will withhold 
payments in accordance with that clause.

(End of clause)

0
20. Add section 252.244-7001 to read as follows:

252.244-7001  Contractor Purchasing System Administration.

    As prescribed in 244.305-71, insert the following clause:

CONTRACTOR PURCHASING SYSTEM ADMINISTRATION (MAY 2011)

    (a) Definitions. As used in this clause--
    Acceptable purchasing system means a purchasing system that 
complies with the system criteria in paragraph (c) of this clause.
    Purchasing system means the Contractor's system or systems for 
purchasing and subcontracting, including make-or-buy decisions, the 
selection of vendors, analysis of quoted prices, negotiation of 
prices with vendors, placing and administering of orders, and 
expediting delivery of materials.
    Significant deficiency means a shortcoming in the system that 
materially affects the ability of officials of the Department of 
Defense to rely upon information produced by the system that is 
needed for management purposes.
    (b) General. The Contractor shall establish and maintain an 
acceptable purchasing system. Failure to maintain an acceptable 
purchasing system, as defined in this clause, may result in 
disapproval of the system by the Contracting Officer and/or 
withholding of payments.
    (c) System criteria. The Contractor's purchasing system shall--
    (1) Have an adequate system description including policies, 
procedures, and purchasing practices that comply with the Federal 
Acquisition Regulation (FAR) and the Defense Federal Acquisition 
Regulation Supplement (DFARS);
    (2) Ensure that all applicable purchase orders and subcontracts 
contain all flowdown clauses, including terms and conditions and any 
other clauses needed to carry out the requirements of the prime 
contract;
    (3) Maintain an organization plan that establishes clear lines 
of authority and responsibility;
    (4) Ensure all purchase orders are based on authorized 
requisitions and include a complete and accurate history of purchase 
transactions to support vendor selected, price paid, and document 
the subcontract/purchase order files which are subject to Government 
review;

[[Page 28878]]

    (5) Establish and maintain adequate documentation to provide a 
complete and accurate history of purchase transactions to support 
vendors selected and prices paid;
    (6) Apply a consistent make-or-buy policy that is in the best 
interest of the Government;
    (7) Use competitive sourcing to the maximum extent practicable, 
and ensure debarred or suspended contractors are properly excluded 
from contract award;
    (8) Evaluate price, quality, delivery, technical capabilities, 
and financial capabilities of competing vendors to ensure fair and 
reasonable prices;
    (9) Require management level justification and adequate cost or 
price analysis, as applicable, for any sole or single source award;
    (10) Perform timely and adequate cost or price analysis and 
technical evaluation for each subcontractor and supplier proposal or 
quote to ensure fair and reasonable subcontract prices;
    (11) Document negotiations in accordance with FAR 15.406-3;
    (12) Seek, take, and document economically feasible purchase 
discounts, including cash discounts, trade discounts, quantity 
discounts, rebates, freight allowances, and company-wide volume 
discounts;
    (13) Ensure proper type of contract selection and prohibit 
issuance of cost-plus-a-percentage-of-cost subcontracts;
    (14) Maintain subcontract surveillance to ensure timely delivery 
of an acceptable product and procedures to notify the Government of 
potential subcontract problems that may impact delivery, quantity, 
or price;
    (15) Document and justify reasons for subcontract changes that 
affect cost or price;
    (16) Notify the Government of the award of all subcontracts that 
contain the FAR and DFARS flowdown clauses that allow for Government 
audit of those subcontracts, and ensure the performance of audits of 
those subcontracts;
    (17) Enforce adequate policies on conflict of interest, gifts, 
and gratuities, including the requirements of the Anti-Kickback Act;
    (18) Perform internal audits or management reviews, training, 
and maintain policies and procedures for the purchasing department 
to ensure the integrity of the purchasing system;
    (19) Establish and maintain policies and procedures to ensure 
purchase orders and subcontracts contain mandatory and applicable 
flowdown clauses, as required by the FAR and DFARS, including terms 
and conditions required by the prime contract and any clauses 
required to carry out the requirements of the prime contract;
    (20) Provide for an organizational and administrative structure 
that ensures effective and efficient procurement of required quality 
materials and parts at the best value from responsible and reliable 
sources;
    (21) Establish and maintain selection processes to ensure the 
most responsive and responsible sources for furnishing required 
quality parts and materials and to promote competitive sourcing 
among dependable suppliers so that purchases are reasonably priced 
and from sources that meet contractor quality requirements;
    (22) Establish and maintain procedures to ensure performance of 
adequate price or cost analysis on purchasing actions;
    (23) Establish and maintain procedures to ensure that proper 
types of subcontracts are selected, and that there are controls over 
subcontracting, including oversight and surveillance of 
subcontracted effort; and
    (24) Establish and maintain procedures to timely notify the 
Contracting Officer, in writing, if--
    (i) The Contractor changes the amount of subcontract effort 
after award such that it exceeds 70 percent of the total cost of the 
work to be performed under the contract, task order, or delivery 
order. The notification shall identify the revised cost of the 
subcontract effort and shall include verification that the 
Contractor will provide added value; or
    (ii) Any subcontractor changes the amount of lower-tier 
subcontractor effort after award such that it exceeds 70 percent of 
the total cost of the work to be performed under its subcontract. 
The notification shall identify the revised cost of the subcontract 
effort and shall include verification that the subcontractor will 
provide added value as related to the work to be performed by the 
lower-tier subcontractor(s).
    (d) Significant deficiencies. (1) The Contracting Officer will 
provide notification of initial determination to the Contractor, in 
writing, of any significant deficiencies. The initial determination 
will describe the deficiency in sufficient detail to allow the 
Contractor to understand the deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
significant deficiencies in the Contractor's purchasing system. If 
the Contractor disagrees with the initial determination, the 
Contractor shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the Contracting 
Officer's final determination concerning--
    (i) Remaining significant deficiencies;
    (ii) The adequacy of any proposed or completed corrective 
action; and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more significant deficiencies remain.
    (e) If the Contractor receives the Contracting Officer's final 
determination of significant deficiencies, the Contractor shall, 
within 45 days of receipt of the final determination, either correct 
the significant deficiencies or submit an acceptable corrective 
action plan showing milestones and actions to eliminate the 
deficiencies.
    (f) Withholding payments. If the Contracting Officer makes a 
final determination to disapprove the Contractor's purchasing 
system, and the contract includes the clause at 252.242-7005, 
Contractor Business Systems, the Contracting Officer will withhold 
payments in accordance with that clause.

