2009-D038 Interim Rule

Vol. 76

Wednesday,

No. 96

May 18, 2011

Part II

Department of Defense
Defense Acquisition Regulations System

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48 CFR Parts 215, 234, 242 et al.
Defense Federal Acquisition Regulation Supplement; Business Systems—
Definition and Administration; Interim Rule

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Federal Register / Vol. 76, No. 96 / Wednesday, May 18, 2011 / Rules and Regulations

DEPARTMENT OF DEFENSE
Defense Acquisition Regulations
System
48 CFR Parts 215, 234, 242, 244, 245,
and 252
[DFARS Case 2009–D038]
RIN 0750–AG58

Defense Federal Acquisition
Regulation Supplement; Business
Systems—Definition and
Administration
Defense Acquisition
Regulations System, Department of
Defense (DoD).
ACTION: Interim rule with request for
comments.
AGENCY:

DoD is amending the Defense
Federal Acquisition Regulation
Supplement (DFARS) to improve the
effectiveness of DoD oversight of
contractor business systems.
DATES: Effective date: May 18, 2011.
Comment date: Comments on the
interim rule should be submitted in
writing to the address shown below on
or before July 18, 2011, to be considered
in the formation of the final rule.
Applicability date: This rule applies
to solicitations issued on or after May
18, 2011. Contracting officers are
encouraged, to the extent feasible, to
amend existing solicitations (including
solicitations for delivery orders and task
orders) in accordance with FAR
1.108(d), in order to include the clause
at DFARS 252.242–7005, Contractor
Business Systems, as applicable, in
contracts (including delivery orders and
task orders) to be awarded on or after
May 18, 2011, and shall amend existing
solicitations (including delivery orders
and task orders) in accordance with
FAR 1.108(d), in order to include the
clause at DFARS 252.242–7005,
Contractor Business Systems, as
applicable, in contracts to be awarded
on or after August 16, 2011.
ADDRESSES: You may submit comments,
identified by DFARS Case 2009–D038,
using any of the following methods:
Æ Regulations.gov: http://
www.regulations.gov. Submit comments
via the Federal eRulemaking portal by
inputting ‘‘DFARS Case 2009–D038’’
under the heading ‘‘Enter keyword or
ID’’ and selecting ‘‘Search.’’ Select the
link ‘‘Submit a Comment’’ that
corresponds with ‘‘DFARS Case 2009–
D038.’’ Follow the instructions provided
at the ‘‘Submit a Comment’’ screen.
Please include your name, company
name (if any), and ‘‘DFARS Case 2009–
D038’’ on your attached document.

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SUMMARY:

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Æ E-mail: [email protected]. Include
DFARS Case 2009–D038 in the subject
line of the message.
Æ Fax: 703–602–0350.
Æ Mail: Defense Acquisition
Regulations System, Attn: Mr. Mark
Gomersall, OUSD (AT&L) DPAP
(DARS), Room 3B855, 3060 Defense
Pentagon, Washington, DC 20301–3060.
Comments received generally will be
posted without change to http://
www.regulations.gov, including any
personal information provided. To
confirm receipt of your comment(s),
please check http://www.regulations.gov
approximately two to three days after
submission to verify posting (except
allow 30 days for posting of comments
submitted by mail).
FOR FURTHER INFORMATION CONTACT:
Mr. Mark Gomersall, 703–602–0302.
SUPPLEMENTARY INFORMATION:
I. Background
DoD published an initial proposed
rule for Business Systems—Definition
and Administration (DFARS Case 2009–
D038) in the Federal Register on
January 15, 2010 (75 FR 2457). Based on
the comments received and subsequent
revisions to the proposed rule, DoD
published a second proposed rule on
December 3, 2010 (75 FR 75550). The
public comment period closed January
10, 2011. On January 7, 2011, the Ike
Skelton National Defense Authorization
Act (NDAA) for Fiscal Year (FY) 2011
was signed into law (Pub. L. 111–383).
NDAA section 893, Contractor Business
Systems, set forth statutory
requirements for the improvement of
contractor business systems to ensure
that such systems provide timely,
reliable information for the management
of DoD programs. Based on the
comments received, the requirements of
the NDAA, and subsequent revisions to
the proposed rule, DoD is publishing
this interim rule with request for
comments.
Contractor business systems and
internal controls are the first line of
defense against waste, fraud, and abuse.
Weak control systems increase the risk
of unallowable and unreasonable costs
on Government contracts. To improve
the effectiveness of Defense Contract
Management Agency (DCMA) and
Defense Contract Audit Agency (DCAA)
oversight of contractor business
systems, DoD is clarifying the definition
and administration of contractor
business systems as follows:
A. DoD is defining contractor business
systems as accounting systems,
estimating systems, purchasing systems,
earned value management systems
(EVMS), material management and

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accounting systems (MMAS), and
property management systems.
B. DoD is implementing compliance
enforcement mechanisms in the form of
a business systems clause which
includes payment withholding that
allows contracting officers to withhold a
percentage of payments, under certain
conditions, when a contractor’s business
system contains significant deficiencies.
Payments could be withheld on—
• Interim payments under—
Æ Cost–reimbursement contracts;
Æ Incentive type contracts;
Æ Time-and-materials contracts;
Æ Labor-hour contracts;
• Progress payments; and
• Performance-based payments.
II. Discussion and Analysis
A. Analysis of Public Comments
The comments received in response to
the second proposed rule have been
analyzed and dispositioned as discussed
below. The comments received were
grouped under 34 general topics. A
summary of the comments follows:
1. Business Systems
a. Earned Value Management Systems
(EVMS)
The following comments were
submitted concerning Earned Value
Management Systems (EVMS):
Comment: Some respondents
expressed concern over disapproval of
EVM systems if the system is not
validated within 16 months since
DCMA is not currently able to meet this
timeline.
Response: The rule requires
contracting officers to determine the
acceptability of the contractor’s earned
value management system in
consultation with the functional
specialist and auditor. Contracting
officers are expected to consider all facts
at their disposal when making such
determinations. However,
circumstances outside of a contractor’s
control may inhibit the initial validation
of a contractor’s EVMS. Therefore,
234.201(7)(iii)(A)(2)(ii) has been revised
to state that the system will be
disapproved ‘‘when initial validation is
not successfully completed within the
timeframe approved by the contracting
officer * * *’’
Comment: Conditions for disapproval
of an EVM system are inconsistent
where the definition of an acceptable
EVMS means that the system generally
complies with system criteria while the
identification of a single deficiency can
make a system unacceptable.
Furthermore, while some respondents
expressed concern that EVM system
deficiencies are related to ill-defined

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contractual requirements, other
respondents indicated that criteria for
disapproval of an EVM system are too
strict and should be more subjective.
Response: The rule requires
contracting officers to determine the
acceptability of the contractor‘s earned
value management system in
consultation with the functional
specialist and auditor. Contracting
officers are expected to consider all facts
at their disposal when making such
determinations. Section 893 of the FY11
NDAA requires systems to be
disapproved when there is a
shortcoming in the system that affects
materially the ability of DoD officials to
rely on information produced by the
system for management purposes. This
interim rule is consistent with this
requirement. In the case of EVM
systems, this means the system has one
or more significant deficiencies due to
the contractor’s failure to comply with
the system criteria in the clause at
252.234–7002, Earned Value
Management System. Since a system
will only be disapproved when a
significant deficiency exists, a system
with deficiencies that do not materially
affect the Government’s ability to rely
on information produced by the system
is considered an acceptable system in
accordance with the definition at
252.234–7002. Therefore, this rule is not
inconsistent with the definition of an
acceptable EVMS.
b. Estimating System
The following comments were
submitted concerning estimating
systems:
Comment: The respondent indicated
that it is unreasonable for an acceptable
estimating system to include controls
for the contractor to compare projected
results to actual results and analyze the
differences. This is a major change in
policy concerning fixed-price contracts
and will open the door to wholesale
Government access to contractor costs
during fixed-price contract performance.
Response: This interim rule sets forth
specific criteria for maintaining an
acceptable estimating system. It is not
unreasonable for a contractor to
establish and maintain an acceptable
estimating system that would include
controls for the contractor to compare
projected results to actual results and
analyze any differences. Such controls
provide a valuable metric for
demonstrating the accuracy of estimates
produced by the system. Systems that
consistently produce accurate estimates
with a reasonable degree of confidence
can significantly reduce the number of
Government resources required to
review cost and price proposals.

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Accurate estimates also provide
substantial advantages to the contractor
by allowing a more accurate forecast of
the projected rate of return. This
existing requirement was relocated from
215.407–5–70 to the clause at 252.215–
7002, Cost Estimating System
Requirements.
c. Accounting Systems
The following comments were
submitted regarding accounting
systems:
Comment: The respondent
recommended deleting the phrase ‘‘or
functional specialist’’ from
242.7502(d)(2)(ii)(C). The respondent
recommended that the 45 day period be
extended to a 60 day period for a
contractor to correct a deficiency or
submit a corrective action plan as is
currently in the DFARS. The policy at
242.7502(d)(2)(ii)(A) should include a
requirement that the contracting
officer’s notification to the contractor
include ‘‘sufficient detail to allow the
contractor to understand the
deficiencies and the potential impact to
the Government’’ as is required in other
system deficiency notifications. Finally,
the respondent recommended that
DCAA focus on the adequacy of a
contractor’s accounting system rather
than the adequacy of the contractor’s
control environment and overall
accounting system controls.
Response: The term functional
specialist needs to be retained. When
specialized expertise is required, the
interim rule requires contracting officers
to consult with auditors and other
individuals with specialized experience,
as necessary, to ensure a full
understanding of issues. For example,
certain issues relating to forecasted costs
may require the expertise of engineers,
price analysts, and others, to understand
or evaluate the contractor’s business
system. It is not necessary to extend the
45 day period to 60 days. The contractor
will be notified formally of deficiencies
at the completion of the audit, and will
be allowed 30 days to respond to the
contracting officer’s initial
determination. The contractor will be
well aware that a deficiency may need
to be corrected and a corrective action
plan may be needed well before that 45
day period begins. For clarity, the
language pertaining to ‘‘sufficient detail’’
in a contracting officer’s notification has
been revised to state that a contracting
officer’s notification will provide ‘‘a
description of each significant
deficiency in sufficient detail to allow
the contractor to understand the
deficiency.’’ DCAA will be reporting
significant deficiencies in accordance
with the new business systems rule.

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Comment: The rule requires periodic
monitoring of the accounting system but
does not provide a definition of what
the expectation or frequency of the
accounting system reviews should be.
Furthermore, the rule fails to recognize
leading practices implemented in
industry through continuous monitoring
and exception reporting.
Response: The size and complexity of
companies and their processes,
operations, and accounting systems
capabilities vary. Therefore, it is not
feasible to establish specific
requirements regarding the extent or
frequency of periodic monitoring.
Comment: The respondent expressed
concern that immaterial audit issues
resulting from CAS 405 noncompliance
audit reports will be considered
significant, resulting in payment
withholding and disputes. The
respondent recommended eliminating
accounting system criterion number 12
from the rule since remedies already
exist through the application of the CAS
administration clause as well as the
Allowable Cost and Payment clause at
FAR 52.216–7.
Response: The rule establishes criteria
for an acceptable accounting system to
provide reasonable assurance that
applicable laws and regulations are
complied with, accounting system and
cost data are reliable, risk of
misallocations and mischarges are
minimized, and contract allocations and
charges are consistent with billing
procedures. An essential characteristic
of an adequate accounting system for
Government contract costing is the
ability of the system to identify and
exclude unallowable costs from costs
charged to Government contracts. The
remedies provided in the CAS
administration clause and the Allowable
Cost and Payment clause at FAR
52.216–7 do not replace the need for
this essential control within a
contractor’s accounting system.
Comment: Accounting system
criterion number 17 introduces the
subjective and undefined terms
‘‘adequate’’ and ‘‘reliable’’ with regard to
accounting systems providing data to be
used to support follow-on acquisitions.
It is not appropriate to tie the basis of
estimates for proposals to the
accounting system. Including this
criterion in the accounting system and
estimating system criteria is redundant.
Response: The variation and
complexity of business systems is such
that it is not practical to eliminate
subjective terms entirely. While the
terms ‘‘adequate’’ and ‘‘reliable’’ imply a
degree of subjectivity, they are
sufficiently common to enable
reasonable parties to agree on the set of

