01.20.12

DCMA Guidance on Business System Rule

On January 17, 2012, the Defense Contract Management Agency (DCMA) published new guidance on Contractor Business Systems in its DCMA Guidebook.

The guidance provides Contracting Officers (CO) with instructions on appropriate and timely actions regarding significant deficiencies identified in Contractor Business Systems.  This guidance follows on the heels of the May 18, 2011 Defense Federal Acquisition Regulation Supplement (DFARS) interim rule on Contractor Business Systems.  The interim rule identifies six Business Systems as: Accounting, Earned Value Management, Estimating, Material Management and Accounting and Property Management and Purchasing.  The interim rule introduced seven new clauses to the DFARS – one for each of the six systems and a seventh (DFARS Clause 252.242-7005, Contractor Business Systems) related to Contractor Business Systems as whole.  The Business System clause establishes requirements for payment withholds in situations where a contractor’s system is disapproved due to the identification of significant deficiencies within the system.

The January 2012 DCMA guidance addresses the following Contracting Officer (CO) responsibilities and associated processes as they relate to contractor business systems:

• Determination of a business system’s approval or disapproval
• Tracking of the status of contractors systems
• Monitoring of the contractor's corrective action plan (CAP) as it relates to correction of systems deficiencies
• Application of payment withholds in situations where systems are not approved
• Consideration of adjustments, increases and releases of withholds
• System approval/disapproval notification and distribution

The DCMA guidance provides invaluable insight into how the agency intends to administer the Business System requirements.  A few key areas of note within the guidance:

• COs are to communicate initial determination of system approval/disapproval within 10 days of receipt of a system audit or functional specialist report
• COs will track the status of a contractor’s business systems in a Contract Business Analysis Repository (CBAR) eTool
• Business system status identification with CBAR will be:  Approved, Disapproved, Not Evaluated or Not Applicable
• Final determination of system approval is subject to additional approval
• While the Business System Clause is applicable to all Cost Accounting Standards (CAS) covered awards, to the extent systems are disapproved, the DCMA guidance is to impose withholds on only CAS covered contracts greater than or equal to $50 million that contain both the Business System Clause and the applicable system clause.  For IDIQ contracts the $50M value is measured at the task order level.
• Where there are no CAS covered contracts greater than or equal to $50 million with the relevant clauses, the CO may implement a payment withhold on one or more contracts under $50 million if needed to protect the Government’s interest
• COs will be required to track the application of withholds on various contracts to ensure regulatory caps of 5% and 10% are not exceeded
• Withholds are applied prospectively from the point of system disapproval and are not to be applied retrospectively
• Similarly reductions to withholds are not retrospective (i.e., do not result in refund of previous withholds)
• Release of withholds is contingent upon successful implementation of corrective actions or close-out of the contract
• If a significant deficiency still exists at the time of closeout of a contract, the CO may release withholds on the completed contract and implement withholds on other contracts to continue to protect the Government’s interest
• Withholds may not be transferred between contracts
• Withhold caps are exclusive of other penalties or other withholds imposed on a contract
• Withholds are not subject to the Prompt Payment Act interest penalties
• Withholds on progress and performance based payment invoices will be made by the paying office
• Withholds on interim vouchers for Cost-Type, Labor-Hour and Time and Materials Contracts are to be reflected as reductions  in the contractor’s invoice amount

The DCMA guidance related to the interim Business System rule provides much needed clarity as to how DCMA intends to administer the rule.  The Defense Contract Audit Agency (DCAA) has yet to publish its guidance on how it will perform audits of business systems under the interim rule. 

In a recent DCMA hosted Industry Day, the DCAA indicated that its audit guidance is scheduled to be published within the first quarter of 2012.

For more information on the interim Business System rule and the DCMA guidance and potential DCAA audit initiatives, please contact:

Sajeev Malaveetil, Partner                   
(703) 770-1060                                             
smalaveetil@argy.com  

 

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