28856 Federal Register / Vol. 76, No. 96 / Wednesday, May 18, 2011 / Rules and Regulations 

DEPARTMENT OF DEFENSE 

Defense Acquisition Regulations 

System 

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

and 252 

[DFARS Case 2009–D038] 

RIN 0750–AG58 

Defense Federal Acquisition 

Regulation Supplement; Business 

Systems—Definition and 

Administration 

AGENCY: Defense Acquisition 

Regulations System, Department of 

Defense (DoD). 

ACTION: Interim rule with request for 

comments. 

SUMMARY: DoD is amending the Defense 

Federal Acquisition Regulation 

Supplement (DFARS) to improve the 

effectiveness of DoD oversight of 

contractor business systems. 

DATES: Effective date: May 18, 2011. 

Comment date: Comments on the 

interim rule should be submitted in 

writing to the address shown below on 

or before July 18, 2011, to be considered 

in the formation of the final rule. 

Applicability date: This rule applies 

to solicitations issued on or after May 

18, 2011. Contracting officers are 

encouraged, to the extent feasible, to 

amend existing solicitations (including 

solicitations for delivery orders and task 

orders) in accordance with FAR 

1.108(d), in order to include the clause 

at DFARS 252.242–7005, Contractor 

Business Systems, as applicable, in 

contracts (including delivery orders and 

task orders) to be awarded on or after 

May 18, 2011, and shall amend existing 

solicitations (including delivery orders 

and task orders) in accordance with 

FAR 1.108(d), in order to include the 

clause at DFARS 252.242–7005, 

Contractor Business Systems, as 

applicable, in contracts to be awarded 

on or after August 16, 2011. 

ADDRESSES: You may submit comments, 

identified by DFARS Case 2009–D038, 

using any of the following methods: 

Æ Regulations.gov: http:// 

www.regulations.gov. Submit comments 

via the Federal eRulemaking portal by 

inputting ‘‘DFARS Case 2009–D038’’ 

under the heading ‘‘Enter keyword or 

ID’’ and selecting ‘‘Search.’’ Select the 

link ‘‘Submit a Comment’’ that 

corresponds with ‘‘DFARS Case 2009– 

D038.’’ Follow the instructions provided 

at the ‘‘Submit a Comment’’ screen. 

Please include your name, company 

name (if any), and ‘‘DFARS Case 2009– 

D038’’ on your attached document. 

Æ E-mail: dfars@osd.mil. Include 

DFARS Case 2009–D038 in the subject 

line of the message. 

Æ Fax: 703–602–0350. 

Æ Mail: Defense Acquisition 

Regulations System, Attn: Mr. Mark 

Gomersall, OUSD (AT&L) DPAP 

(DARS), Room 3B855, 3060 Defense 

Pentagon, Washington, DC 20301–3060. 

Comments received generally will be 

posted without change to http:// 

www.regulations.gov, including any 

personal information provided. To 

confirm receipt of your comment(s), 

please check http://www.regulations.gov 

approximately two to three days after 

submission to verify posting (except 

allow 30 days for posting of comments 

submitted by mail). 

FOR FURTHER INFORMATION CONTACT: 

Mr. Mark Gomersall, 703–602–0302. 

SUPPLEMENTARY INFORMATION: 

I. Background 

DoD published an initial proposed 

rule for Business Systems—Definition 

and Administration (DFARS Case 2009– 

D038) in the Federal Register on 

January 15, 2010 (75 FR 2457). Based on 

the comments received and subsequent 

revisions to the proposed rule, DoD 

published a second proposed rule on 

December 3, 2010 (75 FR 75550). The 

public comment period closed January 

10, 2011. On January 7, 2011, the Ike 

Skelton National Defense Authorization 

Act (NDAA) for Fiscal Year (FY) 2011 

was signed into law (Pub. L. 111–383). 

NDAA section 893, Contractor Business 

Systems, set forth statutory 

requirements for the improvement of 

contractor business systems to ensure 

that such systems provide timely, 

reliable information for the management 

of DoD programs. Based on the 

comments received, the requirements of 

the NDAA, and subsequent revisions to 

the proposed rule, DoD is publishing 

this interim rule with request for 

comments. 

Contractor business systems and 

internal controls are the first line of 

defense against waste, fraud, and abuse. 

Weak control systems increase the risk 

of unallowable and unreasonable costs 

on Government contracts. To improve 

the effectiveness of Defense Contract 

Management Agency (DCMA) and 

Defense Contract Audit Agency (DCAA) 

oversight of contractor business 

systems, DoD is clarifying the definition 

and administration of contractor 

business systems as follows: 

A. DoD is defining contractor business 

systems as accounting systems, 

estimating systems, purchasing systems, 

earned value management systems 

(EVMS), material management and 

accounting systems (MMAS), and 

property management systems. 

B. DoD is implementing compliance 

enforcement mechanisms in the form of 

a business systems clause which 

includes payment withholding that 

allows contracting officers to withhold a 

percentage of payments, under certain 

conditions, when a contractor’s business 

system contains significant deficiencies. 

Payments could be withheld on— 

• Interim payments under— 

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 

The comments received in response to 

the second proposed rule have been 

analyzed and dispositioned as discussed 

below. The comments received were 

grouped under 34 general topics. A 

summary of the comments follows: 

1. Business Systems 

a. Earned Value Management Systems 

(EVMS) 

The following comments were 

submitted concerning Earned Value 

Management Systems (EVMS): 

Comment: Some respondents 

expressed concern over disapproval of 

EVM systems if the system is not 

validated within 16 months since 

DCMA is not currently able to meet this 

timeline. 

Response: The rule requires 

contracting officers to determine the 

acceptability of the contractor’s earned 

value management system in 

consultation with the functional 

specialist and auditor. Contracting 

officers are expected to consider all facts 

at their disposal when making such 

determinations. However, 

circumstances outside of a contractor’s 

control may inhibit the initial validation 

of a contractor’s EVMS. Therefore, 

234.201(7)(iii)(A)(2)(ii) has been revised 

to state that the system will be 

disapproved ‘‘when initial validation is 

not successfully completed within the 

timeframe approved by the contracting 

officer * * *’’ 

Comment: Conditions for disapproval 

of an EVM system are inconsistent 

where the definition of an acceptable 

EVMS means that the system generally 

complies with system criteria while the 

identification of a single deficiency can 

make a system unacceptable. 

Furthermore, while some respondents 

expressed concern that EVM system 

deficiencies are related to ill-defined 


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contractual requirements, other 

respondents indicated that criteria for 

disapproval of an EVM system are too 

strict and should be more subjective. 

Response: The rule requires 

contracting officers to determine the 

acceptability of the contractor‘s earned 

value management system in 

consultation with the functional 

specialist and auditor. Contracting 

officers are expected to consider all facts 

at their disposal when making such 

determinations. Section 893 of the FY11 

NDAA requires systems to be 

disapproved when there is a 

shortcoming in the system that affects 

materially the ability of DoD officials to 

rely on information produced by the 

system for management purposes. This 

interim rule is consistent with this 

requirement. In the case of EVM 

systems, this means the system has one 

or more significant deficiencies due to 

the contractor’s failure to comply with 

the system criteria in the clause at 

252.234–7002, Earned Value 

Management System. Since a system 

will only be disapproved when a 

significant deficiency exists, a system 

with deficiencies that do not materially 

affect the Government’s ability to rely 

on information produced by the system 

is considered an acceptable system in 

accordance with the definition at 

252.234–7002. Therefore, this rule is not 

inconsistent with the definition of an 

acceptable EVMS. 

b. Estimating System 

The following comments were 

submitted concerning estimating 

systems: 

Comment: The respondent indicated 

that it is unreasonable for an acceptable 

estimating system to include controls 

for the contractor to compare projected 

results to actual results and analyze the 

differences. This is a major change in 

policy concerning fixed-price contracts 

and will open the door to wholesale 

Government access to contractor costs 

during fixed-price contract performance. 

Response: This interim rule sets forth 

specific criteria for maintaining an 

acceptable estimating system. It is not 

unreasonable for a contractor to 

establish and maintain an acceptable 

estimating system that would include 

controls for the contractor to compare 

projected results to actual results and 

analyze any differences. Such controls 

provide a valuable metric for 

demonstrating the accuracy of estimates 

produced by the system. Systems that 

consistently produce accurate estimates 

with a reasonable degree of confidence 

can significantly reduce the number of 

Government resources required to 

review cost and price proposals. 

Accurate estimates also provide 

substantial advantages to the contractor 

by allowing a more accurate forecast of 

the projected rate of return. This 

existing requirement was relocated from 

215.407–5–70 to the clause at 252.215– 

7002, Cost Estimating System 

Requirements. 

c. Accounting Systems 

The following comments were 

submitted regarding accounting 

systems: 

Comment: The respondent 

recommended deleting the phrase ‘‘or 

functional specialist’’ from 

242.7502(d)(2)(ii)(C). The respondent 

recommended that the 45 day period be 

extended to a 60 day period for a 

contractor to correct a deficiency or 

submit a corrective action plan as is 

currently in the DFARS. The policy at 

242.7502(d)(2)(ii)(A) should include a 

requirement that the contracting 

officer’s notification to the contractor 

include ‘‘sufficient detail to allow the 

contractor to understand the 

deficiencies and the potential impact to 

the Government’’ as is required in other 

system deficiency notifications. Finally, 

the respondent recommended that 

DCAA focus on the adequacy of a 

contractor’s accounting system rather 

than the adequacy of the contractor’s 

control environment and overall 

accounting system controls. 

Response: The term functional 

specialist needs to be retained. When 

specialized expertise is required, the 

interim rule requires contracting officers 

to consult with auditors and other 

individuals with specialized experience, 

as necessary, to ensure a full 

understanding of issues. For example, 

certain issues relating to forecasted costs 

may require the expertise of engineers, 

price analysts, and others, to understand 

or evaluate the contractor’s business 

system. It is not necessary to extend the 

45 day period to 60 days. The contractor 

will be notified formally of deficiencies 

at the completion of the audit, and will 

be allowed 30 days to respond to the 

contracting officer’s initial 

determination. The contractor will be 

well aware that a deficiency may need 

to be corrected and a corrective action 

plan may be needed well before that 45 

day period begins. For clarity, the 

language pertaining to ‘‘sufficient detail’’ 

in a contracting officer’s notification has 

been revised to state that a contracting 

officer’s notification will provide ‘‘a 

description of each significant 

deficiency in sufficient detail to allow 

the contractor to understand the 

deficiency.’’ DCAA will be reporting 

significant deficiencies in accordance 

with the new business systems rule. 

Comment: The rule requires periodic 

monitoring of the accounting system but 

does not provide a definition of what 

the expectation or frequency of the 

accounting system reviews should be. 

Furthermore, the rule fails to recognize 

leading practices implemented in 

industry through continuous monitoring 

and exception reporting. 

Response: The size and complexity of 

companies and their processes, 

operations, and accounting systems 

capabilities vary. Therefore, it is not 

feasible to establish specific 

requirements regarding the extent or 

frequency of periodic monitoring. 

Comment: The respondent expressed 

concern that immaterial audit issues 

resulting from CAS 405 noncompliance 

audit reports will be considered 

significant, resulting in payment 

withholding and disputes. The 

respondent recommended eliminating 

accounting system criterion number 12 

from the rule since remedies already 

exist through the application of the CAS 

administration clause as well as the 

Allowable Cost and Payment clause at 

FAR 52.216–7. 

Response: The rule establishes criteria 

for an acceptable accounting system to 

provide reasonable assurance that 

applicable laws and regulations are 

complied with, accounting system and 

cost data are reliable, risk of 

misallocations and mischarges are 

minimized, and contract allocations and 

charges are consistent with billing 

procedures. An essential characteristic 

of an adequate accounting system for 

Government contract costing is the 

ability of the system to identify and 

exclude unallowable costs from costs 

charged to Government contracts. The 

remedies provided in the CAS 

administration clause and the Allowable 

Cost and Payment clause at FAR 

52.216–7 do not replace the need for 

this essential control within a 

contractor’s accounting system. 

Comment: Accounting system 

criterion number 17 introduces the 

subjective and undefined terms 

‘‘adequate’’ and ‘‘reliable’’ with regard to 

accounting systems providing data to be 

used to support follow-on acquisitions. 

It is not appropriate to tie the basis of 

estimates for proposals to the 

accounting system. Including this 

criterion in the accounting system and 

estimating system criteria is redundant. 

Response: The variation and 

complexity of business systems is such 

that it is not practical to eliminate 

subjective terms entirely. While the 

terms ‘‘adequate’’ and ‘‘reliable’’ imply a 

degree of subjectivity, they are 

sufficiently common to enable 

reasonable parties to agree on the set of 


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necessary characteristics to meet each 

threshold given the unique set of 

circumstances. It is not inappropriate to 

draw a connection between the basis of 

estimates for proposals and the 

accounting system. Achieving 

consistent and accurate estimates is 

dependent on obtaining accurate and 

reliable information, which often 

includes reported information about 

past results produced by the accounting 

system. The weight assigned to past 

results in developing estimates will vary 

depending on a variety of factors, 

including the similarity of past 

circumstances and the anticipated 

circumstances for which the estimate is 

being developed. In the case of a followon acquisition, as noted by the 

respondent, the circumstances are often 

similar, and thus actual results 

produced by the accounting system are 

likely to play a prominent role in 

developing the estimate. Estimators will 

likely improve accuracy when they 

consider the accounting system results 

during the development of their bases of 

estimates whether or not the acquisition 

is a follow-on acquisition. 

Comment: Referencing 

242.7502(g)(2)(v), which identifies 

reducing the negotiation objective for 

profit or fee as a means to mitigate risk 

of accounting system deficiencies, the 

respondent expressed concern that such 

reductions would be punitive to 

contractors beyond other measures in 

the rule. The respondent recommended 

removal of this paragraph. 

Response: This interim rule does not 

limit the contracting officer’s discretion 

to apply any and all regulatory 

measures, as warranted by the 

circumstances, including mitigating the 

risk of accounting system deficiencies 

by reducing the negotiation objective for 

profit or fee. 

d. Purchasing Systems 

The following comments were 

submitted regarding purchasing 

systems: 

Comment: DFARS 252.244–7001 

requires purchasing policies that 

‘‘comply with the Federal Acquisition 

Regulation (FAR) and the Defense FAR 

Supplement (DFARS).’’ The respondent 

requested that the rule clarify that 

requirements being imposed on 

contractors are done via contract 

clauses. 

Response: All contractual 

requirements are identified and 

accomplished through contract clauses. 

There is no need to issue such a 

clarifying statement in this rule. 

Comment: The definitions of 

subcontracts and purchase orders 

should be revised to exclude agreements 

with vendors that would normally be 

applied to a contractor’s G&A expenses 

or indirect costs. 

Response: Because the Government 

reimburses contractors for its applicable 

share of indirect expenses, it would be 

inappropriate to revise the definitions of 

subcontracts and purchase orders to 

exclude agreements with vendors that 

would normally be applied to a 

contractor’s G&A expenses or indirect 

costs. 

Comment: Purchasing system criteria 

under items 252.244–7001(c)(2) and 

(c)(19) in the purchasing system clause 

appear to be redundant. 

Response: Purchasing system criteria 

under 252.244–7001(c)(2) and (c)(19) are 

not redundant. The criterion under 

(c)(2) requires the contractor to include 

all flowdown clauses, including terms 

and conditions and any other clauses 

needed to carry out the requirements of 

the prime contract, in all applicable 

purchase orders and subcontracts, while 

the criterion under (c)(19) requires the 

contractor to establish and maintain 

policies and procedures to ensure the 

requirements of (c)(2) are accomplished. 

Comment: The rule should establish a 

threshold under purchasing system 

criterion (c)(4) for the documentation of 

purchase orders (e.g., $3,000). 

Response: Since certain requirements 

should apply to all purchases, no 

threshold has been added in (c)(4). 

Comment: The purchasing system 

criterion under item (c)(8) should be 

revised to be consistent with FAR part 

15. 

Response: This rule does not conflict 

with the extensive language under FAR 

part 15. The wording in (c)(8) and FAR 

part 15 is not inconsistent. 

Comment: Purchasing system criteria 

under items (c)(10) and (c)(22) appear to 

be redundant. 

Response: Purchasing system criteria 

under 252.244–7001(c)(10) and (c)(22) 

are not redundant. The criterion under 

(c)(10) requires the contractor to 

perform timely and adequate cost or 

price analysis and technical evaluation 

for each subcontractor and supplier 

proposal or quote to ensure fair and 

reasonable subcontract prices, while the 

criterion under (c)(22) requires the 

contractor to establish and maintain 

procedures to ensure the requirements 

of (c)(10) are accomplished. 

Comment: Notification of subcontract 

awards that contain FAR and DFARS 

clauses allowing for Government audits 

should not be required in the 

purchasing system criterion under item 

(c)(16) since these clauses are required 

flowdowns on all direct-funded 

subcontracts. 

Response: The notification 

requirement under purchasing system 

criterion (c)(16) is appropriate. This 

criterion does not require flowdown of 

FAR and DFARS clauses, but instead 

establishes the requirement that the 

contractor notify the Government of the 

award of all subcontracts that contain 

the FAR and DFARS flowdown clauses 

that allow for Government audit of those 

subcontracts, and ensure the 

performance of audits of those 

subcontracts. 

Comment: The purchasing system 

criterion under item (c)(23) should be 

clarified so that the requirements are 

applicable to first-tier subcontractors. 

Response: The suggested change to 

(c)(23) would make it inconsistent with 

the definition in FAR 44.101. Therefore, 

no change has been made. 

e. Property Systems 

The following comments were 

submitted regarding property systems: 

Comment: Replace the phrase 

‘‘previously unapproved’’ property 

management systems with the phrase 

‘‘disapproved’’ for consistency. 

Response: The phrase ‘‘previously 

unapproved property management 

system’’ in 245.105(e) has been replaced 

with the phrase ‘‘previously 

disapproved property management 

system’’ for consistency. 

Comment: The proposed rule property 

system terminology is inconsistent with 

current FAR part 45. The proposed rule 

provides for ‘‘approval/disapproval’’ of a 

system while FAR part 45 and FAR 

clause 52.245–1 use the verbiage 

‘‘adequate/inadequate.’’ 

Response: The language in DFARS 

245 supplements the FAR language, and 

is consistent with other business system 

sections as well as with section 893 of 

the NDAA. 

Comment: One respondent stated that 

it is unclear whether the proposed rule 

uses a two-step process for approval/ 

disapproval of a property system where 

the Government property administrator 

initially determines if a deficiency 

exists that would make the system 

‘‘inadequate’’ and then works with the 

contracting officer to determine if the 

system is ‘‘approved/disapproved’’ and 

whether payment withholding is 

required, or if the Government property 

administrator is acting as an agent of the 

cognizant contracting officer using a 

one-step process. Another respondent 

suggested that property administrators 

should have the authority to approve 

contractor property management 

systems, and report system deficiencies 

to the cognizant contracting officer 

recommending disapproval. 


