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[Federal Register Volume 77, Number 37 (Friday, February 24, 2012)]
[Rules and Regulations]
[Pages 11355-11366]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-4045]

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 215, 232, 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 
(DoD).

ACTION: Final rule.

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SUMMARY: DoD is adopting as final, with changes, an interim rule 
amending the Defense Federal Acquisition Regulation Supplement (DFARS) 
to improve the effectiveness of DoD oversight of contractor business 
systems.

DATES: Effective date: February 24, 2012.

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

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published an initial proposed rule for Business Systems--
Definition and Administration (DFARS Case 2009-D038) in the Federal 
Register on January 15, 2010 (75 FR 2457). Based on the comments 
received, DoD published a second proposed rule on December 3, 2010 (75 
FR 75550). The public comment period closed January 10, 2011. On 
January 7, 2011, the National Defense Authorization Act (NDAA) for 
Fiscal Year (FY) 2011 was signed into law (Pub. L. 111-383). Section 
893 of the NDAA for FY 2011, Contractor Business Systems, set forth 
statutory requirements for the improvement of contractor business 
systems to ensure that such systems provide timely, reliable 
information for the management of DoD programs. Based on the comments 
received in response to the second proposed rule and the requirements 
of the NDAA for FY 2011, DoD published an interim rule with request for 
comments on May 18, 2011 (76 FR 28856). The public comment period ended 
on July 18, 2011. Comments were received from 14 respondents in 
response to the interim rule.
    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 has clarified the definition and 
administration of contractor business systems as follows:
    A. Contractor business systems have been defined as accounting 
systems, estimating systems, purchasing systems, earned value 
management systems (EVMS), material management and accounting systems 
(MMAS), and property management systems.
    B. Compliance enforcement mechanisms have been implemented in the 
form of a business systems clause which includes payment withholding 
that allows contracting officers to withhold a percentage of payments, 
under certain conditions, when a contractor's business system contains 
significant deficiencies. Payments could be withheld on--
     Interim payments under--
     [cir] Cost-reimbursement contracts;
     [cir] Incentive type contracts;
     [cir] Time-and-materials contracts;
     [cir] Labor-hour contracts;
     Progress payments; and
     Performance-based payments.

II. Discussion and Analysis

A. Analysis of Public Comments

 1. Accounting System Monitoring
    Comment: A respondent stated that DFARS 252.242-7006(c)(8) is 
vague. Periodic monitoring of the system can take many forms and be 
performed by numerous personnel. The respondent suggested that wording 
more in line with DFARS 252.244-7001(c)(18), DFARS 252.215-
7002(d)(4)(xii), or DFARS 252.215-7002(d)(4)(xiii) would better state 
who is expected to perform the monitoring, why the monitoring is being 
performed, and would give a clearer expectation of level of monitoring 
to be performed.
    Response: The size and complexity of companies and their processes, 
operations, and accounting systems capabilities vary. Therefore, it is 
not feasible to establish specific requirements regarding the extent or 
frequency of monitoring by the contractor. However, the term 
``periodic'' has been removed and additional language has been added, 
similar to the language at 252.244-7001 and 252.215-7002, to clarify 
that the contractor's accounting system shall provide for management 
reviews or internal audits of the contractor's system to ensure 
compliance with the contractor's policies, procedures, and established 
accounting practices.
2. Business Systems Clause Prescription
    Comment: A ``covered contract'' is defined at DFARS 242.7000(a) as 
one that is subject to Cost Accounting Standards (CAS). A respondent 
stated that the problem with this prescription is that a contracting 
officer will not typically know if the resulting contract will be 
subject to CAS when drafting the solicitation. A determination as to 
whether CAS applies to a particular contract is made after the offeror 
submits an offer containing the information required by the provision 
at FAR 52.230-1, Cost Accounting Notices and Certification. The 
contracting officer then inserts the appropriate CAS clauses in the 
contract, if necessary. The respondent suggested that one way to 
correct this is to add a paragraph to the clause making it self-
deleting if CAS does not apply to the contract.
    Response: The clause has been amended to make it self-deleting if 
CAS does not apply.
3. Definition of Covered Contract
    Comment: A respondent suggested that the definition of ``covered 
contract'' be modified to match the definition in section 893 of the 
NDAA for FY 2011.
    Response: Section 816 of the NDAA for 2012 redefined ``covered 
contract'' as ``a contract that is subject to the cost accounting 
standards promulgated pursuant to section 1502 of title 41, United 
States Code, that could be affected if the data produced by a 
contractor business system has a significant deficiency.'' The section 
816 definition matches the definition used in this rule, therefore, no 
revisions are necessary.
4. Cost vs. Cost-Reimbursement
    Comment: A respondent stated that the word ``cost'' is used 
throughout the rule when ``cost-reimbursement'' is what is meant. 
Unless this rule only applies to cost contracts, a specific type

[[Page 11356]]

of cost-reimbursement contract described at FAR 16.302, then ``cost'' 
needs to be changed to ``cost-reimbursement'' throughout the rule.
    Response: The term ``cost'' has been replaced by ``cost-
reimbursement,'' as appropriate, throughout the rule.
5. Certified Cost or Pricing Data
    Comment: A respondent suggested that the word ``certified'' needs 
to be inserted before the term ``cost or pricing data'' at DFARS 
242.7203(b). The clause at DFARS 252.215-7002 uses the term ``cost or 
pricing data'' twice in paragraph (c).
    Response: The term ``cost or pricing data'' has been replaced by 
``certified cost or pricing data,'' as appropriate, throughout the 
rule.
6. Fixed-Price Contract
    Comment: A respondent suggested that the words ``fixed-price'' be 
inserted before the second instance of the word ``contract'' at DFARS 
242.7502(a) so that the sentence is consistent with DFARS 242.7503(b).
    Response: The language at DFARS 242.7502(a) applies to any 
contracts that provide for progress payments based on costs or on a 
percentage or stage of completion. Adding the words ``fixed-price'' 
before the second instance of the word ``contract'' is not compatible 
with the intent of DFARS 242.7502(a). However, DFARS 242.7503(b) has 
been revised to delete the fixed-price modifier so that the two 
sentences are consistent.
7. Property Management
    Comment: A respondent stated that the proposed change to require 
administrative contracting officer (ACO) determination of property 
management system compliance is inconsistent with ACO determinations of 
other business systems. According to the respondent, except for 
property management, all business systems proposed for ACO 
determination of acceptability are reviewed by DCAA functional 
specialists outside of the DCMA or Program Office organizational 
structures, or by functional specialists who do not have a defined 
career field certification standard and warrant/letter of appointment. 
In those instances, functional specialist recommendations are advisory 
and the ACO determination of system status is necessary. The respondent 
stated that property management system compliance differs from the 
system status determinations cited in the proposed change in that 
property administrator certification/qualification requirements are 
identified under the unique Defense Acquisition Workforce Improvement 
Act (DAWIA) career field certification standard for industrial contract 
property management and they are issued letters of appointment, which 
requires them to routinely perform their duties as warranted 
contracting officers and communicate system status determinations. 
According to the respondent, ACO responsibility for determinations of 
property management system compliance does not support consistent 
treatment of contractors assigned for DCMA administration. The 
respondent noted that the DCMA Centers concept was established when it 
was found that certain specialty functions such as property, plant 
clearance, terminations, transportation, etc., suffered declines in 
communications and technical expertise due to lack of functional 
supervision. Within DCMA, infrastructure and tools to support 
consistency in property management reside in the DCMA Business Centers, 
not with the Chief Operating Officer/Chief Management Officer. 
Government Accountability Office Standards require performance of 
duties by appropriate, trained personnel. The respondent suggested that 
ACOs do not have the appropriate competencies (knowledge, skills, and 
abilities) to perform this function.
    Response: DAWIA requirements for the industrial property management 
specialist workforce do not alter, and are not inconsistent with DFARS 
requirements for contracting officers to make determinations regarding 
a contractor's business system approval or disapproval. This 
responsibility exists apart from DAWIA requirements for acquisition 
personnel and regardless of agency processes for formally appointing 
individuals as property administrators or plant clearance officers. The 
DFARS rule does not contemplate or require contracting officers to have 
technical expertise in each of the six identified business systems. 
Contracting officers will continue to rely on functional specialists to 
perform the necessary contractor systems reviews as they always have. 
DCMA's ``Center'' concept is not universal to all of DCMA property 
operations. For example, a number of property administrators and plant 
clearance officers do not report operationally to the property center 
(now referred to as the property ``group''), and instead report 
directly to DCMA International. DFARS 245.105 is clear that Government 
property administrators are responsible for providing recommendations 
and reporting system deficiencies to the cognizant contracting officer, 
including recommendations regarding contractor property management 
system approval or disapproval. However, the authority for a 
determination of system approval or disapproval shall remain with the 
cognizant contracting officer who is also responsible for applying a 
payment withhold for disapproved business systems in accordance with 
DFARS 252.242-7005, Contractor Business Systems.
8. Cognizant Contracting Officer
    Comment: A respondent requested that a definition of ``cognizant 
contracting officer'' be added to ensure that it is clear who is 
responsible for (1) assessing and approving/disapproving the six 
business systems, (2) making the decision to withhold payments, and (3) 
implementing and tracking withholds.
    Response: The term ``cognizant contracting officer'' is used 
throughout the DFARS to identify the appropriate contracting officer 
assigned specific responsibilities such as approving or disapproving a 
contractor's business systems and making payment withhold decisions 
under this rule.
9. DoD Officials' Remediation Responsibility
    Comment: A number of respondents stated that the interim rule does 
not address DoD officials working with the contractor to remediate 
deficiencies or to develop a corrective action plan. The NDAA for FY 
2011 contains the requirement for DoD officials to work with the 
contractor to correct cited deficiencies. The respondents suggested 
that this language be explicitly stated in the final rule along with 
additional language that would promote a ``team effort'' resolution of 
any significant deficiency. Further, the respondents suggested that the 
Government should be required to consider mitigating controls as part 
of any evaluation as to the reliability of information produced by a 
business system(s).
    Response: The language in the rule complies with the NDAA for FY 
2011. The rule identifies cognizant contracting officers as the DoD 
officials who are available to work with contractors in the process of 
identifying significant deficiencies, accepting corrective action 
plans, and monitoring the contractor's progress in correcting the 
deficiencies. Contracting officers will notify the contractor, in 
writing, providing a description of each significant deficiency in 
sufficient detail to allow the contractor to understand the deficiency, 
and then identify any issues with a contractor's corrective action 
plan.

