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[Federal Register Volume 75, Number 232 (Friday, December 3, 2010)]
[Proposed Rules]
[Pages 75550-75572]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-30072]

[[Page 75549]]

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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 (DFARS Case 2009-D038); Proposed Rule

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

[[Page 75550]]

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

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

RIN 0750-AG58

Defense Federal Acquisition Regulation Supplement; Business 
Systems--Definition and Administration (DFARS Case 2009-D038)

AGENCY: Defense Acquisition Regulations System, Department of Defense.

ACTION: Proposed rule with request for comments.

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

DATES: Comment Date: Interested parties should submit comments in 
writing to the address shown below on or before January 3, 2011.

ADDRESSES: You may submit comments, identified by DFARS Case 2009-D038, 
using any of the following methods:
    [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.
    E-mail: dfars@osd.mil. Include DFARS Case 2009-D038 in the subject 
line of the message.
    Fax: 703-602-0350.
    Mail: Defense Acquisition Regulations System, Attn: Mr. Mark 
Gomersall, OUSD(AT&L)DPAP/DARS, Room 3B855, 3060 Defense Pentagon, 
Washington, DC 20301-3060.
    Comments received generally will be posted without change to http://www.regulations.gov, including any personal information provided. To 
confirm receipt of your comment, please check http://www.regulations.gov approximately two to three days after submission to 
verify posting (except allow 30 days for posting of comments submitted 
by mail).

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

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published a proposed rule for Business Systems--Definition and 
Administration (DFARS Case 2009-D038) in the Federal Register on 
January 15, 2010 (75 FR 2457). The public comment period closed March 
16, 2010. Based on the comments received and subsequent revisions to 
the proposed rule, DoD is publishing this rule again as a proposed rule 
with request for comments.
    Contractor business systems and internal controls are the first 
line of defense against waste, fraud, and abuse. Weak control systems 
increase the risk of unallowable and unreasonable costs on Government 
contracts. To improve the effectiveness of Defense Contract Management 
Agency (DCMA) and Defense Contract Audit Agency (DCAA) oversight of 
contractor business systems, DoD is considering a rule to clarify the 
definition and administration of contractor business systems as 
follows:
    1. DoD is proposing to define contractor business systems as 
accounting systems, estimating systems, purchasing systems, earned 
value management systems (EVMS), material management and accounting 
systems (MMAS), and property management systems.
    2. DoD is proposing to implement compliance enforcement mechanisms 
in the form of a business systems clause which includes payment 
withholding that allows contracting officers to withhold a percentage 
of payments, under certain conditions, when a contractor's business 
system contains deficiencies. Payments could be withheld on--
     Interim payments under--
    [cir] Cost-reimbursement contracts;
    [cir] Incentive-type contracts;
    [cir] Time-and-materials contracts;
    [cir] Labor-hour contracts;
    [cir] Construction contracts that include FAR clause 52.232-27, 
Prompt Payment for Construction Contracts.
     Progress payments; and
     Performance-based payments.

II. Discussion and Analysis

A. Analysis of Public Comments

    The 370 comments received from 25 respondents have been 
dispositioned as discussed below. The comments received were grouped 
under 46 general topics. A summary of the comments follows:
1. 100 Percent Withholds
    Comment: Respondents suggested that the proposed rule provides 
administrative contracting officers (ACOs) insufficient standards to 
make 100 percent withhold determinations, and does not provide adequate 
provisions for contractor responses.
    Response: DoD notes the concerns expressed by the respondents, and 
has revised the rule to remove the language from clause 252.242-7XXX, 
which set forth procedures for withholding up to 100 percent.
2. Accounting System
    Comment: A number of respondents expressed concern about the 
criteria to be used to determine if a contractor has an acceptable 
accounting system.
    Response: The language at clause 252.242-7YYY has been revised to 
clarify the criteria to be used to determine if a contractor has an 
acceptable accounting system and to delete vague criteria modifiers 
such as ``including but not limited to'' and ``as applicable.''
3. Applicability of Rule
    Comment: A number of respondents questioned the application of this 
rule against certain cost-type contracts. Additionally, some 
respondents expressed concern about the application of the rule to 
commercial contracts. Other respondents suggested the rule be applied 
to only a single contract instead of against all contracts that are 
dependent upon the deficient business system, and that the rule 
establish a minimum dollar threshold for the rule to be applicable.
    Response: The Government may be at risk when a contractor's 
business systems contain deficiencies, regardless of contract type. 
Accordingly, it is appropriate for the ACO to withhold payments to 
protect the interest of the Government. Contracts awarded under FAR 
part 12 regulations will generally be exempt from the requirements of 
this rule. A system deficiency will result in application of a withhold 
against all contracts that contain the business system clause. However, 
DoD agrees with the recommendation for the establishment of a $50 
million threshold for application of the business system clause.
4. Arbitrary Withhold Percentages
    Comment: A number of respondents expressed concern that the rule 
invokes mandatory withholds on payments to Government contractors that 
are arbitrary and punitive and have no relationship with actual harm to 
the Government.
    Response: When contractors fail to maintain business systems, as is 
required by the terms and conditions of

[[Page 75551]]

their contracts, the withhold provisions help to protect the Government 
from the risks of overpayment, increased property losses, or 
nonconforming goods, among others, against which business systems are 
designed to ensure. The proposed rule would protect the Government by 
reducing contract payments temporarily during performance in an amount 
sufficient to mitigate the Government's risk. DoD is relying on the 
percentage withhold amount, not as a penalty for a deficiency, but as 
representing a good-faith estimate of the potential loss that is at 
risk where the actual amounts are difficult to estimate or quantify.
5. Assignment of Payments
    Comment: If the contractor has assigned the right to receive 
payments to a financial institution under the Assignment of Claims Act, 
will payments be withheld from the assignee financial institution? If 
so, this would severely hamper the ability of small- to medium-sized 
businesses from obtaining financing to bid on contracts.
    Response: This rule does not change any rights of the assignee of 
the assignment of claims provision at FAR subpart 32.8 or FAR clause 
52.232-23. Assignees will continue to have the same rights and 
obligations that they had prior to the implementation of this rule. 
Therefore, if the contractor has assigned the right to receive 
payments, and deficiencies in the contractor's business systems 
necessitate the implementation of withholds, in accordance with the 
contract, payments will be withheld from the assignee. The mitigation 
of the impact on small businesses is discussed under comment topic 
number 42.
6. Audits
    Comment: A number of respondents expressed concern that DCAA lacks 
the resources to perform required audits timely and adequately; that 
the proposed rule does not establish a business system approval 
duration, which essentially declares perpetual open-season on all 
contractor business system internal controls, and that the DCAA follow-
up audit is not limited or otherwise focused upon the previously 
identified specific deficiency and the specific corrective actions, and 
therefore, will result in an endless cycle of deficiency reports and 
follow-up audits; that DCAA audit guidance on the reporting of internal 
control deficiencies, which requires all deficiencies to be considered 
significant, effectively ensures that all contractor business systems 
subject to audit will be found inadequate; that audit reports are not 
informative enough to help the contracting officer make effective 
decisions, and that DCAA needs to expand its audit reports to go beyond 
rendering a pass/fail opinion, and include an analysis of the 
materiality of any deficiency.
    Response: DCAA has committed to making follow-up business system 
audits a priority. However, DCAA recognizes that resources are limited, 
and has taken steps to address staffing challenges. A business system 
approval duration and/or narrowly focused DCAA follow-up audit would 
not be appropriate since, at any time after approval, contractor 
conditions could change, rendering the previously-reported opinion as 
not current. DCAA policy is to report only deficiencies determined to 
be significant deficiencies or material weaknesses in accordance with 
generally accepted Government auditing standards. The proposed rule 
language has been revised to state that ``the report shall describe the 
deficiencies in sufficient detail to allow the contracting officer to 
understand the deficiencies and potential adverse impact to the 
Government.''
7. Breach of Contract
    Comment: One respondent believed that the failure of the United 
States Government to pay for goods and services provided could be a 
material breach of contract that would permit the contractor to stop 
work. The respondent stated that the requirement to compensate 
contractors for providing goods and services flows from the United 
States Constitution itself in the Fifth Amendment, and viewing failure 
to pay as a breach of contract has been recognized by the courts.
    Response: DoD does not agree that failure to pay amounts withheld 
would be a breach of contract, and that the Fifth Amendment to the 
Constitution is implicated. The proposed rule would create an explicit 
contract term, and withholding will be authorized pursuant to that 
term. Execution of that contract term would not be a breach of 
contract. Similarly, there is no ``taking'' of property that could 
implicate the Fifth Amendment when a contractor is paid the amount it 
is entitled to under the clear terms of a valid contract.
8. Cash Flow
    Comment: A number of respondents were concerned that the withholds 
would negatively impact cash flow for contractors, and are also likely 
to remain in effect for periods long beyond completion of any 
corrective action performed by contractors.
    Response: The application of the payment withhold will impact and 
reduce a contractor's cash flow. However, the proposed rule would 
protect the Government by temporarily reducing contract payments during 
performance in an amount sufficient to mitigate the Government's risk 
when contractors fail to maintain business systems, as is required by 
the terms and conditions of their contracts. The revised language 
provides for the contracting officer, in consultation with the auditor 
or functional specialist, to discontinue withholding payments prior to 
audit verification if the contractor submits evidence that the 
deficiencies have been corrected. The sooner the contractor corrects 
the deficiencies, the sooner the cash flow will be restored.
9. Compliance Criteria
    Comment: A number of respondents believe the compliance criteria in 
the proposed rule are subjective. These respondents believe that the 
proposed rule prematurely defines business systems without resolving 
the most critical component, which is the actual criteria against which 
contractor compliance will be measured, and that such criteria should 
be vetted with the public. The respondents assert that the proposed 
rule should define objective measurements by which to judge a system as 
deficient, and limit the criteria to a few well-defined metrics that 
cannot be embellished by subjective interpretation.
    Response: DoD partially agrees with the respondents. The rule 
incorporates criteria that are already used by the Government under 
existing authority to evaluate the adequacy of contractor business 
systems. Furthermore, to reduce the subjectivity of the criteria, 
phrases such as ``including but not limited to'' and ``as applicable'' 
have been removed. The public is encouraged to comment on these 
criteria.
10. Consistency: Correction of All Deficiencies or Substantial 
Correction of Deficiencies
    Comment: A number of respondents pointed out that some sections of 
the proposed rule indicate that a finding of system noncompliance will 
be withdrawn when the contractor has ``substantially corrected'' the 
system deficiencies. However, elsewhere, the proposed rule also states 
that the withhold will not be released until ``all deficiencies have 
been corrected.'' The respondents suggested that the proposed rule 
should be revised so that it is consistent.
    Response: DoD concurs with the respondents' recommendation, and has

[[Page 75552]]

revised the rule to state that the withholds will not be released until 
``all deficiencies have been corrected.''
11. Contracting Officer Discretion
    Comment: One respondent believed that the proposed rule 
inappropriately and unnecessarily limits the discretion of the 
contracting officer to make critical determinations about these systems 
specifically, and about the relationship of these systems 
determinations to overall contract performance generally.
    Response: The rule does not in any way limit the authority of 
contracting officers. Although the auditor is required to document the 
deficiencies in a report, the contracting officer has the authority to 
make all initial and final determinations of system deficiencies, 
implement and remove withholds, make determinations to approve, 
disapprove, and reapprove systems, and to take any other appropriate 
actions deemed in the best interests of the Government.
12. Contractor Appeal
    Comment: A number of respondents expressed concern that there is no 
provision in the proposed rule to provide contractors with due process 
or alternative resolution, such as negotiation or alternate disputes 
resolution procedures, and that withholds are at the sole discretion of 
the ACO.
    Response: DoD agrees that the final deficiency determination is at 
the sole discretion of the contracting officer. However, DoD disagrees 
that additional due process remedies are necessary. Contractors are 
afforded an opportunity to respond in writing within 30 days to an 
initial determination of deficiencies from the ACO that identifies 
deficiencies in any of the contractor's business systems. Furthermore, 
DoD does not believe there is a need, or is it appropriate, to develop 
a dispute resolution process beyond that which is already available by 
statute and regulation. Additionally, other avenues of dispute 
resolution outside of the Contract Disputes Act are available for 
resolving disputes that may arise over determinations of system 
deficiencies. The policy set forth in FAR 33.204 still applies, so that 
informal negotiation and alternate disputes resolution remain 
available, and, in fact, are encouraged as alternative methods of 
resolving disputes.
13. DCAA/DCMA Policies
    Comment: One respondent believed that the ultimate impact of this 
rule is dependent on current and future DCAA/DCMA policies that are not 
subject to the public comment process. According to the respondent, 
because the DCMA and DCAA policies will have a significant cost or 
administrative impact on contractors, a strong argument can be made 
that such policies are not just internal agency policies, but policies 
that must be published for public comment, pursuant to the requirements 
of the Office of Federal Procurement Policy (OFPP) Act. Another 
respondent stated that DCAA's current position on reporting system 
results is that if a system opinion is more than three years old, DCAA 
reports that there is ``no audit on file,'' and that DCAA has no 
opinion on the system. This respondent believed that procurement 
contracting officers and ACOs should be permitted to decide for 
themselves what they consider to be ``too old'' or ``not relevant'' for 
purposes of these system reviews, rather than permitting DCAA to simply 
avoid reporting on known information.
    Response: DoD does not agree. The OFPP Act (41 U.S.C. 418b) is 
applicable to procurement policy, regulation, procedure, or form 
relating to the expenditure of appropriated funds that has (1) a 
significant effect beyond the internal operating procedures of the 
agency issuing the procurement policy, et al., and (2) a significant 
increased cost or administrative impact on contractors or offerors. 
DCAA/DCMA internal policies and procedures that are referenced in this 
rule are internal policies and procedures and are not regulatory. 
Therefore, the OFPP Act public comment process is not applicable. DoD 
believes that contracting officers must rely on current and relevant 
information in order to make an appropriate determination as to whether 
to notify a contractor of a system deficiency and possible payment 
withhold. DoD does not believe that an audit report noting a deficiency 
that is in excess of three years old would constitute current 
information.
14. DCMA/DCAA Oversight
    Comment: A number of respondents believe that the Commission on 
Wartime Contracting (CWC) hearings demonstrated that greater 
cooperation must be achieved between DCMA and DCAA to oversee 
Government contractors properly, and that this issue should be 
addressed before imposing more regulations on contractors, especially 
as severe and broad as those proposed.
    Response: DoD is currently taking measures to improve coordination 
between DCMA and DCAA. Concurrent with these measures, DoD is issuing 
this rule to further improve the effectiveness of DCMA and DCAA 
oversight of business systems as recommended by the Commission on 
Wartime Contracting.
15. DCMA/DCAA Resources
    Comment: A couple of respondents suggested that DCMA and DCAA are 
under-resourced to execute the requirements of the rule, and that ACOs 
do not have the training to determine if a deficiency makes a system 
inadequate.
    Response: The need to have effective oversight mechanisms is 
unrelated to resources. This rule does not add additional oversight 
responsibilities onto DCAA and DCMA; it merely provides provisions to 
help protect the Government from the risks of loss due to a 
contractor's failure to maintain business systems, as is required by 
the terms and conditions of their contracts. DoD has confidence that 
contracting personnel will make appropriate determinations in 
accordance with this rule.
16. Deficiency Correction
    Comment: A number of respondents expressed concern that the 
proposed rule provides incomplete guidance for ACOs to approve systems 
when deficiencies previously have been identified. These respondents 
question whether the ACO's determination to reduce or discontinue the 
withholding of payments is discretionary, even if the contractor has 
corrected all deficiencies. One respondent is concerned that there is 
no measurable standard for the Government to decide to increase or 
decrease the payment withholds based on the monitoring of the 
contractor's progress in correcting deficiencies.
    Response: The revised rule language states that the contracting 
officer shall discontinue the withholding of payments and release any 
payments previously withheld when the contracting officer determines 
that the contractor has corrected all system deficiencies after receipt 
of auditor or functional specialist verification. Furthermore, the 
revised language provides for the contracting officer, in consultation 
with the auditor or functional specialist, to discontinue withholding 
payments prior to audit verification if the contractor submits evidence 
that the deficiencies have been corrected. DoD relies on the judgment 
of the ACO to make determinations to decrease or subsequently increase 
the withholding of payments, in accordance with the rule language, on a 
case-by-case basis.
17. Definition of Business System
    Comment: Two respondents requested that the rule include a precise 
definition of an acceptable business system.