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necessary characteristics to meet each
threshold given the unique set of
circumstances. It is not inappropriate to
draw a connection between the basis of
estimates for proposals and the
accounting system. Achieving
consistent and accurate estimates is
dependent on obtaining accurate and
reliable information, which often
includes reported information about
past results produced by the accounting
system. The weight assigned to past
results in developing estimates will vary
depending on a variety of factors,
including the similarity of past
circumstances and the anticipated
circumstances for which the estimate is
being developed. In the case of a followon acquisition, as noted by the
respondent, the circumstances are often
similar, and thus actual results
produced by the accounting system are
likely to play a prominent role in
developing the estimate. Estimators will
likely improve accuracy when they
consider the accounting system results
during the development of their bases of
estimates whether or not the acquisition
is a follow-on acquisition.
Comment: Referencing
242.7502(g)(2)(v), which identifies
reducing the negotiation objective for
profit or fee as a means to mitigate risk
of accounting system deficiencies, the
respondent expressed concern that such
reductions would be punitive to
contractors beyond other measures in
the rule. The respondent recommended
removal of this paragraph.
Response: This interim rule does not
limit the contracting officer’s discretion
to apply any and all regulatory
measures, as warranted by the
circumstances, including mitigating the
risk of accounting system deficiencies
by reducing the negotiation objective for
profit or fee.
d. Purchasing Systems
The following comments were
submitted regarding purchasing
systems:
Comment: DFARS 252.244–7001
requires purchasing policies that
‘‘comply with the Federal Acquisition
Regulation (FAR) and the Defense FAR
Supplement (DFARS).’’ The respondent
requested that the rule clarify that
requirements being imposed on
contractors are done via contract
clauses.
Response: All contractual
requirements are identified and
accomplished through contract clauses.
There is no need to issue such a
clarifying statement in this rule.
Comment: The definitions of
subcontracts and purchase orders
should be revised to exclude agreements

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with vendors that would normally be
applied to a contractor’s G&A expenses
or indirect costs.
Response: Because the Government
reimburses contractors for its applicable
share of indirect expenses, it would be
inappropriate to revise the definitions of
subcontracts and purchase orders to
exclude agreements with vendors that
would normally be applied to a
contractor’s G&A expenses or indirect
costs.
Comment: Purchasing system criteria
under items 252.244–7001(c)(2) and
(c)(19) in the purchasing system clause
appear to be redundant.
Response: Purchasing system criteria
under 252.244–7001(c)(2) and (c)(19) are
not redundant. The criterion under
(c)(2) requires the contractor to include
all flowdown clauses, including terms
and conditions and any other clauses
needed to carry out the requirements of
the prime contract, in all applicable
purchase orders and subcontracts, while
the criterion under (c)(19) requires the
contractor to establish and maintain
policies and procedures to ensure the
requirements of (c)(2) are accomplished.
Comment: The rule should establish a
threshold under purchasing system
criterion (c)(4) for the documentation of
purchase orders (e.g., $3,000).
Response: Since certain requirements
should apply to all purchases, no
threshold has been added in (c)(4).
Comment: The purchasing system
criterion under item (c)(8) should be
revised to be consistent with FAR part
15.
Response: This rule does not conflict
with the extensive language under FAR
part 15. The wording in (c)(8) and FAR
part 15 is not inconsistent.
Comment: Purchasing system criteria
under items (c)(10) and (c)(22) appear to
be redundant.
Response: Purchasing system criteria
under 252.244–7001(c)(10) and (c)(22)
are not redundant. The criterion under
(c)(10) requires the contractor to
perform timely and adequate cost or
price analysis and technical evaluation
for each subcontractor and supplier
proposal or quote to ensure fair and
reasonable subcontract prices, while the
criterion under (c)(22) requires the
contractor to establish and maintain
procedures to ensure the requirements
of (c)(10) are accomplished.
Comment: Notification of subcontract
awards that contain FAR and DFARS
clauses allowing for Government audits
should not be required in the
purchasing system criterion under item
(c)(16) since these clauses are required
flowdowns on all direct-funded
subcontracts.

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Response: The notification
requirement under purchasing system
criterion (c)(16) is appropriate. This
criterion does not require flowdown of
FAR and DFARS clauses, but instead
establishes the requirement that the
contractor notify the Government of the
award of all subcontracts that contain
the FAR and DFARS flowdown clauses
that allow for Government audit of those
subcontracts, and ensure the
performance of audits of those
subcontracts.
Comment: The purchasing system
criterion under item (c)(23) should be
clarified so that the requirements are
applicable to first-tier subcontractors.
Response: The suggested change to
(c)(23) would make it inconsistent with
the definition in FAR 44.101. Therefore,
no change has been made.
e. Property Systems
The following comments were
submitted regarding property systems:
Comment: Replace the phrase
‘‘previously unapproved’’ property
management systems with the phrase
‘‘disapproved’’ for consistency.
Response: The phrase ‘‘previously
unapproved property management
system’’ in 245.105(e) has been replaced
with the phrase ‘‘previously
disapproved property management
system’’ for consistency.
Comment: The proposed rule property
system terminology is inconsistent with
current FAR part 45. The proposed rule
provides for ‘‘approval/disapproval’’ of a
system while FAR part 45 and FAR
clause 52.245–1 use the verbiage
‘‘adequate/inadequate.’’
Response: The language in DFARS
245 supplements the FAR language, and
is consistent with other business system
sections as well as with section 893 of
the NDAA.
Comment: One respondent stated that
it is unclear whether the proposed rule
uses a two-step process for approval/
disapproval of a property system where
the Government property administrator
initially determines if a deficiency
exists that would make the system
‘‘inadequate’’ and then works with the
contracting officer to determine if the
system is ‘‘approved/disapproved’’ and
whether payment withholding is
required, or if the Government property
administrator is acting as an agent of the
cognizant contracting officer using a
one-step process. Another respondent
suggested that property administrators
should have the authority to approve
contractor property management
systems, and report system deficiencies
to the cognizant contracting officer
recommending disapproval.

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Disapproval authority should reside
with the cognizant contracting officer.
Response: DFARS 245.105 is clear
that Government property
administrators are responsible for
providing recommendations and
reporting system deficiencies to the
cognizant contracting officer, including
recommendations regarding contractor
property management system approval
or disapproval. However, system
approval or disapproval authority shall
remain with the cognizant contracting
officer.
2. Resources and Resolution Timing
Comment: DCMA and DCAA are
under-resourced to execute the
requirements of the rule. DCAA does
not have resources to perform timely
follow-up audits/system reviews or
coordinate in a timely manner with
contracting officers to remove payment
withholdings, and contracting officers
do not have the training to determine if
a deficiency makes a system inadequate.
There must be accountability within
DCAA to conduct timely follow-up
audits. Respondents recommended that
contractors should be allowed to request
follow-up audits when deficiencies are
corrected; it should be mandated that
DCAA and DCMA perform follow-up
audits within 30 days of contractor
notification that a deficiency has been
corrected; and that the rule should
permit qualified third party auditors to
provide various accreditations and
audits, as is the case with ISO standards
or CMMI approvals.
Response: The need to have effective
oversight mechanisms is unrelated to
resources. This rule does not add
additional oversight responsibilities
onto DCAA and DCMA; it merely
provides provisions to help protect the
Government from the contractor’s
failure to maintain business systems, as
is required by the terms and conditions
of their contracts. Contracting personnel
will make appropriate determinations in
accordance with this rule. DCMA and
DCAA have been working closely to
align their resources and ensure work is
complementary. The increased
cooperation and coordination between
DCAA and DCMA will enable us to
employ audit resources where they are
needed. Further, the rule has been
revised to require the contracting officer
to reduce the payment withholding by
at least 50 percent if the contracting
officer has not made a determination
whether the contractor has corrected all
significant deficiencies as directed by
the contracting officer’s final
determination, or has not made a
determination whether there is a
reasonable expectation that the

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corrective actions have been
implemented.
3. Contractor Appeals
Comment: DoD needs a contractor
appeals process for implementing the
payment withholding. The rule should
be modified to require discussion with
the PEO and/or SAE before any payment
withholding action is taken. Due to the
vague nature of the system criteria and
subjective nature of the audit
assessments, it will be difficult for
contractors to challenge payment
withholding determinations under the
Contract Disputes Act.
Response: The final deficiency
determination is at the sole discretion of
the contracting officer. However, prior
to making a final deficiency
determination, contractors are afforded
an opportunity to respond in writing
within 30 days to an initial
determination of deficiencies from the
contracting officer that identifies
significant deficiencies in any of the
contractor’s business systems. It is not
necessary or appropriate to develop a
dispute resolution process beyond that
which is already available by statute
and regulation. Additionally, other
avenues of dispute resolution outside of
the Contract Disputes Act are available
for resolving disputes that may arise
over determinations of system
deficiencies. The policy set forth in FAR
33.204 still applies, so that informal
negotiation and alternate dispute
resolution remain available, and, in fact,
are encouraged as alternative methods
of resolving disputes.
4. Risk of Harm and Materiality of
Deficiencies
Comment: ‘‘Risk of harm’’ must be
substantiated and verified. The final
rule should define the phrase ‘‘potential
risk of harm to the Government’’ which
incorporates a nexus between the
amount withheld and the specific harm
that may accrue to the Government
based on the system deficiency, and
require that a deficiency be ‘‘material’’ or
‘‘significant.’’ It is impossible to
determine whether the proposed
controls and remedial actions of this
rule are reasonable and commensurate
with the Government’s risks. Payment
withholdings are liquidated damages in
disguise and, if excessive to the
Government’s risk, will be viewed as
punitive.
Response: The intent of the rule is to
authorize payment withholding when
the contracting officer finds that there
are one or more significant deficiencies
due to the contractor’s failure to meet
one or more of the system criteria. The
rule has been revised to consider

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significant deficiencies in determining
the adequacy of a contractor’s business
system and potential payment
withholding in accordance with section
893 of the FY11 NDAA. Contract terms
explicitly require contractors to
maintain the business systems in
question as a condition of contracting
responsibility and, in some cases,
eligibility for award. Contract prices are
negotiated on the basis that contractors
will maintain such systems, so that the
Government does not need to maintain
far more extensive inspection and audit
functions than it already does. Failure of
the contractor to maintain acceptable
systems during contract performance
deprives the Government of assurances
for which it pays fair value. While not
‘‘deliverable’’ services under specific
contract line items, these business
systems are material terms, performance
of which is required to ensure contracts
will be performed on time, within cost
estimates, and with appropriate
standards of quality. The payment
withholding remedy provides a measure
of the overall contract performance of
which the Government is deprived
during the performance period, and for
which the contractor should not receive
the full financing payments. DoD is
relying on the temporary payment
withholding amounts, not as a penalty
for a deficiency, but as representing a
good-faith estimate sufficient to mitigate
the Government’s risk where the actual
amounts are difficult to estimate or
quantify. Deficiencies that do not
directly relate to unallowable or
unreasonable costs still pose risks to the
Government, and may lead to harm that
may not be calculated readily when the
deficiencies are discovered. In most
cases, the financial impact of a system
deficiency cannot be quantified because
the system produces unreliable
information. When the financial impact
of a deficiency is quantifiable, DoD
expects contracting officers to take
appropriate actions to reduce fees,
recoup unallowable costs, or take legal
action if fraudulent activity is involved.
5. Definition of Deficiency
Comment: The term ‘‘deficiency’’ is
not clearly defined. The rule should
define the terms ‘‘deficiency,’’
‘‘significant deficiency,’’ and ‘‘material
weakness.’’ One respondent suggested
these definitions be set forth in
accordance with the definitions utilized
by the Public Company Accounting
Oversight Board (PCAOB).
Response: The interim rule has been
revised to implement payment
withholding procedures only for
‘‘significant deficiencies,’’ therefore, it is
not necessary to define ‘‘deficiency’’.

