DOD Contractor Compliance Crackdown! Payments Could Be Withheld Up to 50%

January 19th, 2010 | Posted by Nicole Mitchell

A proposed rule released by the Department of Defense (DoD) on January 15, 2010 will provide contracting officers the authority to withhold payments on cost reimbursable type and time and materials type contracts as a response to address business system deficiencies.  The draft rule adds a clause to contracts requiring contractors to certify that they have no major defects in their contractor business systems defined as: accounting systems, estimating systems, purchasing systems (CPS), earned value management systems (EVMS), material management and accounting systems (MMAS), and property management systems. This DoD’s proposal to amend the Defense Federal Acquisition Regulation Supplement (DFARS), continues the crack-down on contractors increasing regulations and potential penalties for contractors with deficient business systems.

The draft rule identifies contractor business systems and internal controls as the first line of defense against waste, fraud, and abuse of tax dollars. The objective of the rule is to improve the effectiveness of Defense Contract Management Agency (DCMA) and Defense Contract Audit Agency (DCAA) oversight of contractor business systems. The requirements of the rule will apply to entities contractually required to maintain one or more of the defined contractor business systems listed above. If deficiencies are identified in the systems and the contractor does not implement corrective action within 45 days, the proposed rule allows contracting officers to withhold up to 10% of each of the Contractor’s payments on cost reimbursement, time and materials, and labor hour type contracts for each system up to a maximum of 50%. If a corrective action plan is submitted but there is not a complete remedy of the deficiency then the contractor could still be subject to a 5% withholding due to the deficiency in the system. If one or more system deficiencies that are highly likely to lead to improper contract payments being made, or represent an unacceptable risk of loss to the Government, contractor could be subject to up to 100% withholding. The rule does not identify the specific guidelines for correcting a deficiency or how quickly the system will be audited to verify the corrective actions taken by the contractor.

This could have a major impact of contractor’s cash flow. The emphasis on transparency, internal control and the importance of compliance systems is apparent in the proposed regulations. At this time DoD is unable to estimate the number of small entities to which this rule will apply. Therefore, DoD invites comments from small business concerns and other interested parties on the expected impact of this rule on small entities no later than March 16, 2010; let your voice be heard on this matter. Please provide your comment to this post.

Do not let an inadequate system leave your organization short on cash in 2010. Contact Nicole Mitchell at 301.222.8231 or nmitchell@aronsoncompany.com for more information how Aronson & Company can work with your organization to develop appropriate compliance business systems.

Tags: business system, compliance, cost reimbursable, CPS, DCAA, defiencies, Department of Defense, DFARS, DoDsmall business, EVMS, internal controls, MMAS, oversight, penalties, penalty, Time and Materials

This entry was posted on Tuesday, January 19th, 2010 at 7:03 pm and is filed under DCAA, FAR Regulations. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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