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    Response: The definition of the term ``acceptable business 
systems'' in clause 252.242-7XXX has been revised for clarity. The 
precise criteria for determining the acceptability of the six business 
systems are contained in the individual business systems clauses.
18. Definition of Deficiency
    Comment: A number of respondents encouraged DoD to provide a clear 
and precise definition of a ``deficiency.''
    Response: The definition of ``deficiency'' used throughout the rule 
means a failure to maintain one or more system criteria of an 
acceptable business system. The criteria for each business system have 
been revised to provide more specificity.
19. Definition of Standards and System Requirements
    Comment: One respondent noted that 242.7502 requires that the audit 
report contain sufficient information so that the ACO will be able to 
understand what the contractor must do to comply with the applicable 
``standard or system requirement.'' The respondent was unsure what 
``standard'' means in this context, since clause 252.242-7YYY (relating 
to accounting system administration) only refers to ``system 
requirements,'' and does not mention any standards.
    Response: The language in 242.7502 has been revised to require the 
audit report to ``describe the deficiencies in sufficient detail to 
allow the contracting officer to understand the deficiencies and the 
potential impact to the Government.'' Additionally, the language in 
both 242.7502 and clause 252.242-7YYY has been revised to refer to 
``system criteria'' to be consistent.
20. Estimating System
    Comment: A number of respondents questioned whether contracting 
officers had the authority to make determinations on whether system 
deficiencies warrant withholds and to consider the impact of 
deficiencies on contractor proposals. Other respondents expressed 
concern with the criteria against which contractor estimating system 
compliance will be measured. One respondent expressed concern with the 
requirements that the estimating system include comparisons of 
projected results to actual results and an analysis of any differences.
    Response: This rule is very clear that contracting officers have 
the authority to make determinations on whether system deficiencies 
warrant withholds and shall consider the impact of deficiencies on 
contractor proposals. This revised proposed rule sets forth specific 
criteria for maintaining an acceptable estimating system. DoD does not 
believe it is unreasonable for a contractor to establish and maintain 
an acceptable estimating system that would include controls for the 
contractor to compare projected results to actual results and analyze 
any differences. This existing requirement was relocated from 215.407-
5-70 into clause 252.215-7002.
21. Earned Value Management System (EVMS)
    Comment: A number of respondents questioned how non-compliance with 
ANSI/EIA-748 fits into this rule because deficiencies in EVMS do not 
result in the billing of unallowable costs to the Government.
    Response: A key DoD concern is the reliability of the contractor's 
EVMS monthly reports. Even though the EVMS system may not directly 
result in the billing of unallowable costs to the Government, it does 
provide important information to senior-level Government officials to 
use when making management decisions regarding major weapon systems. 
Consequently, EVMS was included in the rule to ensure that DoD is 
receiving accurate and reliable EVMS information used to identify 
current and potential cost overruns, etc.; and if there are 
deficiencies with the contractors' EVMS, that they are promptly 
corrected.
22. Failure To Follow Corrective Action Plan
    Comment: One respondent recommended that the contracting officer be 
given the discretion to increase the amount of the withhold under the 
contract if the contractor inexcusably fails to follow the corrective 
action plan accepted by the Government or an acceptable alternative to 
that plan.
    Response: The contracting officer has the discretion in determining 
whether the contractor is following its corrective action plan, and 
whether to increase the withholding percentage in accordance with 
clause 252.242-7XXX. The reason the contracting officer may decrease 
the withholding percentage from five percent to two percent (one 
percent for small businesses) is that an approved corrective action 
plan mitigates the Government's risk by increasing the probability that 
system deficiencies will be corrected in a timely manner. Conversely, 
the reason for increasing the withhold back to five percent (two 
percent for small businesses) is to reinstate the appropriate 
protection for the Government, since the contractor has not adhered to 
its corrective action plan. The contracting officer has complete 
discretion to make these determinations.
23. Financial Impact
    Comment: Several respondents expressed concern that the proposed 
rule will increase administrative costs (to correct deficiencies) 
significantly and destabilize contractor cash management, which could 
have such financial impacts as to affect how the industrial base can 
support the warfighter and national security.
    Response: DoD acknowledges that the application of the payment 
withhold will impact and reduce a contractor's cash flow. Further, DoD 
acknowledges that the initial administrative costs to ensure business 
system compliance may increase. However, in the long run, both the 
contractor's and Government's administrative costs should be reduced 
with the reliance on efficient contractor business systems. Based on 
comments received, DoD has removed the 100 percent withhold from the 
rule and lowered the compounding of deficiency percentages to a maximum 
of 20 percent. However, DoD does not anticipate that the rule will 
cause long-term harm to the industrial base supporting our warfighter 
and national security. The intent of the proposed rule is to strengthen 
contractor business systems and provide a protection for the Government 
from the risks of deficient systems while contractors resolve their 
system deficiencies.
24. Formatting of Rule Language
    Comment: A number of respondents believe the language of the 
proposed rule needs clarifying for more uniform application.
    Response: DoD acknowledges the respondents' comment and has 
clarified the language of the rule in accordance with public comments 
received.
25. General Agreement
    Comment: A number of respondents expressed agreement with the rule, 
citing the necessity for contractors to maintain adequate business 
systems.
    Response: DoD acknowledges the respondents' support of the rule.
26. General Disagreement
    Comment: A number of respondents expressed concern with the rule 
and requested it be withdrawn, citing claims that the rule (a) is 
biased against DoD contractors, (b) does not address problems with 
business system oversight with Government agencies, (c) will have 
unfavorable consequences to industry and Government agencies, and (d) 
is an unnecessary intrusion on the contractual relationship between

[[Page 75554]]

industry and Government. Specifically, respondents suggested that 
adequacy of business systems should be addressed as part of the 
preaward contracting phase rather than through payment withholds, and 
that many of the problems or deficiencies identified in supplier 
systems are traceable to ill-defined contracts, unstable funding, and 
individual interpretations of policy or guidance by inexperienced audit 
personnel. Finally, one respondent was concerned that this proposed 
rule uses a broad-brush approach to what appears to be a narrow problem 
growing out of battlefield contingency contracting and that, contrary 
to its intended purpose, this proposed rule will do little or nothing 
to assist the Government in achieving its goal of reducing fraud, 
waste, and abuse.
    Response: DoD acknowledges the respondents' concern with the rule. 
However, the need to mitigate the Government's risk when contractors 
fail to comply with the terms and conditions of their contracts by 
failing to maintain adequate business systems necessitates this rule. 
DoD partially agrees that the adequacy of business systems should be 
addressed as part of the preaward contracting phase. However, this fact 
does not relieve the contractors' contractual obligations to maintain 
adequate business systems throughout the life of the contract. DoD 
disagrees with the respondent that system deficiencies are traceable to 
ill-defined contracts, unstable funding, and individual interpretations 
of policy or guidance. Business systems are company-wide or segment-
wide systems with established policies and procedures that are applied 
across multiple contracts. This rule mitigates the Government's risk 
when contractors fail to maintain adequate business systems after 
contract award. While DoD acknowledges that issues with contractor 
business systems were discovered through reviews of contractors 
involved with battlefield contingency contracting, DoD does not believe 
that these issues are strictly confined therein. However, DoD notes 
that contractors outside of the contingency contracting arena will not 
be impacted by withholds implemented under this rule if failure to 
maintain adequate business systems, in accordance with the terms and 
conditions of their Government contracts, is limited to being a narrow 
problem growing out of battlefield contingency contracting, as the 
respondent suggests.
27. Impact on Government Systems
    Comment: One respondent believed that the proposed rule will 
require additional resources at Defense Finance and Accounting Service 
and modifications of the Mechanization of Contract Administration 
Services system because all payments for contracts with withholds must 
be processed manually. Furthermore, one respondent suggested that 
contracting officers be granted the authority to release withholds 
under situations where funds are at risk of expiring or being canceled, 
or the contract is being closed.
    Response: The Government is fully capable of modifying its 
automated systems to implement the rule. Contracting officers are the 
only ones granted the authority to release withholds. Withholds will be 
released once the system deficiency has been corrected, or a final 
audit has determined which costs are allowable under the contract.
28. Increased Litigation
    Comment: A number of respondents believe the withholds will result 
in increased litigation that will drain the resources of both 
contractors and the Government, especially since the proposed rule 
states that Prompt Payment Act interest does not accrue on the 
withhold, and prudent contractors will immediately appeal the withhold 
pursuant to the Contract Disputes Act, where interest would accrue on 
the withhold if the Government's position is not sustained. 
Furthermore, most of the issues with deficient business systems could 
be resolved through the exercise of reasonable contracting officer 
discretion if the rule allowed it.
    Response: DoD is uncertain whether the rule, in its final form, 
will lead to increased litigation. It would be unwieldy to establish a 
separate informal process for handling disagreements involving alleged 
system deficiencies, given that the Contract Disputes Act already is an 
established methodology for resolving disagreements, large and small. 
Furthermore, not every claim presented to the contracting officer under 
the Contract Disputes Act results in litigation. In fact, FAR 33.204 
establishes the Government's policy to try to resolve all contractual 
issues in controversy by mutual agreement, even prior to the submission 
of a claim. The contracting officer has the authority to make all 
initial and final determinations of system deficiencies, implement and 
remove withholds, make determinations to approve, disapprove, and 
reapprove systems, and to take any other appropriate actions deemed in 
the best interests of the Government.
29. Information Collection
    Comment: One respondent believed that the information collection 
estimate that DoD included with the proposed rule is understated 
substantially.
    Response: DoD does not agree with the respondent's comment. DoD 
notes that the supporting data referenced by the respondent exceeds the 
information collection requirements established under this rule. DoD 
believes the Paperwork Reduction Act estimates published with the 
proposed rule accurately reflect the contractors' costs to fulfill the 
information collection requirements of this rule. The hours and costs 
cited by the respondent with regard to EVMS do not reflect the 
Paperwork Reduction Act requirements of this rule.
30. Interest on Withholds
    Comment: One respondent disagreed that the withholdings under 
clause 252.242-7XXX, Business Systems, are not subject to the interest 
penalty provisions of the Prompt Payment Act. While contract financing 
payments are generally not subject to the interest penalty, the Prompt 
Payment Act specifically makes the interest penalty applicable to 
interim vouchers under cost-reimbursement contracts for services. This 
statutory provision is implemented in FAR 52.232-25, Alternate I. 
Similarly, FAR 52.232-7 explicitly makes the interest penalty 
applicable to interim vouchers under time-and-materials and labor-hour 
contracts for services. Another respondent suggested that the rule 
allow for Prompt Payment Act interest on amounts withheld if later it 
is determined that the Government incorrectly applied the withhold.
    Response: FAR 52.232-25(a)(5)(ii) states ``The prompt payment 
regulations at 5 CFR 1315.10(c) do not require the Government to pay 
interest penalties if payment delays are due to disagreement between 
the Government and the Contractor over the payment amount or other 
issues involving contract compliance, or on amounts temporarily 
withheld or retained in accordance with the terms of the contract.'' 
Since amounts withheld pursuant to clause 252.242-7XXX are temporarily 
withheld in accordance with the terms of the contract, they are not 
subject to the interest penalty provisions of the Prompt Payment Act.

[[Page 75555]]

31. Internal Audits and Management Reviews
    Comment: A number of respondents recommended that the Government be 
provided complete access to contractors' internal control systems, 
including internal audit reports and management reviews, to ensure a 
contractor has implemented appropriate corrections in response to 
audits and reviews. Further, one respondent suggested that this 
requirement should be based on the comprehensive internal control 
framework of the Committee of Sponsoring Organizations of the Treadway 
Commission (COSO).
    Response: Auditors have access to contractors' records, as provided 
for under the FAR, to ensure contractors have implemented internal 
audits and management reviews. DoD does not agree with implementing the 
COSO internal control framework since COSO is a voluntary private-
sector organization. It would be inappropriate to tie Government 
regulations to the COSO internal control framework since such policies 
are not subject to the Government's rulemaking process.
32. Legality of Withholds
    Comment: Respondents believe the withholds set forth in the rule 
are arbitrary, punitive, contrary to public policy that requires the 
Government withholds to be reasonably related to Government risk, and 
could lead to a cessation of contract payments without any showing of 
actual harm to the Government. The respondents believe the rule would 
not survive legal challenge.
    Response: Contract terms explicitly require contractors to maintain 
the business systems in question as a condition of contracting 
responsibility and, in some cases, eligibility for award. Contract 
prices are negotiated on the basis that contractors will maintain such 
systems, so that the Government does not need to maintain far more 
extensive inspection and audit functions than it already does. Failure 
of the contractor to maintain acceptable systems during contract 
performance deprives the Government of assurances for which it pays 
fair value. While not ``deliverable'' services under specific contract 
line items, these business systems are material terms, performance of 
which is required to ensure contracts will be performed on time, within 
cost estimates, and with appropriate standards of quality. The 
withholding remedy provides a measure of the overall contract 
performance of which the Government is deprived during the performance 
period, and for which the contractor should not receive the full 
financing payments. DoD is relying on the temporary percentage withhold 
amount, not as a penalty for a deficiency, but as representing a good-
faith estimate sufficient to mitigate the Government's risk, where the 
actual amounts are difficult to estimate or quantify.
33. Materiality of Deficiencies
    Comment: Some respondents believe the quality and utility of 
contractor business system information could be greatly enhanced by 
requiring a clear segregation between system conditions that relate 
solely to policy enhancements, especially when the contractor has 
agreed to the policy enhancements or has already made the policy 
enhancements but DCAA has not yet reviewed them, and those system 
conditions that relate to unallowable or unreasonable costs being 
charged to Government contracts. Other respondents are concerned that 
the proposed rule does not make a distinction between minor 
deficiencies that likely pose no threat of significant harm to the 
Government, and material deficiencies that potentially pose such a 
threat. These respondents are concerned that current DCAA guidance 
requires reporting of any perceived deficiency that could directly or 
indirectly result in any amount, no matter how small, of unallowable 
costs being charged to a contract. To avoid such circumstances, it is 
absolutely necessary to impose a materiality requirement in regard to 
system deficiencies. One respondent stated that, although the rule 
requires the auditor or other cognizant functional specialist to assess 
the potential magnitude of the risk to the Government posed by the 
deficiency, the rule fails to establish objective criteria for such an 
assessment, including the need for evidence demonstrating a logical 
nexus between the deficiency and the risk. Finally, one respondent 
suggested the rule should focus on risk management rather than risk 
avoidance. As such, the pass-or-fail assessment of business systems in 
the rule does not adequately address relative degrees of impact or 
risk.
    Response: DoD does not believe that it would be in the Government's 
best interest to attempt to segregate between system deficiencies that 
relate solely to system policy and those system deficiencies that 
relate directly to unallowable or unreasonable costs. Deficiencies that 
do not directly relate to unallowable or unreasonable costs still pose 
risks to the Government, and may lead to harm that may not be 
calculated readily when the deficiencies are discovered. Furthermore, 
DoD disagrees with the assertion that business systems will be deemed 
inadequate and payments withheld for minor deficiencies. The intent of 
the rule is to withhold payments when a deficiency exists that impairs 
the Government's ability to rely on the system's outputs. DoD has 
revised the rule to set forth objective business system criteria. DoD 
believes there is a logical nexus between system deficiencies and risk 
to the Government. The intent of the rule is to withhold payments when 
a deficiency exists that impairs the Government's ability to rely on 
the system's outputs. A system must provide reasonable assurance that 
the relevant system criteria are satisfied and that the risk of 
material misstatements caused by error or fraud is low. The rule has 
been revised to clarify that the contracting officer has the discretion 
to determine whether withholding is warranted to protect the 
Government. Accordingly, DoD disagrees that the rule is based on pass-
fail criteria.
34. Material Management and Accounting System (MMAS)
    Comment: Three respondents questioned the language at clause 
252.242-7004 which requires a contractor's MMAS to have adequate 
internal controls to ensure system and data integrity. The respondents 
contend that internal controls (i.e., policies and procedures) cannot 
provide absolute assurance as required here; the standard is reasonable 
assurance. The respondents cited the requirement that a contractor's 
MMAS shall have adequate internal controls to ensure system and data 
integrity, and shall ``establish and maintain adequate levels of record 
accuracy, and include reconciliation of recorded inventory quantities 
to physical inventory by part number on a periodic basis.'' The 
respondents question what is an adequate level.
    Response: The proposed rule does not require absolute assurance of 
compliance with any of the business system standards or criteria. The 
intent of the rule is to provide reasonable assurance that the system 
criteria are satisfied and that the risk of material misstatements 
caused by error or fraud is low. DoD further notes that this existing 
language in clause 252.242-7004 sets forth a desired 95 percent 
accuracy level.
35. Multiple Withholdings
    Comment: The respondent stated that many of the contractor systems 
covered by this rule are, appropriately, implemented on a corporate-
wide basis.

