Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11355 

List of Subjects in 48 CFR Parts 209, 

216, and 252 

Government procurement. 

Ynette R. Shelkin, 

Editor, Defense Acquisition Regulations 

System. 

Interim Rule Adopted as Final Without 

Change 

■ Accordingly, the interim rule 

amending 48 CFR parts 209, 216, and 

252, which was published at 76 FR 

57674 on September 16, 2011, is 

adopted as a final rule without change. 

[FR Doc. 2012–4040 Filed 2–23–12; 8:45 am] 

BILLING CODE 5001–06–P 

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. 

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— 

Æ Cost-reimbursement contracts; 

Æ Incentive type contracts; 

Æ Time-and-materials contracts; 

Æ 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 


srobinson on DSK4SPTVN1PROD with RULES3
11356 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

of cost-reimbursement contract 

described at FAR 16.302, then ‘‘cost’’ 

needs to be changed to ‘‘costreimbursement’’ 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 ‘‘fixedprice’’ 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. 


srobinson on DSK4SPTVN1PROD with RULES3
Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 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 


srobinson on DSK4SPTVN1PROD with RULES3
11358 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

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 


srobinson on DSK4SPTVN1PROD with RULES3
Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 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 goodfaith 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-andmaterials (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 


srobinson on DSK4SPTVN1PROD with RULES3
11360 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

‘‘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 laborhour 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 


srobinson on DSK4SPTVN1PROD with RULES3
Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 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 


srobinson on DSK4SPTVN1PROD with RULES3
11362 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

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 


srobinson on DSK4SPTVN1PROD with RULES3
Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 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. 


srobinson on DSK4SPTVN1PROD with RULES3
11364 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

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’’ 


srobinson on DSK4SPTVN1PROD with RULES3
Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 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. 

■ 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: 

■ 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] 

■ 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] 

■ 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 

■ 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] 

■ 5. Amend section 242.7000 as follows: 

■ 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; 

■ b. In paragraph (b)(1), remove ‘‘under 

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

contracts billed’’ and add ‘‘under costreimbursement, labor-hour, and timeand-materials contracts billed’’ in its 

place each time it occurs. 

■ c. In paragraph (d)(2), add ‘‘and are 

expected to correct the significant 

deficiencies’’ at the end of the sentence. 


srobinson on DSK4SPTVN1PROD with RULES3
11366 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

■ 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] 

■ 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] 

■ 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] 

■ 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. 

■ 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] 

■ 11. Amend section 252.215–7002 as 

follows: 

■ a. Remove the clause date ‘‘(MAY 

2011)’’ and add ‘‘(FEB 2012)’’ in its 

place. 

■ 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. 

■ 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. 

■ 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. 

■ 12. Amend section 252.242–7005 as 

follows: 

■ a. Remove the clause date ‘‘(MAY 

2011)’’ and add ‘‘(FEB 2012)’’ in its 

place. 

■ b. Redesignate paragraphs (a) through 

(e) as (b) through (f) and add new 

paragraph (a). 

■ 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. 

■ 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. 

■ 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. 

■ 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] 

■ 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] 

■ 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 


srobinson on DSK4SPTVN1PROD with RULES3