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Disapproval authority should reside 

with the cognizant contracting officer. 

Response: DFARS 245.105 is clear 

that Government property 

administrators are responsible for 

providing recommendations and 

reporting system deficiencies to the 

cognizant contracting officer, including 

recommendations regarding contractor 

property management system approval 

or disapproval. However, system 

approval or disapproval authority shall 

remain with the cognizant contracting 

officer. 

2. Resources and Resolution Timing 

Comment: DCMA and DCAA are 

under-resourced to execute the 

requirements of the rule. DCAA does 

not have resources to perform timely 

follow-up audits/system reviews or 

coordinate in a timely manner with 

contracting officers to remove payment 

withholdings, and contracting officers 

do not have the training to determine if 

a deficiency makes a system inadequate. 

There must be accountability within 

DCAA to conduct timely follow-up 

audits. Respondents recommended that 

contractors should be allowed to request 

follow-up audits when deficiencies are 

corrected; it should be mandated that 

DCAA and DCMA perform follow-up 

audits within 30 days of contractor 

notification that a deficiency has been 

corrected; and that the rule should 

permit qualified third party auditors to 

provide various accreditations and 

audits, as is the case with ISO standards 

or CMMI approvals. 

Response: The need to have effective 

oversight mechanisms is unrelated to 

resources. This rule does not add 

additional oversight responsibilities 

onto DCAA and DCMA; it merely 

provides provisions to help protect the 

Government from the contractor’s 

failure to maintain business systems, as 

is required by the terms and conditions 

of their contracts. Contracting personnel 

will make appropriate determinations in 

accordance with this rule. DCMA and 

DCAA have been working closely to 

align their resources and ensure work is 

complementary. The increased 

cooperation and coordination between 

DCAA and DCMA will enable us to 

employ audit resources where they are 

needed. Further, the rule has been 

revised to require the contracting officer 

to reduce the payment withholding by 

at least 50 percent if the contracting 

officer has not made a determination 

whether the contractor has corrected all 

significant deficiencies as directed by 

the contracting officer’s final 

determination, or has not made a 

determination whether there is a 

reasonable expectation that the 

corrective actions have been 

implemented. 

3. Contractor Appeals 

Comment: DoD needs a contractor 

appeals process for implementing the 

payment withholding. The rule should 

be modified to require discussion with 

the PEO and/or SAE before any payment 

withholding action is taken. Due to the 

vague nature of the system criteria and 

subjective nature of the audit 

assessments, it will be difficult for 

contractors to challenge payment 

withholding determinations under the 

Contract Disputes Act. 

Response: The final deficiency 

determination is at the sole discretion of 

the contracting officer. However, prior 

to making a final deficiency 

determination, contractors are afforded 

an opportunity to respond in writing 

within 30 days to an initial 

determination of deficiencies from the 

contracting officer that identifies 

significant deficiencies in any of the 

contractor’s business systems. It is not 

necessary or appropriate to develop a 

dispute resolution process beyond that 

which is already available by statute 

and regulation. Additionally, other 

avenues of dispute resolution outside of 

the Contract Disputes Act are available 

for resolving disputes that may arise 

over determinations of system 

deficiencies. The policy set forth in FAR 

33.204 still applies, so that informal 

negotiation and alternate dispute 

resolution remain available, and, in fact, 

are encouraged as alternative methods 

of resolving disputes. 

4. Risk of Harm and Materiality of 

Deficiencies 

Comment: ‘‘Risk of harm’’ must be 

substantiated and verified. The final 

rule should define the phrase ‘‘potential 

risk of harm to the Government’’ which 

incorporates a nexus between the 

amount withheld and the specific harm 

that may accrue to the Government 

based on the system deficiency, and 

require that a deficiency be ‘‘material’’ or 

‘‘significant.’’ It is impossible to 

determine whether the proposed 

controls and remedial actions of this 

rule are reasonable and commensurate 

with the Government’s risks. Payment 

withholdings are liquidated damages in 

disguise and, if excessive to the 

Government’s risk, will be viewed as 

punitive. 

Response: The intent of the rule is to 

authorize payment withholding when 

the contracting officer finds that there 

are one or more significant deficiencies 

due to the contractor’s failure to meet 

one or more of the system criteria. The 

rule has been revised to consider 

significant deficiencies in determining 

the adequacy of a contractor’s business 

system and potential payment 

withholding in accordance with section 

893 of the FY11 NDAA. Contract terms 

explicitly require contractors to 

maintain the business systems in 

question as a condition of contracting 

responsibility and, in some cases, 

eligibility for award. Contract prices are 

negotiated on the basis that contractors 

will maintain such systems, so that the 

Government does not need to maintain 

far more extensive inspection and audit 

functions than it already does. Failure of 

the contractor to maintain acceptable 

systems during contract performance 

deprives the Government of assurances 

for which it pays fair value. While not 

‘‘deliverable’’ services under specific 

contract line items, these business 

systems are material terms, performance 

of which is required to ensure contracts 

will be performed on time, within cost 

estimates, and with appropriate 

standards of quality. The payment 

withholding remedy provides a measure 

of the overall contract performance of 

which the Government is deprived 

during the performance period, and for 

which the contractor should not receive 

the full financing payments. DoD is 

relying on the temporary payment 

withholding amounts, not as a penalty 

for a deficiency, but as representing a 

good-faith estimate sufficient to mitigate 

the Government’s risk where the actual 

amounts are difficult to estimate or 

quantify. Deficiencies that do not 

directly relate to unallowable or 

unreasonable costs still pose risks to the 

Government, and may lead to harm that 

may not be calculated readily when the 

deficiencies are discovered. In most 

cases, the financial impact of a system 

deficiency cannot be quantified because 

the system produces unreliable 

information. When the financial impact 

of a deficiency is quantifiable, DoD 

expects contracting officers to take 

appropriate actions to reduce fees, 

recoup unallowable costs, or take legal 

action if fraudulent activity is involved. 

5. Definition of Deficiency 

Comment: The term ‘‘deficiency’’ is 

not clearly defined. The rule should 

define the terms ‘‘deficiency,’’ 

‘‘significant deficiency,’’ and ‘‘material 

weakness.’’ One respondent suggested 

these definitions be set forth in 

accordance with the definitions utilized 

by the Public Company Accounting 

Oversight Board (PCAOB). 

Response: The interim rule has been 

revised to implement payment 

withholding procedures only for 

‘‘significant deficiencies,’’ therefore, it is 

not necessary to define ‘‘deficiency’’. 


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The rule is has been revised to define 

‘‘significant deficiency’’ as a 

shortcoming in the business system that 

affects materially the ability of officials 

of the Department of Defense to rely 

upon information produced by the 

system that is needed for management 

purposes, in accordance with section 

893 of the NDAA. DoD will use the 

definition of ‘‘significant deficiency’’ in 

section 893 over the PCAOB definition. 

The term ‘‘material weakness’’ is not 

used in this rule. 

6. System Approval Duration and 

Narrowly Focused Follow-up Audits 

Comment: The rule should implement 

an approval duration for each business 

system, and require follow-up audits to 

narrowly focus on previously-identified 

deficiencies. 

Response: While DCAA may perform 

a narrowly focused follow-up audit, 

imposing a required business system 

approval duration and/or specifically 

limiting the scope of the DCAA followup audit in this rule would not be 

appropriate since, at any time after 

approval, contractor conditions could 

change rendering the previouslyreported opinion as not current. DCAA 

policy is to report only deficiencies 

determined to be significant deficiencies 

in accordance with the definition of 

significant deficiency set forth in this 

rule and generally accepted Government 

auditing standards. 

7. Contracting Officer/ACO References 

Comment: The rule should reference 

‘‘ACO’’ in lieu of ‘‘contracting officer’’ 

since ACOs will have the primary 

responsibility to approve contractor 

business systems. 

Response: The contract 

administration functions in FAR 42.302 

are sometimes performed by 

procurement contracting offices. Since 

procurement contracting offices are 

sometimes responsible for the approval 

and disapproval of contractor business 

systems, the term ‘‘ACO’’ has been 

replaced by ‘‘contracting officer’’ for 

accuracy. 

8. Subjective Assessments and Vague 

Standards 

Comment: The revised proposed rule 

includes incomplete and ambiguous 

definitions of acceptable business 

systems, and fails to address the 

concern with subjective assessments 

and vague standards, which will lead to 

inconsistent treatment within DCAA 

and DCMA. 

Response: The rule incorporates 

criteria that are already used by the 

Government under existing authority to 

evaluate the adequacy of contractor 

business systems. For example, the 

criteria for estimating systems are 

currently located in the DFARS at 

215.407–5–70(d)(2). Given that these 

system criteria have been used for many 

years to assess contractor business 

systems, a reasonable person should be 

able to easily interpret and understand 

what is required to maintain an 

acceptable system. Each significant 

deficiency must be determined on its 

own set of facts and ultimately decided 

by the contracting officer. Inconsistent 

treatment of deficiencies is speculative. 

9. Approval To Withhold Payments 

Comment: The authority to order a 

payment withholding should be vested 

at a higher level than the contracting 

officer because many contracting 

officers do not have sufficient training 

or expertise in the full spectrum of 

business systems covered by the rule. 

Furthermore, contracting officers should 

be allowed to make independent 

business judgments without fear of 

DCAA elevating the matter to a formal 

disputes resolution board, unless the 

contracting officer has ignored or 

disregarded DCAA egregiously. 

Response: The contracting officer is 

the only person with the authority to 

enter into, administer, and/or terminate 

contracts and make related 

determinations and findings. DoD 

contracting personnel are skilled 

professionals. All contracting personnel 

are required by law to obtain a 

certification to ensure they have the 

requisite skills in contracting. When 

specialized expertise is required, 

contracting officers consult with 

auditors and other individuals with 

specialized experience, as necessary, to 

ensure a full understanding of issues. In 

fact, the interim rule requires such 

consultations. Accordingly, the 

contracting officer is the appropriate 

authority for making decisions regarding 

contractor business systems. 

10. Other Remedies 

Comment: The DCAA audit report 

should recommend whether a payment 

withholding is necessary, and if not, 

what other protections are available. 

DoD already has numerous other 

contracting tools available to protect 

itself from any actual loss associated 

with business system deficiencies. The 

proposed clause should state that a 

payment withholding under the clause 

is in lieu of, and not in addition to, 

other sanctions and remedies. 

Response: The existing regulatory 

remedies are not an effective substitute 

for a contract clause that will mitigate 

the Government’s risk while contractors 

correct business system deficiencies. 

The interim rule is required to 

supplement existing enforcement 

mechanisms and protect the 

Government’s interests while the 

contractor completes correction of 

system deficiencies. DoD does not want 

to limit the contracting officer’s 

discretion to apply any and all 

regulatory measures, as warranted by 

the circumstances. For example, if a 

contractor has a deficiency in its 

property management system, the 

contracting officer may implement a 

payment withholding to protect the 

Government’s risk of the contractor 

failing to perform on the contract, and 

may also revoke the Government’s 

assumption of liability to protect the 

Government from risk of loss of the 

Government’s furnished property. 

11. ‘‘Inadequate in Part’’ 

Comment: The final rule should 

provide for ‘‘inadequate in part’’ 

determinations when minor system 

deficiencies will not affect the entire 

business system. 

Response: ‘‘Inadequate in part’’ 

determinations when minor system 

deficiencies are found are not necessary. 

Contractor business systems will only 

be disapproved when the contracting 

officer determines that one or more 

significant deficiencies materially affect 

the ability of officials of the Department 

of Defense to rely upon information 

produced by the system that is needed 

for management purposes. 

12. Payment Withholdings Applied Per 

System or Per Deficiency 

Comment: The rule is unclear 

whether a 5% payment withholding is 

applied against a single deficient 

business system or can be applied for 

each deficiency within a single system. 

Response: Payment withholding 

procedures will be implemented on the 

basis of contractor business systems. 

While multiple payment withholdings 

may be implemented due to significant 

deficiencies in multiple contractor 

business systems, for clarity, the interim 

rule sets forth that the total percentage 

of payments withheld on amounts due 

under each progress payment, 

performance-based payment, or interim 

cost voucher, shall not exceed five 

percent for one or more significant 

deficiencies in any single contractor 

business system, and 10 percent for 

significant deficiencies in multiple 

contractor business systems. 

13. DCAA/Functional Specialist 

Consultation 

Comment: It is unclear what is meant 

by ‘‘consultation with the auditor or 

functional specialist’’ in terms of a 


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contracting officer’s determination to 

discontinue withholding payments prior 

to audit verification. The language in 

DFARS 242.70X1 and 252.242–7XXX 

should explicitly state that the 

contracting officer may discontinue 

withholding payments without the need 

to wait for a final audit report from 

DCAA. 

Response: The contracting officer is 

the only person with the authority to 

enter into, administer, and/or terminate 

contracts and make related 

determinations and findings. However, 

when specialized expertise is required, 

the interim rule requires contracting 

officers to consult with auditors and 

other individuals with specialized 

experience, as necessary, to ensure a full 

understanding of issues. The interim 

rule explicitly states that prior to the 

receipt of verification, the contracting 

officer may discontinue withholding 

payments pending receipt of 

verification, and release any payments 

previously withheld, if the contractor 

submits evidence that the deficiencies 

have been corrected, and the contracting 

officer, in consultation with the auditor 

or functional specialist, determines that 

there is a reasonable expectation that 

the corrective actions have been 

implemented and that the deficiencies 

no longer affect materially the ability of 

the Government to rely upon 

information produced by the system. 

14. Risk Management vs. Risk 

Avoidance 

Comment: The proposed rule’s focus 

on risk avoidance rather than risk 

management has the potential of 

significantly increasing the cost of 

business systems without corresponding 

benefits. To make systems deficiencyproof in order to avoid significant 

payment withholdings, contractors may 

be forced to incur unnecessary costs that 

would be disproportionate to the 

incremental benefits of having near 

perfect systems. DoD has failed to 

consider the concept of causal or 

beneficial relationships between the 

costs to bring business systems into 

compliance with the rule, and the 

benefits of protecting the Government 

from perceived risk. 

Response: DoD will only withhold 

payments in cases where there are 

significant deficiencies in the 

contractor’s business systems. In such 

cases, the ability of the contractor to 

manage risk is questionable and the 

potential risk of harm to the 

Government is increased. Under the 

rule, a contractor business system may 

contain deficiencies that do not affect 

materially the ability of DoD officials to 

rely on information produced by the 

system. Accordingly, the standard for 

withholding payments is commensurate 

with the risk of harm to the 

Government. In the long run, both the 

contractor’s and Government’s 

administrative costs should be reduced 

with the reliance on efficient contractor 

business systems. 

15. Large Businesses 

Comment: The revised rule 

improperly targets large businesses due 

to the $50M dollar contract threshold. 

Response: The $50 million contract 

threshold has been removed from the 

interim rule. The threshold for 

application of the contractor business 

systems clause is set forth in section 893 

of the NDAA, which defines a covered 

contractor as one that is subject to the 

Cost Accounting Standards under 41 

U.S.C. chapter 15, as implemented in 

regulations found at 48 CFR 9903.201– 

1 (see the FAR Appendix). 

16. DCAA Audit Standards 

Comment: DCAA auditors apply a 

higher standard for identifying a 

deficiency in an accounting system 

(‘‘less than a remote possibility that 

potential unallowable costs would be 

immaterial’’) than set forth in the rule. 

DCAA is not able to distinguish 

systemic errors or significant 

deficiencies from normal human errors 

or minor deficiencies. The rule may 

state that it is DCAA policy to report 

only deficiencies determined to be 

significant deficiencies or material 

weaknesses, however the DCAA 

December 19, 2008 MRD (titled Audit 

Guidance on Significant Deficiencies/ 

Material Weaknesses and Audit 

Opinions on Internal Control Systems) 

instructs auditors that anything which is 

subject to DCAA review should be 

considered significant. 

Response: DCAA will report 

significant deficiencies in accordance 

with the definition of significant 

deficiency in this rule, as set forth in 

section 893 of the NDAA and the 

Generally Accepted Government 

Auditing Standards (GAGAS). Based on 

the definition in GAGAS, a significant 

deficiency is a deficiency, or 

combination of deficiencies, that 

adversely affects the entity’s ability to 

initiate, authorize, record, process, or 

report data reliably. The GAGAS 

definition is consistent with the 

definition of significant deficiency in 

the contractor business systems clause. 

Additionally, contracting officers will 

administer this rule according to the 

requirements in section 893 of the 

NDAA. 

17. Arbitrary and Punitive Payment 

Withholdings 

Comment: The payment withholding 

percentages are punitive in nature and 

represent an arbitrary estimate based on 

pressure to incorporate business 

systems payment withholdings into the 

DFARS. The amount of the payment 

withholding should be commensurate 

with the level of risk to the Government 

and not set at arbitrary and punitive 

levels. 

Response: When contractors fail to 

maintain business systems, as is 

required by the terms and conditions of 

their contracts, the payment 

withholding provisions help to protect 

the Government from the risks of 

overpayment, increased property losses, 

or nonconforming goods, among others, 

against which contractor business 

systems are designed to ensure. The 

interim rule would protect the 

Government by reducing contract 

payments temporarily during 

performance in an amount sufficient to 

mitigate the Government’s risk. DoD is 

relying on the payment withholding 

amounts, not as a penalty for a 

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

is at risk where the actual amounts are 

difficult to estimate or quantify. The 

percentage of progress payments, 

performance-based payments, and 

interim payments set forth in this rule 

is in accordance with section 893 of the 

NDAA. 

18. Release of Payment Withholdings 

Comment: DCAA does not issue 

audits addressing ‘‘reasonable 

expectation that the corrective actions 

have been implemented.’’ The only 

existing audit solution is to complete 

the entire follow-up audit, which will 

not be performed in a timely manner 

due to DCAA’s backlog. Furthermore, 

the rule should provide guidance to 

avoid perpetual payment withholdings 

when deficiencies in multiple business 

systems overlap and the timing of 

corrective action plans differ. 

Response: There is no requirement 

that DCAA issue audits addressing 

‘‘reasonable expectation that the 

corrective actions have been 

implemented.’’ The interim rule 

explicitly states that prior to the receipt 

of verification, the contracting officer 

may discontinue withholding payments 

pending receipt of verification, and 

release any payments previously 

withheld, if the contractor submits 

evidence that the significant 

deficiencies have been corrected, and 

the contracting officer, in consultation 

with the auditor or functional specialist, 


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determines that there is a reasonable 

expectation that the corrective actions 

have been implemented. Since payment 

withholding procedures will be 

implemented on the basis of contractor 

business systems, if prior to the 

correction of one or more significant 

deficiencies, other significant 

deficiencies are identified in another 

business system, the contracting officer 

may revise the original final 

determination or issue a subsequent 

determination to disapprove the latter 

business system and implement 

additional payment withholdings. 