[[Page 11357]]

10. Audit Report Quality
    Comment: A respondent stated that DCAA does not have a clean audit 
opinion on the integrity of the audits they perform; reliance is being 
placed on an audit agency that must qualify its own audit reports. 
According to the respondent, the GAO audit reports cited the DCAA for 
many deficiencies that bring into question the validity of audit 
reports issued against contractors' business systems. The respondent 
stated that DCAA should not be viewed as the experts and withholds 
should not be based on audit reports or audit report quality control 
systems of questionable validity. The respondent asserted that the 
Government is attempting to hold contractors to a level of perfection 
that their own audit agency is unable to maintain. Consequently, the 
respondent suggested that the audit report should not be used as the 
sole foundation for a contracting officer's determination of system 
adequacy, particularly if regulatory withholding of payment will be the 
result.
    Response: Currently, DCAA reports for audits performed in 
accordance with Generally Accepted Government Auditing Standards 
(GAGAS) must be qualified because the current external opinion has 
expired. This qualification solely states that the time frame required 
by GAGAS for an external peer review has expired. Outside of this 
exception, all of DCAA's audits are being performed in accordance with 
GAGAS. Furthermore, the objective of the rule is to ensure that 
contractor business systems provide timely, reliable information for 
the management of DoD programs. Contracting personnel will make 
appropriate determinations in accordance with this rule.
11. Resources and Resolution Timing
    Comment: A number of respondents stated that DCAA and DCMA are not 
properly staffed to address the new DFARS rule. Further, with regard to 
EVMS, the rule provides extensive authority to contracting officers and 
DCAA and DCMA auditors in evaluating implementation of the ANSI/EIA 748 
standard, which was intentionally designed to be flexible. According to 
the respondents, the magnitude of programs and contractors requiring 
EVMS surveillance and assessment inherently results in less experienced 
personnel in positions with this authority. The respondents suggested 
that Government resources are not adequate in numbers or depth of 
skills to provide the required oversight.
    Response: This rule does not add additional oversight 
responsibilities to DCAA and DCMA, but instead mitigates the 
Government's risk when contractors fail to maintain business systems, 
as is required by the terms and conditions of their contracts. 
Contracting personnel will continue to make appropriate determinations 
in accordance with this rule. DoD has been taking measures to align 
resources and ensure work is complementary. The increased cooperation 
and coordination between DCAA and DCMA will enable DoD to employ audit 
resources where they are needed.
12. Impact on the Government and Contracting Community
    Comment: A respondent stated that long-term withholds will hurt the 
Government and contracting community. Some system deficiencies can be 
corrected almost immediately, leaving the withhold in place until DCAA 
completes its follow-up audit. According to the respondent, reducing 
the percentage of the withhold to half of the initial percentage will 
still place contractors in a financial crisis. The respondent stated 
that contractors will have to increase their bids to cover potential 
withholds, which would increase the overall price to the Government.
    Response: Both the contractors' and the Government's administrative 
costs should be reduced in the long run with the reliance on efficient 
contractor business systems.
13. National Security
    Comment: A respondent stated that the withholding of payments could 
lessen competition and endanger national security. According to the 
respondent, national security in many respects is dependent on 
contractors. From weapon systems to wartime services, contractors 
perform a vital role in national security. The respondent stated that 
the economic times are bleak, which is already requiring contractors to 
operate on thin margins. The respondent expressed concern that if a 
contractor has a withhold placed upon its billings and is unable to 
meet financial obligations and, therefore, is unable to meets its 
contractual terms due to reduced cash flow, then national security will 
be compromised.
    Response: This rule will not cause long term harm to the defense 
industrial base or national security. Rather, DoD contractor 
competition and national security will be enhanced with the improvement 
of DoD contractors' business systems, and imminent cost savings that 
will result. 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, unnecessarily draining limited DoD resources at 
the taxpayers' expense.
14. Significant Deficiency
    Comment: A respondent expressed concern that DCAA has not updated 
its guidance to reflect the definition of significant deficiency. 
According to the respondent, DCAA has not issued audit guidance to 
align its definition of significant deficiency to that in the NDAA and 
interim rule. DCAA's latest guidance in its MRD 08-PAS-011(R) dated 
March 2, 2008, starts out defining a significant deficiency as a 
``potential unallowable cost that is not clearly immaterial.'' However, 
in MRD 08-PAS-043(R) dated December 19, 2008, DCAA clarified its 
guidance that ``DCAA only performs audits of contractor systems that 
are material to Government contract costs'' and that a contractor's 
``failure to accomplish any applicable control objective should be 
reported as a significant deficiency/material weakness.'' The 
respondent stated that DCAA's clarification changes the criteria from a 
``potential unallowable cost that is not clearly immaterial'' to if any 
deficiency is found during an audit, it is reported and the system is 
rated as inadequate. The respondent expressed concern that DCAA's 
guidance is constantly changing with no oversight body to regulate its 
audit policies.
    Response: DCAA is in the process of updating its guidance and will 
report significant deficiencies in accordance with the definition of 
significant deficiency in this rule, as set forth in section 893 of the 
NDAA for FY 2011. Additionally, contracting officers will administer 
this rule according to the requirements in section 893 of the NDAA for 
FY 2011, as implemented in this rule.
    Comment: A respondent recommended that the following language be 
added to the contractor business systems clauses: ``Significant 
deficiencies are characterized by all of the following: (1) The system 
is not compliant to contract requirements; (2) There is significant net 
harm to the Government resulting in mismanagement, and schedule and 
cost impacts to the contracts covered by the business system; (3) The 
corrections to the system are worthwhile, and the related future 
benefits are clearly and substantially greater than the cost to 
correct; (4) The net harm to the contractor or the Government caused by 
the flaws in the business systems must

