0 Origin COWC Recommendation: Federal Acquisition Regulations should provide clear policy regarding the use of payment withholds on business system deficiencies Mr. Shay Assad, Director, Defense Procurement and Acquisition Policy committed to making those changes during November Hearing Proposed DFARS rule published (DFARS Case 2009-D038, Business Systems – Definition and Administration) on January 15, 2010

1 DCMA Suggestions Last August There should be a common list of the Business Systems Each should be supported by a clause Each should have objective standards/expectations Each should identify specific remedies Each should have criteria for approval/disapproval

2 Need for Regulatory Changes COWC Slide from August Hearing DFARS (a)(4) “The ACO will consider whether it is appropriate to suspend a percentage of progress payments or reimbursement of costs proportionate to the estimated cost risk to the Government, considering audit reports or other relevant input, until the contractor submits a corrective action plan acceptable to the ACO and corrects the deficiencies.”

3 Progress Payment Coverage Referenced in FAR (a) Suspension or reduction of payments. “ The contracting officer shall take these actions only in accordance with the contract terms and never precipitately or arbitrarily. These actions should be taken only after— Notifying the contractor of the intended action and providing an opportunity for discussion; Evaluating the effect of the action on the contractor’s operations, based on the contractor’s financial condition, projected cash requirements, and the existing or available credit arrangements; and Considering the general equities of the particular situation.”

4 Existing Remedies for Withholding/Suspending Payments for System Deficiencies* Progress Payment Clause (FAR ) (c) Reduction or suspension. The Contracting Officer may reduce or suspend progress payments …after finding upon substantial evidence any of the following conditions: (1) The Contractor failed to comply with any material requirement of this contract Performance-Based Payments Clause (FAR ) (e) Reduction or suspension of performance based payments. The Contracting Officer may reduce or suspend progress payments …after finding upon substantial evidence any of the following conditions: (1) The Contractor failed to comply with any material requirement of this contract Fixed Fee (FAR ) (b) “…after payment of 85 percent of the fixed fee, the Contracting Officer may withhold further payment of fee until a reserve is set aside in an amount that the Contracting officer considers necessary to protect the Government’s interest. This reserve shall not exceed 15 percent of the total fixed fee or $100,000, whichever is less.” Incentive Fee (FAR ) (c) Withholding of payment. “…After payment of 85 percent of the fixed fee, the Contracting Officer may withhold further payment of fee until a reserve is set aside in an amount that the Contracting officer considers necessary to protect the Government’s interest. This reserve shall not exceed 15 percent of the total fixed fee or $100,000, whichever is less. Allowable Cost and Payment (FAR ) Provides the ability to withhold (suspend/disapprove) payment of costs where allowabilty (including reasonableness & allocability) is questioned as a direct result of a specific system deficiency. * MMAS Clause Notwithstanding but…

5 Conclusion Where a deficiency poses a material risk of an inappropriate payment, the existing clauses suffice. But that infers causality or a ”logical nexus” that does not exist for all deficiencies. Some deficiencies are mitigated by Government action In some business systems, too difficult to determine amount of costs potentially affected (e.g., Earned Value) Some deficiencies may not impact the allowability of costs directly but harm Department in other ways (e.g., protracted negotiations, more intense Government reviews) New Business System clause needed to withhold funds for all deficiencies requiring correction