Contracting officers will provide 

direction in their determination(s), 

identify the significant deficiencies that 

need to be corrected in order to approve 

each disapproved business system, and 

discontinue the withholding of 

payments and release any payments 

previously withheld. If one previously 

disapproved contractor business system 

is approved, but significant deficiencies 

remain in another system, the 

contracting officer will continue to 

withhold payments relating to the 

remaining disapproved business system 

until the significant deficiencies relating 

to that business system have been 

determined to have been corrected. 

19. Multiple Compliance Regimes 

Comment: The rule provides a 

different set of contractor business 

systems requirements for DoD and 

NASA contractors than are required for 

civilian contractors. 

Response: The business systems 

criteria contained in the business 

systems clauses have been used in 

practice for several decades by 

Government personnel to assess the 

reliability and accuracy of management 

information produced by the applicable 

system. Because they are designed to be 

consistent with GAGAS, which are 

based on standards developed by the 

American Institute of Certified Public 

Accountants (AICPA), the system 

criteria are applicable equally to DoD, 

NASA, and civilian contractors. 

20. NDAA Compliance 

A number of respondents, citing 

section 893 of the NDAA, provided the 

following recommendations: 

Comment: Contractor business system 

disapproval should be based on 

‘‘significant deficiencies’’ as defined in 

section 893 of the NDAA, and the 

maximum cap should be reduced to 10 

percent in accordance with the NDAA. 

Response: The interim rule has been 

revised to reflect the language in section 

893 of the NDAA by incorporating the 

statutory language regarding ‘‘significant 

deficiencies’’ and reducing the 

cumulative payment withholding 

percentage from 20 percent to 10 

percent. 

Comment: The proposed rule 

mandates payment withholdings on all 

contracts, including firm-fixed price 

contract types, while the NDAA 

language makes payment withholdings 

discretionary, and permits them to be 

applied only to CAS-covered contracts 

and not fixed-price contract types. The 

rule should be adjusted to exclude those 

contract types, including firm-fixedprice contracts that have been discretely 

excluded by the Authorization Act. 

Response: Section 893 requires the 

Secretary of Defense to develop and 

initiate a program for the improvement 

of contractor business systems to ensure 

that such systems provide timely, 

reliable information for the management 

of Department of Defense programs. 

Furthermore, the statute sets forth that 

an appropriate official of the 

Department of Defense may withhold up 

to 10 percent of progress payments, 

performance-based payments, and 

interim payments under covered 

contracts from a covered contractor, as 

needed, to protect the interests of the 

Department and ensure compliance, if 

one or more of the contractor business 

systems of the contractor has been 

disapproved. To comply with this 

requirement, under the mandated DoD 

program for the improvement of 

contractor business systems, which 

includes the implementation of this 

interim rule, DoD has interpreted the 

definition of ‘‘covered contract’’ to mean 

a contract that is subject to the Cost 

Accounting Standards under 41 U.S.C. 

chapter 15, as implemented in 

regulations found at 48 CFR 9903.201– 

1 (see the FAR Appendix), which 

includes CAS–covered fixed-price type 

contracts and performance-based 

contracts, as well as cost type contracts. 

Comment: In accordance with the 

NDAA, the rule should identify DoD 

officials who are responsible for the 

approval or disapproval of contractor 

business systems. Furthermore, DoD 

officials must be made available to work 

with the contractor to develop 

corrective action plans and schedules 

for implementation. 

Response: The interim rule continues 

to identify cognizant contracting officers 

as the DoD officials who are responsible 

for the approval or disapproval of 

contractor business systems. 

21. Contract Applicability 

Comment: A number of respondents 

questioned the application of this rule 

against cost type contracts while other 

respondents questioned the application 

of this rule against fixed-price contracts. 

Additionally, some respondents 

expressed concern about the application 

of the rule to commercial contracts and 

construction contracts. Other 

respondents suggested that payment 

withholdings should only be applied to 

contracts which fall under the business 

system found to be deficient, and only 

to contracts administered by the 

contracting officer making the 

determination decision. 

Response: The Government is at risk 

when a contractor’s business systems 

contain significant deficiencies, 

regardless of contract type. Accordingly, 

it is appropriate for the contracting 

officer to withhold payments to protect 

the interest of the Government. 

Contracts awarded under FAR part 12 

regulations will generally be exempt 

from the requirements of this rule. A 

system deficiency may result in 

application of a payment withholding 

against all contracts that contain the 

business systems clause. The rule has 

been tailored to comply with section 

893 of the FY11 NDAA. DoD has 

interpreted the definition of ‘‘covered 

contract’’ to include CAS-covered cost 

type contracts as well as CAS-covered 

fixed-price type contracts and 

performance-based contracts since 

section 893 also allows up to 10 percent 

of progress payments and performancebased payments to be withheld. The 

interim rule provides the contracting 

officer with the sole discretion to 

withhold payments from one or more 

contracts containing the clause at 

252.242–7005, Contractor Business 

Systems. To ensure consistency, it is 

DoD policy that only one contracting 

officer, normally an ACO, has the 

responsibility and authority for 

approval, disapproval, and general 

oversight of contractor business 

systems. When the cognizant 

contracting officer renders a 

determination to approve or disapprove 

a system and withhold payments, all 

contracting officers with contracts 

affected by the determination are 

required to abide by the cognizant 

contracting officer’s decision. The rule 

complies with this long-established 

practice. 

22. DCAA/DCMA Internal Policies 

Comment: By allowing DCMA/DCAA 

to determine the criteria by which 

contractor business systems will be 

measured through their internal policies 

and procedures, it should make those 

internal policies and procedures subject 

to the OFPP Act public comment 

process. 

Response: This rule does not contain 

references to DCAA/DCMA internal 

policies to determine the criteria by 


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which contractor business systems will 

be measured. Rather, as defined in each 

of the individual business system 

clauses in the rule, the definition of an 

acceptable system means a system that 

complies with the system criteria set 

forth in each clause, which have been 

published for public comment. 

23. Cumulative Payment Withholdings 

Comment: The respondent questioned 

whether the 20 percent withhold in the 

proposed rule is in addition to other 

withholding remedies a contracting 

officer may assess. 

Response: In accordance with section 

893 of the NDAA, the cumulative 

payment withholding percentage set 

forth under this interim rule is reduced 

from 20 percent to 10 percent. This 

interim rule does not limit the 

contracting officer’s discretion to apply 

any and all regulatory measures, as 

warranted by the circumstances, 

including other applicable payment 

withholdings. The withholding of any 

amount or subsequent payment to the 

contractor shall not be construed as a 

waiver of any rights or remedies the 

Government has under this contract. 

24. CAS 

Comment: The respondent expressed 

concern that there is no adjudication 

process prior to implementation of 

payment withholdings for 

disagreements or disputes regarding 

interpretation and implementation of 

CAS. Contractors should not be subject 

to payment withholdings on matters 

which await the decision of the 

judiciary. 

Response: The finding of a significant 

deficiency in a business system results 

in only a temporary withholding from 

certain payments to protect the 

Government from potential harm. This 

does not constitute a permanent 

contractual decrement stemming from a 

CAS noncompliance. A contractor is not 

precluded from challenging any 

underlying CAS or other determinations 

through the contract disputes or other 

resolution processes. An additional 

adjudication process is not warranted 

for this rule. Furthermore, a deficiency 

that causes a CAS noncompliance may 

impact other business systems. 

25. Dollar Limitations 

Comment: The lack of dollar 

limitations at the contract level will lead 

to payment withholdings that exceed 

the amount required to protect the 

government. The value withheld at the 

contract level should be limited to 

$100,000 (and at subsequent thresholds 

of $250,000, $500,000, and $1,000,000) 

until authorization is received from 

DCMA headquarters. The approval of 

payment withholdings above the 

thresholds should be based on evidence 

that actual risk or harm in excess of the 

limit exists. 

Response: To ensure sufficient 

mitigation of the Government’s risk, the 

interim rule provides the contracting 

officer with the sole discretion to 

withhold payments from one or more 

contracts containing the clause at 

252.242–7005, Contractor Business 

Systems. Contracting officers will select 

one or more contracts from which 

payments will be withheld. In selecting 

the contract or contracts from which to 

withhold payments, the contracting 

officer shall ensure that the total amount 

of payment withholding does not 

exceed 10 percent of the total amount 

billed. 

26. Standard of Risk 

Comment: The respondent 

recommended that any final rule 

establish a clear, simple, and uniform 

standard of risk to the Government in 

the procedures that are applicable 

across all of the business systems. 

Response: The definition of a 

significant deficiency establishes a 

uniform standard of risk. A significant 

deficiency is defined as a shortcoming 

in the system that materially affects the 

ability of officials of the Department of 

Defense to rely upon information 

produced by the system that is needed 

for management purposes. 

27. Payment Withholding Process 

Comment: Respondents suggested that 

the final rule should require direct 

communication between the contracting 

officer, DCAA, and the contractor to 

allow discussion relating to an 

identified deficiency before payment is 

withheld. The proposed clause should 

provide sufficient time for the 

contracting officer and contractor to 

address potential system deficiencies. 

The respondents recommended that the 

rule require the contracting officer to 

work collaboratively with the contractor 

in determining whether deficiencies 

exist, whether there is a material risk of 

harm, and how to resolve the 

deficiencies without resorting to a 

payment withholding; and allow the 

contractor 90 days to address the 

potential deficiencies and submit a 

response documenting its position 

before the contracting officer can issue 

a final determination and impose a 

payment withholding. Otherwise, the 

rule denies a contractor due process by 

allowing the contracting officer to issue 

initial determinations prior to receiving 

all the facts from the contractor. 

Response: The rule provides adequate 

opportunities for communication 

between the contracting officer and the 

contractor prior to the implementation 

of payment withholdings. The 

contractor will be notified of a 

preliminary finding of a deficiency 

during the course of formal system 

reviews and audits. This occurs before 

the auditor or functional specialist 

releases a report to the contractor and 

contracting officer. After receiving a 

report, the contracting officer will 

promptly evaluate and issue an initial 

determination. The contractor is then 

allowed 30 days to respond to any 

significant deficiencies. Contractors are 

given ample opportunity to present their 

position during system reviews. 

Accordingly, the requirement for a 

contractor to respond within 30 days of 

an initial determination is adequate. 

28. Simplify Administrative Burden 

Comment: The rule should simplify 

the administrative burden for the 

accounting for payment withholdings 

against numerous invoices. 

Response: The interim rule provides 

the contracting officer with the sole 

discretion to withhold payments from 

one or more contracts containing the 

clause at 252.242–7005, Contractor 

Business Systems. The administrative 

burden for the accounting for payment 

withholdings against numerous invoices 

is thus simplified by not mandating that 

payment withholdings be applied 

against all of a contractor’s available 

contracts. 

29. DCAA/DCMA Roles 

Comment: One respondent suggested 

that the wording in 215.407–5–70(c)(3) 

should be revised to state ‘‘the auditor, 

on behalf of the cognizant contracting 

officer, conducts estimating system 

reviews’’ to establish that the contracting 

officer is the lead Federal official, not 

the auditor. Respondents questioned the 

ability of DCAA and DCMA to resolve 

audit recommendations, and further 

questioned the ability of DCAA and 

DCMA to execute their duties effectively 

in the absence of a procedure for 

resolving different judgments regarding 

a deficiency. 

Response: FAR 1.6 sets forth 

contracting officer authority and 

responsibilities. The addition of 

language to DFARS 215.407–5–70 

stating that the contracting officer is the 

lead Federal official is unnecessary. The 

DoD memorandum dated December 4, 

2009, ‘‘Resolving Contract Audit 

Recommendations,’’ clearly defines the 

roles and responsibilities of DCAA and 

DCMA and provides procedures for 

adjudicating differences. 


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30. Functional Specialist 

Comment: Reference to a functional 

specialist under estimating systems 

should be deleted. 

Response: The contracting officer is 

the only person with the authority to 

enter into, administer, and/or terminate 

contracts and make related 

determinations and findings. However, 

when specialized expertise is required, 

the interim rule requires contracting 

officers to consult with auditors and 

other individuals with specialized 

experience, as necessary, to ensure a full 

understanding of issues. Certain issues 

relating to forecasted costs may require 

the expertise of engineers, price 

analysts, and others to understand or 

evaluate the contractor’s estimating 

system. 

31. Policies and Procedures 

Comment: The proposed rule contains 

inconsistent, ill-defined system criteria 

for policies and procedures. The 

requirement for policies and/or 

procedures is the same for all business 

systems and, therefore, the proposed 

rule should be consistent by using the 

terms ‘‘policies and procedures’’ in all 

sections defining system criteria. The 

proposed rule should be revised to 

specify that a business system’s criteria 

for policies and procedures should be in 

writing. 

Response: System criteria are 

consistent with well-established 

Government practices and procedures 

for assessing the contractor business 

systems. For some business systems, the 

DFARS language supplements 

established FAR criteria, while other 

business systems criteria are established 

or revised by this interim rule. 

Therefore, it would be inappropriate to 

attempt to force incorrect terminology 

into business systems criteria for the 

sake of consistency. The systems criteria 

contained in the business systems 

clauses have been used for many years 

by Government personnel to assess the 

reliability and accuracy of management 

information produced by the applicable 

system. 

32. Impact to Industry 

Comment: One respondent 

commented that the proposed payment 

withholding regime will threaten the 

solvency of contractors and preclude 

many companies from contracting with 

the Government. The respondent 

indicated that the payment withholding 

regime will be particularly harsh on 

small businesses. 

Response: In the long run, both the 

contractor’s and the Government’s 

administrative cost should be reduced 

with the reliance on efficient contractor 

business systems. The rule has been 

revised to exclude small businesses in 

accordance with section 893 of the 

FY2011 NDAA. 

33. Effectiveness of This Rule 

Comment: The respondent indicated 

that the proposed payment withholding 

is not tailored reasonably to address the 

Department’s intended goal of 

preventing unallowable and 

unreasonable costs and waste, fraud, 

and abuse and improving the 

effectiveness of DCAA and DCMA. 

Response: As noted by the 

respondent, contractor business systems 

play an important role in preventing 

waste, fraud, and abuse. Significant 

systems deficiencies place a substantial 

resource burden on DCMA and DCAA 

due to the increased oversight needed to 

protect the interests of the Government. 

The rule provides contracting officers 

with an additional tool to mitigate the 

Government’s risk while contractors 

correct business systems deficiencies. 

Reliable contractor business systems 

employ internal controls to prevent 

unallowable and unreasonable costs, as 

well as waste, fraud, and abuse. 

Additionally, it reduces burden on 

Government resources, thereby allowing 

DCMA and DCAA resources to be 

employed more effectively. 

34. Minor Corrections 

Comment: For 252.215–7002, the 

lead-in reference to the prescription 

should be 215.407–5–70. 

Response: Referencing 215.407–5–70 

as the prescription for the clause at 

252.215–7002 would be incorrect. 

DFARS 215.408(2) prescribes the use of 

the clause at 252.215–7002. 

Comment: For 252.215–7002(e) and 

252.242–7004(e), change from ‘‘on any 

system deficiency’’ to ‘‘of any system 

deficiency.’’ 

Response: Correction has been made 

in the interim rule. 

Comment: The respondent 

recommended making the phrase 

‘‘consultation with the auditor or 

functional specialist’’ consistent 

throughout the rule. 

Response: Where appropriate, the 

phrase ‘‘consultation with the auditor or 

functional specialist’’ has been made 

consistent throughout the rule. 

Comment: The respondent 

recommended making the phrase ‘‘all 

findings and recommendations’’ 

consistent throughout the rule. 

Response: Where appropriate, the 

phrase ‘‘all findings and 

recommendations’’ has been made 

consistent throughout the rule. 

Comment: The proposed rule intends 

to add new paragraphs (d) and (e) to 

revised 242.7203, but the text of the 

additional paragraphs denominates 

them at paragraphs (c) and (d). 

Response: Correction has been made 

in the interim rule. 

B. Summary of Proposed Rule Changes 

As a result of public comments 

received in response to the revised 

proposed rule and the requirements set 

forth under section 893 of the NDAA, 

the following changes have been made 

to the interim rule: 

1. The term ‘‘significant deficiency’’ is 

defined, in accordance with section 893, 

as a shortcoming in the system that 

materially affects the ability of officials 

of the Department of Defense to rely 

upon information produced by the 

system that is needed for management 

purposes. The definition of the term 

‘‘significant deficiency’’ provides for 

associated changes to the rule as 

follows: 

(a) The term ‘‘significant deficiency’’ is 

used in lieu of phrases such as 

‘‘deficiency that adversely affects the 

system’’ and ‘‘deficiency that adversely 

affects the system, leading to a potential 

risk of harm to the Government’’ as the 

basis for business systems disapprovals 

and payment withholdings. 

(b) The phrases ‘‘the potential adverse 

impact to the Government’’ and ‘‘its 

potential harm to the Government’’ are 

no longer required to describe the detail 

to which significant deficiencies are 

described by auditors and functional 

specialists to contracting officers, and 

by contracting officers to contractors. 

2. While the proposed rule allowed 

for the implementation of payment 

withholdings with or without 

disapproval of system deficiencies that 

adversely affect the contractor’s 

business systems, this interim rule sets 

forth requirements that a contracting 

officer’s final determination shall 

include a disapproval of the contractor’s 

business system and the 

implementation of payment 

withholdings if a significant deficiency 

still exists after the contracting officer’s 

evaluation of the contractor’s response 

to the initial significant deficiency 

determination. 

3. Where the proposed rule allowed 

for system approval after the contracting 

officer determines that the contractor 

has substantially corrected the system 

deficiencies removing the potential risk 

of harm to the Government, this interim 

rule requires that there are no remaining 

significant deficiencies before a system 

is approved. 

4. The contracting officer will be 

required to reduce a payment 


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Federal Register / Vol. 76, No. 96 / Wednesday, May 18, 2011 / Rules and Regulations 28865 

withholding by at least 50 percent if the 

contracting officer has not made a 

determination whether the contractor 

has corrected all significant deficiencies 

as directed by the contracting officer’s 

final determination, or has not made a 

determination whether there is a 

reasonable expectation that the 

corrective actions have been 

implemented. 

5. The 16-month timeframe for 

completion of a contractor’s initial 

Earned Value Management System 

validation has been revised to allow for 

a timeframe that is approved by the 

contracting officer to allow for 

flexibility in the initial validation 

process. 