[[Page 11358]]

exceed five million dollars; and (5) Deficiencies must be directly 
related to contract management.''
    Response: The respondent's suggested language exceeds the 
definition of ``significant deficiency'' in the NDAA for FY 2011 and 
has not been added to this rule.
    Comment: With respect to the language relating to the finding of a 
significant deficiency by the contracting officer, the interim rule 
states: ``The initial determination by the Government will describe the 
deficiency in sufficient detail to allow the contractor to understand 
the deficiency.'' A respondent suggested that this language be expanded 
to include a specific explanation as to how the deficiency identified 
was determined to be a significant deficiency and further, why 
information produced by the business system under review is considered 
not to be reliable in accordance with the requirements of the enabling 
legislation, the NDAA for FY 2011, which defines a significant 
deficiency as ``A shortcoming in the system that materially affects the 
ability of DoD to rely upon information produced.''
    Response: ``Significant deficiency'' means a shortcoming in the 
system that materially affects the ability of officials of the 
Department of Defense to rely upon information produced by the system 
that is needed for management purposes. The contracting officer's 
significant deficiency determination will describe the significant 
deficiency in sufficient detail to allow the contractor to understand 
the deficiency. This rule incorporates criteria for each business 
system, which define the aspects of the system that materially affect 
the ability of DoD to rely on information produced. Determinations of 
significant deficiencies will be based on the contractor's failure to 
comply with the business system criteria.
15. University Affiliated Research Center (UARC)
    Comment: The interim rule exempts from coverage those contracts 
with educational institutions or Federally Funded Research and 
Development Centers operated by educational institutions. A respondent 
stated that the rule appears to subsume UARCs within the category of 
educational institutions, and requested that the final rule 
specifically list UARCs as exempt from application of the rule.
    Response: The final rule exempts UARCs from the clause at DFARS 
252.242-7005, Contractor Business Systems.
16. Financial Impact of a System Deficiency
    Comment: A respondent took exception to DoD's response to a public 
comment from the second proposed rule, that in most cases, the 
financial impact of a system deficiency cannot be quantified because 
the system produces unreliable information. A respondent stated that 
contractors have fiduciary responsibilities to produce reliable 
information and make bona fide efforts to quantify everything that 
Government officials request.
    Response: DoD relies on the information produced by contractor 
business systems unless those systems are found to contain significant 
deficiencies. Contractors have fiduciary responsibilities to produce 
reliable information. However, if a system is determined to have a 
significant deficiency, in most cases, DoD is unable to rely on that 
system to provide a reliable, quantifiable financial impact of that 
deficiency.
17. Subjective Implementation of the Rule
    Comment: A respondent expressed serious reservations as to the need 
for the rule, and identified potential harms to contractors if the rule 
is administered in an inconsistent or arbitrary fashion. According to 
the respondent, because the determination of a system deficiency is 
dependent upon the subjective interpretation of critical system 
criteria, application of the rule could well lead to inconsistent 
treatment by individual contracting officers and their DCAA advisers.
    Response: This rule incorporates criteria for each business system, 
which define the aspects of the system that materially affect the 
ability of DoD to rely on information produced. Determinations of 
significant deficiencies will be based on the contractor's failure to 
comply with the business system criteria. Each significant deficiency 
must be determined on its own set of facts and ultimately decided by 
the contracting officer.
18. Excessive Costs
    Comment: A number of respondents expressed concern that because of 
the significant potential cash flow impact, contractors may be forced 
to incur unnecessary costs (which will, in turn, ultimately be passed 
on to the Government) to make their systems deficiency-proof in an 
attempt to avoid significant withholdings. According to the 
respondents, while this may seem like an appropriate goal, the costs of 
approaching a level nearing perfection are disproportionate to the 
incremental benefits of having a perfect system. The respondents stated 
that this rule will ultimately result in non-value added direct or 
indirect costs. The respondents suggested that better solutions exist 
that have benefits that will accrue to all of the interested parties.
    Response: The mandate of section 893 of the NDAA for FY 2011 is to 
improve contractor business systems to achieve timely and reliable 
information. Contract terms explicitly require contractors to maintain 
business systems 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. DoD contractor competition will 
be enhanced with the improvement of DoD contractors' business systems 
and imminent cost savings that will result.
19. Application of Withholdings
    Comment: A respondent suggested that the final rule should 
explicitly limit the contracting officer's discretion to apply 
withholdings against only those contracts and invoices that could be 
affected by the identified system deficiency.
    Response: The contracting officer has the sole discretion to 
identify covered contracts containing the clause at DFARS 252.242-7005, 
against which to apply payment withholds. DFARS 252.242-7005(d) limits 
implementation of a payment withhold for significant deficiencies in a 
contractor business system required under a contract. However, this 
does not limit the contracting officer's discretion to apply withholds 
against only those contracts and invoices that could be affected by the 
identified system deficiency.
20. Nexus Between Potential Harm and Withholding
    Comment: A respondent stated that one of the most significant 
problems with the interim rule is that it fails to require any nexus 
whatsoever between (a) the identified system deficiency and the 
potential financial harm to the Government; (b) the identified system 
deficiency and the nature of the specific invoices against which the 
withholdings will be applied; and (c) the identified system deficiency 
and the total amount of the withholding. The respondent stated that 
DCAA's audit report should provide recommendations to the contracting 
officer as to whether withholding payment is necessary to

[[Page 11359]]

protect the Government's interests, and if not, what other protections 
might be available to the Government. The respondent suggested that 
such other protections might include: (1) Closer monitoring of payment 
requests submitted by the contractor in light of the noted deficiency; 
or (2) a decrement to certain, but not all, contract payments (or a 
withholding less than 5 percent) that might be more commensurate with 
the potential financial risk to the Government. The respondent further 
suggested that the final rule should clarify that the contracting 
officer must justify, in writing, the need to withhold against certain 
invoices based upon: (1) The nature of the particular system 
deficiency; (2) the perceived impact to the Government's reliability of 
information generated by such system due to the particular deficiency; 
(3) the nature of the invoices against which the withholdings will be 
applied and their correlation to the perceived risks associated with 
the specific system deficiency; and (4) the amount of withholding 
necessary to adequately protect the Government's interests due to the 
deficiency. The respondent suggested that requiring a written 
withholding determination will properly protect contractors from 
unreasonable or punitive withholdings that are unrelated to the system 
deficiency as well as ensure the withholdings are tailored to the 
Government's interests.
    Response: The intent of the rule is to authorize payment 
withholding when the contracting officer finds that there are one or 
more significant deficiencies due to the contractor's failure to meet 
one or more of the system criteria. The rule requires contracting 
officers to consider significant deficiencies in determining the 
adequacy of a contractor's business system and potential payment 
withholding in accordance with section 893 of the NDAA for FY 2011. 
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, the 
contractual requirements for the contractor 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 and accountability. The payment withholding remedy 
provides a measure of the overall contract performance of which the 
Government is deprived during the performance period, and for which the 
contractor should not receive the full financing payments. DoD is 
relying on the temporary payment withholding amounts, not as a penalty 
for a deficiency, but as representing a good-faith estimate sufficient 
to mitigate the Government's risk where the actual amounts are 
difficult to estimate or quantify. Deficiencies that do not directly 
relate to unallowable or unreasonable costs still pose risks to the 
Government, and may lead to harm that may not be calculated readily 
when the deficiencies are discovered. In most cases, the financial 
impact of a system deficiency cannot be quantified because a deficient 
system produces unreliable information. When the financial impact of a 
deficiency is quantifiable, DoD expects contracting officers to take 
appropriate actions to reduce fees, recoup unallowable costs, or take 
legal action if fraudulent activity is involved.
21. Subcontractor Costs
    Comment: A respondent suggested that the final rule should exempt 
subcontractor costs from withholding under a prime contractor's 
invoice. Unless the identified system deficiency of the prime 
contractor casts some doubt on the reliability of the subcontractor's 
costs in the prime's invoice, the subcontractor costs should be removed 
from the calculation of any withholding.
    Response: Business system deficiencies affect all cost elements. 
Such deficiencies may impact accumulating and recording of 
subcontractor costs and increase the risk of unallowable and 
unreasonable costs on DoD contracts.
22. Time Limit for Withholdings
    Comment: The interim rule provides that if the contracting officer 
does not make a timely determination within 90 days as to whether a 
significant deficiency has been remediated, the withholding percentage 
of monies due will be reduced by 50 percent. A number of respondents 
expressed concern that if the contracting officer continues to not 
render a decision, withholding at this reduced level could continue 
indefinitely. The respondents suggested that the final rule should be 
revised to remove the withholdings in their entirety after 90 days of 
inaction by the Government.
    Response: Contracting officers will make timely decisions and 
promptly discontinue payment withholding when they determine that there 
are no remaining significant deficiencies. The rule requires 
contracting officers to reduce withholding directly related to the 
significant deficiencies by at least 50 percent if, within 90 days of 
receipt of the contractor notification that the contractor has 
corrected the significant deficiencies, the contracting officer has not 
made a determination. This language is sufficient to mitigate a 
contractor's risk due to inaction by the Government.
23. Application to Existing Contracts
    Comment: A respondent stated that the interim rule establishes 
guidelines for contracting officers to determine when the provisions of 
the interim rule will become effective, and properly focuses on the 
treatment of existing solicitations and future contracts. However, the 
respondent expressed concern that the rule is silent on the treatment 
of pre-existing contracts that obviously do not include the contractor 
business systems clause. The respondent suggested that unless the 
contractor and the Government agree upon a bilateral modification, it 
would be improper for the contracting officer to modify unilaterally an 
existing contract that imposes such significant new obligations and 
potential liabilities on the contractor.
    Response: Revisions to the DFARS set forth in this rule do not 
affect existing contracts that do not include the business systems 
clause unless the contractor and the Government agree to modify the 
contract bilaterally.
24. Commercial Contracts
    Comment: A respondent suggested that the rule should exempt 
commercial contracts explicitly. More specifically, the clauses at 
DFARS 252.242-7006, Accounting System Administration, and DFARS 
252.244-7001, Contractor Purchasing Systems Administration, appear to 
be applicable to time-and-materials (T&M) and labor-hour contracts as 
written, per their prescriptions. The respondent questioned whether 
these provisions are applicable to T&M and firm-fixed-price (FFP) 
labor-hour contracts for commercial items. The respondent noted that 
there are times when DoD enters into T&M and labor-hour contracts using 
commercial labor rates such as GSA negotiated rates or other commercial 
rates. However, DFARS 252.242-7006 includes phrases such as