[[Page 75556]]

As a result, the respondent believed that that a deficiency finding 
would impact all proposals and contracts held by that company, 
including those that are not directly affected by the ``deficient'' 
system, and those that are outside DoD and not covered by this rule.
    Response: This payment withholding requirement set forth in this 
rule applies only to contracts that contain clause 252.242-7XXX, 
Business Systems. The withholding is not necessarily limited to a 
single contract, but would apply to multiple contracts that are covered 
by clause 252.242-7XXX. A contractor's respective business systems are 
relied upon by the Government for all contracts that contain the 
respective clauses pertaining to the individual business systems. 
Therefore, it is appropriate for withholds to be applied to multiple 
contracts that rely on the fidelity of the contractor's respective 
business systems.
36. Property Management System
    Comment: One respondent believed that withholding against all of a 
contractor's financing payments would be grossly out of proportion with 
the damage because FAR also already protects the Government's interest 
for deficiencies in a property management system by specifically 
addressing remediation for individual pieces of lost, damaged, 
destroyed, or stolen Government property.
    Response: FAR 45.105 provides that if the contractor does not 
correct property management system deficiencies, the contracting 
officer may revoke the Government's assumption of risk for loss, 
damage, destruction, or theft; and/or the exercise of other rights or 
remedies available to the contracting officer. However, these remedies 
do not mitigate the Government's risk that the contractor could fail to 
perform on the contract. The proposed rule further mitigates the 
Government's risk by withholding payments temporarily when the 
contractor's property management system has deficiencies.
37. Purchasing System
    Comment: A number of respondents expressed concern with the 
purchasing system criteria against which contractor compliance will be 
measured. A number of respondents questioned the criteria in the 
proposed rule that required a purchasing system that procures materials 
``at the most economical cost.'' One respondent asserted that the DoD 
purchasing system requirement should be limited to verification that 
FAR/DFARS required flow downs from the prime or higher-tier contract 
have been included in the purchase order or subcontract. One respondent 
questioned whether it is possible to grant system approval while 
corrective actions are being pursued, and whether withholds would apply 
in this circumstance.
    Response: This revised proposed rule sets forth specific criteria 
for maintaining an acceptable purchasing system. DoD has revised the 
language under clause 252.244-7XXX to require ``An organizational and 
administrative structure that ensures effective and efficient 
procurement of required quality materials and parts at the best value 
from responsible and reliable sources,'' consistent with current 
Federal acquisition policy. Compliance with the policy and procedures 
requirements in clause 252.244-7XXX is necessary to provide reasonable 
assurance to the contracting officer that the purchasing system does 
not contain any deficiencies. The contracting officer is responsible 
for determining whether all required flow-down clauses, including terms 
and conditions, and any other clauses needed to meet the requirements 
of the prime contract, are included in the contractor's purchasing 
system policies and procedures for letting subcontracts. Additionally, 
the Government reviews the contractor's purchasing system to ensure 
that subcontract clauses required under the contractor's purchasing 
system policies are not contrary to Government law or regulation. 
Deficiencies that may result in a withhold may not be significant 
enough to result in a system disapproval. In a scenario in which a 
system has been disapproved and withholds have been implemented, all 
deficiencies must be corrected before the temporary withholds are 
discontinued. For system reapproval, the deficiencies must be corrected 
substantially in the judgment of the contracting officer. The 
contracting officer has the discretion to make both system approval and 
withhold determinations separately on a case-by-case basis.
38. Resolution Timing
    Comment: Respondents believe that the Government should have a time 
limitation requirement to follow up on corrective actions, make system 
approval decisions, and remove withholds.
    Response: DoD acknowledges the respondents' concern regarding the 
timing of follow-up audits. Therefore, the rule has been revised so 
that ``If, prior to the receipt of verification, the contractor submits 
evidence that the deficiencies have been corrected, and the contracting 
officer, in consultation with the auditor or functional specialist, 
determines that there is a reasonable expectation that the corrective 
actions have been implemented, the contracting officer may discontinue 
withholding payments pending receipt of verification and release any 
payments previously withheld.''
39. Risk-based Withholding
    Comment: A number of respondents suggested that any reductions in 
payment should be in proportion to the potential damage/risk to the 
Government and should be imposed only after demonstrating a reasonable 
basis for the actual damage suffered by the Government.
    Response: The intent of the rule is to authorize payment 
withholding when the contracting officer determines there are one or 
more system deficiencies that adversely affect a contractor's business 
system, leading to a potential risk of harm to the Government. The 
potential risk of harm may be a risk that cannot be quantified in terms 
of dollars, such as a deficiency that would compromise contract 
performance. Contract terms explicitly require contractors to maintain 
the business systems in question as a condition of contracting 
responsibility and, in some cases, eligibility for award. Contract 
prices are negotiated on the basis that contractors will maintain such 
systems, so that the Government does not need to maintain far more 
extensive inspection and audit functions than it already does. Failure 
of the contractor to maintain acceptable systems during contract 
performance deprives the Government of assurances for which it pays 
fair value. While not ``deliverable'' services under specific contract 
line items, these business systems are material terms, performance of 
which is required to ensure contracts will be performed on time, within 
cost estimates, and with appropriate standards of quality. The 
withholding remedy provides a measure of the overall contract 
performance of which the Government is deprived during the performance 
period, and for which the contractor should not receive the full 
financing payments. DoD is relying on the temporary percentage withhold 
amount, not as a penalty for a deficiency, but as representing a good-
faith estimate sufficient to mitigate the Government's risk where the 
actual amounts are difficult to estimate or quantify.
40. Roles of DCAA/DCMA
    Comment: A number of respondents were concerned that most 
contracting officers will not have the requisite training and expertise 
to reach independent conclusions relative to

[[Page 75557]]

auditor/contractor disagreements over internal controls. The 
respondents expect contracting officers will, more often than not, 
simply concur with auditor conclusions out of expediency and safety to 
avoid being reported to the DoD IG for investigation, which will 
greatly endanger equity and fairness. These respondents suggested that 
DoD first addresses the adjudication process and the independence of 
DCAA. The respondent stated that DFARS must be absolutely clear with 
regard to the roles and authority of the ACO and the auditor.
    Response: The DoD memo dated December 4, 2009, ``Resolving Contract 
Audit Recommendations,'' clearly defines the roles and responsibilities 
of DCAA and DCMA and provides procedures for adjudicating differences. 
DoD has confidence that contracting officers possess the technical 
knowledge, skills, and experience necessary to reach independent 
determinations on business systems based on sound judgment as required 
by FAR 1.602-2, Responsibilities.
41. Rule Application
    Comment: Two respondents suggested that since the information cited 
in the CWC testimony concerned companies that were involved with 
contingency contracting in Afghanistan and Iraq, that the proposed rule 
is overly broad and should be limited only to contingency contracting.
    Response: DoD notes that while the issues surrounding contractor 
business systems came to light under the findings of the CWC hearings, 
it is a longstanding DoD policy to rely upon effective and efficient 
contractor business systems beyond the realm of the contingency 
contracting arena. DoD does not believe that these issues are limited 
strictly to contingency contracting.
42. Small Business Impact
    Comment: Several respondents commented that the proposed rule 
imposes potentially burdensome requirements on small businesses, since 
with the exception of EVMS and estimating system requirements, business 
system requirements apply to all contractors and contracts, regardless 
of size. Thus, small businesses would be required to implement and 
maintain the same business systems as those systems implemented by the 
largest contractors. The respondents recommended the rule impose 
reasonable limitations on the applicability of the requirements for 
contractor business systems based on the size of the contractor or 
contract.
    Response: DoD agrees that the rule could potentially have an 
adverse impact on small business and has established thresholds 
designed to limit the impact on small business. Additionally, the rule 
has been revised to reduce the percentage of payments withheld if a 
small business has a deficiency that poses a potential risk of harm to 
the Government.
43. Withhold Alternatives
    Comment: A number of respondents believe the proposed rule is 
unnecessary because the Government already has a number of enforcement 
mechanisms to ensure that material deficiencies in contractor systems 
do not result in unchecked fraud, waste, or abuse in Government 
contracting and to provide contractors with appropriate incentives to 
quickly address any deficiencies. Some of the respondents recommended 
that the rule be revised to state that contracting officers should not 
impose duplicative remedies or sanctions.
    Response: The existing regulatory remedies are not an effective 
substitute for a contract clause that will mitigate the Government's 
risk while contractors correct business system deficiencies. The 
proposed rule is required to supplement existing enforcement mechanisms 
and protect the Government's interests while the contractor completes 
correction of system deficiencies. DoD does not wish to limit the 
contracting officer's discretion to apply any and all regulatory 
measures, as warranted by the circumstances. For example, if a 
contractor has a deficiency in its property management system, the 
contracting officer may implement a withhold to protect the 
Government's risk of the contractor failing to perform on the contract, 
and may also revoke the Government's assumption of liability to protect 
the Government from risk of loss of the Government's furnished 
property.
44. Withhold Impacts
    Comment: Several respondents believe the proposed rule would have 
unintended consequences such as establishing a barrier to entry for new 
contractors, harming the cash flow of existing contractors and hurting 
their ability to obtain financing, prompting unnecessary administrative 
cost and improvements to business systems, adversely impacting 
financial performance metrics of return on investment and return on 
sales, and impacting the ability of contractors to attract debt and 
equity investment at beneficial rates. One respondent believed that the 
unintended consequences could directly result in loss of jobs and would 
be contrary to supporting our warfighters and our national security, 
both of which depend on a healthy industrial base.
    Response: DoD does not believe that the rule will cause long-term 
harm to the defense industrial base or national security. DoD 
recognizes that there may be a short-term financial impact on a 
contractor who fails to maintain adequate business systems in 
accordance with the terms of its contract. However, the Government has 
the responsibility to protect the taxpayers. DoD believes that 
contractors who maintain adequate systems will not be impacted by this 
rule and, in fact, will benefit from effective business systems.
45. Withhold Impacts on Government Oversight Costs
    Comment: One respondent recommended that DoD abandon the proposed 
clause 252.242-7XXX because it will increase the Government's oversight 
and enforcement costs.
    Response: DoD appreciates the respondent's concern. However, 
acceptable contractor business systems are the first line of defense 
against fraud, waste, and abuse. As such, it is in the Government's, 
and ultimately the taxpayers', best interest to ensure contractors 
maintain adequate business systems.
46. Withhold Percentages
    Comment: A number of respondents expressed concern over the 
percentages to be withheld, that the rule does not establish a maximum 
dollar amount that may be withheld, and that cumulative withholds of up 
to 50 percent per contract are inappropriate.
    Response: DoD appreciates the respondents' concerns regarding the 
withhold percentages. Accordingly, the proposed rule has been revised 
to reduce the amount that can be withheld for business system 
deficiencies from ten percent to five percent (two percent for small 
business). If the Contractor submits an acceptable corrective action 
plan, the contracting officer will, as appropriate, reduce the 
withholding to two percent (one percent for small businesses). The 
contracting officer will authorize the contractor to bill for amounts 
previously withheld when the contracting officer determines all 
deficiencies have been corrected. Additionally, DoD has revised the 
rule to reduce the cumulative percentage of payments that can be 
withheld on one or more business systems to 20 percent (10 percent for 
small businesses). This limitation refers to the amount that can be 
withheld on any payment if deficiencies exist in one or more business 
systems. The establishment of

[[Page 75558]]

a maximum dollar amount that may be withheld across multiple contracts 
would be inappropriate.