6. The term ‘‘covered contract’’ has 

been defined, in accordance with 

section 893, as a contract that is subject 

to the Cost Accounting Standards under 

41 U.S.C. chapter 15, as implemented in 

regulations found at 48 CFR 9903.201– 

1 (see the FAR Appendix). The 

definition of the term ‘‘covered contract’’ 

provides for associated changes to the 

rule as follows: 

(a) The clause prescription for the 

clause at 252.242–7005, Contractor 

Business Systems, requires that the 

resulting contract will be a ‘‘covered 

contract,’’ which exempts small business 

contracts. Consequently, all language 

pertaining to payment withholdings for 

small business has been struck from the 

rule. 

(b) While the proposed rule set forth 

a $50 million contract threshold for the 

incorporation of the clause at 252.242– 

7005, Contractor Business Systems, this 

interim rule prescribes the 

incorporation of the clause for covered 

contracts in accordance with the 

established definition. 

7. The proposed rule applied payment 

withholdings against all contracts that 

contained the clause at 252.242–7005, 

Contractor Business Systems. This 

interim rule allows the contracting 

officer the discretion to withhold 

payments from one or more contracts 

containing the clause. 

8. This rule revises procedures for the 

implementation of payment 

withholdings by replacing the 

requirement for contracting officers to 

issue unilateral modifications with the 

requirement to issue written 

notifications. Therefore, references to 

unilateral modifications for payment 

withholding as well as the sample 

language for the unilateral modifications 

have been deleted from this rule. 

9. The clause prescription at 242.7002 

for the clause at 252.242–7005, 

Contractor Business Systems, is revised 

to exempt contracts with educational 

institutions or Federally Funded 

Research and Development Centers 

(FFRDCs) operated by educational 

institutions. 

10. The references to construction 

contracts that include the clause at FAR 

52.232–27, Prompt Payment for 

Construction Contracts, under 

242.7502(a), 242.7503, and 252.242– 

7005 have been removed as 

unnecessary. 

11. The initial written determination 

language under 242.7502(d)(2)(ii)(A) has 

been revised to provide a description of 

each significant deficiency in sufficient 

detail to allow the contractor to 

understand the deficiency. 

12. In accordance with section 893, 

the term ‘‘business system’’ is replaced 

with the term ‘‘contractor business 

system.’’ 

13. In accordance with section 893, 

the total percentage of payments that 

may be withheld on a contract shall not 

exceed 10 percent. Additionally, while 

multiple payment withholdings may be 

implemented due to significant 

deficiencies in multiple contractor 

business systems, for clarity, the interim 

rule limits the total percentage of 

payments withheld to five percent for 

one or more significant deficiencies in 

any single contractor business system. 

14. The accounting system criteria 

under 252.242–7006(a)(1) has been 

revised to delete the unnecessary phrase 

‘‘that is adequate for producing 

accounting data that is reliable and costs 

that are recorded, accumulated, and 

billed on Government contracts in 

accordance with contract terms.’’ 

15. The purchasing system criteria 

under paragraph (c) of the clause at 

252.244–7001, Contractor Purchasing 

System Administration, has been 

revised to add paragraph (24) requiring 

contractors to establish and maintain 

procedures to notify the Contracting 

Officer in writing if— 

(a) The Contractor changes the 

amount of subcontract effort after award 

such that it exceeds 70 percent of the 

total cost of work to be performed under 

the contract, task order, or delivery 

order. The notification shall identify the 

revised cost of the subcontract effort and 

shall include verification that the 

Contractor will provide added value; or 

(b) Any subcontractor changes the 

amount of lower-tier subcontractor 

effort after award such that it exceeds 70 

percent of the total cost of the work to 

be performed under its subcontract. The 

notification shall identify the revised 

cost of the subcontract effort and shall 

include verification that the 

subcontractor will provide added value 

as related to the work to be performed 

by the lower-tier subcontractor(s). 

III. Executive Order 12866 and 

Executive Order 13563 

Executive Orders 12866 and 13563 

direct agencies to assess all costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. This is a 

‘‘significant regulatory action’’ and, 

therefore, was subject to review under 

section 6(b) of Executive Order 12866, 

Regulatory Planning and Review, dated 

September 30, 1993. This rule is not a 

major rule under 5 U.S.C. 804. 

IV. Regulatory Flexibility Act 

DoD has prepared an initial regulatory 

flexibility analysis consistent with 5 

U.S.C. 603. A copy of the analysis may 

be obtained from the point of contact 

specified herein. The analysis is 

summarized as follows: 

The objective of the rule is to 

establish a definition for contractor 

business systems and implement 

compliance mechanisms to improve 

DoD oversight of those contractor 

business systems. The requirements of 

the rule will apply to solicitations and 

contracts that are subject to the Cost 

Accounting Standards under 41 U.S.C. 

chapter 15, as implemented in 

regulations found at 48 CFR 9903.201– 

1 (see the FAR Appendix), other than in 

contracts with educational institutions 

or Federally Funded Research and 

Development Centers (FFRDCs) 

operated by educational institutions, 

and include one or more of the defined 

contractor business systems. 

Since contracts and subcontracts with 

small businesses are exempt from CAS 

requirements, DoD estimates that this 

rule will have no impact on small 

businesses. However, DoD invites 

comments from small business concerns 

and other interested parties on the 

expected impact of this rule on small 

entities. 

DoD will also consider comments 

from small entities concerning the 

existing regulations in subparts affected 

by this rule in accordance with 5 U.S.C. 

610. Interested parties must submit such 

comments separately and should cite 5 

U.S.C. 610 (DFARS Case 2009–D038) in 

correspondence. 

V. Paperwork Reduction Act 

The Paperwork Reduction Act (44 

U.S.C. chapter 35) applies because this 


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interim rule contains information 

collection requirements requiring the 

approval of the Office of Management 

and Budget. DoD invites comments on 

the following aspects of the interim rule: 

(a) Whether the collection of 

information is necessary for the proper 

performance of the functions of DoD, 

including whether the information will 

have practical utility; (b) the accuracy of 

the estimate of the burden of the 

information collection; (c) ways to 

enhance the quality, utility, and clarity 

of the information to be collected; and 

(d) ways to minimize the burden of the 

information collection on respondents, 

including the use of automated 

collection techniques or other forms of 

information technology. 

DoD received one comment regarding 

the information collection estimate that 

was included with the initial proposed 

rule published on January 15, 2010, at 

75 FR 2457. The respondent asserted 

that DoD’s estimates were substantially 

understated. However, the supporting 

data referenced by the respondent 

exceeded the information collection 

requirements established under this 

rule. The hours and costs cited by the 

respondent with regard to EVMS did not 

reflect the Paperwork Reduction Act 

requirements of this rule. DoD received 

no comments regarding the information 

collection estimate in response to the 

second proposed rule published on 

December 3, 2010 at 75 FR 75550. With 

no further specific Paperwork Reduction 

Act comments received, and no further 

revisions in this interim rule to the 

information collection requirements, 

DoD concludes that the estimates 

published with the proposed rule 

accurately reflect the contractors’ costs 

to fulfill the information collection 

requirements of this rule. The following 

is a summary of the information 

collection requirements. 

The business systems clauses in this 

interim rule contain requirements for 

contractors to respond to initial and 

final determinations of deficiencies. The 

information contractors will be required 

to submit to respond to deficiencies in 

four of the six business systems defined 

in this rule have been approved by the 

Office of Management and Budget as 

follows: 

(1) Accounting Systems—OMB 

Clearance 9000–0011; 

(2) Estimating Systems—OMB 

Clearance 0704–0232; 

(3) Material Management and 

Accounting Systems—OMB Clearance 

0704–0250; 

(4) Purchasing Systems– OMB 

Clearance 0704–0253; 

(5) Earned Value Management 

Systems—OMB Control Number 0704– 

0479; and 

(6) Contractors Property Management 

System—OMB Control Number 0704– 

0480. 

The information contractors will be 

required to submit to respond to 

deficiencies in contractors’ EVMS is 

estimated as follows: 

Number of respondents—186. 

Responses per respondent—48. 

Annual responses—8,928. 

Burden per response—40 hours. 

Annual burden hours—357,120 

hours. 

The information contractors will be 

required to submit to respond to 

deficiencies in contractors’ property 

management systems is estimated as 

follows: 

Number of respondents: 2,646. 

Responses per respondent: 1. 

Annual responses: 2,646. 

Average burden per response: 1.2 

hours. 

Annual burden hours: 3,200 hours. 

Needs and Uses: DoD needs the 

information required by the business 

systems clause in this interim rule to 

mitigate the risk of unallowable and 

unreasonable costs on Government 

contracts when a contractor has one or 

more deficiencies in a business system. 

Affected public: The business systems 

clause will be used in solicitations and 

contracts that include any of the 

following clauses: 

(1) 252.215–7002, Cost Estimating 

System Requirements; 

(2) 252.234–7002, Earned Value 

Management System; 

(3) 252.242–7004, Material 

Management and Accounting System; 

(4) 252.242–7006, Accounting System 

Administration; 

(5) 252.244–7001, Contractor 

Purchasing System Administration; 

(6) 252.245–7003, Contractor Property 

System Administration. 

Frequency: On occasion. 

VI. Determination To Issue an Interim 

Rule 

A determination has been made under 

the authority of the Secretary of 

Defense, that urgent and compelling 

reasons exist to publish an interim rule 

prior to affording the public an 

opportunity to comment. This interim 

rule implements section 893 of the Ike 

Skelton National Defense Authorization 

Act for Fiscal Year 2011. Section 893 

requires the improvement of contractor 

business systems to ensure that such 

systems provide timely, reliable 

information for the management of DoD 

programs. Contractor business systems 

and internal controls are the first line of 

defense against waste, fraud, and abuse. 

Weak control systems increase the risk 

of unallowable and unreasonable costs 

on Government contracts. 

In implementing section 893, this rule 

will improve the effectiveness of DoD 

oversight for contractor business 

systems. More effective and efficient 

management of DoD programs is key to 

achieving greater efficiency and 

productivity in defense spending. It is 

essential that DoD immediately 

commence to require these 

improvements to contractor business 

systems, and to undertake the enhanced 

oversight necessary for expenditures of 

taxpayer dollars. Comments received in 

response to this interim rule will be 

considered in the formation of the final 

rule. 

List of Subjects in 48 CFR Parts 215, 

234, 242, 244, 245, and 252 

Government procurement. 

Ynette R. Shelkin, 

Editor, Defense Acquisition Regulations 

System. 

Therefore, 48 CFR parts 215, 234, 242, 

244, 245, and 252 are amended as 

follows: 

■ 1. The authority citation for 48 CFR 

parts 215, 234, 242, 244, 245, and 252 

continues to read as follows: 

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

chapter 1. 

PART 215—CONTRACTING BY 

NEGOTIATION 

■ 2. Amend section 215.407–5–70 by 

revising paragraphs (a)(4), (c), and (e) 

through (g) to read as follows: 

215.407–5–70 Disclosure, maintenance, 

and review requirements. 

(a) * * * 

(4) Significant deficiency is defined in 

the clause at 252.215–7002, Cost 

Estimating System Requirements. 

(c) Policy. (1) The contracting officer 

shall— 

(i) Through use of the clause at 

252.215–7002, Cost Estimating System 

Requirements, apply the disclosure, 

maintenance, and review requirements 

to large business contractors meeting the 

criteria in paragraph (b)(2)(i) of this 

section; 

(ii) Consider whether to apply the 

disclosure, maintenance, and review 

requirements to large business 

contractors under paragraph (b)(2)(ii) of 

this section; and 

(iii) Not apply the disclosure, 

maintenance, and review requirements 

to other than large business contractors. 

(2) The cognizant contracting officer, 

in consultation with the auditor, for 


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contractors subject to paragraph (b)(2) of 

this section, shall— 

(i) Determine the acceptability of the 

disclosure and approve or disapprove 

the system: and 

(ii) Pursue correction of any 

deficiencies. 

(3) The auditor conducts estimating 

system reviews. 

(4) An acceptable system shall 

provide for the use of appropriate 

source data, utilize sound estimating 

techniques and good judgment, 

maintain a consistent approach, and 

adhere to established policies and 

procedures. 

(5) In evaluating the acceptability of a 

contractor’s estimating system, the 

contracting officer, in consultation with 

the auditor, shall determine whether the 

contractor’s estimating system complies 

with the system criteria for an 

acceptable estimating system as 

prescribed in the clause at 252.215– 

7002, Cost Estimating System 

Requirements. 

* * * * * 

(e) Disposition of findings—(1) 

Reporting of findings. The auditor shall 

document findings and 

recommendations in a report to the 

contracting officer. If the auditor 

identifies any significant estimating 

system deficiencies, the report shall 

describe the deficiencies in sufficient 

detail to allow the contracting officer to 

understand the deficiencies. 

(2) Initial determination. (i) The 

contracting officer shall review all 

findings and recommendations and, if 

there are no significant deficiencies, 

shall promptly notify the contractor, in 

writing, that the contractor’s estimating 

system is acceptable and approved; or 

(ii) If the contracting officer finds that 

there are one or more significant 

deficiencies (as defined in the clause at 

252.215–7002, Cost Estimating System 

Requirements) due to the contractor’s 

failure to meet one or more of the 

estimating system criteria in the clause 

at 252.215–7002, the contracting officer 

shall— 

(A) Promptly make an initial written 

determination on any significant 

deficiencies and notify the contractor, in 

writing, providing a description of each 

significant deficiency in sufficient detail 

to allow the contractor to understand 

the deficiency; 

(B) Request the contractor to respond 

in writing to the initial determination 

within 30 days; and 

(C) Promptly evaluate the contractor’s 

responses to the initial determination, 

in consultation with the auditor or 

functional specialist, and make a final 

determination. 

(3) Final determination. (i) The 

contracting officer shall make a final 

determination and notify the contractor 

in writing that— 

(A) The contractor’s estimating system 

is acceptable and approved, and no 

significant deficiencies remain, or 

(B) Significant deficiencies remain. 

The notice shall identify any remaining 

significant deficiencies, and indicate the 

adequacy of any proposed or completed 

corrective action. The contracting officer 

shall— 

(1) Request that the contractor, within 

45 days of receipt of the final 

determination, either correct the 

deficiencies or submit an acceptable 

corrective action plan showing 

milestones and actions to eliminate the 

deficiencies; 

(2) Disapprove the system in 

accordance with the clause at 252.215– 

7002, Cost Estimating System 

Requirements; and 

(3) Withhold payments in accordance 

with the clause at 252.242–7005, 

Contractor Business Systems, if the 

clause is included in the contract. 

(ii) Follow the procedures relating to 

monitoring a contractor’s corrective 

action and the correction of significant 

deficiencies in PGI 215.407–5–70(e). 

(f) System approval. The contracting 

officer shall promptly approve a 

previously disapproved estimating 

system and notify the contractor when 

the contracting officer determines that 

there are no remaining significant 

deficiencies. 

(g) Contracting officer notifications. 

The cognizant contracting officer shall 

promptly distribute copies of a 

determination to approve a system, 

disapprove a system and withhold 

payments, or approve a previously 

disapproved system and release 

withheld payments, to the auditor; 

payment office; affected contracting 

officers at the buying activities; and 

cognizant contracting officers in 

contract administration activities. 

PART 234—MAJOR SYSTEM 

ACQUISITION 

■ 3. Add section 234.001 to read as 

follows: 

234.001 Definition. 

As used in this subpart— 

Acceptable earned value management 

system and earned value management 

system are defined in the clause at 

252.234–7002, Earned Value 

Management System. 

Significant deficiency is defined in 

the clause at 252.234–7002, Earned 

Value Management System, and is 

synonymous with noncompliance. 

■ 4. Amend section 234.201 by adding 

paragraphs (5) through (9) to read as 

follows: 

234.201 Policy. 

* * * * * 

(5) The cognizant contracting officer, 

in consultation with the functional 

specialist and auditor, shall— 

(i) Determine the acceptability of the 

contractor’s earned value management 

system and approve or disapprove the 

system; and 

(ii) Pursue correction of any 

deficiencies. 

(6) In evaluating the acceptability of a 

contractor’s earned value management 

system, the contracting officer, in 

consultation with the functional 

specialist and auditor, shall determine 

whether the contractor’s earned value 

management system complies with the 

system criteria for an acceptable earned 

value management system as prescribed 

in the clause at 252.234–7002, Earned 

Value Management System. 

(7) Disposition of findings—(i) 

Reporting of findings. The functional 

specialist or auditor shall document 

findings and recommendations in a 

report to the contracting officer. If the 

functional specialist or auditor 

identifies any significant deficiencies in 

the contractor’s earned value 

management system, the report shall 

describe the deficiencies in sufficient 

detail to allow the contracting officer to 

understand the deficiencies. 

(ii) Initial determination. (A) The 

contracting officer shall review all 

findings and recommendations and, if 

there are no significant deficiencies, 

shall promptly notify the contractor, in 

writing, that the contractor’s earned 

value management system is acceptable 

and approved; or 

(B) If the contracting officer finds that 

there are one or more significant 

deficiencies (as defined in the clause at 

252.234–7002, Earned Value 

Management System) due to the 

contractor’s failure to meet one or more 

of the earned value management system 

criteria in the clause at 252.234–7002, 

the contracting officer shall— 

(1) Promptly make an initial written 

determination on any significant 

deficiencies and notify the contractor, in 

writing, providing a description of each 

significant deficiency in sufficient detail 

to allow the contractor to understand 

the deficiencies; 

(2) Request the contractor to respond, 

in writing, to the initial determination 

within 30 days; and 

(3) Evaluate the contractor’s response 

to the initial determination, in 

consultation with the auditor or 


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functional specialist, and make a final 

determination. 

(iii) Final determination. (A) The 

contracting officer shall make a final 

determination and notify the contractor, 

in writing, that— 

(1) The contractor’s earned value 

management system is acceptable and 

approved, and no significant 

deficiencies remain, or 

(2) Significant deficiencies remain. 

The notice shall identify any remaining 

significant deficiencies, and indicate the 

adequacy of any proposed or completed 

corrective action. The contracting officer 

shall— 

(i) Request that the contractor, within 

45 days of receipt of the final 

determination, either correct the 

deficiencies or submit an acceptable 

corrective action plan showing 

milestones and actions to eliminate the 

deficiencies; 

(ii) Disapprove the system in 

accordance with the clause at 252.234– 

7002, Earned Value Management 

System, when initial validation is not 

successfully completed within the 

timeframe approved by the contracting 

officer, or the contracting officer 

determines that the existing earned 

value management system contains one 

or more significant deficiencies in highrisk guidelines in ANSI/EIA–748 

standards (guidelines 1, 3, 6, 7, 8, 9, 10, 

12, 16, 21, 23, 26, 27, 28, 30, or 32). 