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The rule is has been revised to define
‘‘significant deficiency’’ as a
shortcoming in the business system that
affects materially the ability of officials
of the Department of Defense to rely
upon information produced by the
system that is needed for management
purposes, in accordance with section
893 of the NDAA. DoD will use the
definition of ‘‘significant deficiency’’ in
section 893 over the PCAOB definition.
The term ‘‘material weakness’’ is not
used in this rule.
6. System Approval Duration and
Narrowly Focused Follow-up Audits
Comment: The rule should implement
an approval duration for each business
system, and require follow-up audits to
narrowly focus on previously-identified
deficiencies.
Response: While DCAA may perform
a narrowly focused follow-up audit,
imposing a required business system
approval duration and/or specifically
limiting the scope of the DCAA followup audit in this rule would not be
appropriate since, at any time after
approval, contractor conditions could
change rendering the previouslyreported opinion as not current. DCAA
policy is to report only deficiencies
determined to be significant deficiencies
in accordance with the definition of
significant deficiency set forth in this
rule and generally accepted Government
auditing standards.

srobinson on DSKHWCL6B1PROD with RULES2

7. Contracting Officer/ACO References
Comment: The rule should reference
‘‘ACO’’ in lieu of ‘‘contracting officer’’
since ACOs will have the primary
responsibility to approve contractor
business systems.
Response: The contract
administration functions in FAR 42.302
are sometimes performed by
procurement contracting offices. Since
procurement contracting offices are
sometimes responsible for the approval
and disapproval of contractor business
systems, the term ‘‘ACO’’ has been
replaced by ‘‘contracting officer’’ for
accuracy.
8. Subjective Assessments and Vague
Standards
Comment: The revised proposed rule
includes incomplete and ambiguous
definitions of acceptable business
systems, and fails to address the
concern with subjective assessments
and vague standards, which will lead to
inconsistent treatment within DCAA
and DCMA.
Response: The rule incorporates
criteria that are already used by the
Government under existing authority to
evaluate the adequacy of contractor

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business systems. For example, the
criteria for estimating systems are
currently located in the DFARS at
215.407–5–70(d)(2). Given that these
system criteria have been used for many
years to assess contractor business
systems, a reasonable person should be
able to easily interpret and understand
what is required to maintain an
acceptable system. Each significant
deficiency must be determined on its
own set of facts and ultimately decided
by the contracting officer. Inconsistent
treatment of deficiencies is speculative.
9. Approval To Withhold Payments
Comment: The authority to order a
payment withholding should be vested
at a higher level than the contracting
officer because many contracting
officers do not have sufficient training
or expertise in the full spectrum of
business systems covered by the rule.
Furthermore, contracting officers should
be allowed to make independent
business judgments without fear of
DCAA elevating the matter to a formal
disputes resolution board, unless the
contracting officer has ignored or
disregarded DCAA egregiously.
Response: The contracting officer is
the only person with the authority to
enter into, administer, and/or terminate
contracts and make related
determinations and findings. DoD
contracting personnel are skilled
professionals. All contracting personnel
are required by law to obtain a
certification to ensure they have the
requisite skills in contracting. When
specialized expertise is required,
contracting officers consult with
auditors and other individuals with
specialized experience, as necessary, to
ensure a full understanding of issues. In
fact, the interim rule requires such
consultations. Accordingly, the
contracting officer is the appropriate
authority for making decisions regarding
contractor business systems.
10. Other Remedies
Comment: The DCAA audit report
should recommend whether a payment
withholding is necessary, and if not,
what other protections are available.
DoD already has numerous other
contracting tools available to protect
itself from any actual loss associated
with business system deficiencies. The
proposed clause should state that a
payment withholding under the clause
is in lieu of, and not in addition to,
other sanctions and remedies.
Response: The existing regulatory
remedies are not an effective substitute
for a contract clause that will mitigate
the Government’s risk while contractors
correct business system deficiencies.

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The interim rule is required to
supplement existing enforcement
mechanisms and protect the
Government’s interests while the
contractor completes correction of
system deficiencies. DoD does not want
to limit the contracting officer’s
discretion to apply any and all
regulatory measures, as warranted by
the circumstances. For example, if a
contractor has a deficiency in its
property management system, the
contracting officer may implement a
payment withholding to protect the
Government’s risk of the contractor
failing to perform on the contract, and
may also revoke the Government’s
assumption of liability to protect the
Government from risk of loss of the
Government’s furnished property.
11. ‘‘Inadequate in Part’’
Comment: The final rule should
provide for ‘‘inadequate in part’’
determinations when minor system
deficiencies will not affect the entire
business system.
Response: ‘‘Inadequate in part’’
determinations when minor system
deficiencies are found are not necessary.
Contractor business systems will only
be disapproved when the contracting
officer determines that one or more
significant deficiencies materially affect
the ability of officials of the Department
of Defense to rely upon information
produced by the system that is needed
for management purposes.
12. Payment Withholdings Applied Per
System or Per Deficiency
Comment: The rule is unclear
whether a 5% payment withholding is
applied against a single deficient
business system or can be applied for
each deficiency within a single system.
Response: Payment withholding
procedures will be implemented on the
basis of contractor business systems.
While multiple payment withholdings
may be implemented due to significant
deficiencies in multiple contractor
business systems, for clarity, the interim
rule sets forth that the total percentage
of payments withheld on amounts due
under each progress payment,
performance-based payment, or interim
cost voucher, shall not exceed five
percent for one or more significant
deficiencies in any single contractor
business system, and 10 percent for
significant deficiencies in multiple
contractor business systems.
13. DCAA/Functional Specialist
Consultation
Comment: It is unclear what is meant
by ‘‘consultation with the auditor or
functional specialist’’ in terms of a

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srobinson on DSKHWCL6B1PROD with RULES2

contracting officer’s determination to
discontinue withholding payments prior
to audit verification. The language in
DFARS 242.70X1 and 252.242–7XXX
should explicitly state that the
contracting officer may discontinue
withholding payments without the need
to wait for a final audit report from
DCAA.
Response: The contracting officer is
the only person with the authority to
enter into, administer, and/or terminate
contracts and make related
determinations and findings. However,
when specialized expertise is required,
the interim rule requires contracting
officers to consult with auditors and
other individuals with specialized
experience, as necessary, to ensure a full
understanding of issues. The interim
rule explicitly states that prior to the
receipt of verification, the contracting
officer may discontinue withholding
payments pending receipt of
verification, and release any payments
previously withheld, if the contractor
submits evidence that the deficiencies
have been corrected, and the contracting
officer, in consultation with the auditor
or functional specialist, determines that
there is a reasonable expectation that
the corrective actions have been
implemented and that the deficiencies
no longer affect materially the ability of
the Government to rely upon
information produced by the system.
14. Risk Management vs. Risk
Avoidance
Comment: The proposed rule’s focus
on risk avoidance rather than risk
management has the potential of
significantly increasing the cost of
business systems without corresponding
benefits. To make systems deficiencyproof in order to avoid significant
payment withholdings, contractors may
be forced to incur unnecessary costs that
would be disproportionate to the
incremental benefits of having near
perfect systems. DoD has failed to
consider the concept of causal or
beneficial relationships between the
costs to bring business systems into
compliance with the rule, and the
benefits of protecting the Government
from perceived risk.
Response: DoD will only withhold
payments in cases where there are
significant deficiencies in the
contractor’s business systems. In such
cases, the ability of the contractor to
manage risk is questionable and the
potential risk of harm to the
Government is increased. Under the
rule, a contractor business system may
contain deficiencies that do not affect
materially the ability of DoD officials to
rely on information produced by the

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system. Accordingly, the standard for
withholding payments is commensurate
with the risk of harm to the
Government. In the long run, both the
contractor’s and Government’s
administrative costs should be reduced
with the reliance on efficient contractor
business systems.
15. Large Businesses
Comment: The revised rule
improperly targets large businesses due
to the $50M dollar contract threshold.
Response: The $50 million contract
threshold has been removed from the
interim rule. The threshold for
application of the contractor business
systems clause is set forth in section 893
of the NDAA, which defines a covered
contractor as one that is subject to the
Cost Accounting Standards under 41
U.S.C. chapter 15, as implemented in
regulations found at 48 CFR 9903.201–
1 (see the FAR Appendix).
16. DCAA Audit Standards
Comment: DCAA auditors apply a
higher standard for identifying a
deficiency in an accounting system
(‘‘less than a remote possibility that
potential unallowable costs would be
immaterial’’) than set forth in the rule.
DCAA is not able to distinguish
systemic errors or significant
deficiencies from normal human errors
or minor deficiencies. The rule may
state that it is DCAA policy to report
only deficiencies determined to be
significant deficiencies or material
weaknesses, however the DCAA
December 19, 2008 MRD (titled Audit
Guidance on Significant Deficiencies/
Material Weaknesses and Audit
Opinions on Internal Control Systems)
instructs auditors that anything which is
subject to DCAA review should be
considered significant.
Response: DCAA will report
significant deficiencies in accordance
with the definition of significant
deficiency in this rule, as set forth in
section 893 of the NDAA and the
Generally Accepted Government
Auditing Standards (GAGAS). Based on
the definition in GAGAS, a significant
deficiency is a deficiency, or
combination of deficiencies, that
adversely affects the entity’s ability to
initiate, authorize, record, process, or
report data reliably. The GAGAS
definition is consistent with the
definition of significant deficiency in
the contractor business systems clause.
Additionally, contracting officers will
administer this rule according to the
requirements in section 893 of the
NDAA.

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17. Arbitrary and Punitive Payment
Withholdings
Comment: The payment withholding
percentages are punitive in nature and
represent an arbitrary estimate based on
pressure to incorporate business
systems payment withholdings into the
DFARS. The amount of the payment
withholding should be commensurate
with the level of risk to the Government
and not set at arbitrary and punitive
levels.
Response: When contractors fail to
maintain business systems, as is
required by the terms and conditions of
their contracts, the payment
withholding provisions help to protect
the Government from the risks of
overpayment, increased property losses,
or nonconforming goods, among others,
against which contractor business
systems are designed to ensure. The
interim rule would protect the
Government by reducing contract
payments temporarily during
performance in an amount sufficient to
mitigate the Government’s risk. DoD is
relying on the payment withholding
amounts, not as a penalty for a
deficiency, but as representing a goodfaith estimate of the potential loss that
is at risk where the actual amounts are
difficult to estimate or quantify. The
percentage of progress payments,
performance-based payments, and
interim payments set forth in this rule
is in accordance with section 893 of the
NDAA.
18. Release of Payment Withholdings
Comment: DCAA does not issue
audits addressing ‘‘reasonable
expectation that the corrective actions
have been implemented.’’ The only
existing audit solution is to complete
the entire follow-up audit, which will
not be performed in a timely manner
due to DCAA’s backlog. Furthermore,
the rule should provide guidance to
avoid perpetual payment withholdings
when deficiencies in multiple business
systems overlap and the timing of
corrective action plans differ.
Response: There is no requirement
that DCAA issue audits addressing
‘‘reasonable expectation that the
corrective actions have been
implemented.’’ The interim rule
explicitly states that prior to the receipt
of verification, the contracting officer
may discontinue withholding payments
pending receipt of verification, and
release any payments previously
withheld, if the contractor submits
evidence that the significant
deficiencies have been corrected, and
the contracting officer, in consultation
with the auditor or functional specialist,

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determines that there is a reasonable
expectation that the corrective actions
have been implemented. Since payment
withholding procedures will be
implemented on the basis of contractor
business systems, if prior to the
correction of one or more significant
deficiencies, other significant
deficiencies are identified in another
business system, the contracting officer
may revise the original final
determination or issue a subsequent
determination to disapprove the latter
business system and implement
additional payment withholdings.
Contracting officers will provide
direction in their determination(s),
identify the significant deficiencies that
need to be corrected in order to approve
each disapproved business system, and
discontinue the withholding of
payments and release any payments
previously withheld. If one previously
disapproved contractor business system
is approved, but significant deficiencies
remain in another system, the
contracting officer will continue to
withhold payments relating to the
remaining disapproved business system
until the significant deficiencies relating
to that business system have been
determined to have been corrected.

srobinson on DSKHWCL6B1PROD with RULES2

19. Multiple Compliance Regimes
Comment: The rule provides a
different set of contractor business
systems requirements for DoD and
NASA contractors than are required for
civilian contractors.
Response: The business systems
criteria contained in the business
systems clauses have been used in
practice for several decades by
Government personnel to assess the
reliability and accuracy of management
information produced by the applicable
system. Because they are designed to be
consistent with GAGAS, which are
based on standards developed by the
American Institute of Certified Public
Accountants (AICPA), the system
criteria are applicable equally to DoD,
NASA, and civilian contractors.
20. NDAA Compliance
A number of respondents, citing
section 893 of the NDAA, provided the
following recommendations:
Comment: Contractor business system
disapproval should be based on
‘‘significant deficiencies’’ as defined in
section 893 of the NDAA, and the
maximum cap should be reduced to 10
percent in accordance with the NDAA.
Response: The interim rule has been
revised to reflect the language in section
893 of the NDAA by incorporating the
statutory language regarding ‘‘significant
deficiencies’’ and reducing the

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cumulative payment withholding
percentage from 20 percent to 10
percent.
Comment: The proposed rule
mandates payment withholdings on all
contracts, including firm-fixed price
contract types, while the NDAA
language makes payment withholdings
discretionary, and permits them to be
applied only to CAS-covered contracts
and not fixed-price contract types. The
rule should be adjusted to exclude those
contract types, including firm-fixedprice contracts that have been discretely
excluded by the Authorization Act.
Response: Section 893 requires the
Secretary of Defense to develop and
initiate a program for the improvement
of contractor business systems to ensure
that such systems provide timely,
reliable information for the management
of Department of Defense programs.
Furthermore, the statute sets forth that
an appropriate official of the
Department of Defense may withhold up
to 10 percent of progress payments,
performance-based payments, and
interim payments under covered
contracts from a covered contractor, as
needed, to protect the interests of the
Department and ensure compliance, if
one or more of the contractor business
systems of the contractor has been
disapproved. To comply with this
requirement, under the mandated DoD
program for the improvement of
contractor business systems, which
includes the implementation of this
interim rule, DoD has interpreted the
definition of ‘‘covered contract’’ to mean
a contract that is subject to the Cost
Accounting Standards under 41 U.S.C.
chapter 15, as implemented in
regulations found at 48 CFR 9903.201–
1 (see the FAR Appendix), which
includes CAS–covered fixed-price type
contracts and performance-based
contracts, as well as cost type contracts.
Comment: In accordance with the
NDAA, the rule should identify DoD
officials who are responsible for the
approval or disapproval of contractor
business systems. Furthermore, DoD
officials must be made available to work
with the contractor to develop
corrective action plans and schedules
for implementation.
Response: The interim rule continues
to identify cognizant contracting officers
as the DoD officials who are responsible
for the approval or disapproval of
contractor business systems.
21. Contract Applicability
Comment: A number of respondents
questioned the application of this rule
against cost type contracts while other
respondents questioned the application
of this rule against fixed-price contracts.