B. Summary of Proposed Rule Changes

    As a result of the public comments received, the following changes 
were made to the proposed rule:
    1. To the extent practicable, the rule has been reorganized to 
provide consistency across each of the business systems. Additionally, 
throughout the rule, the term ``ACO'' has been replaced by 
``contracting officer'' for accuracy.
    2. The definition of ``deficiency'' used throughout the rule means 
a failure to maintain one or more system criteria of an acceptable 
business system. This definition has been set forth within each of the 
specific business system clauses 252.215-7002, 252.234-7002, 252.242-
7004, 252.242-7XXX, 252.242-7YYY, 252.244-7XXX, and 252.245-7XXX.
    3. The system criteria for each of the business systems have been 
set forth in clause 252.242-7XXX, Business Systems, as well as in each 
of the individual business system clauses, 252.215-7002, 252.234-7002, 
252.242-7004, 252.242-7YYY, 252.244-7XXX, and 252.245-7XXX.
    4. In the ``policy'' paragraphs for each of the business systems, 
215.407-5-70(c)(2), 234.201(5), 242.7203(c), 242.7502(b), 244.305-
70(a), and 245.105(b), cognizant contracting officers, in consultation 
with the auditor and, where applicable, the functional specialist, 
shall determine the acceptability of the contractor's business systems 
and approve or disapprove the system.
    5. The ``disposition of findings'' paragraphs for each of the 
business systems, 215.407-5-70(e)(2), 234.201(7), 242.7203(c), 
242.7502(d), 244.305-70(c), and 245.105(d), have been reorganized and 
revised to set forth procedures for reporting of findings, and making 
initial and final determinations as follows:
    (a) If there are system deficiencies, the auditor's or functional 
specialist's report to the contracting officer shall describe the 
deficiencies in sufficient detail to allow the contracting officer to 
understand the deficiencies and the potential adverse impact to the 
Government; and
    (b) Revised initial and final determination procedures have been 
set forth.
    6. The business system approval paragraphs, 215.407-5-70(f), 
234.201(8), 242.7203(d), 242.7502(e), 244.305-70(d), and 245.105(e), 
are established to provide procedures for contracting officers to 
promptly approve a previously unapproved business system and notify the 
contractor when the contracting officer determines, in consultation 
with the auditor and/or functional specialist, that the contractor has 
substantially corrected the system deficiencies, removing any potential 
risk of harm to the Government.
    7. The contracting officer notifications paragraphs, 215.407-5-
70(g), 234.201(9), 242.7203(e), 242.7502(f), 244.305-70(e), and 
245.105(f), are established to provide procedures for contracting 
officers to promptly distribute copies of a determination to withhold, 
remove withholds, and approve or disapprove a system to the auditor, 
payment office, contracting officers at the buying activities, and 
cognizant contracting officers in contract administration activities.
    8. Paragraphs 242.7502(g) and 244.305-70(f), on mitigating risk of 
accounting system and purchasing system deficiencies on specific 
proposals, are established to provide contracting officers with 
procedures for evaluating whether a deficiency impacts the 
negotiations, and if so, what alternatives the contracting officer 
should consider.
    9. Section 245.105 is rewritten in its entirety as previously 
noted, and for consistency with the other business systems covered 
under this rule.
    10. Section 242.70X1 Business system deficiencies, has been revised 
in its entirety to set forth policy and procedures for contracting 
officers to make a determination to withhold payments; provide 
appropriate notifications; monitor and verify the correction of 
contractor deficiencies; and implement, reduce, increase, and 
discontinue payment withholding.
    11. Section 242.70X2 Contract clause, has been revised to set forth 
a $50 million threshold and revise the companion clauses that set forth 
the requirements for the use of clause 252.242-7XXX, Business Systems.
    12. In each of the clauses revised under this rule, 252.215-7002, 
252.234-7002, 252.242-7004, 252.242-7YYY, and 252.244-7XXX, the 
language has been revised to replace the phrase and paragraph headings 
entitled ``system requirements'' with ``system criteria,'' and to 
delete from the clauses the phrases ``but is not limited to'' and ``but 
not limited to.''
    13. The ``System deficiencies'' paragraphs in each of the 
individual business systems clauses, 252.215-7002(e), 252.234-7002(i), 
252.242-7004(e), 252.242-7YYY(d), and 252.244-7XXX(d), have been 
revised for consistency and clarity.
    14. In each of the individual business system clauses revised under 
this rule, the following language has been added under paragraphs 
252.215-7002(f), 252.234-7002(i)(4), 252.242-7004(f), 252.242-7YYY(e), 
and 252.244-7XXX(e): ``If the Contractor receives the Contracting 
Officer's final determination of system deficiencies, the Contractor 
shall, within 45 days of receipt of the final determination, either 
correct the deficiencies or submit an acceptable corrective action plan 
showing milestones and actions to eliminate the deficiencies.''
    15. In each of the individual business system clauses revised under 
this rule, the ``Withholding payments'' paragraphs, 252.215-7002(g), 
252.234-7002(k), 252.242-7004(g), 252.242-7YYY(f), and 252.244-7XXX(f), 
are revised as follows: ``If the Contracting Officer determines that 
there are one or more system deficiencies that adversely affect the 
Contractor's purchasing system, leading to a potential risk of harm to 
the Government, and the contract includes the clause at 252.242-7XXX, 
Business Systems, the Contracting Officer will withhold payments in 
accordance with that clause.''
    16. Clause 252.215-7002 is revised as follows:
    (a) The definition of an ``estimating system'' has been revised to 
include the phrase ``budgeting and planning controls,'' and under 
subparagraph (5), to add the phrase ``budgeting and planning'' and the 
phrase ``and budgets.''
    (b) Minor revisions to paragraph (d) system criteria, include the 
addition of the phrase ``and budgets'' in subparagraphs (i), (ii), and 
(v); the addition of the phrase ``and budgeting'' in subparagraphs 
(iii), (iv), and (xii); replacement of the word ``appropriate'' with 
``adequate'' in subparagraph (v); deletion of the phrase ``where 
appropriate'' in subparagraph (xi); replacement of the phrase ``comply 
with this regulation'' with ``ensure timely follow-up actions are taken 
on the management review recommendations'' in subparagraph (xii); 
replacement of the phrase ``the comparison'' with ``budgetary data 
supporting indirect cost estimates and comparisons'' in subparagraph 
(xiii); addition of the phrase ``and notify the Contracting Officer'' 
in subparagraph (xiv); deletion of subparagraph (xv) and its 
replacement with new subparagraphs (xv), (xvi), and (xvii).
    17. Clause 252.234-7002 is revised as follows:
    (a) Definitions of ``acceptable earned value management system'' 
and ``earned value management system'' are added.
    (b) Paragraph (c) is revised as follows: ``If this contract has a 
value of $50 million or more, the Contractor shall use

[[Page 75559]]

an EVMS that has been determined to be acceptable by the cognizant 
Federal agency.'' The phrase ``to be in compliance with the EVMS 
guidelines as stated in paragraph (a)(1) of this clause'' is hereby 
deleted.
    (c) Paragraphs (c) and (g) are revised to replace the references to 
paragraph (a)(1) with references to paragraph (b)(1).
    (d) Paragraph (j), System disapproval, is hereby added to set forth 
when a contracting officer will disapprove a contractor's EVMS.
    (e) Paragraph (h) is renumbered as paragraph (l) and is revised to 
provide the following qualifying phrase: ``With the exception of 
paragraphs (i) through (k) of this clause * * *'' Additionally, the 
reference to paragraph (b) is replaced by a reference to paragraph (c).
    18. Clause 252.242-7002 is revised to add the definition of 
``acceptable material management and accounting system.''
    19. Clause 252.242-7XXX is revised as follows:
    (a) The definition of ``acceptable business systems'' has been 
revised to delete the words ``this contract'' such that acceptable 
business systems ``means business systems that comply with the terms 
and conditions of the applicable business system clauses listed in the 
definition of ``business systems'' in this clause.''
    (b) The definition of ``business systems'' has been revised to 
update the references to the applicable clauses for the property 
management system, 252.245-7XXX, Contractor Property Management System 
Administration, and purchasing system, 252.244-7XXX, Contractor 
Purchasing System Administration.
    (c) Paragraph (c), System deficiencies, has been revised for 
clarity to state under subparagraph (1) that ``The Contractor shall 
respond in writing within 30 days to an initial determination that 
there are one or more system deficiencies that adversely affect the 
Contractor's business system leading to a potential risk of harm to the 
Government.'' Furthermore, the phrase ``that adversely affect the 
Contractor's business system leading to a potential risk of harm to the 
Government'' is also added for clarity.
    (d) Paragraph (d) is revised for clarity, as well, to--
    (i) Reduce the withhold percentage from 10 percent to five percent 
(two percent for small businesses) and from five percent to two percent 
(one percent for small businesses) if the Contractor submits an 
acceptable corrective action plan within 45 days of a notice of the 
Contracting Officer's intent to withhold payments;
    (ii) Set forth procedures for Contracting Officers to withhold 
payments from progress payments and performance-based payments, or 
issue a contract modification requiring the Contractor to implement the 
withholding on interim cost vouchers on cost, labor-hour, and time-and-
materials contracts;
    (iii) Reduce the cumulative percentage of payments withheld on one 
or more business systems from 50 percent to 20 percent (10 percent for 
small businesses);
    (iv) Delete the potential 100 percent withhold for deficiencies 
that are highly likely to lead to improper contract payments or 
represent an unacceptable risk of loss to the Government;
    (v) Add construction contracts that include FAR clause 52.232-27 to 
the list of interim payments applicable to this clause; and
    (vi) Add subparagraph (5) to set forth that ``Payment withholding 
shall not apply to payments on fixed-price line items where performance 
is complete and the items were accepted by the Government.''
    (e) Paragraph (e) is revised for clarity, as well, to--
    (i) Revise procedures for Contracting Officers to discontinue 
withhold payments from progress payments and performance-based 
payments, and unilaterally issue a contract modification to discontinue 
the payment withholding from billings on interim cost vouchers, and 
authorize the Contractor to appropriately bill for any monies 
previously withheld if the Contracting Officer determines the 
Contractor has corrected all deficiencies in a business system; and
    (ii) Revise procedures for Contracting Officers to continue to 
withhold payments from progress payments and performance-based 
payments, or require the Contractor to continue the withholding from 
its billings on interim cost vouchers if the Contracting Officer 
determines the Contractor has not corrected all deficiencies in a 
business system.
    20. Clause 252.242-7YYY is revised as follows:
    (a) The definition of ``acceptable accounting system'' is revised 
to replace the phrase ``requirements under'' with the phrase ``system 
criteria in,'' and replace the word ``invoice'' with the word 
``billing.''
    (b) The definition of ``accounting system'' is revised to replace 
``reporting data'' with ``reporting'' and to add the phrase ``and may 
include subsystems for specific areas such as indirect and other direct 
costs, compensation, billing, labor, and general information 
technology.''
    (c) Paragraph (b), General, is revised to clarify that ``Failure to 
maintain an acceptable accounting system, as defined in this clause, 
shall result in the withholding of payments if the contract includes 
the clause at 252.242-7XXX, Business Systems, and also may result in 
disapproval of the system.''
    21. Clause 252.244-7XXX is revised as follows:
    (a) The definition of an ``acceptable purchasing system'' is added.
    (b) The definition of ``purchasing system'' is revised to delete 
the purchasing system criteria language in subparagraphs (1) through 
(6), which has been relocated to the system criteria paragraph (c).
    22. New clause 252.245-7XXX, Contractor Property System 
Administration, has been added for consistency with the other business 
system clauses, 252.215-7002, 252.234-7002, 252.242-7004, 252.242-7YYY, 
and 252.244-7XXX.

III. Executive Order 12866

    This is a significant regulatory action and, therefore, was subject 
to review under section 6(b) of Executive Order 12866, Regulatory 
Planning and Review, dated September 30, 1993. This rule is not a major 
rule under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

    DoD has prepared an initial regulatory flexibility analysis 
consistent with 5 U.S.C. 603. A copy of the analysis may be obtained 
from the point of contact specified herein. The analysis is summarized 
as follows:
    The objective of the rule is to establish a definition for 
contractor business systems and implement compliance mechanisms to 
improve DoD oversight of those contractor business systems. The 
requirements of the rule will apply to entities contractually required 
to maintain one or more of the defined contractor business systems. 
While DoD did not receive comments with specific impacts on small 
businesses, based on comments received, DoD has revised the proposed 
rule to establish a $50 million threshold designed to limit the impact 
on small business. Additionally, the rule has been revised to reduce 
the percentage of payment withholding if a small business has a 
deficiency that poses a potential risk of harm to the Government.
    At this time, DoD is unable to estimate the number of small 
entities to which this rule will apply. Therefore, DoD invites comments 
from small

[[Page 75560]]

business concerns and other interested parties on the expected impact 
of this rule on small entities.
    DoD will also consider comments from small entities concerning the 
existing regulations in subparts affected by this rule in accordance 
with 5 U.S.C. 610. Interested parties must submit such comments 
separately and should cite 5 U.S.C. 610 (DFARS Case 2009-D038) in 
correspondence.

V. Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. chapter 35) applies because 
the proposed rule contains information collection requirements. In 
accordance with 5 CFR 1320.8, DoD invited comments regarding the 
information collection estimate that DoD included with the initial 
proposed rule published on January 15, 2010, at 75 FR 2457. In 
response, DoD received one comment. The respondent asserted that DoD's 
estimates are substantially understated. However, the supporting data 
referenced by the respondent exceeds the information collection 
requirements established under this rule. The hours and costs cited by 
the respondent with regard to EVMS do not reflect the Paperwork 
Reduction Act requirements of this rule. With no further specific 
Paperwork Reduction Act comments received, and no further revisions in 
this proposed rule to the information collection requirements, DoD 
believes the estimates published with the proposed rule accurately 
reflect the contractors' costs to fulfill the information collection 
requirements of this rule.
    Written comments and recommendations on the proposed information 
collection should be sent to Ms. Jasmeet Seehra at the Office of 
Management and Budget, Desk Officer for DoD, Room 10236, New Executive 
Office Building, Washington, DC 20503, or e-mail Jasmeet_K._Seehra@omb.eop.gov, with a copy to the Defense Acquisition Regulations 
System, Attn: Mr. Mark Gomersall, OUSD(AT&L)DPAP/DARS, Room 3B855, 3060 
Defense Pentagon, Washington, DC 20301-3060. Comments can be received 
from 30 to 60 days after the date of this notice, but comments to OMB 
will be most useful if received by OMB within 30 days after the date of 
this notice.
    To request more information on this proposed information collection 
or to obtain a copy of the proposal and associated collection 
instruments, please write to the Defense Acquisition Regulations 
System, Attn: Mr. Mark Gomersall, OUSD(AT&L)DPAP/DARS, Room 3B855, 3060 
Defense Pentagon, Washington, DC 20301-3060, or e-mail dfars@osd.mil. 
Include DFARS Case 2009-D038 in the subject line of the message.

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

    Government procurement.

Ynette R. Shelkin,
Editor, Defense Acquisition Regulations System.
    Therefore, DoD proposes to amend 48 CFR parts 215, 234, 242, 244, 
245, and 252 as follows:
    1. The authority citation for 48 CFR parts 215, 234, 242, 244, 245, 
and 252 continues to read as follows:

    Authority: 41 U.S.C. 421 and 48 CFR chapter 1.

