Jul 26, 2011

Thomas Marcinko

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DoD to Withhold Payments for Contractors with Deficient Business Systems

On May 18, 2011 the Department of Defense (DoD) issued an interim rule authorizing Contracting Officers, under certain circumstances,  to withhold up to 10% of payments due contractors when one or more of the contractor’s business systems have a significant deficiency.  The business systems covered are the Accounting, Estimating, and Material Management and Accounting Systems, generally reviewed by DCAA and the Purchasing, Earned Value Management and Property Systems typically under the purview of the DCMA.  

The requirements are contained in a new DFARS clause 252.242-7005 “Contractor Business Systems.”  That clause will be included in a all CAS and Modified CAS covered contracts as well as any contract that contains one of the DFAR clause requiring that specific system.  Small businesses are exempt.  Pursuant to that clause the Contracting Officer should withhold up to 5% of the payments on that contract for each business system with a significant deficiency up to a maximum of 10%.  The withholding will continue until such time as the deficiency(s) has been corrected.  The clause will be included in pertinent solicitations effective immediately.  It will also be included in any covered contracts awarded after August 18, 2011.   The clause will not be retroactively applied to existing contracts or task orders but it will be added to existing IDIQ contracts where it will apply to future task orders. This is an interim rule so DoD is accepting comments through July 18, 2011.  Though the new withholding rule is only applicable to DoD contracts most commentators expect that it will ultimately be applied to non-DoD contracts. 

This rule is a classic example of the old bromide, an ounce of prevention is worth a pound a cure.  Any contractor who has or anticipates having a contract subject to the new rule should immediately review their business systems to ensure compliance with Government requirements. Aronson’s team of consultants can assist companies with implementing business systems, reviewing existing systems prior to a government review, or help contractors respond to adverse audit findings.  For more information on how Aronson can help with your business system requirements, please contact Nicole Mitchell, Partner, at (301) 222-8231 or Thomas Marcinko, Principal Consultant, at (301) 231-6237.