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Additionally, some respondents
expressed concern about the application
of the rule to commercial contracts and
construction contracts. Other
respondents suggested that payment
withholdings should only be applied to
contracts which fall under the business
system found to be deficient, and only
to contracts administered by the
contracting officer making the
determination decision.
Response: The Government is at risk
when a contractor’s business systems
contain significant deficiencies,
regardless of contract type. Accordingly,
it is appropriate for the contracting
officer to withhold payments to protect
the interest of the Government.
Contracts awarded under FAR part 12
regulations will generally be exempt
from the requirements of this rule. A
system deficiency may result in
application of a payment withholding
against all contracts that contain the
business systems clause. The rule has
been tailored to comply with section
893 of the FY11 NDAA. DoD has
interpreted the definition of ‘‘covered
contract’’ to include CAS-covered cost
type contracts as well as CAS-covered
fixed-price type contracts and
performance-based contracts since
section 893 also allows up to 10 percent
of progress payments and performancebased payments to be withheld. The
interim rule provides the contracting
officer with the sole discretion to
withhold payments from one or more
contracts containing the clause at
252.242–7005, Contractor Business
Systems. To ensure consistency, it is
DoD policy that only one contracting
officer, normally an ACO, has the
responsibility and authority for
approval, disapproval, and general
oversight of contractor business
systems. When the cognizant
contracting officer renders a
determination to approve or disapprove
a system and withhold payments, all
contracting officers with contracts
affected by the determination are
required to abide by the cognizant
contracting officer’s decision. The rule
complies with this long-established
practice.
22. DCAA/DCMA Internal Policies
Comment: By allowing DCMA/DCAA
to determine the criteria by which
contractor business systems will be
measured through their internal policies
and procedures, it should make those
internal policies and procedures subject
to the OFPP Act public comment
process.
Response: This rule does not contain
references to DCAA/DCMA internal
policies to determine the criteria by

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which contractor business systems will
be measured. Rather, as defined in each
of the individual business system
clauses in the rule, the definition of an
acceptable system means a system that
complies with the system criteria set
forth in each clause, which have been
published for public comment.
23. Cumulative Payment Withholdings
Comment: The respondent questioned
whether the 20 percent withhold in the
proposed rule is in addition to other
withholding remedies a contracting
officer may assess.
Response: In accordance with section
893 of the NDAA, the cumulative
payment withholding percentage set
forth under this interim rule is reduced
from 20 percent to 10 percent. This
interim rule does not limit the
contracting officer’s discretion to apply
any and all regulatory measures, as
warranted by the circumstances,
including other applicable payment
withholdings. The withholding of any
amount or subsequent payment to the
contractor shall not be construed as a
waiver of any rights or remedies the
Government has under this contract.

srobinson on DSKHWCL6B1PROD with RULES2

24. CAS
Comment: The respondent expressed
concern that there is no adjudication
process prior to implementation of
payment withholdings for
disagreements or disputes regarding
interpretation and implementation of
CAS. Contractors should not be subject
to payment withholdings on matters
which await the decision of the
judiciary.
Response: The finding of a significant
deficiency in a business system results
in only a temporary withholding from
certain payments to protect the
Government from potential harm. This
does not constitute a permanent
contractual decrement stemming from a
CAS noncompliance. A contractor is not
precluded from challenging any
underlying CAS or other determinations
through the contract disputes or other
resolution processes. An additional
adjudication process is not warranted
for this rule. Furthermore, a deficiency
that causes a CAS noncompliance may
impact other business systems.
25. Dollar Limitations
Comment: The lack of dollar
limitations at the contract level will lead
to payment withholdings that exceed
the amount required to protect the
government. The value withheld at the
contract level should be limited to
$100,000 (and at subsequent thresholds
of $250,000, $500,000, and $1,000,000)
until authorization is received from

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DCMA headquarters. The approval of
payment withholdings above the
thresholds should be based on evidence
that actual risk or harm in excess of the
limit exists.
Response: To ensure sufficient
mitigation of the Government’s risk, the
interim rule provides the contracting
officer with the sole discretion to
withhold payments from one or more
contracts containing the clause at
252.242–7005, Contractor Business
Systems. Contracting officers will select
one or more contracts from which
payments will be withheld. In selecting
the contract or contracts from which to
withhold payments, the contracting
officer shall ensure that the total amount
of payment withholding does not
exceed 10 percent of the total amount
billed.
26. Standard of Risk

28863

Response: The rule provides adequate
opportunities for communication
between the contracting officer and the
contractor prior to the implementation
of payment withholdings. The
contractor will be notified of a
preliminary finding of a deficiency
during the course of formal system
reviews and audits. This occurs before
the auditor or functional specialist
releases a report to the contractor and
contracting officer. After receiving a
report, the contracting officer will
promptly evaluate and issue an initial
determination. The contractor is then
allowed 30 days to respond to any
significant deficiencies. Contractors are
given ample opportunity to present their
position during system reviews.
Accordingly, the requirement for a
contractor to respond within 30 days of
an initial determination is adequate.

27. Payment Withholding Process

28. Simplify Administrative Burden
Comment: The rule should simplify
the administrative burden for the
accounting for payment withholdings
against numerous invoices.
Response: The interim rule provides
the contracting officer with the sole
discretion to withhold payments from
one or more contracts containing the
clause at 252.242–7005, Contractor
Business Systems. The administrative
burden for the accounting for payment
withholdings against numerous invoices
is thus simplified by not mandating that
payment withholdings be applied
against all of a contractor’s available
contracts.

Comment: Respondents suggested that
the final rule should require direct
communication between the contracting
officer, DCAA, and the contractor to
allow discussion relating to an
identified deficiency before payment is
withheld. The proposed clause should
provide sufficient time for the
contracting officer and contractor to
address potential system deficiencies.
The respondents recommended that the
rule require the contracting officer to
work collaboratively with the contractor
in determining whether deficiencies
exist, whether there is a material risk of
harm, and how to resolve the
deficiencies without resorting to a
payment withholding; and allow the
contractor 90 days to address the
potential deficiencies and submit a
response documenting its position
before the contracting officer can issue
a final determination and impose a
payment withholding. Otherwise, the
rule denies a contractor due process by
allowing the contracting officer to issue
initial determinations prior to receiving
all the facts from the contractor.

29. DCAA/DCMA Roles
Comment: One respondent suggested
that the wording in 215.407–5–70(c)(3)
should be revised to state ‘‘the auditor,
on behalf of the cognizant contracting
officer, conducts estimating system
reviews’’ to establish that the contracting
officer is the lead Federal official, not
the auditor. Respondents questioned the
ability of DCAA and DCMA to resolve
audit recommendations, and further
questioned the ability of DCAA and
DCMA to execute their duties effectively
in the absence of a procedure for
resolving different judgments regarding
a deficiency.
Response: FAR 1.6 sets forth
contracting officer authority and
responsibilities. The addition of
language to DFARS 215.407–5–70
stating that the contracting officer is the
lead Federal official is unnecessary. The
DoD memorandum dated December 4,
2009, ‘‘Resolving Contract Audit
Recommendations,’’ clearly defines the
roles and responsibilities of DCAA and
DCMA and provides procedures for
adjudicating differences.

Comment: The respondent
recommended that any final rule
establish a clear, simple, and uniform
standard of risk to the Government in
the procedures that are applicable
across all of the business systems.
Response: The definition of a
significant deficiency establishes a
uniform standard of risk. A significant
deficiency is defined as a shortcoming
in the system that materially affects the
ability of officials of the Department of
Defense to rely upon information
produced by the system that is needed
for management purposes.

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30. Functional Specialist
Comment: Reference to a functional
specialist under estimating systems
should be deleted.
Response: The contracting officer is
the only person with the authority to
enter into, administer, and/or terminate
contracts and make related
determinations and findings. However,
when specialized expertise is required,
the interim rule requires contracting
officers to consult with auditors and
other individuals with specialized
experience, as necessary, to ensure a full
understanding of issues. Certain issues
relating to forecasted costs may require
the expertise of engineers, price
analysts, and others to understand or
evaluate the contractor’s estimating
system.
31. Policies and Procedures
Comment: The proposed rule contains
inconsistent, ill-defined system criteria
for policies and procedures. The
requirement for policies and/or
procedures is the same for all business
systems and, therefore, the proposed
rule should be consistent by using the
terms ‘‘policies and procedures’’ in all
sections defining system criteria. The
proposed rule should be revised to
specify that a business system’s criteria
for policies and procedures should be in
writing.
Response: System criteria are
consistent with well-established
Government practices and procedures
for assessing the contractor business
systems. For some business systems, the
DFARS language supplements
established FAR criteria, while other
business systems criteria are established
or revised by this interim rule.
Therefore, it would be inappropriate to
attempt to force incorrect terminology
into business systems criteria for the
sake of consistency. The systems criteria
contained in the business systems
clauses have been used for many years
by Government personnel to assess the
reliability and accuracy of management
information produced by the applicable
system.

srobinson on DSKHWCL6B1PROD with RULES2

32. Impact to Industry
Comment: One respondent
commented that the proposed payment
withholding regime will threaten the
solvency of contractors and preclude
many companies from contracting with
the Government. The respondent
indicated that the payment withholding
regime will be particularly harsh on
small businesses.
Response: In the long run, both the
contractor’s and the Government’s
administrative cost should be reduced

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with the reliance on efficient contractor
business systems. The rule has been
revised to exclude small businesses in
accordance with section 893 of the
FY2011 NDAA.
33. Effectiveness of This Rule
Comment: The respondent indicated
that the proposed payment withholding
is not tailored reasonably to address the
Department’s intended goal of
preventing unallowable and
unreasonable costs and waste, fraud,
and abuse and improving the
effectiveness of DCAA and DCMA.
Response: As noted by the
respondent, contractor business systems
play an important role in preventing
waste, fraud, and abuse. Significant
systems deficiencies place a substantial
resource burden on DCMA and DCAA
due to the increased oversight needed to
protect the interests of the Government.
The rule provides contracting officers
with an additional tool to mitigate the
Government’s risk while contractors
correct business systems deficiencies.
Reliable contractor business systems
employ internal controls to prevent
unallowable and unreasonable costs, as
well as waste, fraud, and abuse.
Additionally, it reduces burden on
Government resources, thereby allowing
DCMA and DCAA resources to be
employed more effectively.
34. Minor Corrections
Comment: For 252.215–7002, the
lead-in reference to the prescription
should be 215.407–5–70.
Response: Referencing 215.407–5–70
as the prescription for the clause at
252.215–7002 would be incorrect.
DFARS 215.408(2) prescribes the use of
the clause at 252.215–7002.
Comment: For 252.215–7002(e) and
252.242–7004(e), change from ‘‘on any
system deficiency’’ to ‘‘of any system
deficiency.’’
Response: Correction has been made
in the interim rule.
Comment: The respondent
recommended making the phrase
‘‘consultation with the auditor or
functional specialist’’ consistent
throughout the rule.
Response: Where appropriate, the
phrase ‘‘consultation with the auditor or
functional specialist’’ has been made
consistent throughout the rule.
Comment: The respondent
recommended making the phrase ‘‘all
findings and recommendations’’
consistent throughout the rule.
Response: Where appropriate, the
phrase ‘‘all findings and
recommendations’’ has been made
consistent throughout the rule.