PART 215--CONTRACTING BY NEGOTIATION

    2. Amend section 215.407-5-70 by:
    a. Adding introductory text to paragraph (a);
    b. Revising paragraph (a)(4);
    c. Revising the heading of paragraph (c);
    d. Revising paragraphs (c)(2) and (c)(3);
    e. Removing paragraph (c)(4);
    f. Redesignating paragraphs (d)(1), (d)(2), and (d)(3) as 
paragraphs (c)(4), (c)(5), and (c)(6);
    g. Revising newly designated paragraphs (c)(4) and (c)(5);
    h. Removing the heading of paragraph (d);
    i. Removing paragraphs (e), and (f);
    j. Redesignating paragraph (g) as paragraph (d); and
    k. Adding new paragraphs (e) through (g) to read as follows:

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

    (a) Definitions. As used in this subsection--
* * * * *
    (4) Deficiency is defined in 252.215-7002, Cost Estimating System 
Requirements.
    (b) * * *
    (c) Policy.
* * * * *
    (2) The cognizant contracting officer, in consultation with the 
auditor, for contractors subject to paragraph (b)(2) of this subsection 
shall--
    (i) Determine the acceptability of the disclosure and approve or 
disapprove the system; and
    (ii) Pursue correction of any deficiencies.
    (3) The auditor conducts estimating system reviews.
    (4) An acceptable system shall provide for the use of appropriate 
source data, utilize sound estimating techniques and good judgment, 
maintain a consistent approach, and adhere to established policies and 
procedures.
    (5) In evaluating the acceptability of a contractor's estimating 
system, the contracting officer, in consultation with the auditor, 
shall determine whether the contractor's estimating system complies 
with the system criteria for an acceptable estimating system as 
prescribed in 252.215-7002, Cost Estimating System Requirements.
* * * * *
    (e) Disposition of findings--(1) Reporting of findings. The auditor 
shall document findings and recommendations in a report to the 
contracting officer. If the auditor identifies any estimating system 
deficiencies, the report shall describe the deficiencies in sufficient 
detail to allow the contracting officer to understand the deficiencies 
and the potential adverse impact to the Government.
    (2) Initial determination. (i) The contracting officer shall review 
all findings and recommendations and, if there are no deficiencies that 
adversely affect the system, shall promptly notify the contractor in 
writing that the contractor's estimating system is acceptable and 
approved; or
    (ii) If the contracting officer determines that there are one or 
more system deficiencies that adversely affect the contractor's 
estimating system, leading to a potential risk of harm to the 
Government, the contracting officer shall----
    (A) Promptly make an initial determination on any system 
deficiencies and notify the contractor, in writing, providing a 
description of the deficiency in sufficient detail to allow the 
contractor to understand the deficiency and its potential harm to the 
Government;
    (B) Request the contractor to respond in writing to the initial 
determination within 30 days; and
    (C) Promptly evaluate the contractor's responses to the initial 
determination, in consultation with the auditor or functional 
specialist, and make a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor in writing that--
    (A) The contractor's estimating system is acceptable and approved, 
or
    (B) System deficiencies still remain. The notice shall indicate the 
adequacy of any proposed or completed corrective action. The 
contracting officer shall--

[[Page 75561]]

    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies;
    (2) Disapprove the system in accordance with 252.215-7002, Cost 
Estimating System Requirements, if the contracting officer determines 
that one or more deficiencies warrant system disapproval based on the 
risk to the Government; and
    (3) Withhold payments in accordance with 252.242-7XXX, Business 
Systems, if the clause is included in the contract and the contracting 
officer determines that there are one or more system deficiencies that 
adversely affect the contractor's estimating system, leading to a 
potential risk of harm to the Government.
    (ii) Follow the procedures relating to a correction of system 
deficiencies in PGI 215.407-5-70(e)(3).
    (f) System approval. The contracting officer shall promptly approve 
a previously disapproved estimating system and notify the contractor 
when the contracting officer determines that the contractor has 
substantially corrected the system deficiencies removing the potential 
risk of harm to the Government.
    (g) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to 
withhold, remove withholds, and approve or disapprove a system to the 
auditor; payment office; affected contracting officers at the buying 
activities; and cognizant contracting officers in contract 
administration activities.

PART 234--MAJOR SYSTEM ACQUISITION

    2A. Add section 234.001 to read as follows:

234.001  Definition.

    As used in this subpart--
    Acceptable earned value management system and earned value 
management system are defined in 252.234-7002, Earned Value Management 
System.
    Deficiency is defined in 252.234-7002, Earned Value Management 
System, and is synonymous with noncompliance.
    3. Amend section 234.201 by adding paragraphs (5) through (9) to 
read as follows:

234.201  Policy.

* * * * *
    (5) The cognizant contracting officer, in consultation with the 
functional specialist and auditor, shall--
    (i) Determine the acceptability of the contractor's earned value 
management system and approve or disapprove the system; and
    (ii) Pursue correction of any deficiencies.
    (6) In evaluating the acceptability of a contractor's earned value 
management system, the contracting officer, in consultation with the 
functional specialist and auditor, shall determine whether the 
contractor's earned value management system complies with the system 
criteria for an acceptable earned value management system as prescribed 
in 252.234-7002, Earned Value Management System.
    (7) Disposition of findings--(i) Reporting of findings. The 
functional specialist or auditor shall document findings and 
recommendations in a report to the contracting officer. If the 
functional specialist or auditor identifies any deficiencies in the 
contractor's earned value management system, the report shall describe 
the deficiencies in sufficient detail to allow the contracting officer 
to understand the deficiencies and the potential adverse impact to the 
Government.
    (ii) Initial determination. (A) The contracting officer shall 
review all findings and recommendations and, if there are no 
deficiencies that adversely affect the system, shall promptly notify 
the contractor, in writing, that the contractor's earned value 
management system is acceptable and approved; or
    (B) If the contracting officer determines that there are one or 
more system deficiencies that adversely affect the contractor's earned 
value management system, leading to a potential risk of harm to the 
Government, the contracting officer shall--
    (1) Promptly make an initial determination on any system 
deficiencies and notify the contractor, in writing, providing a 
description of the deficiency in sufficient detail to allow the 
contractor to understand the deficiencies and the potential adverse 
impact to the Government;
    (2) Request the contractor to respond in writing to the initial 
determination within 30 days; and
    (3) Evaluate the contractor's response to the initial 
determination, in consultation with the auditor or functional 
specialist, and make a final determination.
    (iii) Final determination. (A) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (1) The contractor's earned value management system is acceptable 
and approved, or
    (2) Systems deficiencies still remain. The notice shall indicate 
the adequacy of any proposed or completed corrective action. The 
contracting officer shall--
    (i) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies;
    (ii) Disapprove the system in accordance with 252.234-7002, Earned 
Value Management System, when initial validation is not successfully 
completed within a 16 month period from contract award, or the existing 
earned value management system contains one or more deficiencies in 
high-risk guidelines in ANSI/EIA-748 standards (guidelines 1, 3, 6, 7, 
8, 9, 10, 12, 16, 21, 23, 26, 27, 28, 30, or 32). For the remaining 16 
guidelines in ANSI/EIA-748 standards, the contracting officer shall use 
discretion to disapprove the system based on input received from 
functional specialists and the auditor; and
    (iii) Withhold payments in accordance with 252.242-7XXX, Business 
Systems, if the clause is included in the contract and the contracting 
officer determines that there are one or more system deficiencies that 
adversely affect the contractor's earned value management system, 
leading to a potential risk of harm to the Government.
    (B) Follow the procedures relating to correction of system 
deficiencies at PGI 234.201(7)(iii).
    (8) System approval. The contracting officer shall promptly approve 
a previously disapproved earned value management system and notify the 
contractor when the contracting officer determines that the contractor 
has substantially corrected the system deficiencies, removing the 
potential risk of harm to the Government.
    (9) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to 
withhold, remove withholds, and approve or disapprove a system to the 
auditor; payment office; affected contracting officers at the buying 
activities; and cognizant contracting officers in contract 
administration activities.

PART 242--CONTRACT ADMINISTRATION AND AUDIT SERVICES

    4. Add subpart 242.70 to read as follows:

[[Page 75562]]

Subpart 242.70--Business Systems
Sec.
242.70X1 Business system deficiencies.
242.70X2 Contract clause.

Subpart 242.70--Business Systems

242.70X1  Business system deficiencies.

    (a) Definition. As used in this subpart----
    Acceptable business systems and business systems are defined in 
252.242-7XXX, Business Systems.
    Deficiency is defined in 252.242-7XXX, Business Systems.
    (b) Determination to withhold payments. If the contracting officer 
determines that one or more system deficiencies adversely affect the 
contractor's business systems included in 252.242-7XXX, Business 
Systems, that lead to a potential risk of harm to the Government, the 
contracting officer will--
    (1) Promptly notify the contractor, in writing, of the contracting 
officer's determination to implement payment withholding in accordance 
with 252.242-7XXX, Business Systems. The notice of payment withhold 
shall be included in the contracting officer's written final 
determination for the business system and shall inform the contractor 
that--
    (i) Payments shall be withheld in accordance with 252.242-7XXX, 
Business Systems, until the contracting officer determines that all 
system deficiencies have been corrected; and
    (ii) The contracting officer reserves the right to take other 
actions within the terms and conditions of the contract.
    (2) Provide all contracting officers administering contracts 
containing 252.242-7XXX, Business Systems, a copy of the determination 
and instructions for issuing unilateral contract modifications to 
withhold payments on those contracts, and reducing progress payments 
and performance-based payments, as applicable. The contracting officer 
shall also provide a copy of the determination to the auditor; payment 
office; affected contracting officers at the buying activities; and 
cognizant contracting officers in contract administration activities.
    (3) Contracting officers shall use a format substantially the same 
as the following for unilateral modifications for making an initial 
payment withholding, reducing the payment withholding, and 
discontinuing the payment withholding in accordance with 252.242-7XXX, 
Business Systems:
    (i) Use this format for unilateral modifications for implementing 
payment withholding:

Payment Withholding

    (A) The purpose of this unilateral modification is to implement a 
payment withholding per the terms of 252.242-7XXX, Business Systems, 
and as a result of the Contracting Officer's determination, dated YYYY/
MM/DD, with respect to the deficiencies found in the Contractor's 
system(s).
    (B) Effective immediately, five percent (two percent for small 
businesses) of each request for payment under this contract will be 
withheld as described below. Upon receipt of an acceptable corrective 
action plan from the Contractor, a determination will be made with 
respect to reducing the percentage being withheld to two percent (one 
percent for small businesses) until the Contracting Officer determines 
that the Contractor has corrected all system deficiencies, as 
identified in the Contracting Officer's determination. Failure to 
follow the accepted corrective action plan will result in an increase 
in the percentage withheld against each payment under this contract to 
five percent (two percent for small businesses). Such reduction or 
increase will be made by contract modification.
    (C) For payments under cost, labor-hour, or time-and-materials 
contracts: The Contractor shall apply a five percent (two percent for 
small businesses) withhold to the amount being billed and prepare a 
cost voucher in Wide Area WorkFlow (WAWF) for the net amount due. The 
Contractor shall show the amount withheld on the current billing, as 
well as the cumulative amount withheld to date on this contract in 
accordance with 252.242-7XXX, in the Comments block of the 
Miscellaneous Info Tab in WAWF.
    (D) For progress payments: The Contractor shall prepare the request 
in WAWF without applying any withhold percentage. The Contracting 
Officer will reduce the approved amount by five percent (two percent 
for small businesses) and record the amount being withheld on the 
progress payment request, as well as the cumulative amount withheld on 
this contract in accordance with 252.242-7XXX, in the Comments block of 
the Miscellaneous Info Tab in WAWF.
    (E) For performance-based payments: The Contractor shall prepare 
the request in WAWF without applying any withhold percentage to the 
performance-based payment event schedule amounts. The Contracting 
Officer will reduce the amount approved by five percent (two percent 
for small businesses)and record the amount being withheld on the 
performance-based payment, as well as the cumulative amount withheld on 
this contract, in accordance with 252.242-7XXX, in the Comments block 
of the of the Miscellaneous Info Tab in WAWF.
    (F) These payment withhold amounts will not be recorded in 
Mechanization of Contract Administration Services as withholds and 
there is no ACTION required on the part of the payment office to effect 
the withhold.
    (ii) Use this format for unilateral modifications for reducing 
payment withholding:

Reduction of Temporary Payment Withholding

    (A) The purpose of this unilateral modification is to reduce the 
payment withholding percentage per the terms of 252.242-7XXX, Business 
Systems, as a result of receiving an acceptable corrective action plan 
from the contractor, dated YYYY/MM/DD, for resolving deficiencies in 
its system(s) as identified in the Contracting Officer's determination, 
dated YYYY/MM/DD. This reduction is prospective and previous amounts 
withheld will not be reduced or released at this time.
    (B) Effective immediately, two percent (one percent for small 
businesses) of each request for payment under this contract will be 
withheld as described below. The two percent (one percent for small 
businesses) being withheld will remain in effect until the Contracting 
Officer determines that the Contractor has corrected all system 
deficiencies as identified in the Contracting Officer's determination. 
Failure to follow the accepted corrective action plan will result in an 
increase in the percentage withheld against each payment under this 
contract to five percent (two percent for small businesses). Such 
increase will be made by contract modification.
    (C) For payments under cost, labor-hour, or time-and-materials 
contracts: The Contractor shall apply a two percent (one percent for 
small businesses) withhold to the amount being billed and prepare a 
cost voucher in Wide Area WorkFlow (WAWF) for the net amount due. The 
Contractor shall show the amount withheld on the current billing, as 
well as the cumulative amount withheld to date on this contract in 
accordance with 252.242-7XXX, in the Comments block of the 
Miscellaneous Info Tab in WAWF.
    (D) For progress payments: The Contractor shall prepare the request 
in WAWF without applying any withhold percentage. The Contracting 
Officer will reduce the approved amount by two percent (one percent for 
small

[[Page 75563]]

businesses) and record the amount being withheld on the progress 
payment request, as well as the cumulative amount withheld on this 
contract, in accordance with 252.242-7XXX, in the Comments block of the 
Miscellaneous Info Tab in WAWF.
    (E) For performance-based payments: The Contractor shall prepare 
the request in WAWF without applying any withhold percentage to the 
performance-based payment event schedule amounts. The Contracting 
Officer will reduce the amount approved by two percent (one percent for 
small businesses) and record the amount being withheld on the 
performance-based payment, as well as the cumulative amount withheld on 
this contract, in accordance with 252.242-7XXX, in the Comments block 
of the of the Miscellaneous Info Tab in WAWF.
    (F) These payment withhold amounts will not be recorded in 
Mechanization of Contract Administration Services as withholds and 
there is no ACTION required on the part of the payment office to effect 
the withhold.
    (iii) Use the format below if payment withholding is discontinued 
pending receipt of auditor or functional specialist verification and 
based on evidence that the contractor has corrected all system 
deficiencies, in accordance with 252.242-7XXX, Business Systems:

Discontinuation of Payment Withholding

    (A) The purpose of this unilateral modification is to discontinue 
the payment withhold as identified in Modification XXXXX and release 
previous amounts withheld on this contract, in accordance with 252.242-
7XXX, Business Systems.
    (B) The discontinuation of the payment withhold is made pending 
receipt of verification and based on evidence submitted by the 
Contractor that all the Contractor's system(s) deficiencies identified 
in the Contracting Officer's determination, dated YYYY/MM/DD, have been 
corrected.
    (C) The Contractor is authorized to submit a bill in the amount of 
$XXXXXXXX. The billed amount should be submitted on the same type of 
invoice as the withhold was originally taken, as appropriate.
    (iv) Use the format below if payment withholding is discontinued 
after auditor or functional specialist verification that the contractor 
has corrected all system deficiencies, in accordance with 252.242-7XXX, 
Business Systems:

Discontinuation of Payment Withholding

    (A) The purpose of this unilateral modification is to discontinue 
the payment withhold as identified in Modification XXXXX and release 
previous amounts withheld on this contract, in accordance with 252.242-
7XXX, Business Systems.
    (B) The discontinuation of the payment withhold is made based on 
verification that all the contractor's system(s) deficiencies 
identified in the Contracting Officer's final determination, dated 
YYYY/MM/DD, have been corrected.
    (C) The Contractor is authorized to submit a bill in the amount of 
$XXXXXXXX. The billed amount should be submitted on the same type of 
invoice as the withhold was originally taken, as appropriate.
    (c) If the contracting officer determines that none of the system 
deficiencies adversely affect any of the contractor's business systems 
included in 252.242-7XXX, Business Systems, that lead to potential risk 
of harm to the Government, the contracting officer shall promptly 
notify the contractor in writing of the contracting officer's 
determination not to implement payment withholds in accordance with 
252.242-7XXX, Business Systems.
    (d) Monitoring contractor's corrective action. The contracting 
officer, in consultation with the auditor or functional specialist, 
shall monitor the contractor's progress in correcting the deficiencies. 
The contracting officer shall notify the contractor of any decision to 
decrease or increase the amount of payment withholding in accordance 
with 252.242-7XXX, Business Systems.
    (e) Correction of system deficiencies. (1) If the contractor 
notifies the contracting officer that the contractor has corrected the 
system deficiencies, the contracting officer shall request the auditor 
or functional specialist to review the correction to verify that the 
deficiencies have been corrected. If, after receipt of verification, 
the contracting officer determines that the contractor has corrected 
all system deficiencies, the contracting officer shall discontinue the 
withholding of payments and release any payments previously withheld.
    (2) Prior to the receipt of verification, the contracting officer 
may discontinue withholding payments pending receipt of verification, 
and release any payments previously withheld, if the contractor submits 
evidence that the deficiencies have been corrected, and the contracting 
officer, in consultation with the auditor or functional specialist, 
determines that there is a reasonable expectation that the corrective 
actions have been implemented.