[[Page 11360]]

``segregation of direct costs from indirect costs, allocation of 
indirect costs, exclusion of unallowables'' that are not relevant 
principles for commercial-item contracts. According to the respondent, 
DFARS 252.244-7001 appears to be applicable if a contractor has any T&M 
or FFP labor-hour contracts, regardless of whether subcontractors are 
performing this labor. The respondent questioned whether the 
prescriptions of the clauses should indicate their applicability only 
to noncommercial-item T&M and labor-hour contracts, or whether the 
clauses should indicate what would be applicable to commercial-item 
contractors.
    Response: In accordance with FAR 12.301(d)(1), the clauses at DFARS 
252.242-7006, Accounting System Administration, and DFARS 252.244-7001, 
Contractor Purchasing Systems Administration, are not applicable to T&M 
and FFP labor-hour contracts for commercial items. Furthermore, 
paragraph (6) of 48 CFR 9903.201-1, CAS Applicability, exempts FFP, 
T&M, and labor-hour contracts and subcontracts, for the acquisition of 
commercial items. Consequently, commercial-item contracts are not 
covered contracts and will not contain the clause at DFARS 252.242-
7005, Contractor Business Systems.
25. Significant Deficiency Determination Review
    Comment: A respondent suggested that language should be inserted in 
the final rule that would require any withhold decision resulting from 
a business system significant deficiency to be approved at least two 
levels above the contracting officer prior to the imposition of the 
withhold.
    Response: The contracting officer is the only person with the 
authority to enter into, administer, and/or terminate contracts and 
make related determinations and findings. DoD contracting personnel are 
skilled professionals. All contracting personnel are required by law to 
obtain a certification to ensure they have the requisite skills in 
contracting. When specialized expertise is required, contracting 
officers consult with auditors and other individuals with specialized 
experience, as necessary, to ensure a full understanding of issues. In 
fact, the rule requires such consultations. Accordingly, the 
contracting officer is the appropriate authority for making decisions 
regarding contractor business systems.
26. Prompt Contracting Officer Notification
    Comment: A respondent stated that in numerous places in the rule, 
the term ``promptly'' is used to describe the response time required of 
the contracting officer, while the contractor is given a very specific 
response time (i.e., 30 days). The respondent recommended that the 
Government response time be equally specific in terms of number of 
days, and that the contracting officer provide an initial written 
determination on any significant deficiency within 30 days of 
discovery.
    Response: In fairness to the Government and contractors, the 
contracting officer must take whatever time is appropriate and 
necessary to review findings and recommendations prior to making an 
initial determination if one or more significant deficiencies 
materially affects the ability of DoD officials to rely upon 
information produced by the system.
27. Required Withholds
    Comment: A respondent stated that the NDAA for FY 2011 provides the 
contracting officer the latitude to make reasonable decisions regarding 
withholding stating that ``an appropriate official of the Department of 
Defense may withhold up to 10 percent. * * *,'' however, the rule makes 
withholds an imperative. The respondent suggested that the rule should 
reflect the language in the law.
    Response: Section 893 of the NDAA for FY 2011 requires the 
Secretary of Defense to develop and initiate a program for the 
improvement of contractor business systems to ensure that such systems 
provide timely, reliable information for the management of DoD 
programs. Further, the statute sets forth that an appropriate official 
of the Department of Defense may withhold up to 10 percent of progress 
payments, performance-based payments, and interim payments under 
covered contracts from a covered contractor, as needed, to protect the 
interests of the Department and ensure compliance, if one or more of 
the contractor business systems has been disapproved. As a matter of 
policy, the DoD program that implements section 893 mandates withholds 
for significant deficiencies found in contractor business systems to 
protect DoD and the U.S. taxpayers from potential waste, fraud, and 
abuse, as allowed for in the statute.
28. Internal Controls
    Comment: A respondent suggested that internal controls should be 
explicitly defined using the Generally Accepted Government Auditing 
Standards definition, which states that internal controls are ``an 
integral component of an organization's management that provides 
reasonable assurance that the following objectives are being achieved: 
Effectiveness and efficiency of operations, reliability of financial 
reporting, and compliance with applicable laws and regulations.''
    Response: The rule focuses on ``business systems,'' which includes 
internal controls and the specific criteria that those systems must 
meet to be acceptable. The term ``internal controls'' is commonly 
defined throughout professional accounting documents and literature 
and, therefore, does not require an explicit definition in this rule.
29. Estimating System Integration
    Comment: A respondent expressed concern that integrating business 
systems without clear benefit is costly, disruptive, and an allowable 
cost. The respondent recommended that the estimating system language be 
changed to eliminate the requirement to integrate the contractor's 
estimating system with the contractor's related management systems.
    Response: An effective estimating system must gather and process 
information from other business systems outside the traditional 
estimating departmental functions. For example, a soundly functioning 
estimating department will find it necessary to obtain information 
about historical purchases from the accounting system to help form 
reliable estimates of prospective direct material purchases. System 
integration promotes consistency and prevents individual departments 
within a company from generating output without consideration of 
information available in other related business systems. Fair and 
reasonable estimates for future work must be reflective of the 
contractor organization as a whole, which requires a level of 
integration. An estimating system that is disconnected to the other 
contractor business systems is a reflection of poor internal controls.
30. Executive Order 12866
    Comment: A respondent suggested that requirements for systems 
integration and oversight by applicable financial control systems are 
very expensive, specify contractor behavior instead of desired outcome, 
and should be eliminated, if feasible. In general, the interim rule 
should be harmonized with Executive Order 12866, which directs 
agencies, to the extent feasible, to