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Comment: The proposed rule intends
to add new paragraphs (d) and (e) to
revised 242.7203, but the text of the
additional paragraphs denominates
them at paragraphs (c) and (d).
Response: Correction has been made
in the interim rule.
B. Summary of Proposed Rule Changes
As a result of public comments
received in response to the revised
proposed rule and the requirements set
forth under section 893 of the NDAA,
the following changes have been made
to the interim rule:
1. The term ‘‘significant deficiency’’ is
defined, in accordance with section 893,
as a shortcoming in the system that
materially affects the ability of officials
of the Department of Defense to rely
upon information produced by the
system that is needed for management
purposes. The definition of the term
‘‘significant deficiency’’ provides for
associated changes to the rule as
follows:
(a) The term ‘‘significant deficiency’’ is
used in lieu of phrases such as
‘‘deficiency that adversely affects the
system’’ and ‘‘deficiency that adversely
affects the system, leading to a potential
risk of harm to the Government’’ as the
basis for business systems disapprovals
and payment withholdings.
(b) The phrases ‘‘the potential adverse
impact to the Government’’ and ‘‘its
potential harm to the Government’’ are
no longer required to describe the detail
to which significant deficiencies are
described by auditors and functional
specialists to contracting officers, and
by contracting officers to contractors.
2. While the proposed rule allowed
for the implementation of payment
withholdings with or without
disapproval of system deficiencies that
adversely affect the contractor’s
business systems, this interim rule sets
forth requirements that a contracting
officer’s final determination shall
include a disapproval of the contractor’s
business system and the
implementation of payment
withholdings if a significant deficiency
still exists after the contracting officer’s
evaluation of the contractor’s response
to the initial significant deficiency
determination.
3. Where the proposed rule allowed
for system approval after the contracting
officer determines that the contractor
has substantially corrected the system
deficiencies removing the potential risk
of harm to the Government, this interim
rule requires that there are no remaining
significant deficiencies before a system
is approved.
4. The contracting officer will be
required to reduce a payment

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withholding by at least 50 percent if the
contracting officer has not made a
determination whether the contractor
has corrected all significant deficiencies
as directed by the contracting officer’s
final determination, or has not made a
determination whether there is a
reasonable expectation that the
corrective actions have been
implemented.
5. The 16-month timeframe for
completion of a contractor’s initial
Earned Value Management System
validation has been revised to allow for
a timeframe that is approved by the
contracting officer to allow for
flexibility in the initial validation
process.
6. The term ‘‘covered contract’’ has
been defined, in accordance with
section 893, as a contract that is subject
to the Cost Accounting Standards under
41 U.S.C. chapter 15, as implemented in
regulations found at 48 CFR 9903.201–
1 (see the FAR Appendix). The
definition of the term ‘‘covered contract’’
provides for associated changes to the
rule as follows:
(a) The clause prescription for the
clause at 252.242–7005, Contractor
Business Systems, requires that the
resulting contract will be a ‘‘covered
contract,’’ which exempts small business
contracts. Consequently, all language
pertaining to payment withholdings for
small business has been struck from the
rule.
(b) While the proposed rule set forth
a $50 million contract threshold for the
incorporation of the clause at 252.242–
7005, Contractor Business Systems, this
interim rule prescribes the
incorporation of the clause for covered
contracts in accordance with the
established definition.
7. The proposed rule applied payment
withholdings against all contracts that
contained the clause at 252.242–7005,
Contractor Business Systems. This
interim rule allows the contracting
officer the discretion to withhold
payments from one or more contracts
containing the clause.
8. This rule revises procedures for the
implementation of payment
withholdings by replacing the
requirement for contracting officers to
issue unilateral modifications with the
requirement to issue written
notifications. Therefore, references to
unilateral modifications for payment
withholding as well as the sample
language for the unilateral modifications
have been deleted from this rule.
9. The clause prescription at 242.7002
for the clause at 252.242–7005,
Contractor Business Systems, is revised
to exempt contracts with educational
institutions or Federally Funded

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Research and Development Centers
(FFRDCs) operated by educational
institutions.
10. The references to construction
contracts that include the clause at FAR
52.232–27, Prompt Payment for
Construction Contracts, under
242.7502(a), 242.7503, and 252.242–
7005 have been removed as
unnecessary.
11. The initial written determination
language under 242.7502(d)(2)(ii)(A) has
been revised to provide a description of
each significant deficiency in sufficient
detail to allow the contractor to
understand the deficiency.
12. In accordance with section 893,
the term ‘‘business system’’ is replaced
with the term ‘‘contractor business
system.’’
13. In accordance with section 893,
the total percentage of payments that
may be withheld on a contract shall not
exceed 10 percent. Additionally, while
multiple payment withholdings may be
implemented due to significant
deficiencies in multiple contractor
business systems, for clarity, the interim
rule limits the total percentage of
payments withheld to five percent for
one or more significant deficiencies in
any single contractor business system.
14. The accounting system criteria
under 252.242–7006(a)(1) has been
revised to delete the unnecessary phrase
‘‘that is adequate for producing
accounting data that is reliable and costs
that are recorded, accumulated, and
billed on Government contracts in
accordance with contract terms.’’
15. The purchasing system criteria
under paragraph (c) of the clause at
252.244–7001, Contractor Purchasing
System Administration, has been
revised to add paragraph (24) requiring
contractors to establish and maintain
procedures to notify the Contracting
Officer in writing if—
(a) The Contractor changes the
amount of subcontract effort after award
such that it exceeds 70 percent of the
total cost of work to be performed under
the contract, task order, or delivery
order. The notification shall identify the
revised cost of the subcontract effort and
shall include verification that the
Contractor will provide added value; or
(b) Any subcontractor changes the
amount of lower-tier subcontractor
effort after award such that it exceeds 70
percent of the total cost of the work to
be performed under its subcontract. The
notification shall identify the revised
cost of the subcontract effort and shall
include verification that the
subcontractor will provide added value
as related to the work to be performed
by the lower-tier subcontractor(s).

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III. Executive Order 12866 and
Executive Order 13563
Executive Orders 12866 and 13563
direct agencies to assess all costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing rules,
and of promoting flexibility. This is a
‘‘significant regulatory action’’ and,
therefore, was subject to review under
section 6(b) of Executive Order 12866,
Regulatory Planning and Review, dated
September 30, 1993. This rule is not a
major rule under 5 U.S.C. 804.
IV. Regulatory Flexibility Act
DoD has prepared an initial regulatory
flexibility analysis consistent with 5
U.S.C. 603. A copy of the analysis may
be obtained from the point of contact
specified herein. The analysis is
summarized as follows:
The objective of the rule is to
establish a definition for contractor
business systems and implement
compliance mechanisms to improve
DoD oversight of those contractor
business systems. The requirements of
the rule will apply to solicitations and
contracts that are subject to the Cost
Accounting Standards under 41 U.S.C.
chapter 15, as implemented in
regulations found at 48 CFR 9903.201–
1 (see the FAR Appendix), other than in
contracts with educational institutions
or Federally Funded Research and
Development Centers (FFRDCs)
operated by educational institutions,
and include one or more of the defined
contractor business systems.
Since contracts and subcontracts with
small businesses are exempt from CAS
requirements, DoD estimates that this
rule will have no impact on small
businesses. However, DoD invites
comments from small business concerns
and other interested parties on the
expected impact of this rule on small
entities.
DoD will also consider comments
from small entities concerning the
existing regulations in subparts affected
by this rule in accordance with 5 U.S.C.
610. Interested parties must submit such
comments separately and should cite 5
U.S.C. 610 (DFARS Case 2009–D038) in
correspondence.
V. Paperwork Reduction Act
The Paperwork Reduction Act (44
U.S.C. chapter 35) applies because this

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interim rule contains information
collection requirements requiring the
approval of the Office of Management
and Budget. DoD invites comments on
the following aspects of the interim rule:
(a) Whether the collection of
information is necessary for the proper
performance of the functions of DoD,
including whether the information will
have practical utility; (b) the accuracy of
the estimate of the burden of the
information collection; (c) ways to
enhance the quality, utility, and clarity
of the information to be collected; and
(d) ways to minimize the burden of the
information collection on respondents,
including the use of automated
collection techniques or other forms of
information technology.
DoD received one comment regarding
the information collection estimate that
was included with the initial proposed
rule published on January 15, 2010, at
75 FR 2457. The respondent asserted
that DoD’s estimates were substantially
understated. However, the supporting
data referenced by the respondent
exceeded the information collection
requirements established under this
rule. The hours and costs cited by the
respondent with regard to EVMS did not
reflect the Paperwork Reduction Act
requirements of this rule. DoD received
no comments regarding the information
collection estimate in response to the
second proposed rule published on
December 3, 2010 at 75 FR 75550. With
no further specific Paperwork Reduction
Act comments received, and no further
revisions in this interim rule to the
information collection requirements,
DoD concludes that the estimates
published with the proposed rule
accurately reflect the contractors’ costs
to fulfill the information collection
requirements of this rule. The following
is a summary of the information
collection requirements.
The business systems clauses in this
interim rule contain requirements for
contractors to respond to initial and
final determinations of deficiencies. The
information contractors will be required
to submit to respond to deficiencies in
four of the six business systems defined
in this rule have been approved by the
Office of Management and Budget as
follows:
(1) Accounting Systems—OMB
Clearance 9000–0011;
(2) Estimating Systems—OMB
Clearance 0704–0232;
(3) Material Management and
Accounting Systems—OMB Clearance
0704–0250;
(4) Purchasing Systems– OMB
Clearance 0704–0253;

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(5) Earned Value Management
Systems—OMB Control Number 0704–
0479; and
(6) Contractors Property Management
System—OMB Control Number 0704–
0480.
The information contractors will be
required to submit to respond to
deficiencies in contractors’ EVMS is
estimated as follows:
Number of respondents—186.
Responses per respondent—48.
Annual responses—8,928.
Burden per response—40 hours.
Annual burden hours—357,120
hours.
The information contractors will be
required to submit to respond to
deficiencies in contractors’ property
management systems is estimated as
follows:
Number of respondents: 2,646.
Responses per respondent: 1.
Annual responses: 2,646.
Average burden per response: 1.2
hours.
Annual burden hours: 3,200 hours.
Needs and Uses: DoD needs the
information required by the business
systems clause in this interim rule to
mitigate the risk of unallowable and
unreasonable costs on Government
contracts when a contractor has one or
more deficiencies in a business system.
Affected public: The business systems
clause will be used in solicitations and
contracts that include any of the
following clauses:
(1) 252.215–7002, Cost Estimating
System Requirements;
(2) 252.234–7002, Earned Value
Management System;
(3) 252.242–7004, Material
Management and Accounting System;
(4) 252.242–7006, Accounting System
Administration;
(5) 252.244–7001, Contractor
Purchasing System Administration;
(6) 252.245–7003, Contractor Property
System Administration.
Frequency: On occasion.
VI. Determination To Issue an Interim
Rule
A determination has been made under
the authority of the Secretary of
Defense, that urgent and compelling
reasons exist to publish an interim rule
prior to affording the public an
opportunity to comment. This interim
rule implements section 893 of the Ike
Skelton National Defense Authorization
Act for Fiscal Year 2011. Section 893
requires the improvement of contractor
business systems to ensure that such
systems provide timely, reliable
information for the management of DoD
programs. Contractor business systems
and internal controls are the first line of

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defense against waste, fraud, and abuse.
Weak control systems increase the risk
of unallowable and unreasonable costs
on Government contracts.
In implementing section 893, this rule
will improve the effectiveness of DoD
oversight for contractor business
systems. More effective and efficient
management of DoD programs is key to
achieving greater efficiency and
productivity in defense spending. It is
essential that DoD immediately
commence to require these
improvements to contractor business
systems, and to undertake the enhanced
oversight necessary for expenditures of
taxpayer dollars. Comments received in
response to this interim rule will be
considered in the formation of the final
rule.
List of Subjects in 48 CFR Parts 215,
234, 242, 244, 245, and 252
Government procurement.
Ynette R. Shelkin,
Editor, Defense Acquisition Regulations
System.

Therefore, 48 CFR parts 215, 234, 242,
244, 245, and 252 are amended as
follows:
■ 1. The authority citation for 48 CFR
parts 215, 234, 242, 244, 245, and 252
continues to read as follows:
Authority: 41 U.S.C. 1303 and 48 CFR
chapter 1.

PART 215—CONTRACTING BY
NEGOTIATION
2. Amend section 215.407–5–70 by
revising paragraphs (a)(4), (c), and (e)
through (g) to read as follows:

■

215.407–5–70 Disclosure, maintenance,
and review requirements.

(a) * * *
(4) Significant deficiency is defined in
the clause at 252.215–7002, Cost
Estimating System Requirements.
(c) Policy. (1) The contracting officer
shall—
(i) Through use of the clause at
252.215–7002, Cost Estimating System
Requirements, apply the disclosure,
maintenance, and review requirements
to large business contractors meeting the
criteria in paragraph (b)(2)(i) of this
section;
(ii) Consider whether to apply the
disclosure, maintenance, and review
requirements to large business
contractors under paragraph (b)(2)(ii) of
this section; and
(iii) Not apply the disclosure,
maintenance, and review requirements
to other than large business contractors.
(2) The cognizant contracting officer,
in consultation with the auditor, for

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contractors subject to paragraph (b)(2) of
this section, shall—
(i) Determine the acceptability of the
disclosure and approve or disapprove
the system: and
(ii) Pursue correction of any
deficiencies.
(3) The auditor conducts estimating
system reviews.
(4) An acceptable system shall
provide for the use of appropriate
source data, utilize sound estimating
techniques and good judgment,
maintain a consistent approach, and
adhere to established policies and
procedures.
(5) In evaluating the acceptability of a
contractor’s estimating system, the
contracting officer, in consultation with
the auditor, shall determine whether the
contractor’s estimating system complies
with the system criteria for an
acceptable estimating system as
prescribed in the clause at 252.215–
7002, Cost Estimating System
Requirements.
*
*
*
*
*
(e) Disposition of findings—(1)
Reporting of findings. The auditor shall
document findings and
recommendations in a report to the
contracting officer. If the auditor
identifies any significant estimating
system deficiencies, the report shall
describe the deficiencies in sufficient
detail to allow the contracting officer to
understand the deficiencies.
(2) Initial determination. (i) The
contracting officer shall review all
findings and recommendations and, if
there are no significant deficiencies,
shall promptly notify the contractor, in
writing, that the contractor’s estimating
system is acceptable and approved; or
(ii) If the contracting officer finds that
there are one or more significant
deficiencies (as defined in the clause at
252.215–7002, Cost Estimating System
Requirements) due to the contractor’s
failure to meet one or more of the
estimating system criteria in the clause
at 252.215–7002, the contracting officer
shall—
(A) Promptly make an initial written
determination on any significant
deficiencies and notify the contractor, in
writing, providing a description of each
significant deficiency in sufficient detail
to allow the contractor to understand
the deficiency;
(B) Request the contractor to respond
in writing to the initial determination
within 30 days; and
(C) Promptly evaluate the contractor’s
responses to the initial determination,
in consultation with the auditor or
functional specialist, and make a final
determination.