242.70X2  Contract clause.

    Use the clause at 252.242-7XXX, Business Systems, in solicitations 
and contracts when the expected contract value is equal to or greater 
than $50 million, and when the solicitation or contract includes any of 
the following clauses:
    (a) 252.215-7002, Cost Estimating System Requirements.
    (b) 252.234-7002, Earned Value Management System.
    (c) 252.242-7004, Material Management and Accounting System.
    (d) 252.242-7YYY, Accounting System Administration.
    (e) 252.244-7XXX, Contractor Purchasing System Administration.
    (f) 252.245-7XXX, Contractor Property Management System 
Administration.
    5. Revise section 242.7201 to read as follows:

242.7201  Definitions.

    As used in this subpart--
    Acceptable material management and accounting system, material 
management and accounting system, and valid time-phased requirements 
are defined in 252.242.7004, Material Management and Accounting System.
    Deficiency is defined in 252.242.7004, Material Management and 
Accounting System.
    6. Amend section 242.7202 by:
    a. Redesignating the introductory text as paragraph (a);
    b. Redesignating existing paragraphs (a) through (c) as paragraphs 
(a)(1) through (a)(3), respectively; and
    c. Adding new paragraphs (b) and (c) to read as follows:

242.7202  Policy.

* * * * *
    (b) The cognizant contracting officer, in consultation with the 
auditor and functional specialist, shall--
    (1) Determine the acceptability of the contractor's MMAS and 
approve or disapprove the system; and
    (2) Pursue correction of any deficiencies.
    (c) In evaluating the acceptability of the contractor's MMAS, the 
contracting officer, in consultation with the auditor and functional 
specialist, shall determine whether the contractor's MMAS complies with 
the system criteria for an acceptable MMAS as prescribed in 252.242-
7004, Material Management and Accounting System.
    7. Amend section 242.7203 by:

[[Page 75564]]

    a. Removing paragraph (c);
    b. Redesignating paragraph (d) as paragraph (c);
    c. Revising newly designated paragraph (c); and
    d. Adding new paragraphs (d) and (e) to read as follows:

242.7203  Review procedures.

* * * * *
    (c) Disposition of findings--(1) Reporting of findings. The auditor 
or functional specialist shall document findings and recommendations in 
a report to the contracting officer. If the auditor or functional 
specialist identifies any MMAS deficiencies, the report shall describe 
the deficiencies in sufficient detail to allow the contracting officer 
to understand the deficiencies and the potential adverse impact to the 
Government.
    (2) Initial determination. (i) The contracting officer shall review 
findings and recommendations and if there are no deficiencies that 
adversely affect the system, shall promptly notify the contractor, in 
writing, that the contractor's MMAS is acceptable and approved; or
    (ii) If the contracting officer determines that there are one or 
more system deficiencies that adversely affect the contractor's MMAS, 
leading to a potential risk of harm to the Government, the contracting 
officer shall--
    (A) Promptly make an initial determination on any system 
deficiencies and notify the contractor, in writing, providing a 
description of deficiencies in sufficient detail to allow the 
contractor to understand the deficiencies and the potential adverse 
impact to the Government;
    (B) Request the contractor to respond in writing to the initial 
determination within 30 days; and
    (C) Promptly evaluate the contractor's response to the initial 
determination in consultation with the auditor or functional 
specialists, and make a final determination.
    (3) Final determination. (i) The ACO shall make a final 
determination and notify the contractor that--
    (A) The contractor's MMAS is acceptable and approved, or
    (B) System deficiencies still remain. The notice shall indicate the 
adequacy of any proposed or completed corrective action. The 
contracting officer shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies;
    (2) Make a determination to disapprove the system in accordance 
with 252.242-7004, Material Management and Accounting System, if the 
contracting officer determines that one or more deficiencies warrant 
system disapproval based on the risk to the Government; and
    (3) Withhold payments in accordance with 252.242-7XXX, Business 
Systems, if the clause is included in the contract and the contracting 
officer determines that there are one or more system deficiencies that 
adversely affect the contractor's MMAS, leading to a potential risk of 
harm to the Government.
    (ii) Follow the procedures relating to correction of system 
deficiencies in PGI 242.7203.
    (d) System approval. The contracting officer shall promptly approve 
a previously disapproved MMAS and notify the contractor when the 
contracting officer determines that the contractor has substantially 
corrected the system deficiencies, removing the potential risk of harm 
to the Government.
    (e) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to 
withhold, remove withholds, and approve or disapprove a system to the 
auditor; payment office; affected contracting officers at the buying 
activities; and cognizant contracting officers in contract 
administration activities.
    8. Revise subpart 242.75 to read as follows:
Subpart 242.75--Contractor Accounting Systems
Sec.
242.7501 Definitions.
242.7502 Policy.
242.7503 Contract clause.

Subpart 242.75--Contractor Accounting Systems

242.7501  Definitions.

    As used in this subpart--
    Acceptable accounting system, and accounting system are defined in 
252.242-7YYY, Accounting System Administration.
    Deficiency is defined in 252.242-7YYY, Accounting System 
Administration.

242.7502  Policy.

    (a) Contractors receiving cost-reimbursement, incentive-type, time-
and-materials, or labor-hour contracts, contracts which provide for 
progress payments based on costs or on a percentage or stage of 
completion, or construction contracts that include the clause at FAR 
52.232-27, Prompt Payment for Construction Contracts, shall maintain an 
acceptable accounting system.
    (b) The cognizant contracting officer, in consultation with the 
auditor, shall--
    (1) Determine the acceptability of a contractor's accounting system 
and approve or disapprove the system; and
    (2) Pursue correction of any deficiencies.
    (c) In evaluating the acceptability of a contractor's accounting 
system, the contracting officer, in consultation with the auditor, 
shall determine whether the contractor's accounting system complies 
with the system criteria for an acceptable accounting system as 
prescribed in 252.242-7YYY, Accounting System Administration.
    (d) Disposition of findings--(1) Reporting of findings. The auditor 
shall document findings and recommendations in a report to the 
contracting officer. If the auditor identifies any accounting system 
deficiencies, the report shall describe the deficiencies in sufficient 
detail to allow the contracting officer to understand the deficiencies 
and the potential adverse impact to the Government. Follow the 
procedures at PGI 242.70X1(b) for reporting of deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
findings and recommendations and, if there are no deficiencies that 
adversely affect the system, shall promptly notify the contractor, in 
writing, that the contractor's accounting system is acceptable and 
approved; or
    (ii) If the contracting officer determines that there are one or 
more system deficiencies that adversely affect the contractor's 
accounting system, leading to a potential risk of harm to the 
Government, the contracting officer shall--
    (A) Promptly make an initial determination on any system 
deficiencies and notify the contractor, in writing;
    (B) Request the contractor to respond in writing to the initial 
determination within 30 days; and
    (C) Evaluate the contractor`s response to the initial 
determination, in consultation with the auditor or functional 
specialist and make a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (A) The contractor's accounting system is acceptable and approved, 
or
    (B) System deficiencies still remain. The notice shall indicate the 
adequacy

[[Page 75565]]

of any proposed or completed corrective action. The contracting officer 
shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies;
    (2) Make a determination to disapprove the system in accordance 
with 252.242-7YYY, Accounting System Administration, if the contracting 
officer determines that one or more deficiencies warrant system 
disapproval based on the risk to the Government; and
    (3) Withhold payments in accordance with 252.242-7XXX, Business 
Systems, if the clause is included in the contract and the contracting 
officer determines that there are one or more system deficiencies that 
adversely affect the contractor's accounting system, leading to a 
potential risk of harm to the Government.
    (ii) Follow the procedures relating to correction of system 
deficiencies in PGI 242.7502.
    (e) System approval. The contracting officer shall promptly approve 
a previously disapproved accounting system and notify the contractor 
when the contracting officer determines that the contractor has 
substantially corrected the system deficiencies, removing the potential 
risk of harm to the Government.
    (f) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to 
withhold, remove withholds, and approve or disapprove a system to the 
auditor; payment office; affected contracting officers at the buying 
activities; and cognizant contracting officers in contract 
administration activities.
    (g) Mitigating the risk of accounting system deficiencies on 
specific proposals. (1) Field pricing teams shall discuss identified 
accounting system deficiencies and their impact in all reports on 
contractor proposals until the deficiencies are resolved.
    (2) The contracting officer responsible for negotiation of a 
proposal generated by an accounting system with an identified 
deficiency shall evaluate whether the deficiency impacts the 
negotiations. If it does not, the contracting officer should proceed 
with negotiations. If it does, the contracting officer should consider 
other alternatives, e.g.--
    (i) Allowing the contractor additional time to correct the 
accounting system deficiency and submit a corrected proposal;
    (ii) Considering another type of contract, e.g., a fixed-price 
incentive (firm target) contract instead of a 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 unilaterally adjust 
the contract price if the contractor fails to submit the supplemental 
proposal; and
    (iv) Provide that failure of the Government and the contractor to 
agree to the price adjustment shall be a dispute under the Disputes 
clause.

242.7503  Contract clause.

    Use the clause at 252.242-7YYY, Accounting System Administration, 
in solicitations and contracts when contemplating--
    (a) A cost-reimbursement, 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; or
    (c) A construction contract that includes the clause at FAR 52.232-
27, Prompt Payment for Construction Contracts.

PART 244--SUBCONTRACTING POLICIES AND PROCEDURES

    9. Add subpart 244.1 to read as follows:
Subpart 244.1--General
Sec.
244.101 Definitions.

Subpart 244.1--General

244.101  Definitions.

    As used in this subpart--
    Acceptable purchasing system, and purchasing system are defined in 
252.244-7XXX, Purchasing System Administration.
    Deficiency is defined in 252.244-7XXX, Purchasing System 
Administration.
    10. Revise section 244.305-70 to read as follows:

244.305-70  Policy.

    Use the procedures of this subsection instead of FAR 44.305-2(c) 
and 44.305-3(b).
    (a) The cognizant contracting officer, in consultation with the 
purchasing system analyst or auditor, shall--
    (1) Determine the acceptability of the contractor's purchasing 
system and approve or disapprove the system; and
    (2) Pursue correction of any deficiencies.
    (b) In evaluating the acceptability of the contractor's purchasing 
system, the contracting officer, in consultation with the purchasing 
system analyst and auditor, shall determine whether the contractor's 
purchasing system complies with the system criteria for an acceptable 
purchasing system as prescribed in 252.244-7XXX, Contractor Purchasing 
System Administration.
    (c) Disposition of findings--(1) Reporting of findings. The 
purchasing system analyst or auditor shall document findings and 
recommendations in a report to the contracting officer. If the 
purchasing system analyst or auditor identifies any purchasing system 
deficiencies, the report shall describe the deficiencies in sufficient 
detail to allow the contracting officer to understand the deficiencies 
and the potential adverse impact to the Government.
    (2) Initial determination. (i) The contracting officer shall review 
all findings and recommendations and, if there are no deficiencies that 
adversely affect the system, shall promptly notify the contractor that 
the contractor's purchasing system is acceptable and approved; or
    (ii) If the contracting officer determines that there are one or 
more system deficiencies that adversely affect the contractor's 
purchasing system, leading to a potential risk of harm to the 
Government, the contracting officer shall--
    (A) Promptly make an initial determination on any system 
deficiencies and notify the contractor, in writing, providing a 
description of the deficiencies in sufficient detail to allow

[[Page 75566]]

the contractor to understand the deficiencies and the potential adverse 
impact to the Government;
    (B) Request the contractor to respond in writing to the initial 
determination within 30 days; and
    (C) Evaluate the contractor's response to the initial determination 
in consultation with the auditor or functional specialist, and make a 
final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (A) The contractor's purchasing system is acceptable and approved, 
or
    (B) System deficiencies still remain. The notice shall indicate the 
adequacy of any proposed or completed corrective action. The 
contracting officer shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies;
    (2) Make a determination to disapprove the system in accordance 
with 252.244-7XXX, Contractor Purchasing System Administration, if the 
contracting officer determines that one or more deficiencies warrant 
system disapproval based on the risk to the Government; and
    (3) Withhold payments in accordance with 252.242-7XXX, Business 
Systems, if the clause is included in the contract and the contracting 
officer determines that there are one or more system deficiencies that 
adversely affect the contractor's purchasing system, leading to a 
potential risk of harm to the Government.
    (ii) Follow the procedures in accordance with 252.244-7XXX, 
Contractor Purchasing System Administration, and PGI 244.305-70 for 
disposition of report findings.
    (d) System approval. The contracting officer shall promptly approve 
a previously disapproved purchasing system and notify the contractor 
when the contracting officer determines that the contractor has 
substantially corrected the system deficiencies, removing the potential 
risk of harm to the Government.
    (e) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to 
withhold, remove withholds, and approve or disapprove a system to the 
auditor; payment office; affected contracting officers at the buying 
activities; and cognizant contracting officers in contract 
administration activities.
    (f) Mitigating the risk of purchasing system deficiencies on 
specific proposals. (1) Source selection evaluation teams shall discuss 
identified purchasing system deficiencies and their impact in all 
reports on contractor proposals until the deficiencies are resolved.
    (2) The contracting officer responsible for negotiation of a 
proposal generated by a purchasing system with an identified deficiency 
shall evaluate whether the deficiency impacts the negotiations. If it 
does not, the contracting officer should proceed with negotiations. If 
it does, the contracting officer should consider other alternatives, 
e.g.--
    (i) Allowing the contractor additional time to correct the 
purchasing system deficiency and submit a corrected proposal;
    (ii) Considering another type of contract, e.g., a fixed-price 
incentive (firm target) contract instead of 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 unilaterally adjust 
the contract price if the contractor fails to submit the supplemental 
proposal; and
    (iv) Provide that failure of the Government and the contractor to 
agree to the price adjustment shall be a dispute under the Disputes 
clause.
    11. Add new section 244.305-7X to read as follows:

244.305-7X  Contract clause.