When the contracting officer determines 

that the existing earned value 

management system contains one or 

more significant deficiencies in one or 

more of the remaining 16 guidelines in 

ANSI/EIA–748 standards, the 

contracting officer shall use discretion 

to disapprove the system based on input 

received from functional specialists and 

the auditor; and 

(iii) Withhold payments in accordance 

with the clause at 252.242–7005, 

Contractor Business Systems, if the 

clause is included in the contract. 

(B) Follow the procedures relating to 

monitoring a contractor’s corrective 

action and the correction of significant 

deficiencies at PGI 234.201(7). 

(8) System approval. The contracting 

officer shall promptly approve a 

previously disapproved earned value 

management system and notify the 

contractor when the contracting officer 

determines that there are no remaining 

significant deficiencies. 

(9) Contracting officer notifications. 

The cognizant contracting officer shall 

promptly distribute copies of a 

determination to approve a system, 

disapprove a system and withhold 

payments, or approve a previously 

disapproved system and release 

withheld payments to the auditor; 

payment office; affected contracting 

officers at the buying activities; and 

cognizant contracting officers in 

contract administration activities. 

PART 242—CONTRACT 

ADMINISTRATION AND AUDIT 

SERVICES 

■ 5. Add subpart 242.70 to read as 

follows: 

SUBPART 242.70—CONTRACTOR 

BUSINESS SYSTEMS 

Sec. 

242.7000 Contractor business system 

deficiencies. 

242.7001 Contract clause. 

SUBPART 242.70—CONTRACTOR 

BUSINESS SYSTEMS 

242.7000 Contractor business system 

deficiencies. 

(a) Definitions. As used in this 

subpart— 

Acceptable contractor business 

systems and contractor business systems 

are defined in the clause at 252.242– 

7005, Contractor Business Systems. 

Covered contract means a contract 

that is subject to the Cost Accounting 

Standards under 41 U.S.C. chapter 15, 

as implemented in regulations found at 

48 CFR 9903.201–1 (see the FAR 

Appendix). 

Significant deficiency is defined in 

the clause at 252.242–7005, Contractor 

Business Systems. 

(b) Determination to withhold 

payments. If the contracting officer 

makes a final determination to 

disapprove a contractor’s business 

system in accordance with the clause at 

252.242–7005, Contractor Business 

Systems, the contracting officer shall— 

(1) In accordance with agency 

procedures, identify one or more 

covered contracts containing the clause 

at 252.242–7005, Contractor Business 

Systems, from which payments will be 

withheld. When identifying the covered 

contracts from which to withhold 

payments, the contracting officer shall 

ensure that the total amount of payment 

withholding under 252.242–7005, does 

not exceed 10 percent of progress 

payments, performance-based 

payments, and interim payments under 

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

contracts billed under each of the 

identified covered contracts. Similarly, 

the contracting officer shall ensure that 

the total amount of payment 

withholding under the clause at 

252.242–7005, Contractor Business 

Systems, for each business system does 

not exceed five percent of progress 

payments, performance-based 

payments, and interim payments under 

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

contracts billed under each of the 

identified covered contracts. The 

contracting officer has the sole 

discretion to identify the covered 

contracts from which to withhold 

payments. 

(2) Promptly notify the contractor, in 

writing, of the contracting officer’s 

determination to implement payment 

withholding in accordance with the 

clause at 252.242–7005, Contractor 

Business Systems. The notice of 

payment withholding shall be included 

in the contracting officer’s written final 

determination for the contractor 

business system and shall inform the 

contractor that— 

(i) Payments shall be withheld from 

the contract or contracts identified in 

the written determination in accordance 

with the clause at 252.242–7005, 

Contractor Business Systems, until the 

contracting officer determines that there 

are no remaining significant 

deficiencies; and 

(ii) The contracting officer reserves 

the right to take other actions within the 

terms and conditions of the contract. 

(3) Provide all contracting officers 

administering the selected contracts 

from which payments will be withheld, 

a copy of the determination. The 

contracting officer shall also provide a 

copy of the determination to the auditor; 

payment office; affected contracting 

officers at the buying activities; and 

cognizant contracting officers in 

contract administration activities. 

(c) Monitoring contractor’s corrective 

action. The contracting officer, in 

consultation with the auditor or 

functional specialist, shall monitor the 

contractor’s progress in correcting the 

deficiencies. The contracting officer 

shall notify the contractor of any 

decision to decrease or increase the 

amount of payment withholding in 

accordance with the clause at 252.242– 

7005, Contractor Business Systems. 

(d) Correction of significant 

deficiencies. (1) If the contractor notifies 

the contracting officer that the 

contractor has corrected the significant 

deficiencies, the contracting officer shall 

request the auditor or functional 

specialist to review the correction to 

verify that the deficiencies have been 

corrected. If, after receipt of verification, 

the contracting officer determines that 

the contractor has corrected all 

significant deficiencies as directed by 

the contracting officer’s final 

determination, the contracting officer 

shall discontinue the withholding of 

payments, release any payments 

previously withheld, and approve the 

system, unless other significant 

deficiencies remain. 


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(2) Prior to the receipt of verification, 

the contracting officer may discontinue 

withholding payments pending receipt 

of verification, and release any 

payments previously withheld, if the 

contractor submits evidence that the 

significant deficiencies have been 

corrected, and the contracting officer, in 

consultation with the auditor or 

functional specialist, determines that 

there is a reasonable expectation that 

the corrective actions have been 

implemented. 

(3) Within 90 days of receipt of the 

contractor notification that the 

contractor has corrected the significant 

deficiencies, the contracting officer 

shall— 

(i) Make a determination that— 

(A) The contractor has corrected all 

significant deficiencies as directed by 

the contracting officer’s final 

determination in accordance with 

paragraph (d)(1) of this section; 

(B) There is a reasonable expectation 

that the corrective actions have been 

implemented in accordance with 

paragraph (d)(2) of this section; or 

(C) The contractor has not corrected 

all significant deficiencies as directed 

by the contracting officer’s final 

determination in accordance with 

paragraph (d)(1) of this section, or there 

is not a reasonable expectation that the 

corrective actions have been 

implemented in accordance with 

paragraph (d)(2) of this section; or 

(ii) Reduce withholding directly 

related to the significant deficiencies 

covered under the corrective action plan 

by at least 50 percent of the amount 

being withheld from progress payments 

and performance-based payments, and 

direct the contractor, in writing, to 

reduce the percentage withheld on 

interim cost vouchers by at least 50 

percent, until the contracting officer 

makes a determination in accordance 

with paragraph (d)(3)(i) of this section. 

(4) If, at any time, the contracting 

officer determines that the contractor 

has failed to correct the significant 

deficiencies identified in the 

contractor’s notification, the contracting 

officer will continue, reinstate, or 

increase withholding from progress 

payments and performance-based 

payments, and direct the contractor, in 

writing, to continue, reinstate, or 

increase the percentage withheld on 

interim cost vouchers to the percentage 

initially withheld, until the contracting 

officer determines that the contractor 

has corrected all significant deficiencies 

as directed by the contracting officer’s 

final determination. 

(e) For sample formats for written 

notifications of contracting officer 

determinations to initiate payment 

withholding, reduce payment 

withholding, and discontinue payment 

withholding in accordance with the 

clause at DFARS 252.242–7005, 

Contractor Business Systems, see PGI 

242.7000. 

242.7001 Contract clause. 

Use the clause at 252.242–7005, 

Contractor Business Systems, in 

solicitations and contracts (other than in 

contracts with educational institutions 

or Federally Funded Research and 

Development Centers (FFRDCs) 

operated by educational institutions) 

when— 

(a) The resulting contract will be a 

covered contract as defined in 

242.7000(a); and 

(b) The solicitation or contract 

includes any of the following clauses: 

(1) 252.215–7002, Cost Estimating 

System Requirements. 

(2) 252.234–7002, Earned Value 

Management System. 

(3) 252.242–7004, Material 

Management and Accounting System. 

(4) 252.242–7006, Accounting System 

Administration. 

(5) 252.244–7001, Contractor 

Purchasing System Administration. 

(6) 252.245–7003, Contractor Property 

Management System Administration. 

■ 6. Revise sections 242.7201 and 

242.7202 to read as follows: 

242.7201 Definitions. 

Acceptable material management and 

accounting system, material 

management and accounting system, 

and valid time-phased requirements are 

defined in the clause at 252.242–7004, 

Material Management and Accounting 

System. 

Significant deficiency is defined in 

the clause at 252.242.7004, Material 

Management and Accounting System. 

242.7202 Policy. 

(a) DoD policy is for its contractors to 

have an MMAS that conforms to the 

standards in paragraph (e) of the clause 

at 252.242–7004, Material Management 

and Accounting System, so that the 

system— 

(1) Reasonably forecasts material 

requirements; 

(2) Ensures the costs of purchased and 

fabricated material charged or allocated 

to a contract are based on valid timephased requirements; and 

(3) Maintains a consistent, equitable, 

and unbiased logic for costing of 

material transactions. 

(b) The cognizant contracting officer, 

in consultation with the auditor and 

functional specialist, if appropriate, 

shall— 

(1) Determine the acceptability of the 

contractor’s MMAS and approve or 

disapprove the system; and 

(2) Pursue correction of any 

deficiencies. 

(c) In evaluating the acceptability of 

the contractor’s MMAS, the contracting 

officer, in consultation with the auditor 

and functional specialist, if appropriate, 

shall determine whether the contractor’s 

MMAS complies with the system 

criteria for an acceptable MMAS as 

prescribed in the clause at 252.242– 

7004, Material Management and 

Accounting System. 

■ 7. Amend section 242.7203 by 

revising paragraphs (c) and (d) and 

adding paragraph (e) to read as follows: 

242.7203 Review procedures. 

* * * * * 

(c) Disposition of findings—(1) 

Reporting of findings. The auditor or 

functional specialist shall document 

findings and recommendations in a 

report to the contracting officer. If the 

auditor or functional specialist 

identifies any significant MMAS 

deficiencies, the report shall describe 

the deficiencies in sufficient detail to 

allow the contracting officer to 

understand the deficiencies. 

(2) Initial determination. (i) The 

contracting officer shall review findings 

and recommendations and, if there are 

no significant deficiencies, shall 

promptly notify the contractor, in 

writing, that the contractor’s MMAS is 

acceptable and approved; or 

(ii) If the contracting officer finds that 

there are one or more significant 

deficiencies (as defined in the clause at 

252.242–7004, Material Management 

and Accounting System) due to the 

contractor’s failure to meet one or more 

of the MMAS system criteria in the 

clause at 252.242–7004, Material 

Management and Accounting System, 

the contracting officer shall— 

(A) Promptly make an initial written 

determination on any significant 

deficiencies and notify the contractor, in 

writing, providing a description of each 

significant deficiency in sufficient detail 

to allow the contractor to understand 

the deficiency; 

(B) Request the contractor to respond, 

in writing, to the initial determination 

within 30 days; and 

(C) Promptly evaluate the contractor’s 

response to the initial determination in 

consultation with the auditor or 

functional specialist, and make a final 

determination. 

(3) Final determination. (i) The ACO 

shall make a final determination and 

notify the contractor that— 


srobinson on DSKHWCL6B1PROD with RULES2
28870 Federal Register / Vol. 76, No. 96 / Wednesday, May 18, 2011 / Rules and Regulations 

(A) The contractor’s MMAS is 

acceptable and approved, and no 

deficiencies remain, or 

(B) Significant deficiencies remain. 

The notice shall identify any remaining 

significant deficiencies, and indicate the 

adequacy of any proposed or completed 

corrective action. The contracting officer 

shall— 

(1) Request that the contractor, within 

45 days of receipt of the final 

determination, either correct the 

deficiencies or submit an acceptable 

corrective action plan showing 

milestones and actions to eliminate the 

deficiencies; 

(2) Disapprove the system in 

accordance with the clause at 252.242– 

7004, Material Management and 

Accounting System; and 

(3) Withhold payments in accordance 

with the clause at 252.242–7005, 

Contractor Business Systems, if the 

clause is included in the contract. 

(ii) Follow the procedures relating to 

monitoring a contractor’s corrective 

action and the correction of significant 

deficiencies in PGI 242.7203. 

(d) System approval. The contracting 

officer shall promptly approve a 

previously disapproved MMAS and 

notify the contractor when the 

contracting officer determines that there 

are no remaining significant 

deficiencies. 

(e) Contracting officer notifications. 

The cognizant contracting officer shall 

promptly distribute copies of a 

determination to approve a system, 

disapprove a system and withhold 

payments, or approve a previously 

disapproved system and release 

withheld payments to the auditor; 

payment office; affected contracting 

officers at the buying activities; and 

cognizant contracting officers in 

contract administration activities. 

■ 8. Revise subpart 242.75 to read as 

follows: 

Subpart 242.75—Contractor Accounting 

Systems and Related Controls 

Sec. 

242.7501 Definitions. 

242.7502 Policy. 

242.7503 Contract clause. 

Subpart 242.75—Contractor 

Accounting Systems and Related 

Controls 

242.7501 Definitions. 

As used in this subpart— 

Acceptable accounting system, and 

accounting system are defined in the 

clause at 252.242–7006, Accounting 

System Administration. 

Significant deficiency is defined in 

the clause at 252.242–7006, Accounting 

System Administration. 

242.7502 Policy. 

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

or contracts which provide for progress 

payments based on costs or on a 

percentage or stage of completion, shall 

maintain an accounting system. 

(b) The cognizant contracting officer, 

in consultation with the auditor or 

functional specialist, shall— 

(1) Determine the acceptability of a 

contractor’s accounting system and 

approve or disapprove the system; and 

(2) Pursue correction of any 

deficiencies. 

(c) In evaluating the acceptability of a 

contractor’s accounting system, the 

contracting officer, in consultation with 

the auditor or functional specialist, shall 

determine whether the contractor’s 

accounting system complies with the 

system criteria for an acceptable 

accounting system as prescribed in the 

clause at 252.242–7006, Accounting 

System Administration. 

(d) Disposition of findings— (1) 

Reporting of findings. The auditor shall 

document findings and 

recommendations in a report to the 

contracting officer. If the auditor 

identifies any significant accounting 

system deficiencies, the report shall 

describe the deficiencies in sufficient 

detail to allow the contracting officer to 

understand the deficiencies. Follow the 

procedures at PGI 242.7502 for reporting 

of deficiencies. 

(2) Initial determination. (i) The 

contracting officer shall review findings 

and recommendations and, if there are 

no significant deficiencies, shall 

promptly notify the contractor, in 

writing, that the contractor’s accounting 

system is acceptable and approved; or 

(ii) If the contracting officer finds that 

there are one or more significant 

deficiencies (as defined in the clause at 

252.242–7006, Accounting System 

Administration) due to the contractor’s 

failure to meet one or more of the 

accounting system criteria in the clause 

at 252.242–7006, the contracting officer 

shall— 

(A) Promptly make an initial written 

determination on any significant 

deficiencies and notify the contractor, in 

writing, providing a description of each 

significant deficiency in sufficient detail 

to allow the contractor to understand 

the deficiency; 

(B) Request the contractor to respond, 

in writing, to the initial determination 

within 30 days; and 

(C) Promptly evaluate the contractor‘s 

response to the initial determination, in 

consultation with the auditor or 

functional specialist, and make a final 

determination. 

(3) Final determination. (i) The 

contracting officer shall make a final 

determination and notify the contractor, 

in writing, that— 

(A) The contractor’s accounting 

system is acceptable and approved, and 

no significant deficiencies remain, or 

(B) Significant deficiencies remain. 

The notice shall identify any remaining 

significant deficiencies, and indicate the 

adequacy of any proposed or completed 

corrective action. The contracting officer 

shall— 

(1) Request that the contractor, within 

45 days of receipt of the final 

determination, either correct the 

deficiencies or submit an acceptable 

corrective action plan showing 

milestones and actions to eliminate the 

deficiencies; 

(2) Make a determination to 

disapprove the system in accordance 

with the clause at 252.242–7006, 

Accounting System Administration; and 

(3) Withhold payments in accordance 

with the clause at 252.242–7005, 

Contractor Business Systems, if the 

clause is included in the contract. 

(ii) Follow the procedures relating to 

monitoring a contractor’s corrective 

action and the correction of significant 

deficiencies in PGI 242.7502. 

(e) System approval. The contracting 

officer shall promptly approve a 

previously disapproved accounting 

system and notify the contractor when 

the contracting officer determines that 

there are no remaining significant 

deficiencies. 

(f) Contracting officer notifications. 

The cognizant contracting officer shall 

promptly distribute copies of a 

determination to approve a system, 

disapprove a system and withhold 

payments, or approve a previously 

disapproved system and release 

withheld payments to the auditor; 

payment office; affected contracting 

officers at the buying activities; and 

cognizant contracting officers in 

contract administration activities. 

(g) Mitigating the risk of accounting 

system deficiencies on specific 

proposals. 

(1) Field pricing teams shall discuss 

identified accounting system 

deficiencies and their impact in all 

reports on contractor proposals until the 

deficiencies are resolved. (2) The 

contracting officer responsible for 

negotiation of a proposal generated by 

an accounting system with an identified 

deficiency shall evaluate whether the 

deficiency impacts the negotiations. If it 

does not, the contracting officer should 

proceed with negotiations. If it does, the 

contracting officer should consider 

other alternatives, e.g.— 


srobinson on DSKHWCL6B1PROD with RULES2
Federal Register / Vol. 76, No. 96 / Wednesday, May 18, 2011 / Rules and Regulations 28871 

(i) Allowing the contractor additional 

time to correct the accounting system 

deficiency and submit a corrected 

proposal; 

(ii) Considering another type of 

contract, e.g., a fixed-price incentive 

(firm target) contract instead of a firmfixed-price; 

(iii) Using additional cost analysis 

techniques to determine the 

reasonableness of the cost elements 

affected by the accounting system’s 

deficiency; 

(iv) Segregating the questionable areas 

as a cost-reimbursable line item; 

(v) Reducing the negotiation objective 

for profit or fee; or 

(vi) Including a contract (reopener) 

clause that provides for adjustment of 

the contract amount after award. 

(3) The contracting officer who 

incorporates a reopener clause into the 

contract is responsible for negotiating 

price adjustments required by the 

clause. Any reopener clause 

necessitated by an accounting system 

deficiency should— 

(i) Clearly identify the amounts and 

items that are in question at the time of 

negotiation; 

(ii) Indicate a specific time or 

subsequent event by which the 

contractor will submit a supplemental 

proposal, including cost or pricing data, 

identifying the cost impact adjustment 

necessitated by the deficient accounting 

system; 

(iii) Provide for the contracting officer 

to adjust the contract price unilaterally 

if the contractor fails to submit the 

supplemental proposal; and 

(iv) Provide that failure of the 

Government and the contractor to agree 

to the price adjustment shall be a 

dispute under the Disputes clause. 