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(3) Final determination. (i) The
contracting officer shall make a final
determination and notify the contractor
in writing that—
(A) The contractor’s estimating system
is acceptable and approved, and no
significant deficiencies remain, or
(B) Significant deficiencies remain.
The notice shall identify any remaining
significant deficiencies, and indicate the
adequacy of any proposed or completed
corrective action. The contracting officer
shall—
(1) Request that the contractor, within
45 days of receipt of the final
determination, either correct the
deficiencies or submit an acceptable
corrective action plan showing
milestones and actions to eliminate the
deficiencies;
(2) Disapprove the system in
accordance with the clause at 252.215–
7002, Cost Estimating System
Requirements; and
(3) Withhold payments in accordance
with the clause at 252.242–7005,
Contractor Business Systems, if the
clause is included in the contract.
(ii) Follow the procedures relating to
monitoring a contractor’s corrective
action and the correction of significant
deficiencies in PGI 215.407–5–70(e).
(f) System approval. The contracting
officer shall promptly approve a
previously disapproved estimating
system and notify the contractor when
the contracting officer determines that
there are no remaining significant
deficiencies.
(g) Contracting officer notifications.
The cognizant contracting officer shall
promptly distribute copies of a
determination to approve a system,
disapprove a system and withhold
payments, or approve a previously
disapproved system and release
withheld payments, to the auditor;
payment office; affected contracting
officers at the buying activities; and
cognizant contracting officers in
contract administration activities.
PART 234—MAJOR SYSTEM
ACQUISITION
3. Add section 234.001 to read as
follows:

■

234.001

Definition.

As used in this subpart—
Acceptable earned value management
system and earned value management
system are defined in the clause at
252.234–7002, Earned Value
Management System.
Significant deficiency is defined in
the clause at 252.234–7002, Earned
Value Management System, and is
synonymous with noncompliance.

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4. Amend section 234.201 by adding
paragraphs (5) through (9) to read as
follows:

■

234.201

Policy.

*

*
*
*
*
(5) The cognizant contracting officer,
in consultation with the functional
specialist and auditor, shall—
(i) Determine the acceptability of the
contractor’s earned value management
system and approve or disapprove the
system; and
(ii) Pursue correction of any
deficiencies.
(6) In evaluating the acceptability of a
contractor’s earned value management
system, the contracting officer, in
consultation with the functional
specialist and auditor, shall determine
whether the contractor’s earned value
management system complies with the
system criteria for an acceptable earned
value management system as prescribed
in the clause at 252.234–7002, Earned
Value Management System.
(7) Disposition of findings—(i)
Reporting of findings. The functional
specialist or auditor shall document
findings and recommendations in a
report to the contracting officer. If the
functional specialist or auditor
identifies any significant deficiencies in
the contractor’s earned value
management system, the report shall
describe the deficiencies in sufficient
detail to allow the contracting officer to
understand the deficiencies.
(ii) Initial determination. (A) The
contracting officer shall review all
findings and recommendations and, if
there are no significant deficiencies,
shall promptly notify the contractor, in
writing, that the contractor’s earned
value management system is acceptable
and approved; or
(B) If the contracting officer finds that
there are one or more significant
deficiencies (as defined in the clause at
252.234–7002, Earned Value
Management System) due to the
contractor’s failure to meet one or more
of the earned value management system
criteria in the clause at 252.234–7002,
the contracting officer shall—
(1) Promptly make an initial written
determination on any significant
deficiencies and notify the contractor, in
writing, providing a description of each
significant deficiency in sufficient detail
to allow the contractor to understand
the deficiencies;
(2) Request the contractor to respond,
in writing, to the initial determination
within 30 days; and
(3) Evaluate the contractor’s response
to the initial determination, in
consultation with the auditor or

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functional specialist, and make a final
determination.
(iii) Final determination. (A) The
contracting officer shall make a final
determination and notify the contractor,
in writing, that—
(1) The contractor’s earned value
management system is acceptable and
approved, and no significant
deficiencies remain, or
(2) Significant deficiencies remain.
The notice shall identify any remaining
significant deficiencies, and indicate the
adequacy of any proposed or completed
corrective action. The contracting officer
shall—
(i) Request that the contractor, within
45 days of receipt of the final
determination, either correct the
deficiencies or submit an acceptable
corrective action plan showing
milestones and actions to eliminate the
deficiencies;
(ii) Disapprove the system in
accordance with the clause at 252.234–
7002, Earned Value Management
System, when initial validation is not
successfully completed within the
timeframe approved by the contracting
officer, or the contracting officer
determines that the existing earned
value management system contains one
or more significant deficiencies in highrisk guidelines in ANSI/EIA–748
standards (guidelines 1, 3, 6, 7, 8, 9, 10,
12, 16, 21, 23, 26, 27, 28, 30, or 32).
When the contracting officer determines
that the existing earned value
management system contains one or
more significant deficiencies in one or
more of the remaining 16 guidelines in
ANSI/EIA–748 standards, the
contracting officer shall use discretion
to disapprove the system based on input
received from functional specialists and
the auditor; and
(iii) Withhold payments in accordance
with the clause at 252.242–7005,
Contractor Business Systems, if the
clause is included in the contract.
(B) Follow the procedures relating to
monitoring a contractor’s corrective
action and the correction of significant
deficiencies at PGI 234.201(7).
(8) System approval. The contracting
officer shall promptly approve a
previously disapproved earned value
management system and notify the
contractor when the contracting officer
determines that there are no remaining
significant deficiencies.
(9) Contracting officer notifications.
The cognizant contracting officer shall
promptly distribute copies of a
determination to approve a system,
disapprove a system and withhold
payments, or approve a previously
disapproved system and release
withheld payments to the auditor;

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payment office; affected contracting
officers at the buying activities; and
cognizant contracting officers in
contract administration activities.
PART 242—CONTRACT
ADMINISTRATION AND AUDIT
SERVICES
5. Add subpart 242.70 to read as
follows:

■

SUBPART 242.70—CONTRACTOR
BUSINESS SYSTEMS
Sec.
242.7000 Contractor business system
deficiencies.
242.7001 Contract clause.

SUBPART 242.70—CONTRACTOR
BUSINESS SYSTEMS
242.7000 Contractor business system
deficiencies.

(a) Definitions. As used in this
subpart—
Acceptable contractor business
systems and contractor business systems
are defined in the clause at 252.242–
7005, Contractor Business Systems.
Covered contract means a contract
that is subject to the Cost Accounting
Standards under 41 U.S.C. chapter 15,
as implemented in regulations found at
48 CFR 9903.201–1 (see the FAR
Appendix).
Significant deficiency is defined in
the clause at 252.242–7005, Contractor
Business Systems.
(b) Determination to withhold
payments. If the contracting officer
makes a final determination to
disapprove a contractor’s business
system in accordance with the clause at
252.242–7005, Contractor Business
Systems, the contracting officer shall—
(1) In accordance with agency
procedures, identify one or more
covered contracts containing the clause
at 252.242–7005, Contractor Business
Systems, from which payments will be
withheld. When identifying the covered
contracts from which to withhold
payments, the contracting officer shall
ensure that the total amount of payment
withholding under 252.242–7005, does
not exceed 10 percent of progress
payments, performance-based
payments, and interim payments under
cost, labor-hour, and time-and-materials
contracts billed under each of the
identified covered contracts. Similarly,
the contracting officer shall ensure that
the total amount of payment
withholding under the clause at
252.242–7005, Contractor Business
Systems, for each business system does
not exceed five percent of progress
payments, performance-based
payments, and interim payments under

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cost, labor-hour, and time-and-materials
contracts billed under each of the
identified covered contracts. The
contracting officer has the sole
discretion to identify the covered
contracts from which to withhold
payments.
(2) Promptly notify the contractor, in
writing, of the contracting officer’s
determination to implement payment
withholding in accordance with the
clause at 252.242–7005, Contractor
Business Systems. The notice of
payment withholding shall be included
in the contracting officer’s written final
determination for the contractor
business system and shall inform the
contractor that—
(i) Payments shall be withheld from
the contract or contracts identified in
the written determination in accordance
with the clause at 252.242–7005,
Contractor Business Systems, until the
contracting officer determines that there
are no remaining significant
deficiencies; and
(ii) The contracting officer reserves
the right to take other actions within the
terms and conditions of the contract.
(3) Provide all contracting officers
administering the selected contracts
from which payments will be withheld,
a copy of the determination. The
contracting officer shall also provide a
copy of the determination to the auditor;
payment office; affected contracting
officers at the buying activities; and
cognizant contracting officers in
contract administration activities.
(c) Monitoring contractor’s corrective
action. The contracting officer, in
consultation with the auditor or
functional specialist, shall monitor the
contractor’s progress in correcting the
deficiencies. The contracting officer
shall notify the contractor of any
decision to decrease or increase the
amount of payment withholding in
accordance with the clause at 252.242–
7005, Contractor Business Systems.
(d) Correction of significant
deficiencies. (1) If the contractor notifies
the contracting officer that the
contractor has corrected the significant
deficiencies, the contracting officer shall
request the auditor or functional
specialist to review the correction to
verify that the deficiencies have been
corrected. If, after receipt of verification,
the contracting officer determines that
the contractor has corrected all
significant deficiencies as directed by
the contracting officer’s final
determination, the contracting officer
shall discontinue the withholding of
payments, release any payments
previously withheld, and approve the
system, unless other significant
deficiencies remain.

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(2) Prior to the receipt of verification,
the contracting officer may discontinue
withholding payments pending receipt
of verification, and release any
payments previously withheld, if the
contractor submits evidence that the
significant deficiencies have been
corrected, and the contracting officer, in
consultation with the auditor or
functional specialist, determines that
there is a reasonable expectation that
the corrective actions have been
implemented.
(3) Within 90 days of receipt of the
contractor notification that the
contractor has corrected the significant
deficiencies, the contracting officer
shall—
(i) Make a determination that—
(A) The contractor has corrected all
significant deficiencies as directed by
the contracting officer’s final
determination in accordance with
paragraph (d)(1) of this section;
(B) There is a reasonable expectation
that the corrective actions have been
implemented in accordance with
paragraph (d)(2) of this section; or
(C) The contractor has not corrected
all significant deficiencies as directed
by the contracting officer’s final
determination in accordance with
paragraph (d)(1) of this section, or there
is not a reasonable expectation that the
corrective actions have been
implemented in accordance with
paragraph (d)(2) of this section; or
(ii) Reduce withholding directly
related to the significant deficiencies
covered under the corrective action plan
by at least 50 percent of the amount
being withheld from progress payments
and performance-based payments, and
direct the contractor, in writing, to
reduce the percentage withheld on
interim cost vouchers by at least 50
percent, until the contracting officer
makes a determination in accordance
with paragraph (d)(3)(i) of this section.
(4) If, at any time, the contracting
officer determines that the contractor
has failed to correct the significant
deficiencies identified in the
contractor’s notification, the contracting
officer will continue, reinstate, or
increase withholding from progress
payments and performance-based
payments, and direct the contractor, in
writing, to continue, reinstate, or
increase the percentage withheld on
interim cost vouchers to the percentage
initially withheld, until the contracting
officer determines that the contractor
has corrected all significant deficiencies
as directed by the contracting officer’s
final determination.
(e) For sample formats for written
notifications of contracting officer
determinations to initiate payment

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withholding, reduce payment
withholding, and discontinue payment
withholding in accordance with the
clause at DFARS 252.242–7005,
Contractor Business Systems, see PGI
242.7000.
242.7001

Contract clause.

Use the clause at 252.242–7005,
Contractor Business Systems, in
solicitations and contracts (other than in
contracts with educational institutions
or Federally Funded Research and
Development Centers (FFRDCs)
operated by educational institutions)
when—
(a) The resulting contract will be a
covered contract as defined in
242.7000(a); and
(b) The solicitation or contract
includes any of the following clauses:
(1) 252.215–7002, Cost Estimating
System Requirements.
(2) 252.234–7002, Earned Value
Management System.
(3) 252.242–7004, Material
Management and Accounting System.
(4) 252.242–7006, Accounting System
Administration.
(5) 252.244–7001, Contractor
Purchasing System Administration.
(6) 252.245–7003, Contractor Property
Management System Administration.
■ 6. Revise sections 242.7201 and
242.7202 to read as follows:
242.7201

Definitions.