[[Page 11361]]

specify performance objectives rather than behavior, and to assess all 
costs and benefits of available regulatory alternatives, and to select 
regulatory approaches that maximize net benefits.
    Response: The desired outcomes for the requirements for business 
systems integration and oversight by applicable financial control 
systems are to achieve accurate, complete, and current data, and 
consistency across the contractor's business systems. In accordance 
with Executive Order 12866, DoD has assessed all costs and benefits of 
available regulatory alternatives and has selected the regulatory 
approach that maximizes net benefits, including potential economic, 
environmental, public health and safety effects, distributive impacts, 
and equity.
31. Materiality
    Comment: A respondent stated that the term ``material'' requires 
better amplification in the final rule to reduce variability in 
interpretation. The respondent suggested that the final rule should 
specify that when determining materiality, a contracting officer or 
auditor should rely on established Government standards such as CAS and 
Federal Accounting Standards Advisory Board statements.
    Response: The rule requires that an acceptable business system 
comply with the system criteria set forth under each of the six 
business system clauses. The criteria for each business system defines 
the aspects of the system that materially affect the ability of DoD to 
rely on information produced. Determinations of significant 
deficiencies will be based on the contractor's failure to comply with 
the business system criteria. For example, the system criteria under 
the clause at DFARS 252.242-7006, Accounting System Administration, 
requires that the contractor's accounting system ``shall provide for * 
* * Accounting practices in accordance with standards promulgated by 
the Cost Accounting Standards Board, if applicable, otherwise, 
Generally Accepted Accounting Principles.'' Each significant deficiency 
must be determined on its own set of facts regarding compliance with 
the system criteria.
32. Due Process
    (A) Comment: A respondent stated that the rule denies a contractor 
due process and notification of alleged noncompliance by allowing the 
contracting officer to issue initial determinations prior to receiving 
all the facts, and giving the contractor only 30 days to respond. The 
respondent suggested that the contractor should be given 60 days from 
the initial determination that a significant deficiency exists to 
respond to the contracting officer, and also provide the contracting 
officer the flexibility to allow more than 60 days if deemed necessary.
    Response: The rule provides adequate opportunities for 
communication between the contracting officer and the contractor prior 
to the implementation of payment withholds. The contractor will be 
notified of a preliminary finding of a deficiency during the course of 
formal system reviews and audits. This occurs before the auditor or 
functional specialist releases a report to the contractor and 
contracting officer. After receiving a report, the contracting officer 
will promptly evaluate and issue an initial determination. The 
contractor is then allowed 30 days to respond to any significant 
deficiencies. Contractors are given ample opportunity to present their 
position during system reviews. Accordingly, the requirement for a 
contractor to respond within 30 days of an initial determination is 
adequate. The rule does not preclude the contracting officer from 
granting a contractor additional time to respond should that be 
requested and warranted.
    (B) Comment: A respondent stated that provisions in these clauses 
do not nullify rights under other contract clauses or due process 
actions. The respondent recommended adding the phrase ``except for 
actions resolved under contract disputes'' to the end of the sentence 
in DFARS 252.242-7005(d)(8).
    Response: Nothing in the rule negates the contracting parties' 
rights and obligations under the Contract Disputes Act and disputes 
clause, the availability of other avenues of dispute resolution, or the 
entitlement to Contract Disputes Act interest on contractor claims. 
However, Prompt Payment Act interest entitlement is not intended in any 
event. Under these circumstances, a reference to disputes resolution in 
DFARS 252.242-7005(d)(8) is not needed.
33. Cost Considerations
    Comment: A respondent recommended that plans and actions to correct 
significant deficiencies should always include cost considerations, as 
there will be a direct and indirect impact on contracts.
    Response: While cost is a consideration, the criteria placed in the 
systems clauses for the six business systems covered by this rule have 
been identified as critical to assure the Government that the 
information created by the systems is reliable and that the systems 
operate to protect the Government's interest. There may be more than 
one way to correct a system deficiency. In selecting a particular 
corrective action, cost may be a factor for contractors to discuss with 
the Government when presenting a plan for corrective action.
34. PGI Language
    Comment: A respondent referenced DFARS 215.407-5-70(e)(3)(ii) which 
instructs contracting officers to follow the procedures relating to 
monitoring a contractor's corrective action and the correction of 
significant deficiencies in DFARS Procedures, Guidance, and Information 
(PGI) 215.407-5-70(e). The respondent suggested that since PGI is not 
regulation, references to specific PGI should stay out of regulation.
    Response: The PGI procedures referenced in DFARS 215.407-5-
70(e)(3)(ii) are mandatory internal DoD procedures applicable to 
monitoring a contractor's corrective action and the correction of 
significant deficiencies. Although the internal procedures are not part 
of the regulation, inclusion in the DFARS of the requirement to follow 
the procedures is necessary in order to make the procedures mandatory. 
In other instances, a reference to PGI may be necessary in order to 
notify contracting officers that additional guidance is available.
35. Earned Value Management Systems (EVMS)
    Comment: A respondent recommended that DoD validate the 
requirements of EVMS (ANSI/EIA-748 standard) with regard to 
reliability, effectiveness, and efficiency prior to proceeding to a 
final rule.
    Response: DoD recognizes the 32 guidelines in the ANSI/EIA-748 for 
use on defense acquisition programs. These guidelines have become, and 
continue to be, the universally accepted criteria against which 
industry and the Government determine and document the reliability and 
effectiveness of their EVMS. The National Defense Industrial 
Association Program Management Systems Committee is required to 
periodically reaffirm ANSI/EIA-748 and make any required revisions, 
with full and active participation by the Government. Therefore, DoD 
continues to recognize the EVMS guidelines in the revised version of 
ANSI/EIA-748 and will continue to direct their use in DoD's earned 
value management policy.
36. Substantially Corrected Deficiencies
    Comment: A respondent recommended that the contracting officer 
request the auditor or functional

[[Page 11362]]

specialist to review the contractor's corrective action when the 
deficiencies have been ``substantially'' corrected, and discontinue 
withholding of payments, release any payments previously withheld, and 
approve the system upon a contracting officer determination that the 
contractor has ``appropriately'' corrected significant deficiencies in 
lieu of the requirement that the contractor has corrected ``all'' 
significant deficiencies.
    Response: Significant deficiency, in the case of a contractor 
business system, means a shortcoming in the system that materially 
affects the ability of officials of the Department of Defense to rely 
upon information produced by the system that is needed for management 
purposes. For this reason, the contracting officer shall discontinue 
the withholding of payments, release any payments previously withheld, 
and approve the system only after the contracting officer determines 
that the contractor has corrected all significant deficiencies as 
directed by the contracting officer's final determination.
37. Delivery of Contract Line Items
    Comment: A respondent suggested that the contracting officer 
discontinue withholding of payments and release any payments previously 
held upon delivery of contract line items.
    Response: In accordance with the clause at DFARS 252.242-7005, 
Contractor Business Systems, a payment withhold is only applied to 
progress payments, performance-based payments, and interim payments 
under cost-reimbursement contracts, incentive type contracts, T&M 
contracts, and labor-hour contracts. Payment withholding shall not 
apply to payments on fixed-price line items where performance is 
complete and the items were accepted by the Government. However, since 
contract line items under cost-reimbursement contracts are based on a 
contractor's actual costs and not on negotiated fixed prices, payment 
withholding will not be discontinued and previously withheld payments 
will not be released until the contract is completed, or all 
significant deficiencies have been corrected, whichever comes first.
38. Other Remedies
    Comment: Reducing the negotiation objective for profit or fee is 
listed as one option for contracting officers to consider during 
negotiations when a proposal is generated by a purchasing system with 
an identified deficiency. A respondent suggested that this is a 
punitive and inappropriate response to a system deficiency and should 
be removed.
    Response: This rule does not limit the contracting officer's 
discretion to apply any and all regulatory measures, as warranted by 
the circumstances, including mitigating the risk of system deficiencies 
by reducing the negotiation objective for profit or fee.
39. Property System Approval/Disapproval
    Comment: A respondent suggested that property systems be determined 
to be adequate or inadequate instead of being approved or disapproved.
    Response: The language in DFARS part 245 is consistent with other 
business systems language, as well as with section 893 of the NDAA for 
FY 2011.
40. Estimating System Infrastructure
    Comment: A respondent stated that contractors must have the 
latitude to establish their own effective and efficient infrastructure 
to achieve specific ``performance objectives.'' Contractors must be 
judged by the quality of outcome rather than on externally imposed 
processes and policies. The respondent suggested replacing the phrase 
``Estimating system means the Contractor's policies, procedures, and 
practices for budgeting and planning controls * * *'' with ``Estimating 
system means the Contractor's infrastructure for budgeting and planning 
controls * * *.''
    Response: Effective internal control systems are process oriented 
rather than focused on outcomes alone. Effective policies, procedures, 
and practices are the foundation for all organizations to achieve their 
operational, financial, and compliance objectives on a consistent 
basis.
41. Privileged or Confidential
    Comment: A respondent suggested revising DFARS 252.215-7002(d)(1) 
as follows: ``The Contractor shall disclose its estimating system to 
the Administrative Contracting Officer (ACO), in writing. The 
Government `shall' protect the information as privileged or 
confidential. The Contractor must mark the documents with the 
appropriate legends before submission as well.''
    Response: This rule is not intended to change the Government's 
existing obligations under law and regulation to protect a contractor's 
privileged or confidential information. The advisory at DFARS 252.215-
7002(d)(1) that contractors mark documents with appropriate legends is 
intended to encourage good business practices in order to help the 
Government identify information that the contractor wishes to be 
protected.
42. Flow Down
    Comment: DFARS clause 252.244-7001, paragraph (c)(16), requires 
notification to the Government of the award of all subcontracts that 
contain the FAR/DFARS flowdown clauses that allow for Government audit 
and to ensure the performance of audits. A respondent recommended that 
the rule articulate this specific FAR/DFARS clause and define whose 
responsibility it is to both conduct the audit and ensure the 
performance of the audit. Paragraph (c)(17) of this clause requires the 
contractor to ``enforce'' certain Government policies for subcontracts. 
The respondent stated that prime contractors can flow down requirements 
or certify to certain attestations, or ensure to the best of their 
ability, but cannot enforce them with a subcontract. That can be 
accomplished only by the subcontractors themselves. The respondent 
recommended that DoD replace the word ``enforce'' with ``implement.''
    Response: The notification requirement under the purchasing system 
criterion in the clause at DFARS 252.244-7001, paragraph (c)(16), is 
appropriate. The criterion does not require flow down of FAR and DFARS 
clauses to subcontracts, but instead establishes the requirement that 
the contractor notify the Government of the award of all subcontracts 
that contain the FAR and DFARS flowdown clauses that allow for 
Government audit of those subcontracts, and ensure the performance of 
audits of those subcontracts.
43. Potential Risk of Harm
    Comment: With reference to DFARS 252.245-7003(f), a respondent 
suggested that ``Potential risk of harm'' has been removed from other 
interim rules and should be removed here, as well.
    Response: The phrase ``potential risk of harm'' has been removed 
from DFARS 252.245-7003(f).
44. Quicker Deficiency Corrections
    Comment: A respondent stated that an auditor or functional analyst 
may identify a significant deficiency in one or more systems that may 
be corrected by relatively simple means, such as a change in policies, 
practices, or minor changes to the software of the system itself. Often 
the deficiency is identified and agreed to by the contractor and 
appropriate changes are made even before the deficiency report is 
received by the contracting officer, thus allowing