242.7503 Contract clause. 

Use the clause at 252.242–7006, 

Accounting System Administration, in 

solicitations and contracts when 

contemplating— 

(a) A cost-reimbursement, incentive 

type, time-and-materials, or labor-hour 

contract; 

(b) A fixed-price contract with 

progress payments made on the basis of 

costs incurred by the contractor or on a 

percentage or stage of completion. 

PART 244—SUBCONTRACTING 

POLICIES AND PROCEDURES 

■ 9. Add subpart 244.1 to read as 

follows: 

SUBPART 244.1—GENERAL 

Sec. 

244.101 Definitions 

SUBPART 244.1—GENERAL 

244.101 Definitions. 

As used in this subpart—— 

Acceptable purchasing system and 

purchasing system are defined in the 

clause at 252.244–7001, Contractor 

Purchasing System Administration. 

Significant deficiency is defined in 

the clause at 252.244–7001, Contractor 

Purchasing System Administration. 

244.304 [Removed] 

■ 10. Remove section 244.304. 

■ 11. Revise section 244.305 to read as 

follows: 

244.305 Granting, withholding, or 

withdrawing approval. 

244.305–70 Policy. 

Use this subsection instead of FAR 

44.305–2(c) and 44.305–3(b). 

(a) The cognizant contracting officer, 

in consultation with the purchasing 

system analyst or auditor, shall— 

(1) Determine the acceptability of the 

contractor’s purchasing system and 

approve or disapprove the system; and 

(2) Pursue correction of any 

deficiencies. 

(b) In evaluating the acceptability of 

the contractor’s purchasing system, the 

contracting officer, in consultation with 

the purchasing system analyst or 

auditor, shall determine whether the 

contractor’s purchasing system complies 

with the system criteria for an 

acceptable purchasing system as 

prescribed in the clause at 252.244– 

7001, Contractor Purchasing System 

Administration. 

(c) Disposition of findings—(1) 

Reporting of findings. The purchasing 

system analyst or auditor shall 

document findings and 

recommendations in a report to the 

contracting officer. If the auditor or 

purchasing system analyst identifies any 

significant purchasing system 

deficiencies, the report shall describe 

the deficiencies in sufficient detail to 

allow the contracting officer to 

understand the deficiencies. 

(2) Initial determination. (i) The 

contracting officer shall review all 

findings and recommendations and, if 

there are no significant deficiencies, 

shall promptly notify the contractor that 

the contractor’s purchasing system is 

acceptable and approved; or 

(ii) If the contracting officer finds that 

there are one or more significant 

deficiencies (as defined in the clause at 

252.244–7001, Contractor Purchasing 

System Administration) due to the 

contractor’s failure to meet one or more 

of the purchasing system criteria in the 

clause at 252.244–7001, the contracting 

officer shall— 

(A) Promptly make an initial written 

determination on any significant 

deficiencies and notify the contractor, in 

writing, providing a description of each 

significant deficiency in sufficient detail 

to allow the contractor to understand 

the deficiency; 

(B) Request the contractor to respond, 

in writing, to the initial determination 

within 30 days; and 

(C) Evaluate the contractor’s response 

to the initial determination in 

consultation with the auditor or 

purchasing system analyst, and make a 

final determination. 

(3) Final determination. (i) The 

contracting officer shall make a final 

determination and notify the contractor, 

in writing, that— 

(A) The contractor’s purchasing 

system is acceptable and approved, and 

no significant deficiencies remain, or 

(B) Significant deficiencies remain. 

The notice shall identify any remaining 

significant deficiencies, and indicate the 

adequacy of any proposed or completed 

corrective action. The contracting officer 

shall— 

(1) Request that the contractor, within 

45 days of receipt of the final 

determination, either correct the 

deficiencies or submit an acceptable 

corrective action plan showing 

milestones and actions to eliminate the 

deficiencies; 

(2) Disapprove the system in 

accordance with the clause at 252.244– 

7001, Contractor Purchasing System 

Administration; and 

(3) Withhold payments in accordance 

with the clause at 252.242–7005, 

Contractor Business Systems, if the 

clause is included in the contract. 

(ii) Follow the procedures relating to 

monitoring a contractor’s corrective 

action and the correction of significant 

deficiencies in PGI 244.305–70. 

(d) System approval. The contracting 

officer shall promptly approve a 

previously disapproved purchasing 

system and notify the contractor when 

the contracting officer determines that 

there are no remaining significant 

deficiencies. 

(e) Contracting officer notifications. 

The cognizant contracting officer shall 

promptly distribute copies of a 

determination to approve a system, 

disapprove a system and withhold 

payments, or approve a previously 

disapproved system and release 

withheld payments to the auditor; 

payment office; affected contracting 

officers at the buying activities; and 

cognizant contracting officers in 

contract administration activities. 

(f) Mitigating the risk of purchasing 

system deficiencies on specific 

proposals. 


srobinson on DSKHWCL6B1PROD with RULES2
28872 Federal Register / Vol. 76, No. 96 / Wednesday, May 18, 2011 / Rules and Regulations 

(1) Source selection evaluation teams 

shall discuss identified purchasing 

system deficiencies and their impact in 

all reports on contractor proposals until 

the deficiencies are resolved. 

(2) The contracting officer responsible 

for negotiation of a proposal generated 

by a purchasing system with an 

identified deficiency shall evaluate 

whether the deficiency impacts the 

negotiations. If it does not, the 

contracting officer should proceed with 

negotiations. If it does, the contracting 

officer should consider other 

alternatives, e.g.— 

(i) Allowing the contractor additional 

time to correct the purchasing system 

deficiency and submit a corrected 

proposal; 

(ii) Considering another type of 

contract, e.g., a fixed-price incentive 

(firm target) contract instead of firmfixed-price; 

(iii) Using additional cost analysis 

techniques to determine the 

reasonableness of the cost elements 

affected by the purchasing system’s 

deficiency; 

(iv) Segregating the questionable areas 

as a cost-reimbursable line item; 

(v) Reducing the negotiation objective 

for profit or fee; or 

(vi) Including a contract (reopener) 

clause that provides for adjustment of 

the contract amount after award. 

(3) The contracting officer who 

incorporates a reopener clause into the 

contract is responsible for negotiating 

price adjustments required by the 

clause. Any reopener clause 

necessitated by a purchasing system 

deficiency should— 

(i) Clearly identify the amounts and 

items that are in question at the time of 

negotiation; 

(ii) Indicate a specific time or 

subsequent event by which the 

contractor will submit a supplemental 

proposal, including cost or pricing data, 

identifying the cost impact adjustment 

necessitated by the deficient purchasing 

system; 

(iii) Provide for the contracting officer 

to adjust the contract price unilaterally 

if the contractor fails to submit the 

supplemental proposal; and 

(iv) Provide that failure of the 

Government and the contractor to agree 

to the price adjustment shall be a 

dispute under the Disputes clause. 

244.305–71 Contract clause. 

Use the clause at 252.244–7001, 

Contractor Purchasing System 

Administration, in solicitations and 

contracts containing the clause at FAR 

52.244–2, Subcontracts. 

PART 245—GOVERNMENT PROPERTY 

■ 12. Revise section 245.105 to read as 

follows: 

245.105 Contractors’ property 

management system compliance. 

(a) Definitions— 

(1) Acceptable property management 

system and property management 

system are defined in the clause at 

252.245–7003, Contractor Property 

Management System Administration. 

(2) Significant deficiency is defined in 

the clause at 252.245–7003, Contractor 

Property Management System 

Administration. 

(b) Policy. The cognizant contracting 

officer, in consultation with the 

property administrator, shall— 

(1) Determine the acceptability of the 

system and approve or disapprove the 

system; and 

(2) Pursue correction of any 

deficiencies. 

(c) In evaluating the acceptability of a 

contractor’s property management 

system, the contracting officer, in 

consultation with the property 

administrator, shall determine whether 

the contractor’s property management 

system complies with the system 

criteria for an acceptable property 

management system as prescribed in the 

clause at 252.245–7003, Contractor 

Property Management System 

Administration. 

(d) Disposition of findings—(1) 

Reporting of findings. The property 

administrator shall document findings 

and recommendations in a report to the 

contracting officer. If the property 

administrator identifies any significant 

property system deficiencies, the report 

shall describe the deficiencies in 

sufficient detail to allow the contracting 

officer to understand the deficiencies. 

(2) Initial determination. (i) The 

contracting officer shall review findings 

and recommendations and, if there are 

no significant deficiencies, shall 

promptly notify the contractor, in 

writing, that the contractor’s property 

management system is acceptable and 

approved; or 

(ii) If the contracting officer finds that 

there are one or more significant 

deficiencies (as defined in the clause at 

252.245–7003, Contractor Property 

Management System Administration) 

due to the contractor’s failure to meet 

one or more of the property 

management system criteria in the 

clause at 252.245–7003, the contracting 

officer shall— 

(A) Promptly make an initial written 

determination on any significant 

deficiencies and notify the contractor, in 

writing, providing a description of each 

significant deficiency in sufficient detail 

to allow the contractor to understand 

the deficiency; 

(B) Request the contractor to respond, 

in writing, to the initial determination 

within 30 days and; 

(C) Evaluate the contractor’s response 

to the initial determination, in 

consultation with the property 

administrator, and make a final 

determination. 

(3) Final determination. (i) The 

contracting officer shall make a final 

determination and notify the contractor, 

in writing, that— 

(A) The contractor’s property 

management system is acceptable and 

approved, and no significant 

deficiencies remain, or 

(B) Significant deficiencies remain. 

The notice shall identify any remaining 

significant deficiencies, and indicate the 

adequacy of any proposed or completed 

corrective action. The contracting officer 

shall— 

(1) Request that the contractor, within 

45 days of receipt of the final 

determination, either correct the 

deficiencies or submit an acceptable 

corrective action plan showing 

milestones and actions to eliminate the 

deficiencies; 

(2) Disapprove the system in 

accordance with the clause at 252.245– 

7003, Contractor Property Management 

System Administration; and 

(3) Withhold payments in accordance 

with the clause at 252.242–7005, 

Contractor Business Systems, if the 

clause is included in the contract. 

(ii) Follow the procedures relating to 

monitoring a contractor’s corrective 

action and the correction of significant 

deficiencies in PGI 245.105. 

(e) System approval. The contracting 

officer shall promptly approve a 

previously disapproved property 

management system and notify the 

contractor when the contracting officer 

determines, in consultation with the 

property administrator, that there are no 

remaining significant deficiencies. 

(f) Contracting officer notifications. 

The cognizant contracting officer shall 

promptly distribute copies of a 

determination to approve a system, 

disapprove a system and withhold 

payments, or approve a previously 

disapproved system and release 

withheld payments to the auditor; 

payment office; affected contracting 

officers at the buying activities; and 

cognizant contracting officers in 

contract administration activities. 

■ 13. Amend section 245.107 by adding 

paragraph (d) to read as follows: 

245.107 Contract clauses. 

* * * * * 


srobinson on DSKHWCL6B1PROD with RULES2
Federal Register / Vol. 76, No. 96 / Wednesday, May 18, 2011 / Rules and Regulations 28873 

(d) Use the clause at 252.245–7003, 

Contractor Property Management 

System Administration, in solicitations 

and contracts containing the clause at 

FAR 52.245–1, Government Property. 

PART 252—SOLICITATION 

PROVISIONS AND CONTRACT 

CLAUSES 

■ 14. Revise section 252.215–7002 to 

read as follows: 

252.215–7002 Cost Estimating System 

Requirements. 

As prescribed in 215.408(2), use the 

following clause: 

Cost Estimating System Requirements 

(May 2011) 

(a) Definitions. 

Acceptable estimating system means an 

estimating system complies with the system 

criteria in paragraph (d) of this clause, and 

provides for a system that— 

(1) Is maintained, reliable, and consistently 

applied; 

(2) Produces verifiable, supportable, 

documented, and timely cost estimates that 

are an acceptable basis for negotiation of fair 

and reasonable prices; 

(3) Is consistent with and integrated with 

the Contractor’s related management systems; 

and 

(4) Is subject to applicable financial control 

systems. 

Estimating system means the Contractor’s 

policies, procedures, and practices for 

budgeting and planning controls, and 

generating estimates of costs and other data 

included in proposals submitted to 

customers in the expectation of receiving 

contract awards. Estimating system includes 

the Contractor’s— 

(1) Organizational structure; 

(2) Established lines of authority, duties, 

and responsibilities; 

(3) Internal controls and managerial 

reviews; 

(4) Flow of work, coordination, and 

communication; and 

(5) Budgeting, planning, estimating 

methods, techniques, accumulation of 

historical costs, and other analyses used to 

generate cost estimates. 

Significant deficiency means a shortcoming 

in the system that materially affects the 

ability of officials of the Department of 

Defense to rely upon information produced 

by the system that is needed for management 

purposes. 

(b) General. The Contractor shall establish, 

maintain, and comply with an acceptable 

estimating system. 

(c) Applicability. Paragraphs (d) and (e) of 

this clause apply if the Contractor is a large 

business and either— 

(1) In its fiscal year preceding award of this 

contract, received Department of Defense 

(DoD) prime contracts or subcontracts, 

totaling $50 million or more for which cost 

or pricing data were required; or 

(2) In its fiscal year preceding award of this 

contract— 

(i) Received DoD prime contracts or 

subcontracts totaling $10 million or more 

(but less than $50 million) for which cost or 

pricing data were required; and 

(ii) Was notified, in writing, by the 

Contracting Officer that paragraphs (d) and 

(e) of this clause apply. 

(d) System requirements. (1) The 

Contractor shall disclose its estimating 

system to the Administrative Contracting 

Officer (ACO), in writing. If the Contractor 

wishes the Government to protect the 

information as privileged or confidential, the 

Contractor must mark the documents with 

the appropriate legends before submission. 

(2) An estimating system disclosure is 

acceptable when the Contractor has provided 

the ACO with documentation that— 

(i) Accurately describes those policies, 

procedures, and practices that the Contractor 

currently uses in preparing cost proposals; 

and 

(ii) Provides sufficient detail for the 

Government to reasonably make an informed 

judgment regarding the acceptability of the 

Contractor’s estimating practices. 

(3) The Contractor shall— 

(i) Comply with its disclosed estimating 

system; and 

(ii) Disclose significant changes to the cost 

estimating system to the ACO on a timely 

basis. 

(4) The Contractor’s estimating system 

shall provide for the use of appropriate 

source data, utilize sound estimating 

techniques and good judgment, maintain a 

consistent approach, and adhere to 

established policies and procedures. An 

acceptable estimating system shall 

accomplish the following functions: 

(i) Establish clear responsibility for 

preparation, review, and approval of cost 

estimates and budgets; 

(ii) Provide a written description of the 

organization and duties of the personnel 

responsible for preparing, reviewing, and 

approving cost estimates and budgets; 

(iii) Ensure that relevant personnel have 

sufficient training, experience, and guidance 

to perform estimating and budgeting tasks in 

accordance with the Contractor’s established 

procedures; 

(iv) Identify and document the sources of 

data and the estimating methods and 

rationale used in developing cost estimates 

and budgets; 

(v) Provide for adequate supervision 

throughout the estimating and budgeting 

process; 

(vi) Provide for consistent application of 

estimating and budgeting techniques; 

(vii) Provide for detection and timely 

correction of errors; 

(viii) Protect against cost duplication and 

omissions; 

(ix) Provide for the use of historical 

experience, including historical vendor 

pricing information, where appropriate; 

(x) Require use of appropriate analytical 

methods; 

(xi) Integrate information available from 

other management systems; 

(xii) Require management review, 

including verification of the company’s 

estimating and budgeting policies, 

procedures, and practices; 

(xiii) Provide for internal review of, and 

accountability for, the acceptability of the 

estimating system, including the budgetary 

data supporting indirect cost estimates and 

comparisons of projected results to actual 

results, and an analysis of any differences; 

(xiv) Provide procedures to update cost 

estimates and notify the Contracting Officer 

in a timely manner throughout the 

negotiation process; 

(xv) Provide procedures that ensure 

subcontract prices are reasonable based on a 

documented review and analysis provided 

with the prime proposal, when practicable; 

(xvi) Provide estimating and budgeting 

practices that consistently generate sound 

proposals that are compliant with the 

provisions of the solicitation and are 

adequate to serve as a basis to reach a fair 

and reasonable price; and 

(xvii) Have an adequate system 

description, including policies, procedures, 

and estimating and budgeting practices, that 

comply with the Federal Acquisition 

Regulation and Defense Federal Acquisition 

Regulation Supplement. 

(e) Significant deficiencies. (1) The 

Contracting Officer will provide an initial 

determination to the Contractor, in writing, 

of any significant deficiencies. The initial 

determination will describe the deficiency in 

sufficient detail to allow the Contractor to 

understand the deficiency. 

(2) The Contractor shall respond within 30 

days to a written initial determination from 

the Contracting Officer that identifies 

significant deficiencies in the Contractor’s 

estimating system. If the Contractor disagrees 

with the initial determination, the Contractor 

shall state, in writing, its rationale for 

disagreeing. 

(3) The Contracting Officer will evaluate 

the Contractor’s response and notify the 

Contractor, in writing, of the Contracting 

Officer’s final determination concerning— 

(i) Remaining significant deficiencies; 

(ii) The adequacy of any proposed or 

completed corrective action; and 

(iii) System disapproval, if the Contracting 

Officer determines that one or more 

significant deficiencies remain. 

(f) If the Contractor receives the 

Contracting Officer’s final determination of 

significant deficiencies, the Contractor shall, 

within 45 days of receipt of the final 

determination, either correct the significant 

deficiencies or submit an acceptable 

corrective action plan showing milestones 

and actions to eliminate the significant 

deficiencies. 

(g) Withholding payments. If the 

Contracting Officer makes a final 

determination to disapprove the Contractor’s 

estimating system, and the contract includes 

the clause at 252.242–7005, Contractor 

Business Systems, the Contracting Officer 

will withhold payments in accordance with 

that clause. 

(End of clause) 

■ 16. Revise section 252.234–7002 to 

read as follows: 

252.234–7002 Earned Value Management 

System. 

As prescribed in 234.203(2), use the 

following clause: 


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EARNED VALUE MANAGEMENT 

SYSTEM (MAY 2011) 

(a) Definitions. As used in this clause— 

Acceptable earned value management 

system means an earned value management 

system that generally complies with system 

criteria in paragraph (b) of this clause. 

Earned value management system means 

an earned value management system that 

complies with the earned value management 

system guidelines in the ANSI/EIA–748. 

Significant deficiency means a shortcoming 

in the system that materially affects the 

ability of officials of the Department of 

Defense to rely upon information produced 

by the system that is needed for management 

purposes. 