Acceptable material management and
accounting system, material
management and accounting system,
and valid time-phased requirements are
defined in the clause at 252.242–7004,
Material Management and Accounting
System.
Significant deficiency is defined in
the clause at 252.242.7004, Material
Management and Accounting System.
242.7202

Policy.

(a) DoD policy is for its contractors to
have an MMAS that conforms to the
standards in paragraph (e) of the clause
at 252.242–7004, Material Management
and Accounting System, so that the
system—
(1) Reasonably forecasts material
requirements;
(2) Ensures the costs of purchased and
fabricated material charged or allocated
to a contract are based on valid timephased requirements; and
(3) Maintains a consistent, equitable,
and unbiased logic for costing of
material transactions.
(b) The cognizant contracting officer,
in consultation with the auditor and
functional specialist, if appropriate,
shall—

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28869

(1) Determine the acceptability of the
contractor’s MMAS and approve or
disapprove the system; and
(2) Pursue correction of any
deficiencies.
(c) In evaluating the acceptability of
the contractor’s MMAS, the contracting
officer, in consultation with the auditor
and functional specialist, if appropriate,
shall determine whether the contractor’s
MMAS complies with the system
criteria for an acceptable MMAS as
prescribed in the clause at 252.242–
7004, Material Management and
Accounting System.
■ 7. Amend section 242.7203 by
revising paragraphs (c) and (d) and
adding paragraph (e) to read as follows:
242.7203

Review procedures.

*

*
*
*
*
(c) Disposition of findings—(1)
Reporting of findings. The auditor or
functional specialist shall document
findings and recommendations in a
report to the contracting officer. If the
auditor or functional specialist
identifies any significant MMAS
deficiencies, the report shall describe
the deficiencies in sufficient detail to
allow the contracting officer to
understand the deficiencies.
(2) Initial determination. (i) The
contracting officer shall review findings
and recommendations and, if there are
no significant deficiencies, shall
promptly notify the contractor, in
writing, that the contractor’s MMAS is
acceptable and approved; or
(ii) If the contracting officer finds that
there are one or more significant
deficiencies (as defined in the clause at
252.242–7004, Material Management
and Accounting System) due to the
contractor’s failure to meet one or more
of the MMAS system criteria in the
clause at 252.242–7004, Material
Management and Accounting System,
the contracting officer shall—
(A) Promptly make an initial written
determination on any significant
deficiencies and notify the contractor, in
writing, providing a description of each
significant deficiency in sufficient detail
to allow the contractor to understand
the deficiency;
(B) Request the contractor to respond,
in writing, to the initial determination
within 30 days; and
(C) Promptly evaluate the contractor’s
response to the initial determination in
consultation with the auditor or
functional specialist, and make a final
determination.
(3) Final determination. (i) The ACO
shall make a final determination and
notify the contractor that—

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(A) The contractor’s MMAS is
acceptable and approved, and no
deficiencies remain, or
(B) Significant deficiencies remain.
The notice shall identify any remaining
significant deficiencies, and indicate the
adequacy of any proposed or completed
corrective action. The contracting officer
shall—
(1) Request that the contractor, within
45 days of receipt of the final
determination, either correct the
deficiencies or submit an acceptable
corrective action plan showing
milestones and actions to eliminate the
deficiencies;
(2) Disapprove the system in
accordance with the clause at 252.242–
7004, Material Management and
Accounting System; and
(3) Withhold payments in accordance
with the clause at 252.242–7005,
Contractor Business Systems, if the
clause is included in the contract.
(ii) Follow the procedures relating to
monitoring a contractor’s corrective
action and the correction of significant
deficiencies in PGI 242.7203.
(d) System approval. The contracting
officer shall promptly approve a
previously disapproved MMAS and
notify the contractor when the
contracting officer determines that there
are no remaining significant
deficiencies.
(e) Contracting officer notifications.
The cognizant contracting officer shall
promptly distribute copies of a
determination to approve a system,
disapprove a system and withhold
payments, or approve a previously
disapproved system and release
withheld payments to the auditor;
payment office; affected contracting
officers at the buying activities; and
cognizant contracting officers in
contract administration activities.
■ 8. Revise subpart 242.75 to read as
follows:
Subpart 242.75—Contractor Accounting
Systems and Related Controls
Sec.
242.7501 Definitions.
242.7502 Policy.
242.7503 Contract clause.

Subpart 242.75—Contractor
Accounting Systems and Related
Controls
srobinson on DSKHWCL6B1PROD with RULES2

242.7501

Definitions.

As used in this subpart—
Acceptable accounting system, and
accounting system are defined in the
clause at 252.242–7006, Accounting
System Administration.
Significant deficiency is defined in
the clause at 252.242–7006, Accounting
System Administration.

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242.7502

Policy.

(a) Contractors receiving costreimbursement, incentive type, timeand-materials, or labor-hour contracts,
or contracts which provide for progress
payments based on costs or on a
percentage or stage of completion, shall
maintain an accounting system.
(b) The cognizant contracting officer,
in consultation with the auditor or
functional specialist, shall—
(1) Determine the acceptability of a
contractor’s accounting system and
approve or disapprove the system; and
(2) Pursue correction of any
deficiencies.
(c) In evaluating the acceptability of a
contractor’s accounting system, the
contracting officer, in consultation with
the auditor or functional specialist, shall
determine whether the contractor’s
accounting system complies with the
system criteria for an acceptable
accounting system as prescribed in the
clause at 252.242–7006, Accounting
System Administration.
(d) Disposition of findings— (1)
Reporting of findings. The auditor shall
document findings and
recommendations in a report to the
contracting officer. If the auditor
identifies any significant accounting
system deficiencies, the report shall
describe the deficiencies in sufficient
detail to allow the contracting officer to
understand the deficiencies. Follow the
procedures at PGI 242.7502 for reporting
of deficiencies.
(2) Initial determination. (i) The
contracting officer shall review findings
and recommendations and, if there are
no significant deficiencies, shall
promptly notify the contractor, in
writing, that the contractor’s accounting
system is acceptable and approved; or
(ii) If the contracting officer finds that
there are one or more significant
deficiencies (as defined in the clause at
252.242–7006, Accounting System
Administration) due to the contractor’s
failure to meet one or more of the
accounting system criteria in the clause
at 252.242–7006, the contracting officer
shall—
(A) Promptly make an initial written
determination on any significant
deficiencies and notify the contractor, in
writing, providing a description of each
significant deficiency in sufficient detail
to allow the contractor to understand
the deficiency;
(B) Request the contractor to respond,
in writing, to the initial determination
within 30 days; and
(C) Promptly evaluate the contractor‘s
response to the initial determination, in
consultation with the auditor or
functional specialist, and make a final
determination.

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(3) Final determination. (i) The
contracting officer shall make a final
determination and notify the contractor,
in writing, that—
(A) The contractor’s accounting
system is acceptable and approved, and
no significant deficiencies remain, or
(B) Significant deficiencies remain.
The notice shall identify any remaining
significant deficiencies, and indicate the
adequacy of any proposed or completed
corrective action. The contracting officer
shall—
(1) Request that the contractor, within
45 days of receipt of the final
determination, either correct the
deficiencies or submit an acceptable
corrective action plan showing
milestones and actions to eliminate the
deficiencies;
(2) Make a determination to
disapprove the system in accordance
with the clause at 252.242–7006,
Accounting System Administration; and
(3) Withhold payments in accordance
with the clause at 252.242–7005,
Contractor Business Systems, if the
clause is included in the contract.
(ii) Follow the procedures relating to
monitoring a contractor’s corrective
action and the correction of significant
deficiencies in PGI 242.7502.
(e) System approval. The contracting
officer shall promptly approve a
previously disapproved accounting
system and notify the contractor when
the contracting officer determines that
there are no remaining significant
deficiencies.
(f) Contracting officer notifications.
The cognizant contracting officer shall
promptly distribute copies of a
determination to approve a system,
disapprove a system and withhold
payments, or approve a previously
disapproved system and release
withheld payments to the auditor;
payment office; affected contracting
officers at the buying activities; and
cognizant contracting officers in
contract administration activities.
(g) Mitigating the risk of accounting
system deficiencies on specific
proposals.
(1) Field pricing teams shall discuss
identified accounting system
deficiencies and their impact in all
reports on contractor proposals until the
deficiencies are resolved. (2) The
contracting officer responsible for
negotiation of a proposal generated by
an accounting system with an identified
deficiency shall evaluate whether the
deficiency impacts the negotiations. If it
does not, the contracting officer should
proceed with negotiations. If it does, the
contracting officer should consider
other alternatives, e.g.—

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Federal Register / Vol. 76, No. 96 / Wednesday, May 18, 2011 / Rules and Regulations
(i) Allowing the contractor additional
time to correct the accounting system
deficiency and submit a corrected
proposal;
(ii) Considering another type of
contract, e.g., a fixed-price incentive
(firm target) contract instead of a firmfixed-price;
(iii) Using additional cost analysis
techniques to determine the
reasonableness of the cost elements
affected by the accounting system’s
deficiency;
(iv) Segregating the questionable areas
as a cost-reimbursable line item;
(v) Reducing the negotiation objective
for profit or fee; or
(vi) Including a contract (reopener)
clause that provides for adjustment of
the contract amount after award.
(3) The contracting officer who
incorporates a reopener clause into the
contract is responsible for negotiating
price adjustments required by the
clause. Any reopener clause
necessitated by an accounting system
deficiency should—
(i) Clearly identify the amounts and
items that are in question at the time of
negotiation;
(ii) Indicate a specific time or
subsequent event by which the
contractor will submit a supplemental
proposal, including cost or pricing data,
identifying the cost impact adjustment
necessitated by the deficient accounting
system;
(iii) Provide for the contracting officer
to adjust the contract price unilaterally
if the contractor fails to submit the
supplemental proposal; and
(iv) Provide that failure of the
Government and the contractor to agree
to the price adjustment shall be a
dispute under the Disputes clause.
242.7503

Contract clause.

srobinson on DSKHWCL6B1PROD with RULES2

Use the clause at 252.242–7006,
Accounting System Administration, in
solicitations and contracts when
contemplating—
(a) A cost-reimbursement, incentive
type, time-and-materials, or labor-hour
contract;
(b) A fixed-price contract with
progress payments made on the basis of
costs incurred by the contractor or on a
percentage or stage of completion.
PART 244—SUBCONTRACTING
POLICIES AND PROCEDURES
9. Add subpart 244.1 to read as
follows:

■

SUBPART 244.1—GENERAL
Sec.
244.101 Definitions

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SUBPART 244.1—GENERAL
244.101

Definitions.

As used in this subpart——
Acceptable purchasing system and
purchasing system are defined in the
clause at 252.244–7001, Contractor
Purchasing System Administration.
Significant deficiency is defined in
the clause at 252.244–7001, Contractor
Purchasing System Administration.
244.304
■

[Removed]

10. Remove section 244.304.

11. Revise section 244.305 to read as
follows:

■

244.305 Granting, withholding, or
withdrawing approval.
244.305–70

Policy.

Use this subsection instead of FAR
44.305–2(c) and 44.305–3(b).
(a) The cognizant contracting officer,
in consultation with the purchasing
system analyst or auditor, shall—
(1) Determine the acceptability of the
contractor’s purchasing system and
approve or disapprove the system; and
(2) Pursue correction of any
deficiencies.
(b) In evaluating the acceptability of
the contractor’s purchasing system, the
contracting officer, in consultation with
the purchasing system analyst or
auditor, shall determine whether the
contractor’s purchasing system complies
with the system criteria for an
acceptable purchasing system as
prescribed in the clause at 252.244–
7001, Contractor Purchasing System
Administration.
(c) Disposition of findings—(1)
Reporting of findings. The purchasing
system analyst or auditor shall
document findings and
recommendations in a report to the
contracting officer. If the auditor or
purchasing system analyst identifies any
significant purchasing system
deficiencies, the report shall describe
the deficiencies in sufficient detail to
allow the contracting officer to
understand the deficiencies.
(2) Initial determination. (i) The
contracting officer shall review all
findings and recommendations and, if
there are no significant deficiencies,
shall promptly notify the contractor that
the contractor’s purchasing system is
acceptable and approved; or
(ii) If the contracting officer finds that
there are one or more significant
deficiencies (as defined in the clause at
252.244–7001, Contractor Purchasing
System Administration) due to the
contractor’s failure to meet one or more
of the purchasing system criteria in the
clause at 252.244–7001, the contracting
officer shall—

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28871

(A) Promptly make an initial written
determination on any significant
deficiencies and notify the contractor, in
writing, providing a description of each
significant deficiency in sufficient detail
to allow the contractor to understand
the deficiency;
(B) Request the contractor to respond,
in writing, to the initial determination
within 30 days; and
(C) Evaluate the contractor’s response
to the initial determination in
consultation with the auditor or
purchasing system analyst, and make a
final determination.
(3) Final determination. (i) The
contracting officer shall make a final
determination and notify the contractor,
in writing, that—
(A) The contractor’s purchasing
system is acceptable and approved, and
no significant deficiencies remain, or
(B) Significant deficiencies remain.
The notice shall identify any remaining
significant deficiencies, and indicate the
adequacy of any proposed or completed
corrective action. The contracting officer
shall—
(1) Request that the contractor, within
45 days of receipt of the final
determination, either correct the
deficiencies or submit an acceptable
corrective action plan showing
milestones and actions to eliminate the
deficiencies;
(2) Disapprove the system in
accordance with the clause at 252.244–
7001, Contractor Purchasing System
Administration; and
(3) Withhold payments in accordance
with the clause at 252.242–7005,
Contractor Business Systems, if the
clause is included in the contract.
(ii) Follow the procedures relating to
monitoring a contractor’s corrective
action and the correction of significant
deficiencies in PGI 244.305–70.
(d) System approval. The contracting
officer shall promptly approve a
previously disapproved purchasing
system and notify the contractor when
the contracting officer determines that
there are no remaining significant
deficiencies.
(e) Contracting officer notifications.
The cognizant contracting officer shall
promptly distribute copies of a
determination to approve a system,
disapprove a system and withhold
payments, or approve a previously
disapproved system and release
withheld payments to the auditor;
payment office; affected contracting
officers at the buying activities; and
cognizant contracting officers in
contract administration activities.
(f) Mitigating the risk of purchasing
system deficiencies on specific
proposals.