[[Page 11363]]

the auditor or functional analyst to review the changes being made to 
the business system. According to the respondent, in such cases, the 
contracting officer should have the option not to withhold any amounts 
from billings; as it reads now, it is unclear that the contracting 
officer has this option. Furthermore, such language would encourage 
quicker resolution for correcting deficiencies that are not in dispute 
since it would encourage contractors to accelerate making changes even 
before the contracting officer issues an initial determination. The 
other remedies for significant deficiencies would continue as is. The 
respondent recommended adding optional language to the contracting 
officer's final determination that states ``the contractor's business 
system is acceptable and approved based upon the corrective actions 
already taken by the contractor.''
    Response: The withholding of payments shall not be implemented 
until the contracting officer issues a final determination that 
significant deficiencies remain. If a significant deficiency is 
corrected by relatively simple means, and appropriate changes are made 
before the deficiency report is received by the contracting officer, 
DoD expects that the contracting officer would utilize sound business 
judgment in issuing initial and final determinations, and implementing 
payment withholds, if applicable.
45. Contractor Appeals
    Comment: One respondent recommended that when a contracting officer 
issues a final determination of a significant deficiency, the letter 
sent to the company should include language referring to the Contracts 
Disputes Act and what rights the contractor may have to appeal the 
contracting officer decision. According to the respondent, it is not 
clear that there is any appeal from the contracting officer's final 
decision, even though the decision may be completely in error. The 
respondent stated that the interim rule also does not address how such 
an appeal should be addressed by the contracting officer. It appears 
based on the Government comments to the interim rule that the Contracts 
Disputes Act of 1978 would apply to disputes over significant 
deficiencies in business systems. According to the respondent, it is 
not clear whether the final determination made by the contracting 
officer is subject to the appeals process outlined in FAR 33.211 or 
whether the contractor may have to certify and send a claim to the 
contracting officer to initiate the FAR part 33 process. The respondent 
suggested that this should be clarified in the final rule for the 
benefit of the Government and the contractors. Another respondent 
expressed concern that the appeals process in FAR 33.204 does not 
address the issue of the contracting officer having sole authority to 
implement the rule.
    Response: Final determinations on the adequacy of the contractor's 
business systems under the rule are not contracting officer's final 
decisions for the purposes of the Contract Disputes Act of 1978 (CDA). 
Because the final determinations are not made in response to a claim 
submitted for a decision by a contractor against the Government related 
to a contract, they are not final decisions in accordance with the CDA. 
Further clarification in the rule of the disputes process or the rights 
the contractor may have under the CDA does not appear necessary.
46. Definition of Deficiency
    Comment: A respondent stated that clarification of materiality in 
regard to system deficiencies continues to be inadequate. The interim 
rule indicates that a single significant deficiency in an EVMS 
guideline may result in withdrawal of EVMS approval for a company and 
subsequent implementation of the 5 percent payment withholding clause. 
The respondent stated that industry continues to maintain that this 
does not allow for tempering of findings based on risk, the degree of 
potential harm to the Government that could result from the identified 
deficiency, or any other factor that would indicate whether the 
deficiency is material in nature. The respondent suggested an 
incremental process for withholding of payments and withdrawal of EVMS 
system approval that takes materiality of deficiencies into 
consideration and incorporates DCMA's Corrective Action Request process 
and definitions for severity of findings of EVMS deficiencies.
    Response: All significant deficiencies pose risks to the Government 
and may lead to harm that may not be readily calculated when the 
deficiencies are discovered. The intent of the rule is to withhold 
payments when there is a shortcoming in the system that materially 
affects the ability of DoD officials to rely on information produced by 
the system for management purposes, i.e., significant deficiency. In 
the case of EVM, a disapproval would mean the system has one or more 
significant deficiencies due to the contractor's failure to comply with 
the system criteria in the clause at DFARS 252.234-7002, Earned Value 
Management System, and the contracting officer would be required to 
apply a withhold in accordance with the clause at DFARS 252.242-7005, 
Contractor Business Systems.
47. EVMS Functional Specialist Consultation
    Comment: A respondent stated that it continues to be unclear where 
the functional specialist resides in regards to EVMS, the CMO, or the 
DCMA Earned Value Management Center.
    Response: EVMS functional specialists operate out of the DCMA 
Earned Value Management Center.
48. Contractor Monitoring and Reporting
    Comment: A respondent suggested standardization of two contractor 
requirements across all business systems to (1) monitor and 
periodically review the business system to ensure compliance with 
established policies and procedures and (2) upon request, present 
results of those internal reviews to the administrative contracting 
officer (along the lines of DFARS 252.242-7004(c)(2) and (d)(10)). 
Currently, both requirements are included in the interim rule, but not 
for all business systems.
    Response: While the system criteria language is not standardized 
across all business systems clauses, each business system clause 
contains system-specific requirements for contractor monitoring and 
disclosure. For example, under the property system criteria, the 
contractor is required to ``establish and maintain procedures necessary 
to assess its property management system effectiveness, and shall 
perform periodic internal reviews and audits. Significant findings and/
or results of such reviews and audits pertaining to Government property 
shall be made available to the Property Administrator.'' Furthermore, 
the contractor ``shall periodically perform, record, and disclose 
physical inventory results.''
49. System Approval
    Comment: A respondent suggested that the rule make it clear that 
based on section 893(b)(4) of the NDAA for FY 2011, a business system 
is considered to be approved absent a finding by the contracting 
officer of a significant deficiency.
    Response: Section 893(b)(4) of the NDAA for FY 2011 simply requires 
development of a program to ``provide for the approval of any 
contractor business system that does not have a significant 
deficiency.'' Approval of a business system is an affirmative action.

