On Tuesday, March 16, 2010, the Council of Defense and Space Industry Associations (CODSIA), Aerospace Industries Association (AIA), and the National Defense Industrial Association (NDIA), among others, submitted separate comments that strongly opposed the proposed rule “to improve the effectiveness of DoD oversight of contractor business systems.” 75 Fed. Reg. 2457 (Jan. 15, 2010). These industry comments were united in requesting that the proposed rule be withdrawn or that no further action be taken until a public hearing.

Reaction to the proposed rule is unsurprising given it would allow an administrative contracting officer (ACO) to withhold between 10 and 100% of contractor payments upon a determination that a contractor’s business system contains “deficiencies.” Id. The business systems covered by the rule broadly include: (1) accounting systems; (2) estimating systems; MMAS (Material Management and Accounting Systems); purchasing systems; property management systems, and EVMS (Earned Value Management Systems). Id. at 2458.

Industry describes the rule as arbitrary and grossly disproportionate to the rules’ stated objectives of fighting waste, fraud, and abuse by establishing a strong set of contractor business systems. DoD’s perception of an ineffective Defense Contract Management Agency (DCMA) and Defense Contract Audit Agency (DCAA), which oversee contractors’ business systems, apparently provided impetus for the proposed rule. Yet DoD failed to focus attention on improving the current effectiveness of DCMA/DCAA, and instead proposed a new set of potential punitive measures at industry. There is no showing that the Government suffered material problems (outside perhaps contingency contracting in Iraq and Afghanistan) that could not be addressed through existing tools and processes.

As noted in the industry comments, the proposed rule is highly subjective and biased in the Government’s favor. While “deficiency” is defined as “failure to maintain an element of an acceptable estimating system,” id., this open-ended definition could largely be shaped according to the individual auditor’s subjective and uninformed viewpoint. The proposed rule focuses on rooting out every deficiency, without any regard to a causal nexus to billed unallowable costs, which forces contractors to achieve a subjectively high degree of internal control precision or perfection that will come at great administrative cost. This is contrary to FAR 1.102-2(c)(2), which focuses on “risk management” vs. “risk avoidance.” The concept of materiality is simply not present in the rule.

The comments also correctly note that the withhold amounts are unprecedented as they are: (a) unbounded by a maximum dollar amount; (b) unrelated to an objective performance or administrative requirement; and (c) do not consider the effect on the contractor’s financial condition. The withhold amounts are also a percentage of the entire invoice, rather than related only to those elements that are likely to be impacted by the deficiency.

The rule does not establish a business system approval duration, thus allowing system audits to remain perpetually open. The rule also presumes the Government has the requisite capacity and capability to implement and administer it. Moreover, although contractors are required to respond to and correct alleged deficiencies in a specified time, the Government has no time requirements for follow-up on contractor corrective actions, system approval decisions and remove withhold decisions. Finally, the myriad inconsistencies, ambiguities, subjective terms, and open-ended requirements contained within the proposed rule will be very difficult to implement.

CODSIA’s 15-page comments (with an additional 5-page detailed Appendix discussing ambiguities within the proposed rule) were fully endorsed by NDIA, which wrote a 5-page set of comments regarding why EVMS should not be considered an appropriate business system for the proposed rule. NDIA argued that EVMS is not like an accounting system of “perfect data,” but rather a decisionmaking tool that evaluates performance trends and metrics. Given that a deficiency in an EVMS system would not directly affect contract cost or schedule, it would be inappropriate to withhold payments due to any perceived deficiencies.

Because of the many perceived problems with this proposed rule, we hope that DoD will eventually abandon the concept entirely or at least proceed cautiously and incrementally, perhaps first by holding a public hearing.