    Use the clause at 252.244-7XXX, Contractor Purchasing System 
Administration, in solicitations and contracts containing the clause at 
FAR 52.244-2, Subcontracts.

PART 245--GOVERNMENT PROPERTY

    12. Revise section 245.105 to read as follows:

245.105  Contractor's property management system compliance.

    (a) Definitions--(1) Acceptable property management system and 
property management system are defined in 252.242-7XXX, Contractor 
Property Management System Administration.
    (2) Deficiency is defined in 252.242-7XXX, Contractor Property 
Management System Administration.
    (b) Policy. The cognizant contracting officer, in consultation with 
the property administrator, shall--
    (1) Determine the acceptability of the system and approve or 
disapprove the system; and
    (2) Pursue correction of any deficiencies.
    (c) In evaluating the acceptability of a contractor's property 
management system, the contracting officer, in consultation with the 
property administrator, shall determine whether the contractor's 
property management system complies with the system criteria for an 
acceptable property management system as prescribed in 252.242-7XXX, 
Contractor Property Management System Administration.
    (d) Disposition of findings--(1) Reporting of findings. The 
property administrator shall document findings and recommendations in a 
report to the contracting officer. If the property administrator 
identifies any property system deficiencies, the report shall describe 
the deficiencies in sufficient detail to allow the contracting officer 
to understand the deficiencies and the potential adverse impact to the 
Government.
    (2) Initial determination. (i) The contracting officer shall review 
findings and recommendations and, if there are no deficiencies that 
adversely affect the system, shall promptly notify the contractor, in 
writing, that the contractor's property management system is acceptable 
and approved; or
    (ii) If the contracting officer determines that there are one or 
more system deficiencies that adversely affect the contractor's 
property management system, leading to a potential risk of harm to the 
Government, the contracting officer shall--
    (A) Promptly make an initial determination on any system 
deficiencies and notify the contractor, in writing, providing a 
description of

[[Page 75567]]

deficiencies in sufficient detail to allow the contractor to understand 
the deficiencies and the potential adverse impact to the Government;
    (B) Request the contractor to respond in writing to the initial 
determination within 30 days and;
    (C) Evaluate the contractor's response to the initial 
determination, in consultation with the property administrator and make 
a final determination;
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (A) The contractor's property management system is acceptable and 
approved, or
    (B) System deficiencies still remain. The notice shall indicate the 
adequacy of any proposed or completed corrective action. The 
contracting officer shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies;
    (2) Promptly make a determination to disapprove the system if the 
contracting officer determines that one or more deficiencies warrant 
the system disapproval based on the risk to the Government; and
    (3) Withhold payments in accordance with 252.242-7XXX, Business 
Systems, if the clause is included in the contract and the contracting 
officer determines that there are one or more system deficiencies that 
adversely affect the contractor's property system, leading to a 
potential risk of harm to the Government.
    (ii) Follow the procedures in PGI 245.105 for disposition of report 
findings.
    (e) System Approval. The contracting officer shall promptly approve 
a previously unapproved property management system and notify the 
contractor when the contracting officer determines, in consultation 
with the property administrator, that the contractor has substantially 
corrected the system deficiencies, removing the potential risk of harm 
to the Government.
    (f) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to 
withhold, remove withholds, and approve or disapprove a system to the 
auditor; payment office; affected contracting officers at the buying 
activities; and cognizant contracting officers in contract 
administration activities.
    12A. Add new section 245.105-7X to read as follows:

245.105-7X  Contract clause.

    Use the clause at 252.245-7XXX, Contractor Property System 
Administration, in solicitations and contracts containing the clause at 
FAR 52.245-1, Government Property.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

    13. Revise section 252.215-7002 to read as follows:

252.215-7002  Cost estimating system requirements.

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

COST ESTIMATING SYSTEM REQUIREMENTS (DATE)

    (a) Definitions. As used in this clause--
    Acceptable estimating system means an estimating system that 
complies with the system criteria in paragraph (d) of this clause, 
and provides for a system that--
    (1) Is maintained, reliable, and consistently applied;
    (2) Produces verifiable, supportable, and documented cost 
estimates that are an acceptable basis for negotiation of fair and 
reasonable prices;
    (3) Is consistent with and integrated with the Contractor's 
related management systems; and
    (4) Is subject to applicable financial control systems.
    Deficiency means a failure to meet one or more system criteria 
of an acceptable estimating system.
    Estimating system means the Contractor's policies, procedures, 
and practices for budgeting and planning controls, and generating 
estimates of costs and other data included in proposals submitted to 
customers in the expectation of receiving contract awards. 
Estimating system includes the Contractor's--
    (1) Organizational structure;
    (2) Established lines of authority, duties, and 
responsibilities;
    (3) Internal controls and managerial reviews;
    (4) Flow of work, coordination, and communication; and
    (5) Budgeting, planning, and estimating methods, techniques, 
accumulation of historical costs, and other analyses used to 
generate cost estimates and budgets.
    (b) General. The Contractor shall establish, maintain, and 
comply with an acceptable estimating system.
    (c) Applicability. Paragraphs (d) and (e) of this clause apply 
if the Contractor is a large business and either--
    (1) In its fiscal year preceding award of this contract, 
received Department of Defense (DoD) prime contracts or 
subcontracts, totaling $50 million or more for which cost or pricing 
data were required; or
    (2) In its fiscal year preceding award of this contract--
    (i) Received DoD prime contracts or subcontracts totaling $10 
million or more (but less than $50 million) for which cost or 
pricing data were required; and
    (ii) Was notified in writing by the Contracting Officer that 
paragraphs (d) and (e) of this clause apply.
    (d) System criteria. (1) The Contractor shall disclose its 
estimating system to the Administrative Contracting Officer (ACO) in 
writing. If the Contractor wishes the Government to protect the 
information as privileged or confidential, the Contractor must mark 
the documents with the appropriate legends before submission.
    (2) An estimating system disclosure is acceptable when the 
Contractor has provided the ACO with documentation that--
    (i) Accurately describes those policies, procedures, and 
practices that the Contractor currently uses in preparing cost 
proposals; and
    (ii) Provides sufficient detail for the Government to reasonably 
make an informed judgment regarding the acceptability of the 
Contractor's estimating practices.
    (3) The Contractor shall--
    (i) Comply with its disclosed estimating system; and
    (ii) Disclose significant changes to the cost estimating system 
to the ACO on a timely basis.
    (4) The Contractor's estimating system shall provide for the use 
of appropriate source data, utilize sound estimating techniques and 
good judgment, maintain a consistent approach, and adhere to 
established policies and procedures. An acceptable estimating system 
shall accomplish the following functions--
    (i) Establish clear responsibility for preparation, review, and 
approval of cost estimates and budgets;
    (ii) Provide a written description of the organization and 
duties of the personnel responsible for preparing, reviewing, and 
approving cost estimates and budgets;
    (iii) Ensure that relevant personnel have sufficient training, 
experience, and guidance to perform estimating and budgeting tasks 
in accordance with the contractor's established procedures;
    (iv) Identify and document the sources of data and the 
estimating methods and rationale used in developing cost estimates 
and budgets;
    (v) Provide for adequate supervision throughout the estimating 
and budgeting process;
    (vi) Provide for consistent application of estimating and 
budgeting techniques;
    (vii) Provide for detection and timely correction of errors;
    (viii) Protect against cost duplication and omissions;
    (ix) Provide for the use of historical experience, including 
historical vendor pricing information, where appropriate;
    (x) Require use of appropriate analytical methods;
    (xi) Integrate information available from other management 
systems;
    (xii) Require management review, including verification of the 
company's estimating and budgeting policies, procedures, and 
practices;

[[Page 75568]]

    (xiii) Provide for internal review of, and accountability for, 
the acceptability of the estimating system, including the budgetary 
data supporting indirect cost estimates and comparisons of projected 
results to actual results, and an analysis of any differences;
    (xiv) Provide procedures to update cost estimates and notify the 
Contracting Officer in a timely manner throughout the negotiation 
process;
    (xv) Provide procedures that ensure subcontract prices are 
reasonable based on a documented review and analysis;
    (xvi) Provide estimating and budgeting practices that 
consistently generate sound proposals that are compliant with the 
provisions of the solicitation and are adequate to serve as a basis 
to reach a fair and reasonable price; and
    (xvii) Have an adequate system description, including policies, 
procedures, and estimating and budgeting practices that comply with 
the Federal Acquisition Regulation and Defense Federal Acquisition 
Regulation Supplement.
    (e) System deficiencies. (1) The Contracting Officer will 
provide an initial determination to the Contractor, in writing, on 
any system deficiencies. The initial determination will describe the 
deficiency in sufficient detail to allow the Contractor to 
understand the deficiency and its potential harm to the Government.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
deficiencies in the Contractor's estimating system. If the 
Contractor disagrees with the initial determination, the Contractor 
shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the Contracting 
Officer's final determination concerning--
    (i) Remaining deficiencies;
    (ii) The adequacy of any proposed or completed corrective 
action; and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more deficiencies warrant system disapproval based on 
the risk to the Government.
    (f) If the Contractor receives the Contracting Officer's final 
determination of system deficiencies, the Contractor shall, within 
45 days of receipt of the final determination, either correct the 
deficiencies or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the deficiencies.
    (g) Withholding payments. If the Contracting Officer determines 
that there are one or more system deficiencies that adversely affect 
the Contractor's estimating system, leading to a potential risk of 
harm to the Government, and the contract includes 252.242-7XXX, 
Business Systems, the Contracting Officer will withhold payments in 
accordance with that clause.

(End of clause)

    14. Revise section 252.234-7002 to read as follows:

252.234-7002  Earned Value Management System.

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

EARNED VALUE MANAGEMENT SYSTEM (DATE)

    (a) Definitions. As used in this clause--
    Acceptable earned value management system means an earned value 
management system that generally complies with system criteria in 
paragraph (b) of this clause.
    Deficiency means a failure to meet one or more system criteria 
of an acceptable earned value management system.
    Earned value management system means an earned value management 
system that complies with the earned value management system 
guidelines in the ANSI/EIA-748.
    (b) System Criteria. In the performance of this contract, the 
Contractor shall use--
    (1) An Earned Value Management System (EVMS) that complies with 
the EVMS guidelines in the American National Standards Institute/
Electronic Industries Alliance Standard 748, Earned Value Management 
Systems (ANSI/EIA-748); and
    (2) Management procedures that provide for generation of timely, 
reliable, and verifiable information for the Contract Performance 
Report (CPR) and the Integrated Master Schedule (IMS) required by 
the CPR and IMS data items of this contract.
    (c) If this contract has a value of $50 million or more, the 
Contractor shall use an EVMS that has been determined to be 
acceptable by the cognizant Federal agency. If, at the time of 
award, the Contractor's EVMS has not been determined by the 
cognizant Federal agency to be in compliance with the EVMS 
guidelines as stated in paragraph (b)(1) of this clause, the 
Contractor shall apply its current system to the contract and shall 
take necessary actions to meet the milestones in the Contractor's 
EVMS plan.
    (d) If this contract has a value of less than $50 million, the 
Government will not make a formal determination that the 
Contractor's EVMS complies with the EVMS guidelines in ANSI/EIA-748 
with respect to the contract. The use of the Contractor's EVMS for 
this contract does not imply a Government determination of the 
Contractor's compliance with the EVMS guidelines in ANSI/EIA-748 for 
application to future contracts. The Government will allow the use 
of a Contractor's EVMS that has been formally reviewed and 
determined by the cognizant Federal agency to be in compliance with 
the EVMS guidelines in ANSI/EIA-748.
    (e) The Contractor shall submit notification of any proposed 
substantive changes to the EVMS procedures and the impact of those 
changes to the cognizant Federal agency. If this contract has a 
value of $50 million or more, unless a waiver is granted by the 
cognizant Federal agency, any EVMS changes proposed by the 
Contractor require approval of the cognizant Federal agency prior to 
implementation. The cognizant Federal agency will advise the 
Contractor of the acceptability of such changes as soon as 
practicable (generally within 30 calendar days) after receipt of the 
Contractor's notice of proposed changes. If the cognizant Federal 
agency waives the advance approval requirements, the Contractor 
shall disclose EVMS changes to the cognizant Federal agency at least 
14 calendar days prior to the effective date of implementation.
    (f) The Government will schedule integrated baseline reviews as 
early as practicable, and the review process will be conducted not 
later than 180 calendar days after contract award, the exercise of 
significant contract options, and the incorporation of major 
modifications. During such reviews, the Government and the 
Contractor will jointly assess the Contractor's baseline to be used 
for performance measurement to ensure complete coverage of the 
statement of work, logical scheduling of the work activities, 
adequate resourcing, and identification of inherent risks.
    (g) The Contractor shall provide access to all pertinent records 
and data requested by the Contracting Officer or duly authorized 
representative as necessary to permit Government surveillance to 
ensure that the EVMS complies, and continues to comply, with the 
performance criteria referenced in paragraph (b) of this clause.
    (h) When indicated by contract performance, the Contractor shall 
submit a request for approval to initiate an over-target baseline or 
over-target schedule to the Contracting Officer. The request shall 
include a top-level projection of cost and/or schedule growth, a 
determination of whether or not performance variances will be 
retained, and a schedule of implementation for the rebaselining. The 
Government will acknowledge receipt of the request in a timely 
manner (generally within 30 calendar days).
    (i) System deficiencies. (1) The Contracting Officer will 
provide an initial determination to the Contractor, in writing, on 
any system deficiencies. The initial determination will describe the 
deficiency in sufficient detail to allow the Contractor to 
understand the deficiency and its potential harm to the Government.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
deficiencies in the Contractor's EVMS. If the Contractor disagrees 
with the initial determination, the Contractor shall state in 
writing its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the Contracting 
Officer's final determination concerning--
    (i) Remaining deficiencies;
    (ii) The adequacy of any proposed or completed corrective 
action; and
    (iii) System non-compliance, when the Contractor's existing EVMS 
contains one or more deficiencies in any of the 32 foundational 
guidelines in ANSI/EIA-748.
    (4) If the Contractor receives the Contracting Officer's final 
determination of system deficiencies, the Contractor shall, within 
45 days of receipt of the final determination, either correct the 
deficiencies or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the deficiencies.
    (j) System disapproval. The Contracting Officer will disapprove 
the Contractor's EVMS when--
    (1) Initial validation is not successfully completed within a 16 
month period from contract award; or
    (2) The existing EVMS contains one or more deficiencies in high-
risk guidelines in ANSI/EIA-748 standards (guidelines 1, 3, 6,

[[Page 75569]]

7, 8, 9, 10, 12, 16, 21, 23, 26, 27, 28, 30 or 32). For the 
remaining 16 guidelines in ANSI/EIA-748 standards, the Contracting 
Officer will use discretion to disapprove the system based on input 
received from functional specialists and the auditor.
    (k) Withholding payments. If the Contracting Officer determines 
that there are one or more system deficiencies that adversely affect 
the Contractor's EVMS, leading to a potential risk of harm to the 
Government, and the contract includes 252.242-7XXX, Business 
Systems, the Contracting Officer will withhold payments in 
accordance with that clause.]
    (l) With the exception of paragraphs (i) through (k) of this 
clause, the Contractor shall require its subcontractors to comply 
with EVMS requirements as follows:
    (1) For subcontracts valued at $50 million or more, the 
following subcontractors shall comply with the requirements of this 
clause:
    [Contracting Officer to insert names of subcontractors (or 
subcontracted effort if subcontractors have not been selected) 
designated for application of the EVMS requirements of this clause.]
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------

     (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)

    15. Amend section 252.242-7004 by:
    a. Revising the section heading, clause title, and the clause date;
    b. Adding paragraphs (a)(4) and (a)(5);
    c. Removing paragraph (d);
    d. Redesignating existing paragraph (e) as paragraph (d); and
    e. Adding new paragraphs (e) through (g) to read as follows:

252.242-7004   Material management and accounting system (MMAS).