[[Page 11364]]

The absence of a finding of a significant deficiency is not considered 
a system approval; however, a system review or audit that does not 
result in a finding of one or more significant deficiencies will lead 
to a system approval under the rule.
50. Contractor Notification
    Comment: A respondent suggested that the rule provide that the 
contractor should have simultaneous access with the contracting officer 
to any report of a significant deficiency in order to expedite a 
thoughtful and timely response, given the interim rule has specific 
time frames in terms of responding to the Government.
    Response: The rule provides adequate opportunities for 
communication between the contracting officer and the contractor prior 
to the implementation of payment withholds. The contractor will be 
notified of a preliminary finding of a deficiency during the course of 
formal systems reviews and audits. This occurs before the auditor or 
functional specialist releases a report to the contractor and 
contracting officer. After receiving a report, the contracting officer 
will promptly evaluate and issue an initial determination. The 
contractor is then allowed 30 days to respond to any significant 
deficiencies. Contractors are given ample opportunity to present their 
position during systems reviews.
51. Deficiencies Across Multiple Systems
    Comment: A respondent suggested that language be added to the final 
rule that makes it clear that if one specific deficiency relates to 
more than one business system, that withholding not be calculated twice 
for the same deficiency, as this would in essence represent double 
counting and would produce an inequitable result.
    Response: Withholds are based on deficient business systems. A 
significant deficiency may result in the disapproval of multiple 
business systems resulting in a withhold applied against each system up 
to a maximum withhold of 10 percent per contract. Specific system 
criteria or requirements exist for each of the business systems. If a 
significant deficiency exists, then the ability to rely on information 
produced by the system is materially affected and the contracting 
officer is required to issue a final determination with a notice to 
withhold payments. There is a connection between the payment withhold 
and the business system. If similar significant deficiencies are 
determined to exist for multiple contractor business systems according 
to the published criteria for those systems, then a withhold could 
apply for each business system required under the contract.
52. Corrective Action Plan (CAP)
    Comment: A respondent suggested that the current business systems 
language be modified in the final regulation indicating that 
withholding not be required if an acceptable corrective action plan is 
in place.
    Response: Payment withholds are applied when the contracting 
officer makes a final determination to disapprove a contractor's 
business system in accordance with the clause at DFARS 252.242-7005, 
Contractor Business Systems. Submission of a corrective action plan 
doesn't mean that the contractor has corrected all significant 
deficiencies identified in the final determination. Rather, the 
corrective action plan provides milestones and identifies actions that 
will eliminate the significant deficiencies. Until the contracting 
officer has evidence that the contractor has corrected the significant 
deficiencies, a payment withhold must remain in place in order to 
protect the interests of the Government.
53. Miscellaneous Editorial Comments
    Comment: One respondent submitted a number of miscellaneous 
editorial comments.
    Response: Miscellaneous editorial comments have been considered and 
incorporated into the final rule, as appropriate.

B. Summary of Rule Changes

    As a result of public comments received in response to the interim 
rule, the following changes have been made:
    1. DFARS 215.407-5-70(d) is removed. The criteria for maintaining 
an acceptable estimating system have been relocated to the clause at 
252.215-7002, Cost Estimating System Requirements.
    2. DFARS 232.503-15 has been revised to correct the reference to 
the system criteria at DFARS 252.242-7004(d)(7).
    3. DFARS 242.302(a)(4) has been deleted and an additional contract 
administration function to approve or disapprove contractor business 
systems has been added at DFARS 242.302(a)(S-74).
    4. The term ``cost'' has been replaced by ``cost-reimbursement,'' 
as appropriate, in DFARS 242.7000(b)(1) and DFARS 252.242-7005(e).
    5. The phrase ``and are expected to correct the significant 
deficiencies'' has been added to the end of DFARS 242.7000(d)(2) for 
clarity.
    6. Under DFARS 242.7001, Contract clause, University Associated 
Research Centers (UARCs) has been added to the list of entities to 
which the clause at DFARS 252.242-7005 does not apply.
    7. DFARS 242.7502(g)(2)(ii) and (iv) are revised to remove specific 
examples of alternatives that contracting officers should consider to 
mitigate the risk of accounting system deficiencies on proposals where 
the deficiency impacts negotiations. These examples are removed so that 
contracting officers do not misinterpret these as being appropriate for 
mitigating all accounting system deficiencies.
    8. The term ``cost or pricing data'' has been replaced by 
``certified cost or pricing data,'' as appropriate, in DFARS 
242.7502(g)(3)(ii), DFARS 244.305-70(f)(3)(ii), and DFARS 252.215-
7002(c)(1) and (2).
    9. The words ``fixed-price'' have been deleted from 242.7503(b) for 
clarity.
    10. The words ``compliance with'' have been added at DFARS 252.215-
7002(d)(4)(xii) for clarity, as well as numerous changes in punctuation 
have been made throughout 252.215-7002(d)(4).
    11. The clause at 252.242-7005, Contractor Business Systems, has 
been amended to clarify that the clause is applicable only to contracts 
awarded that are subject to Cost Accounting Standards (CAS), since a 
contracting officer is not likely to know if the resulting contract 
will be subject to CAS when drafting the solicitation. As a result, 
paragraphs (a) through (e) have been redesignated as (b) through (f).
    12. The clause at DFARS 252.242-7005, Contractor Business Systems, 
has been amended to clarify the language regarding Contracting Officer 
determinations made based on the evidence submitted by the Contractor, 
that there is a reasonable expectation that the Contractor's corrective 
actions have been implemented and are expected to correct the 
significant deficiencies. Additionally, the clause language has been 
amended to require that Contracting Officers reduce withholding 
directly related to the significant deficiencies by at least 50 percent 
if, within 90 days of receipt of the Contractor notification that the 
Contractor has corrected the significant deficiencies, the Contracting 
Officer has not made a determination. In amending this clause, 
paragraph (f)(iii) has been added and former paragraphs (f)(iii) and 
(iv) have been redesignated as (f)(iv) and (v).
    13. The clause at DFARS 252.242-7006, Accounting System 
Administration, has been amended to delete the term ``periodic 
monitoring''

[[Page 11365]]

under paragraph (c)(8), and add additional language to clarify the 
intent of the system criterion.
    14. The clause at DFARS 252.245-7003, Contractor Property 
Management System Administration, has been amended to delete from 
paragraph (f) the phrase ``leading to a potential risk of harm to the 
Government.''

III. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is a significant regulatory action and, therefore, was subject to 
review under section 6(b) of E.O. 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

    A final regulatory flexibility analysis has been prepared 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., 
and is summarized as follows:
    The objective of the rule is to establish a definition for 
contractor business systems and implement compliance mechanisms to 
improve DoD oversight of those contractor business systems. The 
requirements of the rule will apply to solicitations and contracts that 
are subject to the Cost Accounting Standards under 41 U.S.C. chapter 
15, as implemented in regulations found at 48 CFR 9903.201-1 (see the 
FAR Appendix), other than in contracts with educational institutions, 
Federally Funded Research and Development Centers operated by 
educational institutions, or University Associated Research Centers, 
and include one or more of the defined contractor business systems.
    No comments were submitted by the public or from the Chief Counsel 
for Advocacy of the Small Business Administration in response to the 
initial regulatory flexibility analysis published with the interim 
rule.
    DoD does not expect this rule to have a significant economic impact 
on a substantial number of small entities within the meaning of the 
Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because contracts 
and subcontracts with small businesses are exempt from Cost Accounting 
Standards (CAS) requirements.
    The business systems clause in the proposed rule contains a 
requirement for contractors to respond to initial and final 
determinations of deficiencies. The information contractors will be 
required to submit to respond to deficiencies in the six business 
systems defined in this rule have been approved by the Office of 
Management and Budget as follows:
    (1) Accounting Systems--OMB Clearance 9000-0011.
    (2) Estimating Systems--OMB Clearance 0704-0232.
    (3) Material Management and Accounting Systems (MMAS)--OMB 
Clearance 0704-0250.
    (4) Purchasing Systems--OMB Clearance 0704-0253.
    (5) Earned Value Management Systems--OMB Clearance 0704-0479.
    (6) Property Management Systems--OMB Clearance 0704-0480.
    Since contracts and subcontracts with small businesses are exempt 
from CAS requirements, DoD estimates that small entities will not be 
impacted by projected reporting, recordkeeping, and other compliance 
requirements of the rule.
    There were no significant alternatives identified that would meet 
the requirements of the applicable statutes.

V. Paperwork Reduction Act

    The rule contains information collection requirements that require 
the approval of the Office of Management and Budget under the Paperwork 
Reduction Act (44 U.S.C. chapter 35). The business systems clause in 
the proposed rule contains a requirement for contractors to respond to 
initial and final determinations of deficiencies. OMB has cleared this 
information collection requirement under OMB Control Numbers 0704-0479, 
Business Systems--Definition and Administration, DFARS 234, Earned 
Value Management Systems; and 0704-0480, Business Systems--Definition 
and Administration, DFARS 245, Contractors Property Management System.
    The information contractors will be required to submit to respond 
to deficiencies in four of the six business systems defined in this 
rule were approved previously by the Office of Management and Budget as 
follows:
    (1) Accounting Systems--OMB Clearance 9000-0011.
    (2) Estimating Systems--OMB Clearance 0704-0232.
    (3) MMAS--OMB Clearance 0704-0250.
    (4) Purchasing Systems--OMB Clearance 0704-0253.

