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E
ffective May 18, 2011, the
"Contractor Business Systems
Rule" (the "Interim Rule") became
available to Contracting Officers for
incorporation in all new Department of
Defense (DOD) CAS-covered solicita-
tions and contract awards.
Few rules have generated more indus-
try controversy than the Contractor
Business Systems Rule. DOD contrac-
tors should be on alert for the incorpo-
rating clause (DFAR 252.242.7005) in
applicable solicitations issued after
May 18, 2011, and other contractors
need to keep their ear to the ground for
changes to the Federal Acquisition
Regulation (FAR). As is often the case,
DFAR clauses are frequently adopted
by the more broadly applicable FAR.
What is the "Contractor
Business Systems Rule?"
The Rule (when present in a solicita-
tion or contract) requires DOD contrac-
tors to maintain business systems free
of "significant deficiencies" or face
potential payment withholds (up to five
percent per business system, 10 per-
cent maximum overall) under their
newly awarded CAS-covered con-
tracts. The Rule defines the following
"business systems":
Accounting Systems
Estimating Systems
Purchasing Systems
Earned Value Management Systems
(EVMS)
Material Management and
Accounting Systems (MMAS)
Property Management Systems
These are six systems well-known to
established contractors under the
watchful eye of the Defense Contract
Audit Agency (DCAA). The Rule creates
a mechanism for which a Contracting
Officer may withhold payments to con-
tractors in the event any one of the sys-
tems is deemed to have one or more
"significant deficiencies." The incredibly
subjective nature of a "significant defi-
ciency" all but assures that contractors
will have to maintain near-perfect sys-
tems of internal control or risk payment
withholds under covered contracts.
The Original Proposed Rule (and its
successor) received hundreds of com-
ments citing the Rule's excessive
applicability, ambiguity, subjectivity,
and general lack of causation between
withholds and financial harm to the
government as a result of business
system inadequacies. As a result, the
contracting community was able to
effect the following noteworthy revi-
sions in the Interim Rule for which
some can take solace:
The Rule is now only applicable to
DOD CAS-covered contracts (previ-
ously it was applicable to all DOD con-
tractors, including Small Businesses).
The Contracting Officer has discre-
tion as to which DOD CAS-covered
contracts will be subject to a potential
withhold.
The Interim Rule incorporates the
concept of materiality in its definition of
a "significant deficiency."
Contractor Risks
While the Rule has addressed some of
the contracting community's concerns,
it still carries significant risks that con-
tractors must consider in assessing its
compliance program, including:
Subjectivity of a
"Significant Deficiency"
The Rule defines a "significant defi-
ciency" as "a shortcoming in the sys-
tem that materially affects the ability of
DOD to rely upon information produced
by the system that is needed for man-
agement purposes." All contractors
know that "significant" (no matter how
well-defined) is a term where little
agreement is found with auditors. As
such, we can expect much debate
between contractors and auditors on
the term. Given previous DCAA guid-
ance to auditors included a "goal" for
45 percent of their audits to have find-
ings, it is likely that contractors may
often find themselves on the wrong end
of the interpretation.
Cash Flow Crunch
"Cash is king" goes the saying, and this
couldn't ring any truer in today's cash-
strapped economy. A limitation on cash
flow from government contracts, often
low-margin jobs to begin with, may
cause contractors to require additional
financing to plug the cash gap. Note
that the Interim Rule expressly
exempts withholds from Prompt
Payment Act interest, further limiting
contractor cash flow.
Increased Frequency in
Business Systems Audits
More audits of business systems are
reasonable to expect. With more audits
and increased scrutiny come more
reported "significant deficiencies"
and unapproved business systems.
Depending on the business system
advocacy community education
24
U.S. Government Contractors
Prepare For `Contractor Business
Systems Rule'
By Ryan Koenitzer, CPA