(b) System criteria. In the performance of 

this contract, the Contractor shall use— 

(1) An Earned Value Management System 

(EVMS) that complies with the EVMS 

guidelines in the American National 

Standards Institute/Electronic Industries 

Alliance Standard 748, Earned Value 

Management Systems (ANSI/EIA–748); and 

(2) Management procedures that provide 

for generation of timely, reliable, and 

verifiable information for the Contract 

Performance Report (CPR) and the Integrated 

Master Schedule (IMS) required by the CPR 

and IMS data items of this contract. 

(c) If this contract has a value of $50 

million or more, the Contractor shall use an 

EVMS that has been determined to be 

acceptable by the Cognizant Federal Agency 

(CFA). If, at the time of award, the 

Contractor’s EVMS has not been determined 

by the CFA to be in compliance with the 

EVMS guidelines as stated in paragraph (b)(1) 

of this clause, the Contractor shall apply its 

current system to the contract and shall take 

necessary actions to meet the milestones in 

the Contractor’s EVMS plan. 

(d) If this contract has a value of less than 

$50 million, the Government will not make 

a formal determination that the Contractor’s 

EVMS complies with the EVMS guidelines in 

ANSI/EIA–748 with respect to the contract. 

The use of the Contractor’s EVMS for this 

contract does not imply a Government 

determination of the Contractor’s compliance 

with the EVMS guidelines in ANSI/EIA–748 

for application to future contracts. The 

Government will allow the use of a 

Contractor’s EVMS that has been formally 

reviewed and determined by the CFA to be 

in compliance with the EVMS guidelines in 

ANSI/EIA–748. 

(e) The Contractor shall submit notification 

of any proposed substantive changes to the 

EVMS procedures and the impact of those 

changes to the CFA. If this contract has a 

value of $50 million or more, unless a waiver 

is granted by the CFA, any EVMS changes 

proposed by the Contractor require approval 

of the CFA prior to implementation. The CFA 

will advise the Contractor of the acceptability 

of such changes as soon as practicable 

(generally within 30 calendar days) after 

receipt of the Contractor’s notice of proposed 

changes. If the CFA waives the advance 

approval requirements, the Contractor shall 

disclose EVMS changes to the CFA at least 

14 calendar days prior to the effective date 

of implementation. 

(f) The Government will schedule 

integrated baseline reviews as early as 

practicable, and the review process will be 

conducted not later than 180 calendar days 

after— 

(1) Contract award; 

(2) The exercise of significant contract 

options; and 

(3) The incorporation of major 

modifications. 

During such reviews, the Government and 

the Contractor will jointly assess the 

Contractor’s baseline to be used for 

performance measurement to ensure 

complete coverage of the statement of work, 

logical scheduling of the work activities, 

adequate resourcing, and identification of 

inherent risks. 

(g) The Contractor shall provide access to 

all pertinent records and data requested by 

the Contracting Officer or duly authorized 

representative as necessary to permit 

Government surveillance to ensure that the 

EVMS complies, and continues to comply, 

with the performance criteria referenced in 

paragraph (b) of this clause. 

(h) When indicated by contract 

performance, the Contractor shall submit a 

request for approval to initiate an over-target 

baseline or over-target schedule to the 

Contracting Officer. The request shall include 

a top-level projection of cost and/or schedule 

growth, a determination of whether or not 

performance variances will be retained, and 

a schedule of implementation for the 

rebaselining. The Government will 

acknowledge receipt of the request in a 

timely manner (generally within 30 calendar 

days). 

(i) Significant deficiencies. (1) The 

Contracting Officer will provide an initial 

determination to the Contractor, in writing, 

on any significant deficiencies. The initial 

determination will describe the deficiency in 

sufficient detail to allow the Contractor to 

understand the deficiency. 

(2) The Contractor shall respond within 30 

days to a written initial determination from 

the Contracting Officer that identifies 

significant deficiencies in the Contractor’s 

EVMS. If the Contractor disagrees with the 

initial determination, the Contractor shall 

state, in writing, its rationale for disagreeing. 

(3) The Contracting Officer will evaluate 

the Contractor’s response and notify the 

Contractor, in writing, of the Contracting 

Officer’s final determination concerning— 

(i) Remaining significant deficiencies; 

(ii) The adequacy of any proposed or 

completed corrective action; 

(iii) System noncompliance, when the 

Contractor’s existing EVMS fails to comply 

with the earned value management system 

guidelines in the ANSI/EIA–748; and 

(iv) System disapproval, if initial EVMS 

validation is not successfully completed 

within the timeframe approved by the 

Contracting Officer, or if the Contracting 

Officer determines that the Contractor’s 

earned value management system contains 

one or more significant deficiencies in highrisk guidelines in ANSI/EIA–748 standards 

(guidelines 1, 3, 6, 7, 8, 9, 10, 12, 16, 21, 23, 

26, 27, 28, 30, or 32). When the Contracting 

Officer determines that the existing earned 

value management system contains one or 

more significant deficiencies in one or more 

of the remaining 16 guidelines in ANSI/EIA– 

748 standards, the contracting officer will use 

discretion to disapprove the system based on 

input received from functional specialists 

and the auditor. 

(4) If the Contractor receives the 

Contracting Officer’s final determination of 

significant deficiencies, the Contractor shall, 

within 45 days of receipt of the final 

determination, either correct the significant 

deficiencies or submit an acceptable 

corrective action plan showing milestones 

and actions to eliminate the significant 

deficiencies. 

(j) Withholding payments. If the 

Contracting Officer makes a final 

determination to disapprove the Contractor’s 

EVMS, and the contract includes the clause 

at 252.242–7005, Contractor Business 

Systems, the Contracting Officer will 

withhold payments in accordance with that 

clause. 

(k) With the exception of paragraphs (i) 

and (j) of this clause, the Contractor shall 

require its subcontractors to comply with 

EVMS requirements as follows: 

(1) For subcontracts valued at $50 million 

or more, the following subcontractors shall 

comply with the requirements of this clause: 

[Contracting Officer to insert names of 

subcontractors (or subcontracted effort if 

subcontractors have not been selected) 

designated for application of the EVMS 

requirements of this clause.] 

lllllllllllllllllllll

lllllllllllllllllllll

lllllllllllllllllllll

lllllllllllllllllllll

(2) For subcontracts valued at less than $50 

million, the following subcontractors shall 

comply with the requirements of this clause, 

excluding the requirements of paragraph (c) 

of this clause: 

[Contracting Officer to insert names of 

subcontractors (or subcontracted effort if 

subcontractors have not been selected) 

designated for application of the EVMS 

requirements of this clause.] 

lllllllllllllllllllll

lllllllllllllllllllll

lllllllllllllllllllll

lllllllllllllllllllll

(End of clause) 

■ 17. Revise section 252.242–7004 to 

read as follows: 

252.242–7004 Material Management and 

Accounting System. 

As prescribed in 242.7204, use the 

following clause: 

MATERIAL MANAGEMENT AND 

ACCOUNTING SYSTEM (MAY 2011) 

(a) Definitions. As used in this clause— 

(1) Material management and accounting 

system (MMAS) means the Contractor’s 

system or systems for planning, controlling, 

and accounting for the acquisition, use, 

issuing, and disposition of material. Material 

management and accounting systems may be 

manual or automated. They may be standVerDate Mar<15>2010 16:34 May 17, 2011 Jkt 223001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\18MYR2.SGM 18MYR2

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alone systems or they may be integrated with 

planning, engineering, estimating, 

purchasing, inventory, accounting, or other 

systems. 

(2) Valid time-phased requirements means 

material that is— 

(i) Needed to fulfill the production plan, 

including reasonable quantities for scrap, 

shrinkage, yield, etc.; and 

(ii) Charged/billed to contracts or other 

cost objectives in a manner consistent with 

the need to fulfill the production plan. 

(3) Contractor means a business unit as 

defined in section 31.001 of the Federal 

Acquisition Regulation (FAR). 

(4) Acceptable material management and 

accounting system means a MMAS that 

generally complies with the system criteria in 

paragraph (d) of this clause. 

(5) Significant deficiency means a 

shortcoming in the system that materially 

affects the ability of officials of the 

Department of Defense to rely upon 

information produced by the system that is 

needed for management purposes. 

(b) General. The Contractor shall— 

(1) Maintain an MMAS that— 

(i) Reasonably forecasts material 

requirements; 

(ii) Ensures that costs of purchased and 

fabricated material charged or allocated to a 

contract are based on valid time-phased 

requirements; and 

(iii) Maintains a consistent, equitable, and 

unbiased logic for costing of material 

transactions; and 

(2) Assess its MMAS and take reasonable 

action to comply with the MMAS standards 

in paragraph (e) of this clause. 

(c) Disclosure and maintenance 

requirements. The Contractor shall— 

(1) Have policies, procedures, and 

operating instructions that adequately 

describe its MMAS; 

(2) Provide to the Administrative 

Contracting Officer (ACO), upon request, the 

results of internal reviews that it has 

conducted to ensure compliance with 

established MMAS policies, procedures, and 

operating instructions; and 

(3) Disclose significant changes in its 

MMAS to the ACO at least 30 days prior to 

implementation. 

(d) System criteria. The MMAS shall have 

adequate internal controls to ensure system 

and data integrity, and shall— 

(1) Have an adequate system description 

including policies, procedures, and operating 

instructions that comply with the Federal 

Acquisition Regulation and Defense Federal 

Acquisition Regulation Supplement; 

(2) Ensure that costs of purchased and 

fabricated material charged or allocated to a 

contract are based on valid time-phased 

requirements as impacted by minimum/ 

economic order quantity restrictions. 

(i) A 98 percent bill of material accuracy 

and a 95 percent master production schedule 

accuracy are desirable as a goal in order to 

ensure that requirements are both valid and 

appropriately time-phased. 

(ii) If systems have accuracy levels below 

these, the Contractor shall provide adequate 

evidence that— 

(A) There is no material harm to the 

Government due to lower accuracy levels; 

and 

(B) The cost to meet the accuracy goals is 

excessive in relation to the impact on the 

Government; 

(3) Provide a mechanism to identify, 

report, and resolve system control 

weaknesses and manual override. Systems 

should identify operational exceptions, such 

as excess/residual inventory, as soon as 

known; 

(4) Provide audit trails and maintain 

records (manual and those in machine– 

readable form) necessary to evaluate system 

logic and to verify through transaction testing 

that the system is operating as desired; 

(5) Establish and maintain adequate levels 

of record accuracy, and include 

reconciliation of recorded inventory 

quantities to physical inventory by part 

number on a periodic basis. A 95 percent 

accuracy level is desirable. If systems have an 

accuracy level below 95 percent, the 

Contractor shall provide adequate evidence 

that— 

(i) There is no material harm to the 

Government due to lower accuracy levels; 

and 

(ii) The cost to meet the accuracy goal is 

excessive in relation to the impact on the 

Government; 

(6) Provide detailed descriptions of 

circumstances that will result in manual or 

system generated transfers of parts; 

(7) Maintain a consistent, equitable, and 

unbiased logic for costing of material 

transactions as follows: 

(i) The Contractor shall maintain and 

disclose written policies describing the 

transfer methodology and the loan/pay-back 

technique. 

(ii) The costing methodology may be 

standard or actual cost, or any of the 

inventory costing methods in 48 CFR 

9904.411–50(b). The Contractor shall 

maintain consistency across all contract and 

customer types, and from accounting period 

to accounting period for initial charging and 

transfer charging. 

(iii) The system should transfer parts and 

associated costs within the same billing 

period. In the few instances where this may 

not be appropriate, the Contractor may 

accomplish the material transaction using a 

loan/pay-back technique. The ‘‘loan/pay-back 

technique’’ means that the physical part is 

moved temporarily from the contract, but the 

cost of the part remains on the contract. The 

procedures for the loan/pay-back technique 

must be approved by the ACO. When the 

technique is used, the Contractor shall have 

controls to ensure— 

(A) Parts are paid back expeditiously; 

(B) Procedures and controls are in place to 

correct any overbilling that might occur; 

(C) Monthly, at a minimum, identification 

of the borrowing contract and the date the 

part was borrowed; and 

(D) The cost of the replacement part is 

charged to the borrowing contract; 

(8) Where allocations from common 

inventory accounts are used, have controls 

(in addition to those in paragraphs (d)(2) and 

(7) of this clause) to ensure that— 

(i) Reallocations and any credit due are 

processed no less frequently than the routine 

billing cycle; 

(ii) Inventories retained for requirements 

that are not under contract are not allocated 

to contracts; and 

(iii) Algorithms are maintained based on 

valid and current data; 

(9) Have adequate controls to ensure that 

physically commingled inventories that may 

include material for which costs are charged 

or allocated to fixed-price, costreimbursement, and commercial contracts do 

not compromise requirements of any of the 

standards in paragraphs (d)(1) through (8) of 

this clause. Government-furnished material 

shall not be— 

(i) Physically commingled with other 

material; or 

(ii) Used on commercial work; and 

(10) Be subjected to periodic internal 

reviews to ensure compliance with 

established policies and procedures. 

(e) Significant deficiencies. (1) The 

Contracting Officer will provide an initial 

determination to the Contractor, in writing, 

of any significant deficiencies. The initial 

determination will describe the deficiency in 

sufficient detail to allow the Contractor to 

understand the deficiency. 

(2) The Contractor shall respond within 30 

days to a written initial determination from 

the Contracting Officer that identifies 

significant deficiencies in the Contractor’s 

MMAS. If the Contractor disagrees with the 

initial determination, the Contractor shall 

state, in writing, its rationale for disagreeing. 

(3) The Contracting Officer will evaluate 

the Contractor’s response and notify the 

Contractor, in writing, of the Contracting 

Officer’s final determination concerning— 

(i) Remaining significant deficiencies; 

(ii) The adequacy of any proposed or 

completed corrective action; and 

(iii) System disapproval if the Contracting 

Officer determines that one or more 

significant deficiencies remain. 

(f) If the Contractor receives the 

Contracting Officer’s final determination of 

significant deficiencies, the Contractor shall, 

within 45 days of receipt of the final 

determination, either correct the significant 

deficiencies or submit an acceptable 

corrective action plan showing milestones 

and actions to eliminate the significant 

deficiencies. 

(g) Withholding payments. If the 

Contracting Officer makes a final 

determination to disapprove the Contractor’s 

MMAS, and the contract includes the clause 

at 252.242–7005, Contractor Business 

Systems, the Contracting Officer will 

withhold payments in accordance with that 

clause. 

(End of clause) 

■ 18. Add section 252.242–7005 to read 

as follows 

252.242–7005 Contractor Business 

Systems. 

As prescribed in 242.7001, use the 

following clause: 

CONTRACTOR BUSINESS SYSTEMS 

(MAY 2011) 

(a) Definitions. As used in this clause— 

Acceptable contractor business systems 

means contractor business systems that 


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comply with the terms and conditions of the 

applicable business system clauses listed in 

the definition of ‘‘contractor business 

systems’’ in this clause. 

Contractor business systems means— 

(1) Accounting system, if this contract 

includes the clause at 252.242–7006, 

Accounting System Administration; 

(2) Earned value management system, if 

this contract includes the clause at 252.234– 

7002, Earned Value Management System; 

(3) Estimating system, if this contract 

includes the clause at 252.215–7002, Cost 

Estimating System Requirements; 

(4) Material management and accounting 

system, if this contract includes the clause at 

252.242–7004, Material Management and 

Accounting System; 

(5) Property management system, if this 

contract includes the clause at 252.245–7003, 

Contractor Property Management System 

Administration; and 

(6) Purchasing system, if this contract 

includes the clause at 252.244–7001, 

Contractor Purchasing System 

Administration. 

Significant deficiency, in the case of a 

contractor business system, means a 

shortcoming in the system that materially 

affects the ability of officials of the 

Department of Defense to rely upon 

information produced by the system that is 

needed for management purposes. 

(b) General. The Contractor shall establish 

and maintain acceptable business systems in 

accordance with the terms and conditions of 

this contract. 

(c) Significant deficiencies. (1) The 

Contractor shall respond, in writing, within 

30 days to an initial determination that there 

are one or more significant deficiencies in 

one or more of the Contractor’s business 

systems. 

(2) The Contracting Officer will evaluate 

the Contractor’s response and notify the 

Contractor, in writing, of the final 

determination as to whether the Contractor’s 

business system contains significant 

deficiencies. If the Contracting Officer 

determines that the Contractor’s business 

system contains significant deficiencies, the 

final determination will include a notice to 

withhold payments. 

(d) Withholding payments. (1) If the 

Contracting Officer issues the final 

determination with a notice to withhold 

payments for significant deficiencies in a 

contractor business system required under 

this contract, the Contracting Officer will 

withhold five percent of amounts due from 

progress payments and performance-based 

payments, and direct the Contractor, in 

writing, to withhold five percent from its 

billings on interim cost vouchers on cost, 

labor-hour, and time-and-materials contracts 

until the Contracting Officer has determined 

that the Contractor has corrected all 

significant deficiencies as directed by the 

contracting officer’s final determination. The 

Contractor shall, within 45 days of receipt of 

the notice, either correct the deficiencies or 

submit an acceptable corrective action plan 

showing milestones and actions to eliminate 

the deficiencies. 

(2) If the Contractor submits an acceptable 

corrective action plan within 45 days of 

receipt of a notice of the Contracting Officer’s 

intent to withhold payments, and the 

Contracting Officer, in consultation with the 

auditor or functional specialist, determines 

that the Contractor is effectively 

implementing such plan, the Contracting 

Officer will reduce withholding directly 

related to the significant deficiencies covered 

under the corrective action plan, to two 

percent from progress payments and 

performance-based payments, and direct the 

Contractor, in writing, to reduce the 

percentage withheld on interim cost 

vouchers to two percent until the Contracting 

Officer determines the Contractor has 

corrected all significant deficiencies as 

directed by the Contracting Officer’s final 

determination. However, if at any time, the 

Contracting Officer determines that the 

Contractor has failed to follow the accepted 

corrective action plan, the Contracting 

Officer will increase withholding from 

progress payments and performance-based 

payments, and direct the Contractor, in 

writing, to increase the percentage withheld 

on interim cost vouchers to the percentage 

initially withheld, until the Contracting 

Officer determines that the Contractor has 

corrected all significant deficiencies as 

directed by the Contracting Officer’s final 

determination. 

(3) Payment withhold percentage limits. 

(i) The total percentage of payments 

withheld on amounts due under each 

progress payment, performance-based 

payment, or interim cost voucher, on this 

contract shall not exceed— 

(A) Five percent for one or more significant 

deficiencies in any single contractor business 

system; and 

(B) Ten percent for significant deficiencies 

in multiple contractor business systems. 

(ii) If this contract contains pre-existing 

withholds, and the application of any 

subsequent payment withholds will cause 

withholding under this clause to exceed the 

payment withhold percentage limits in 

paragraph (d)(3)(i) of this clause, the 

Contracting Officer will reduce the payment 

withhold percentage in the final 

determination to an amount that will not 

exceed the payment withhold percentage 

limits. 