List of Subjects in 48 CFR Parts 215, 232, 234, 242, 244, 245, and 
252

    Government procurement.

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

0
Accordingly, the interim rule amending 48 CFR parts 215, 234, 242, 244, 
245, and 252, which was published in the Federal Register at 76 FR 
28856 on May 18, 2011, is adopted as a final rule with the following 
changes:

0
1. The authority citation for 48 CFR parts 215, 232, 242, and 244 is 
revised to read as follows:

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

PART 215--CONTACTING BY NEGOTIATION

215.407-5-70   [Amended]

0
2. Amend section 215.407-5-70 by removing paragraph (d) and 
redesignating paragraphs (e) through (g) as paragraphs (d) through (f).

PART 232--CONTRACT FINANCING

232.503-15  [Amended]

0
3. In section 232.503-15, in the introductory text of paragraph (d), 
remove ``conforms to the standard at 252.242-7004(e)(7)'' and add 
``conforms to the system criteria at 252.242-7004(d)(7)'' in its place.

PART 242--CONTRACT ADMINISTRATION AND AUDIT SERVICES

0
4. In section 242.302, remove paragraph (a)(4) and add paragraph (a)(S-
74) to read as follows:

242.302  Contract administration functions.

    (a) * * *
    (S-74) Approve or disapprove contractor business systems, as 
identified in the clause at 252.242-7005, Contractor Business Systems.
* * * * *

242.7000  [Amended]

0
5. Amend section 242.7000 as follows:
0
a. In paragraph (a), in the definition for ``Covered contract'', add 
``(10 U.S.C. 2302 note, as amended by section 816 of Pub. L. 112-81)'' 
at the end of the sentence;
0
b. In paragraph (b)(1), remove ``under cost, labor-hour, and time-and-
materials contracts billed'' and add ``under cost-reimbursement, labor-
hour, and time-and-materials contracts billed'' in its place each time 
it occurs.
0
c. In paragraph (d)(2), add ``and are expected to correct the 
significant deficiencies'' at the end of the sentence.

[[Page 11366]]

0
6. In section 242.7001, revise the introductory text to read as 
follows:

242.7001   Contract clause.

    Use the clause at 252.242-7005, Contractor Business Systems, in 
solicitations and contracts (other than in contracts with educational 
institutions, Federally Funded Research and Development Centers 
(FFRDCs), or University Associated Research Centers (UARCs) operated by 
educational institutions) when--
* * * * *

242.7502   [Amended]

0
7. In section 242.7502, in paragraph (g)(2)(ii), remove ``, e.g., a 
fixed-price incentive (firm target) contract instead of a firm-fixed-
price'', remove paragraph (g)(2)(iv) and redesignate paragraphs 
(g)(2)(v) and (g)(2)(vi) as paragraphs (g)(2)(iv) and (g)(2)(v), and in 
paragraph (g)(3)(ii), remove ``including cost or pricing data'' and add 
``including certified cost or pricing data'' in its place.

242.7503   [Amended]

0
8. In section 242.7503, in paragraph (b), remove ``A fixed-price 
contract with progress payments'' and add ``A contract with progress 
payments'' in its place.

PART 244--SUBCONTRACTING POLICIES AND PROCEDURES

244.305-70   [Amended]

0
9. In section 244.305-70, in paragraph (f)(3)(ii), remove ``including 
cost or pricing data'' and add ``including certified cost or pricing 
data'' in its place.

0
10. The authority citation for 48 CFR part 252 continues to read as 
follows:

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

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

252.215-7002   [Amended]

0
11. Amend section 252.215-7002 as follows:
0
a. Remove the clause date ``(MAY 2011)'' and add ``(FEB 2012)'' in its 
place.
0
b. In paragraph (a), in the definition for ``Acceptable estimating 
system'', remove ``an estimating system complies with'' and add ``an 
estimating system that complies with'' in its place.
0
c. In paragraphs (c)(1) and (c)(2)(i), remove ``for which cost or 
pricing data were required'' and add ``for which certified cost or 
pricing data were required'' in its place.
0
d. In paragraphs (d)(4)(i) through (d)(4)(xv), remove ``;'' at the end 
of the sentence and add ``.'' in its place and in paragraph 
(d)(4)(xvi), remove ``; and'' at the end of the sentence and add ``.'' 
in its place.

0
12. Amend section 252.242-7005 as follows:
0
a. Remove the clause date ``(MAY 2011)'' and add ``(FEB 2012)'' in its 
place.
0
b. Redesignate paragraphs (a) through (e) as (b) through (f) and add 
new paragraph (a).
0
c. In newly redesignated paragraph (e)(1), remove ``cost vouchers on 
cost, labor-hour, and time-and-materials contracts'' and add ``cost 
vouchers on cost-reimbursement, labor-hour, and time-and-materials 
contracts'' in its place and remove ``as directed by the contracting 
officer's final determination'' and add ``as directed by the 
Contracting Officer's final determination'' in its place.
0
d. In newly redesignated paragraph (e)(3)(ii), remove ``percentage 
limits in paragraph (d)(3)(i) of this clause'' and add ``percentage 
limits in paragraph (e)(3)(i) of this clause'' in its place.
0
e. In newly redesignated paragraph (f)(2)(ii), remove ``in accordance 
with paragraph (d) of this clause'' and add ``in accordance with 
paragraph (e) of this clause'' in its place.
0
f. Further redesignate newly redesignated paragraphs (f)(2)(iii) and 
(f)(2)(iv) as paragraphs (f)(2)(iv) and (f)(2)(v), add new paragraph 
(f)(2)(iii), and revise newly redesignated paragraph (f)(2)(iv).
    The additions and revisions read as follows:

252.242-7005   Contractor business systems.

* * * * *
    (a) This clause only applies to covered contracts that are subject 
to the Cost Accounting Standards under 41 U.S.C. chapter 15, as 
implemented in regulations found at 48 CFR 9903.201-1 (see the FAR 
Appendix).
* * * * *
    (f) * * *
    (2) * * *
    (iii) If the Contracting Officer determines, based on the evidence 
submitted by the Contractor, that there is a reasonable expectation 
that the corrective actions have been implemented and are expected to 
correct the significant deficiencies, the Contracting Officer will 
discontinue withholding payments, and release any payments previously 
withheld directly related to the significant deficiencies identified in 
the Contractor notification, and direct the Contractor, in writing, to 
discontinue the payment withholding from billings on interim cost 
vouchers associated with the Contracting Officer's final determination, 
and authorize the Contractor to bill for any monies previously 
withheld.
    (iv) If, within 90 days of receipt of the Contractor notification 
that the Contractor has corrected the significant deficiencies, the 
Contracting Officer has not made a determination in accordance with 
paragraphs (f)(2)(i), (ii), or (iii) of this clause, the Contracting 
Officer will reduce withholding directly related to the significant 
deficiencies identified in the Contractor notification by at least 50 
percent of the amount being withheld from progress payments and 
performance-based payments, and direct the Contractor, in writing, to 
reduce the payment withholding from billings on interim cost vouchers 
directly related to the significant deficiencies identified in the 
Contractor notification by a specified percentage that is at least 50 
percent, but not authorize the Contractor to bill for any monies 
previously withheld until the Contracting Officer makes a determination 
in accordance with paragraphs (f)(2)(i), (ii), or (iii) of this clause.
* * * * *

252.242-7006   [Amended]

0
13. In section 252.242-7006, remove the clause date ``(MAY 2011)'' and 
add ``(FEB 2012)'' in its place and in paragraph (c)(8), remove 
``Periodic monitoring of the system'' and add ``Management reviews or 
internal audits of the system to ensure compliance with the 
Contractor's established policies, procedures, and accounting 
practices'' in its place.

252.245-7003   [Amended]

0
14. In section 252.245-7003, remove the clause date ``(MAY 2011)'' and 
add ``(FEB 2012)'' in its place and in paragraph (f), remove ``leading 
to a potential risk of harm to the Government,''.

[FR Doc. 2012-4045 Filed 2-23-12; 8:45 am]
BILLING CODE 5001-06-P
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