(End of clause)

0
21. Add section 252.245-7003 to read as follows:

252.245-7003  Contractor Property Management System Administration.

    As prescribed in 245.107, insert the following clause:

CONTRACTOR PROPERTY MANAGEMENT SYSTEM ADMINISTRATION (MAY 2011)

    (a) Definitions. As used in this clause--
    Acceptable property management system means a property system 
that complies with the system criteria in paragraph (c) of this 
clause.
    Property management system means the Contractor's system or 
systems for managing and controlling Government property.
    Significant deficiency means a shortcoming in the system that 
materially affects the ability of officials of the Department of 
Defense to rely upon information produced by the system that is 
needed for management purposes.
    (b) General. The Contractor shall establish and maintain an 
acceptable property management system. Failure to maintain an 
acceptable property management system, as defined in this clause, 
may result in disapproval of the system by the Contracting Officer 
and/or withholding of payments.
    (c) System criteria. The Contractor's property management system 
shall be in accordance with paragraph (f) of the contract clause at 
Federal Acquisition Regulation 52.245-1.
    (d) Significant deficiencies. (1) The Contracting Officer will 
provide an initial determination to the Contractor, in writing, of 
any significant deficiencies. The initial determination will 
describe the deficiency in sufficient detail to allow the Contractor 
to understand the deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
significant deficiencies in the Contractor's property management 
system. If the Contractor disagrees with the initial determination, 
the Contractor shall state, in writing, its rationale for 
disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the Contracting 
Officer's final determination concerning--
    (i) Remaining significant deficiencies;
    (ii) The adequacy of any proposed or completed corrective 
action; and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more significant deficiencies remain.
    (e) If the Contractor receives the Contracting Officer's final 
determination of significant deficiencies, the Contractor shall, 
within 45 days of receipt of the final determination, either correct 
the significant deficiencies or submit an acceptable corrective 
action plan showing milestones and actions to eliminate the 
significant deficiencies.
    (f) Withholding payments. If the Contracting Officer makes a 
final determination to disapprove the Contractor's property 
management system, leading to a potential risk of harm to the 
Government, and the contract includes the clause at 252.242-7005, 
Contractor Business Systems,

[[Page 28879]]

the Contracting Officer will withhold payments in accordance with 
that clause.

(End of clause)

[FR Doc. 2011-11691 Filed 5-17-11; 8:45 am]
BILLING CODE 5001-08-P
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