* * * * *

MATERIAL MANAGEMENT AND ACCOUNTING SYSTEM (MMAS) (DATE)

    (a) * * *
    (4) Acceptable material management and accounting system means a 
MMAS that generally complies with the system criteria in paragraph 
(d) of this clause.
    (5) Deficiency means a failure to meet one or more system 
criteria of an acceptable material management and accounting system.
* * * * *
    (e) System deficiencies. (1) The Contracting Officer will 
provide an initial determination to the Contractor, in writing, on 
any system deficiencies. The initial determination will describe the 
deficiency in sufficient detail to allow the Contractor to 
understand the deficiency and its potential harm to the Government.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
deficiencies in the Contractor's MMAS. If the Contractor disagrees 
with the initial determination, the Contractor shall state, in 
writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the Contracting 
Officer's final determination concerning--
    (i) Remaining deficiencies;
    (ii) The adequacy of any proposed or completed corrective 
action; and
    (iii) System disapproval if the Contracting Officer determines 
that one or more deficiencies warrants system disapproval based on 
the risk to the Government.
    (f) If the Contractor receives the Contracting Officer's final 
determination of system deficiencies, the Contractor shall, within 
45 days of receipt of the final determination, either correct the 
deficiencies or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the deficiencies.
    (g) Withholding payments. If the Contracting Officer determines 
that there are one or more system deficiencies that adversely affect 
the Contractor's MMAS, leading to a potential risk of harm to the 
Government, and the contract includes 252.242-7XXX, Business 
Systems, the Contracting Officer will withhold payments in 
accordance with that clause.

(End of clause)

    16. Add section 252.242-7XXX to read as follows:

252.242-7XXX   Business systems.

    As prescribed in 242.70X2, use the following clause:

BUSINESS SYSTEMS (DATE)

    (a) Definitions. As used in this clause--
    Acceptable business systems means business systems that comply 
with the terms and conditions of the applicable business system 
clauses listed in the definition of ``Business Systems'' in this 
clause.
    Business systems means--
    (1) Accounting system, if this contract includes 252.242-7YYY, 
Accounting System Administration;
    (2) Earned value management system, if this contract includes 
252.234-7002, Earned Value Management System;
    (3) Estimating system, if this contract includes 252.215-7002, 
Cost Estimating System Requirements;
    (4) Material management and accounting system, if this contract 
includes 252.242-7004, Material Management and Accounting System;
    (5) Property management system, if this contract includes 
252.245-7XXX, Contractor Property System Administration; and
    (6) Purchasing system, if this contract includes 252.244-7XXX, 
Contractor Purchasing System Administration.
    Deficiency means a failure to meet one or more system criteria 
of an acceptable business system.
    (b) General. The Contractor shall establish and maintain 
acceptable business systems in accordance with the terms and 
conditions of this contract.
    (c) System deficiencies. (1) The Contractor shall respond, in 
writing, within 30 days to an initial determination that there are 
one or more system deficiencies that adversely affect the 
Contractor's business system leading to a potential risk of harm to 
the Government.
    (2) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the final 
determination as to whether the business system contains 
deficiencies that adversely affect the Contractor's business system 
leading to a potential risk of harm to the Government. If the 
Contracting Officer determines that the Contractor's business system 
contains such deficiencies, the final determination will include a 
notice to withhold payments.
    (d) Withholding of payments. (1) If the Contracting Officer 
issues the final determination with a notice to withhold payments 
for deficiencies in a business system required under this contract, 
the Contracting Officer will, as applicable, withhold five percent 
(two percent for small businesses) of amounts due from progress 
payments and performance-based payments, and unilaterally issue a 
contract modification requiring the Contractor to withhold five 
percent (two percent for small businesses) from its billings on 
interim cost vouchers on cost, labor-hour, and time-and-materials 
contracts until all deficiencies have been corrected. The Contractor 
shall, within 45 days of receipt of the notice, either correct the 
deficiencies or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the deficiencies.
    (2) If the Contractor submits an acceptable corrective action 
plan within 45 days of receipt of a notice of the Contracting 
Officer's intent to withhold payments, the Contracting Officer will, 
as appropriate, reduce withholding to two percent (one percent for 
small businesses) from progress payments and performance-based 
payments, and issue a unilateral modification to reduce the 
percentage withheld on interim cost vouchers to two percent (one 
percent for small businesses) until the Contracting Officer 
determines that the Contractor has corrected all deficiencies 
identified in the final determination. However, if at any time, the 
Contracting Officer determines that the Contractor has failed to 
follow the accepted corrective action plan, the Contracting Officer 
will issue a unilateral modification to increase the percentage 
withheld to the percentage initially withheld, until the Contracting 
Officer determines that the Contractor has corrected all 
deficiencies identified in the final determination.
    (3) The total percentage of payments withheld on amounts due 
under each progress payment, performance-based payment, or interim 
cost voucher, for deficiencies on one or more business systems, 
shall not exceed 20 percent (10 percent for small businesses) on 
this contract.

[[Page 75570]]

    (4) For the purpose of this clause, payment means any of the 
following payments authorized under this contract:
    (i) Interim payments under--
    (A) Cost-reimbursement contracts;
    (B) Incentive-type contracts;
    (C) Time-and-materials contracts;
    (D) Labor-hour contracts;
    (E) Construction contracts that include the clause at Federal 
Acquisition Regulation 52.232-27, Prompt Payment for Construction 
Contracts.
    (ii) Progress payments.
    (iii) Performance-based payments.
    (5) Payment withholding shall not apply to payments on fixed-
price line items where performance is complete and the items were 
accepted by the Government.
    (6) The withholding of any amount or subsequent payment to the 
Contractor shall not be construed as a waiver of any rights or 
remedies the Government has under this contract.
    (7) Notwithstanding the provisions of any clause in this 
contract providing for interim, partial, or other payment 
withholding on any basis, the Contracting Officer may withhold 
payment in accordance with the provisions of this clause.
    (8) The payment withholding authorized in this clause is not 
subject to the 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 
shall take one of the following actions:
    (i) If the Contracting Officer determines the Contractor has 
corrected all deficiencies in a business system, the Contracting 
Officer will, as appropriate, discontinue the withholding of 
progress payments and performance-based payments, and unilaterally 
issue a contract modification to discontinue the payment withholding 
from billings on interim cost vouchers under this contract 
associated with that business system, and authorize the contractor 
to bill for any monies previously withheld that are not also being 
withheld due to deficiencies on other business systems under this 
contract. Any payment withholding in effect on other business 
systems under this contract will remain in effect until the 
deficiencies for those business systems are corrected.
    (ii) If the Contracting Officer determines the Contractor has 
not corrected all system deficiencies, the Contracting Officer will 
continue the withholding of progress payments and performance-based 
payments, and the Contractor shall continue withholding amounts from 
its billings on interim cost vouchers in accordance with paragraph 
(d) of this clause, and not bill for any monies previously withheld.

(End of clause)

    17. Add section 252.242-7YYY to read as follows:

252.242-7YYY   Accounting system administration.

    As prescribed in 242.7503, use the following clause:

ACCOUNTING SYSTEM ADMINISTRATION (DATE)

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

(End of clause)

    18. Add section 252.244-7XXX to read as follows:

[[Page 75571]]

252.244-7XXX  Contractor purchasing system administration.

    As prescribed in 244.305-7X, insert the following clause:

CONTRACTOR PURCHASING SYSTEM ADMINISTRATION (DATE)

    (a) Definitions. As used in this clause--
    Acceptable purchasing system means a purchasing system that 
complies with the system criteria in paragraph (c) of this clause.
    Deficiency means a failure to meet one or more system criteria 
of an acceptable purchasing system.
    Purchasing system means the Contractor's system or systems for 
purchasing and subcontracting, including make or buy decisions, the 
selection of vendors, analysis of quoted prices, negotiation of 
prices with vendors, placing and administering of orders, and 
expediting delivery of materials.
    (b) General. The Contractor shall establish and maintain an 
acceptable purchasing system. Failure to maintain an acceptable 
purchasing system, as defined in this clause, may result in 
disapproval of the system by the Contracting Officer and/or 
withholding of payments.
    (c) System criteria. The Contractor's purchasing system shall--
    (1) Have an adequate system description including policies, 
procedures, and purchasing practices that comply with the Federal 
Acquisition Regulation (FAR) and the Defense FAR Supplement (DFARS);
    (2) Ensure that all applicable purchase orders and subcontracts 
contain all flow-down clauses, including terms and conditions and 
any other clauses needed to carry out the requirements of the prime 
contract;
    (3) Maintain an organization plan that establishes clear lines 
of authority and responsibility;
    (4) Ensure all purchase orders are based on authorized 
requisitions and include a complete and accurate history of purchase 
transactions to support vendor selected, price paid, and document 
the subcontract/purchase order files which are subject to Government 
review;
    (5) Establish and maintain adequate documentation to provide a 
complete and accurate history of purchase transactions to support 
vendors selected and prices paid;
    (6) Apply a consistent make-or-buy policy that is in the best 
interest of the Government;
    (7) Use competitive sourcing to the maximum extent practicable, 
and ensure debarred or suspended contractors are properly excluded 
from contract award;
    (8) Evaluate price, quality, delivery, technical capabilities, 
and financial capabilities of competing vendors to ensure fair and 
reasonable prices;
    (9) Require management level justification and adequate cost or 
price analysis, as applicable, for any sole or single source award;
    (10) Perform adequate cost or price analysis and technical 
evaluation for each subcontractor and supplier proposal or quote to 
ensure fair and reasonable subcontract prices;
    (11) Document negotiations in accordance with FAR 15.406-3;
    (12) Seek, take, and document economically feasible purchase 
discounts, including cash discounts, trade discounts, quantity 
discounts, rebates, freight allowances, and company-wide volume 
discounts;
    (13) Ensure proper type of contract selection and prohibit 
issuance of cost-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 flow-down clauses that allow for 
Government audit of those subcontracts, and ensure the performance 
of audits of those subcontracts;
    (17) Enforce adequate policies on conflict of interest, gifts, 
and gratuities, including the requirements of the Anti-Kickback Act;
    (18) Perform internal audits or management reviews, training, 
and maintain policies and procedures for the purchasing department 
to ensure the integrity of the purchasing system;
    (19) Establish and maintain policies and procedures to ensure 
purchase orders and subcontracts contain mandatory and applicable 
flow-down clauses, as required by the FAR and DFARS, including terms 
and conditions required by the prime contract and any clauses 
required to carry out the requirements of the prime contract;
    (20) Provide for an organizational and administrative structure 
that ensures effective and efficient procurement of required quality 
materials and parts at the best value from responsible and reliable 
sources;
    (21) Establish and maintain selection processes to ensure the 
most responsive and responsible sources for furnishing required 
quality parts and materials and to promote competitive sourcing 
among dependable suppliers so that purchases are reasonably priced 
and from sources that meet contractor quality requirements;
    (22) Ensure performance of adequate price or cost analysis on 
purchasing actions; and
    (23) Establish and maintain procedures to ensure that proper 
types of subcontracts are selected, and that there are controls over 
subcontracting, including oversight and surveillance of 
subcontracted effort.
    (d) System deficiencies. (1) The Contracting Officer will 
provide notification of initial determination to the Contractor, in 
writing, of any system deficiencies. The initial determination will 
describe the deficiency in sufficient detail to allow the Contractor 
to understand the deficiency and its potential harm to the 
Government.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
deficiencies in the Contractor's purchasing system. If the 
Contractor disagrees with the initial determination, the Contractor 
shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the Contracting 
Officer's final determination concerning--
    (i) Remaining deficiencies;
    (ii) The adequacy of any proposed or completed corrective 
action; and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more deficiencies warrant system disapproval based on 
the risk to the Government.
    (e) If the Contractor receives the Contracting Officer's final 
determination of system deficiencies, the Contractor shall, within 
45 days of receipt of the final determination, either correct the 
deficiencies or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the deficiencies.
    (f) Withholding payments. If the Contracting Officer determines 
that there are one or more system deficiencies that adversely affect 
the Contractor's purchasing system, leading to a potential risk of 
harm to the Government, and the contract includes 252.242-7XXX, 
Business Systems, the Contracting Officer will withhold payments in 
accordance with that clause.

(End of clause)

    19. Add section 252.245-7XXX to read as follows:

252.245-7XXX  Contractor property management system administration.

    As prescribed in 245.105-7X, insert the following clause:

CONTRACTOR PROPERTY MANAGEMENT SYSTEM ADMINISTRATION (DATE)

    (a) Definitions. As used in this clause--
    Acceptable property management system means a property system 
that complies with the system criteria in paragraph (c) of this 
clause.
    Deficiency means a failure to meet one or more system criteria 
of an acceptable property management system.
    Property management system means the Contractor's system or 
systems for managing and controlling Government property.
    (b) General. The Contractor shall establish and maintain an 
acceptable property management system. Failure to maintain an 
acceptable property management system, as defined in this clause, 
may result in disapproval of the system by the Contracting Officer 
and/or withholding of payments.
    (c) System criteria. The Contractor's property management system 
shall be in accordance with paragraph (f) of the contract clause at 
Federal Acquisition Regulation 52.245-1.
    (d) System deficiencies. (1) The Contracting Officer will 
provide an initial determination to the Contractor, in writing, of 
any system deficiencies. The initial determination will describe the 
deficiency in sufficient detail to allow the Contractor to 
understand the deficiency and its potential harm to the Government.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
deficiencies in the Contractor's property management system. If the 
Contractor disagrees with the initial determination, the Contractor 
shall state, in writing, its rationale for disagreeing.

[[Page 75572]]

    (3) The contracting officer will evaluate the Contractor's 
response and notify the Contractor, in writing, of the Contracting 
Officer's final determination concerning--
    (i) Remaining deficiencies;
    (ii) The adequacy of any proposed or completed corrective 
action; and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more deficiencies warrant system disapproval based on 
the risk to the Government.
    (e) If the Contractor receives the Contracting Officer's final 
determination of system deficiencies, the Contractor shall, within 
45 days of receipt of the final determination, either correct the 
deficiencies or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the deficiencies.
    (f) Withholding payments. If the Contracting Officer determines 
that there are one or more system deficiencies that adversely affect 
the Contractor's property management system, leading to a potential 
risk of harm to the Government, and the contract includes 252.242-
7XXX, Business Systems, the Contracting Officer will withhold 
payments in accordance with that clause.

(End of clause)

[FR Doc. 2010-30072 Filed 12-2-10; 8:45 am]
BILLING CODE 5001-08-P
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