(4) For the purpose of this clause, payment 

means any of the following payments 

authorized under this contract: 

(i) Interim payments under— 

(A) Cost-reimbursement contracts; 

(B) Incentive type contracts; 

(C) Time-and-materials contracts; 

(D) Labor-hour contracts. 

(ii) Progress payments. 

(iii) Performance-based payments. 

(5) Payment withholding shall not apply to 

payments on fixed-price line items where 

performance is complete and the items were 

accepted by the Government. 

(6) The withholding of any amount or 

subsequent payment to the Contractor shall 

not be construed as a waiver of any rights or 

remedies the Government has under this 

contract. 

(7) Notwithstanding the provisions of any 

clause in this contract providing for interim, 

partial, or other payment withholding on any 

basis, the Contracting Officer may withhold 

payment in accordance with the provisions 

of this clause. 

(8) The payment withholding authorized in 

this clause is not subject to the interestpenalty provisions of the Prompt Payment 

Act. 

(e) Correction of deficiencies. (1) The 

Contractor shall notify the Contracting 

Officer, in writing, when the Contractor has 

corrected the business system’s deficiencies. 

(2) Once the Contractor has notified the 

Contracting Officer that all deficiencies have 

been corrected, the Contracting Officer will 

take one of the following actions: 

(i) If the Contracting Officer determines 

that the Contractor has corrected all 

significant deficiencies as directed by the 

Contracting Officer’s final determination, the 

Contracting Officer will, as appropriate, 

discontinue the withholding of progress 

payments and performance-based payments, 

and direct the Contractor, in writing, to 

discontinue the payment withholding from 

billings on interim cost vouchers under this 

contract associated with the Contracting 

Officer’s final determination, and authorize 

the Contractor to bill for any monies 

previously withheld that are not also being 

withheld due to other significant 

deficiencies. Any payment withholding 

under this contract due to other significant 

deficiencies, will remain in effect until the 

Contracting Officer determines that those 

significant deficiencies are corrected. 

(ii) If the Contracting Officer determines 

that the Contractor still has significant 

deficiencies, the Contracting Officer will 

continue the withholding of progress 

payments and performance-based payments, 

and the Contractor shall continue 

withholding amounts from its billings on 

interim cost vouchers in accordance with 

paragraph (d) of this clause, and not bill for 

any monies previously withheld. 

(iii) If, within 90 days of receipt of the 

Contractor notification that the Contractor 

has corrected the significant deficiencies, the 

Contracting Officer has not made a 

determination whether the Contractor has 

corrected all significant deficiencies as 

directed by the Contracting Officer’s final 

determination, or has not made a 

determination whether there is a reasonable 

expectation that the corrective actions have 

been implemented, the Contracting Officer 

will reduce withholding directly related to 

the significant deficiencies covered under the 

corrective action plan by at least 50 percent 

of the amount being withheld from progress 

payments and performance-based payments, 

and direct the Contractor, in writing, to 

reduce the percentage withheld on interim 

cost vouchers by at least 50 percent, until the 

Contracting Officer makes a determination 

whether the Contractor has corrected all 

significant deficiencies as directed by the 

Contracting Officer’s final determination, or 

has made a determination whether there is a 

reasonable expectation that the corrective 

actions have been implemented. 

(iv) At any time after the Contracting 

Officer reduces or discontinues the 

withholding of progress payments and 

performance-based payments, or directs the 

Contractor to reduce or discontinue the 

payment withholding from billings on 


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interim cost vouchers under this contract, if 

the Contracting Officer determines that the 

Contractor has failed to correct the significant 

deficiencies identified in the Contractor’s 

notification, the Contracting Officer will 

reinstate or increase withholding from 

progress payments and performance-based 

payments, and direct the Contractor, in 

writing, to reinstate or increase the 

percentage withheld on interim cost 

vouchers to the percentage initially withheld, 

until the Contracting Officer determines that 

the Contractor has corrected all significant 

deficiencies as directed by the Contracting 

Officer’s final determination. 

(End of clause) 

■ 19. Add section 252.242–7006 to read 

as follows: 

252.242–7006 Accounting System 

Administration. 

As prescribed in 242.7503, use the 

following clause: 

ACCOUNTING SYSTEM 

ADMINISTRATION (MAY 2011) 

(a) Definitions. As used in this clause— 

(1) Acceptable accounting system means a 

system that complies with the system criteria 

in paragraph (c) of this clause to provide 

reasonable assurance that— 

(i) Applicable laws and regulations are 

complied with; 

(ii) The accounting system and cost data 

are reliable; 

(iii) Risk of misallocations and mischarges 

are minimized; and 

(iv) Contract allocations and charges are 

consistent with billing procedures. 

(2) Accounting system means the 

Contractor’s system or systems for accounting 

methods, procedures, and controls 

established to gather, record, classify, 

analyze, summarize, interpret, and present 

accurate and timely financial data for 

reporting in compliance with applicable 

laws, regulations, and management 

decisions, and may include subsystems for 

specific areas such as indirect and other 

direct costs, compensation, billing, labor, and 

general information technology. 

(3) Significant deficiency means a 

shortcoming in the system that materially 

affects the ability of officials of the 

Department of Defense to rely upon 

information produced by the system that is 

needed for management purposes. 

(b) General. The Contractor shall establish 

and maintain an acceptable accounting 

system. Failure to maintain an acceptable 

accounting system, as defined in this clause, 

shall result in the withholding of payments 

if the contract includes the clause at 

252.242–7005, Contractor Business Systems, 

and also may result in disapproval of the 

system. 

(c) System criteria. The Contractor’s 

accounting system shall provide for— 

(1) A sound internal control environment, 

accounting framework, and organizational 

structure; 

(2) Proper segregation of direct costs from 

indirect costs; 

(3) Identification and accumulation of 

direct costs by contract; 

(4) A logical and consistent method for the 

accumulation and allocation of indirect costs 

to intermediate and final cost objectives; 

(5) Accumulation of costs under general 

ledger control; 

(6) Reconciliation of subsidiary cost 

ledgers and cost objectives to general ledger; 

(7) Approval and documentation of 

adjusting entries; 

(8) Periodic monitoring of the system; 

(9) A timekeeping system that identifies 

employees’ labor by intermediate or final cost 

objectives; 

(10) A labor distribution system that 

charges direct and indirect labor to the 

appropriate cost objectives; 

(11) Interim (at least monthly) 

determination of costs charged to a contract 

through routine posting of books of account; 

(12) Exclusion from costs charged to 

Government contracts of amounts which are 

not allowable in terms of Federal Acquisition 

Regulation (FAR) part 31, Contract Cost 

Principles and Procedures, and other contract 

provisions; 

(13) Identification of costs by contract line 

item and by units (as if each unit or line item 

were a separate contract), if required by the 

contract; 

(14) Segregation of preproduction costs 

from production costs, as applicable; 

(15) Cost accounting information, as 

required— 

(i) By contract clauses concerning 

limitation of cost (FAR 52.232–20), limitation 

of funds (FAR 52.232–22), or allowable cost 

and payment (FAR 52.216–7); and 

(ii) To readily calculate indirect cost rates 

from the books of accounts; 

(16) Billings that can be reconciled to the 

cost accounts for both current and 

cumulative amounts claimed and comply 

with contract terms; 

(17) Adequate, reliable data for use in 

pricing follow-on acquisitions; and 

(18) Accounting practices in accordance 

with standards promulgated by the Cost 

Accounting Standards Board, if applicable, 

otherwise, Generally Accepted Accounting 

Principles. 

(d) Significant deficiencies. (1) The 

Contracting Officer will provide an initial 

determination to the Contractor, in writing, 

on any significant deficiencies. The initial 

determination will describe the deficiency in 

sufficient detail to allow the Contractor to 

understand the deficiency. 

(2) The Contractor shall respond within 30 

days to a written initial determination from 

the Contracting Officer that identifies 

significant deficiencies in the Contractor’s 

accounting system. If the Contractor 

disagrees with the initial determination, the 

Contractor shall state, in writing, its rationale 

for disagreeing. 

(3) The Contracting Officer will evaluate 

the Contractor’s response and notify the 

Contractor, in writing, of the Contracting 

Officer’s final determination concerning— 

(i) Remaining significant deficiencies; 

(ii) The adequacy of any proposed or 

completed corrective action; and 

(iii) System disapproval, if the Contracting 

Officer determines that one or more 

significant deficiencies remain. 

(e) If the Contractor receives the 

Contracting Officer’s final determination of 

significant deficiencies, the Contractor shall, 

within 45 days of receipt of the final 

determination, either correct the significant 

deficiencies or submit an acceptable 

corrective action plan showing milestones 

and actions to eliminate the significant 

deficiencies. 

(f) Withholding payments. If the 

Contracting Officer makes a final 

determination to disapprove the Contractor’s 

accounting system, and the contract includes 

the clause at 252.242–7005, Contractor 

Business Systems, the Contracting Officer 

will withhold payments in accordance with 

that clause. 

(End of clause) 

■ 20. Add section 252.244–7001 to read 

as follows: 

252.244–7001 Contractor Purchasing 

System Administration. 

As prescribed in 244.305–71, insert 

the following clause: 

CONTRACTOR PURCHASING 

SYSTEM ADMINISTRATION (MAY 

2011) 

(a) Definitions. As used in this clause— 

Acceptable purchasing system means a 

purchasing system that complies with the 

system criteria in paragraph (c) of this clause. 

Purchasing system means the Contractor’s 

system or systems for purchasing and 

subcontracting, including make-or-buy 

decisions, the selection of vendors, analysis 

of quoted prices, negotiation of prices with 

vendors, placing and administering of orders, 

and expediting delivery of materials. 

Significant deficiency means a shortcoming 

in the system that materially affects the 

ability of officials of the Department of 

Defense to rely upon information produced 

by the system that is needed for management 

purposes. 

(b) General. The Contractor shall establish 

and maintain an acceptable purchasing 

system. Failure to maintain an acceptable 

purchasing system, as defined in this clause, 

may result in disapproval of the system by 

the Contracting Officer and/or withholding of 

payments. 

(c) System criteria. The Contractor’s 

purchasing system shall— 

(1) Have an adequate system description 

including policies, procedures, and 

purchasing practices that comply with the 

Federal Acquisition Regulation (FAR) and 

the Defense Federal Acquisition Regulation 

Supplement (DFARS); 

(2) Ensure that all applicable purchase 

orders and subcontracts contain all 

flowdown clauses, including terms and 

conditions and any other clauses needed to 

carry out the requirements of the prime 

contract; 

(3) Maintain an organization plan that 

establishes clear lines of authority and 

responsibility; 

(4) Ensure all purchase orders are based on 

authorized requisitions and include a 

complete and accurate history of purchase 

transactions to support vendor selected, price 

paid, and document the subcontract/ 

purchase order files which are subject to 

Government review; 


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(5) Establish and maintain adequate 

documentation to provide a complete and 

accurate history of purchase transactions to 

support vendors selected and prices paid; 

(6) Apply a consistent make-or-buy policy 

that is in the best interest of the Government; 

(7) Use competitive sourcing to the 

maximum extent practicable, and ensure 

debarred or suspended contractors are 

properly excluded from contract award; 

(8) Evaluate price, quality, delivery, 

technical capabilities, and financial 

capabilities of competing vendors to ensure 

fair and reasonable prices; 

(9) Require management level justification 

and adequate cost or price analysis, as 

applicable, for any sole or single source 

award; 

(10) Perform timely and adequate cost or 

price analysis and technical evaluation for 

each subcontractor and supplier proposal or 

quote to ensure fair and reasonable 

subcontract prices; 

(11) Document negotiations in accordance 

with FAR 15.406–3; 

(12) Seek, take, and document 

economically feasible purchase discounts, 

including cash discounts, trade discounts, 

quantity discounts, rebates, freight 

allowances, and company-wide volume 

discounts; 

(13) Ensure proper type of contract 

selection and prohibit issuance of cost-plusa-percentage-of-cost subcontracts; 

(14) Maintain subcontract surveillance to 

ensure timely delivery of an acceptable 

product and procedures to notify the 

Government of potential subcontract 

problems that may impact delivery, quantity, 

or price; 

(15) Document and justify reasons for 

subcontract changes that affect cost or price; 

(16) Notify the Government of the award of 

all subcontracts that contain the FAR and 

DFARS flowdown clauses that allow for 

Government audit of those subcontracts, and 

ensure the performance of audits of those 

subcontracts; 

(17) Enforce adequate policies on conflict 

of interest, gifts, and gratuities, including the 

requirements of the Anti-Kickback Act; 

(18) Perform internal audits or 

management reviews, training, and maintain 

policies and procedures for the purchasing 

department to ensure the integrity of the 

purchasing system; 

(19) Establish and maintain policies and 

procedures to ensure purchase orders and 

subcontracts contain mandatory and 

applicable flowdown clauses, as required by 

the FAR and DFARS, including terms and 

conditions required by the prime contract 

and any clauses required to carry out the 

requirements of the prime contract; 

(20) Provide for an organizational and 

administrative structure that ensures 

effective and efficient procurement of 

required quality materials and parts at the 

best value from responsible and reliable 

sources; 

(21) Establish and maintain selection 

processes to ensure the most responsive and 

responsible sources for furnishing required 

quality parts and materials and to promote 

competitive sourcing among dependable 

suppliers so that purchases are reasonably 

priced and from sources that meet contractor 

quality requirements; 

(22) Establish and maintain procedures to 

ensure performance of adequate price or cost 

analysis on purchasing actions; 

(23) Establish and maintain procedures to 

ensure that proper types of subcontracts are 

selected, and that there are controls over 

subcontracting, including oversight and 

surveillance of subcontracted effort; and 

(24) Establish and maintain procedures to 

timely notify the Contracting Officer, in 

writing, if— 

(i) The Contractor changes the amount of 

subcontract effort after award such that it 

exceeds 70 percent of the total cost of the 

work to be performed under the contract, task 

order, or delivery order. The notification 

shall identify the revised cost of the 

subcontract effort and shall include 

verification that the Contractor will provide 

added value; or 

(ii) Any subcontractor changes the amount 

of lower-tier subcontractor effort after award 

such that it exceeds 70 percent of the total 

cost of the work to be performed under its 

subcontract. The notification shall identify 

the revised cost of the subcontract effort and 

shall include verification that the 

subcontractor will provide added value as 

related to the work to be performed by the 

lower-tier subcontractor(s). 

(d) Significant deficiencies. (1) The 

Contracting Officer will provide notification 

of initial determination to the Contractor, in 

writing, of any significant deficiencies. The 

initial determination will describe the 

deficiency in sufficient detail to allow the 

Contractor to understand the deficiency. 

(2) The Contractor shall respond within 30 

days to a written initial determination from 

the Contracting Officer that identifies 

significant deficiencies in the Contractor’s 

purchasing system. If the Contractor 

disagrees with the initial determination, the 

Contractor shall state, in writing, its rationale 

for disagreeing. 

(3) The Contracting Officer will evaluate 

the Contractor’s response and notify the 

Contractor, in writing, of the Contracting 

Officer’s final determination concerning— 

(i) Remaining significant deficiencies; 

(ii) The adequacy of any proposed or 

completed corrective action; and 

(iii) System disapproval, if the Contracting 

Officer determines that one or more 

significant deficiencies remain. 

(e) If the Contractor receives the 

Contracting Officer’s final determination of 

significant deficiencies, the Contractor shall, 

within 45 days of receipt of the final 

determination, either correct the significant 

deficiencies or submit an acceptable 

corrective action plan showing milestones 

and actions to eliminate the deficiencies. 

(f) Withholding payments. If the 

Contracting Officer makes a final 

determination to disapprove the Contractor’s 

purchasing system, and the contract includes 

the clause at 252.242–7005, Contractor 

Business Systems, the Contracting Officer 

will withhold payments in accordance with 

that clause. 

(End of clause) 

■ 21. Add section 252.245–7003 to read 

as follows: 

252.245–7003 Contractor Property 

Management System Administration. 

As prescribed in 245.107, insert the 

following clause: 

CONTRACTOR PROPERTY 

MANAGEMENT SYSTEM 

ADMINISTRATION (MAY 2011) 

(a) Definitions. As used in this clause— 

Acceptable property management system 

means a property system that complies with 

the system criteria in paragraph (c) of this 

clause. 

Property management system means the 

Contractor’s system or systems for managing 

and controlling Government property. 

Significant deficiency means a shortcoming 

in the system that materially affects the 

ability of officials of the Department of 

Defense to rely upon information produced 

by the system that is needed for management 

purposes. 

(b) General. The Contractor shall establish 

and maintain an acceptable property 

management system. Failure to maintain an 

acceptable property management system, as 

defined in this clause, may result in 

disapproval of the system by the Contracting 

Officer and/or withholding of payments. 

(c) System criteria. The Contractor’s 

property management system shall be in 

accordance with paragraph (f) of the contract 

clause at Federal Acquisition Regulation 

52.245–1. 

(d) Significant deficiencies. (1) The 

Contracting Officer will provide an initial 

determination to the Contractor, in writing, 

of any significant deficiencies. The initial 

determination will describe the deficiency in 

sufficient detail to allow the Contractor to 

understand the deficiency. 

(2) The Contractor shall respond within 30 

days to a written initial determination from 

the Contracting Officer that identifies 

significant deficiencies in the Contractor’s 

property management system. If the 

Contractor disagrees with the initial 

determination, the Contractor shall state, in 

writing, its rationale for disagreeing. 

(3) The Contracting Officer will evaluate 

the Contractor’s response and notify the 

Contractor, in writing, of the Contracting 

Officer’s final determination concerning— 

(i) Remaining significant deficiencies; 

(ii) The adequacy of any proposed or 

completed corrective action; and 

(iii) System disapproval, if the Contracting 

Officer determines that one or more 

significant deficiencies remain. 

(e) If the Contractor receives the 

Contracting Officer’s final determination of 

significant deficiencies, the Contractor shall, 

within 45 days of receipt of the final 

determination, either correct the significant 

deficiencies or submit an acceptable 

corrective action plan showing milestones 

and actions to eliminate the significant 

deficiencies. 

(f) Withholding payments. If the 

Contracting Officer makes a final 

determination to disapprove the Contractor’s 

property management system, leading to a 

potential risk of harm to the Government, 

and the contract includes the clause at 

252.242–7005, Contractor Business Systems, 


srobinson on DSKHWCL6B1PROD with RULES2
Federal Register / Vol. 76, No. 96 / Wednesday, May 18, 2011 / Rules and Regulations 28879 

the Contracting Officer will withhold 

payments in accordance with that clause. 

(End of clause) 

[FR Doc. 2011–11691 Filed 5–17–11; 8:45 am] 

BILLING CODE 5001–08–P 


srobinson on DSKHWCL6B1PROD with RULES2