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Federal Register / Vol. 76, No. 96 / Wednesday, May 18, 2011 / Rules and Regulations

(1) Source selection evaluation teams
shall discuss identified purchasing
system deficiencies and their impact in
all reports on contractor proposals until
the deficiencies are resolved.
(2) The contracting officer responsible
for negotiation of a proposal generated
by a purchasing system with an
identified deficiency shall evaluate
whether the deficiency impacts the
negotiations. If it does not, the
contracting officer should proceed with
negotiations. If it does, the contracting
officer should consider other
alternatives, e.g.—
(i) Allowing the contractor additional
time to correct the purchasing system
deficiency and submit a corrected
proposal;
(ii) Considering another type of
contract, e.g., a fixed-price incentive
(firm target) contract instead of firmfixed-price;
(iii) Using additional cost analysis
techniques to determine the
reasonableness of the cost elements
affected by the purchasing system’s
deficiency;
(iv) Segregating the questionable areas
as a cost-reimbursable line item;
(v) Reducing the negotiation objective
for profit or fee; or
(vi) Including a contract (reopener)
clause that provides for adjustment of
the contract amount after award.
(3) The contracting officer who
incorporates a reopener clause into the
contract is responsible for negotiating
price adjustments required by the
clause. Any reopener clause
necessitated by a purchasing system
deficiency should—
(i) Clearly identify the amounts and
items that are in question at the time of
negotiation;
(ii) Indicate a specific time or
subsequent event by which the
contractor will submit a supplemental
proposal, including cost or pricing data,
identifying the cost impact adjustment
necessitated by the deficient purchasing
system;
(iii) Provide for the contracting officer
to adjust the contract price unilaterally
if the contractor fails to submit the
supplemental proposal; and
(iv) Provide that failure of the
Government and the contractor to agree
to the price adjustment shall be a
dispute under the Disputes clause.
244.305–71

Contract clause.

Use the clause at 252.244–7001,
Contractor Purchasing System
Administration, in solicitations and
contracts containing the clause at FAR
52.244–2, Subcontracts.

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PART 245—GOVERNMENT PROPERTY
12. Revise section 245.105 to read as
follows:

■

245.105 Contractors’ property
management system compliance.

(a) Definitions—
(1) Acceptable property management
system and property management
system are defined in the clause at
252.245–7003, Contractor Property
Management System Administration.
(2) Significant deficiency is defined in
the clause at 252.245–7003, Contractor
Property Management System
Administration.
(b) Policy. The cognizant contracting
officer, in consultation with the
property administrator, shall—
(1) Determine the acceptability of the
system and approve or disapprove the
system; and
(2) Pursue correction of any
deficiencies.
(c) In evaluating the acceptability of a
contractor’s property management
system, the contracting officer, in
consultation with the property
administrator, shall determine whether
the contractor’s property management
system complies with the system
criteria for an acceptable property
management system as prescribed in the
clause at 252.245–7003, Contractor
Property Management System
Administration.
(d) Disposition of findings—(1)
Reporting of findings. The property
administrator shall document findings
and recommendations in a report to the
contracting officer. If the property
administrator identifies any significant
property system deficiencies, the report
shall describe the deficiencies in
sufficient detail to allow the contracting
officer to understand the deficiencies.
(2) Initial determination. (i) The
contracting officer shall review findings
and recommendations and, if there are
no significant deficiencies, shall
promptly notify the contractor, in
writing, that the contractor’s property
management system is acceptable and
approved; or
(ii) If the contracting officer finds that
there are one or more significant
deficiencies (as defined in the clause at
252.245–7003, Contractor Property
Management System Administration)
due to the contractor’s failure to meet
one or more of the property
management system criteria in the
clause at 252.245–7003, the contracting
officer shall—
(A) Promptly make an initial written
determination on any significant
deficiencies and notify the contractor, in
writing, providing a description of each

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significant deficiency in sufficient detail
to allow the contractor to understand
the deficiency;
(B) Request the contractor to respond,
in writing, to the initial determination
within 30 days and;
(C) Evaluate the contractor’s response
to the initial determination, in
consultation with the property
administrator, and make a final
determination.
(3) Final determination. (i) The
contracting officer shall make a final
determination and notify the contractor,
in writing, that—
(A) The contractor’s property
management system is acceptable and
approved, and no significant
deficiencies remain, or
(B) Significant deficiencies remain.
The notice shall identify any remaining
significant deficiencies, and indicate the
adequacy of any proposed or completed
corrective action. The contracting officer
shall—
(1) Request that the contractor, within
45 days of receipt of the final
determination, either correct the
deficiencies or submit an acceptable
corrective action plan showing
milestones and actions to eliminate the
deficiencies;
(2) Disapprove the system in
accordance with the clause at 252.245–
7003, Contractor Property Management
System Administration; and
(3) Withhold payments in accordance
with the clause at 252.242–7005,
Contractor Business Systems, if the
clause is included in the contract.
(ii) Follow the procedures relating to
monitoring a contractor’s corrective
action and the correction of significant
deficiencies in PGI 245.105.
(e) System approval. The contracting
officer shall promptly approve a
previously disapproved property
management system and notify the
contractor when the contracting officer
determines, in consultation with the
property administrator, that there are no
remaining significant deficiencies.
(f) Contracting officer notifications.
The cognizant contracting officer shall
promptly distribute copies of a
determination to approve a system,
disapprove a system and withhold
payments, or approve a previously
disapproved system and release
withheld payments to the auditor;
payment office; affected contracting
officers at the buying activities; and
cognizant contracting officers in
contract administration activities.
13. Amend section 245.107 by adding
paragraph (d) to read as follows:

■

245.107

*

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*

Contract clauses.

*

18MYR2

*

*

Federal Register / Vol. 76, No. 96 / Wednesday, May 18, 2011 / Rules and Regulations
(d) Use the clause at 252.245–7003,
Contractor Property Management
System Administration, in solicitations
and contracts containing the clause at
FAR 52.245–1, Government Property.
PART 252—SOLICITATION
PROVISIONS AND CONTRACT
CLAUSES
14. Revise section 252.215–7002 to
read as follows:

■

252.215–7002 Cost Estimating System
Requirements.

As prescribed in 215.408(2), use the
following clause:

srobinson on DSKHWCL6B1PROD with RULES2

Cost Estimating System Requirements
(May 2011)
(a) Definitions.
Acceptable estimating system means an
estimating system complies with the system
criteria in paragraph (d) of this clause, and
provides for a system that—
(1) Is maintained, reliable, and consistently
applied;
(2) Produces verifiable, supportable,
documented, and timely cost estimates that
are an acceptable basis for negotiation of fair
and reasonable prices;
(3) Is consistent with and integrated with
the Contractor’s related management systems;
and
(4) Is subject to applicable financial control
systems.
Estimating system means the Contractor’s
policies, procedures, and practices for
budgeting and planning controls, and
generating estimates of costs and other data
included in proposals submitted to
customers in the expectation of receiving
contract awards. Estimating system includes
the Contractor’s—
(1) Organizational structure;
(2) Established lines of authority, duties,
and responsibilities;
(3) Internal controls and managerial
reviews;
(4) Flow of work, coordination, and
communication; and
(5) Budgeting, planning, estimating
methods, techniques, accumulation of
historical costs, and other analyses used to
generate cost estimates.
Significant deficiency means a shortcoming
in the system that materially affects the
ability of officials of the Department of
Defense to rely upon information produced
by the system that is needed for management
purposes.
(b) General. The Contractor shall establish,
maintain, and comply with an acceptable
estimating system.
(c) Applicability. Paragraphs (d) and (e) of
this clause apply if the Contractor is a large
business and either—
(1) In its fiscal year preceding award of this
contract, received Department of Defense
(DoD) prime contracts or subcontracts,
totaling $50 million or more for which cost
or pricing data were required; or
(2) In its fiscal year preceding award of this
contract—

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(i) Received DoD prime contracts or
subcontracts totaling $10 million or more
(but less than $50 million) for which cost or
pricing data were required; and
(ii) Was notified, in writing, by the
Contracting Officer that paragraphs (d) and
(e) of this clause apply.
(d) System requirements. (1) The
Contractor shall disclose its estimating
system to the Administrative Contracting
Officer (ACO), in writing. If the Contractor
wishes the Government to protect the
information as privileged or confidential, the
Contractor must mark the documents with
the appropriate legends before submission.
(2) An estimating system disclosure is
acceptable when the Contractor has provided
the ACO with documentation that—
(i) Accurately describes those policies,
procedures, and practices that the Contractor
currently uses in preparing cost proposals;
and
(ii) Provides sufficient detail for the
Government to reasonably make an informed
judgment regarding the acceptability of the
Contractor’s estimating practices.
(3) The Contractor shall—
(i) Comply with its disclosed estimating
system; and
(ii) Disclose significant changes to the cost
estimating system to the ACO on a timely
basis.
(4) The Contractor’s estimating system
shall provide for the use of appropriate
source data, utilize sound estimating
techniques and good judgment, maintain a
consistent approach, and adhere to
established policies and procedures. An
acceptable estimating system shall
accomplish the following functions:
(i) Establish clear responsibility for
preparation, review, and approval of cost
estimates and budgets;
(ii) Provide a written description of the
organization and duties of the personnel
responsible for preparing, reviewing, and
approving cost estimates and budgets;
(iii) Ensure that relevant personnel have
sufficient training, experience, and guidance
to perform estimating and budgeting tasks in
accordance with the Contractor’s established
procedures;
(iv) Identify and document the sources of
data and the estimating methods and
rationale used in developing cost estimates
and budgets;
(v) Provide for adequate supervision
throughout the estimating and budgeting
process;
(vi) Provide for consistent application of
estimating and budgeting techniques;
(vii) Provide for detection and timely
correction of errors;
(viii) Protect against cost duplication and
omissions;
(ix) Provide for the use of historical
experience, including historical vendor
pricing information, where appropriate;
(x) Require use of appropriate analytical
methods;
(xi) Integrate information available from
other management systems;
(xii) Require management review,
including verification of the company’s
estimating and budgeting policies,
procedures, and practices;

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(xiii) Provide for internal review of, and
accountability for, the acceptability of the
estimating system, including the budgetary
data supporting indirect cost estimates and
comparisons of projected results to actual
results, and an analysis of any differences;
(xiv) Provide procedures to update cost
estimates and notify the Contracting Officer
in a timely manner throughout the
negotiation process;
(xv) Provide procedures that ensure
subcontract prices are reasonable based on a
documented review and analysis provided
with the prime proposal, when practicable;
(xvi) Provide estimating and budgeting
practices that consistently generate sound
proposals that are compliant with the
provisions of the solicitation and are
adequate to serve as a basis to reach a fair
and reasonable price; and
(xvii) Have an adequate system
description, including policies, procedures,
and estimating and budgeting practices, that
comply with the Federal Acquisition
Regulation and Defense Federal Acquisition
Regulation Supplement.
(e) Significant deficiencies. (1) The
Contracting Officer will provide an initial
determination to the Contractor, in writing,
of any significant deficiencies. The initial
determination will describe the deficiency in
sufficient detail to allow the Contractor to
understand the deficiency.
(2) The Contractor shall respond within 30
days to a written initial determination from
the Contracting Officer that identifies
significant deficiencies in the Contractor’s
estimating system. If the Contractor disagrees
with the initial determination, the Contractor
shall state, in writing, its rationale for
disagreeing.
(3) The Contracting Officer will evaluate
the Contractor’s response and notify the
Contractor, in writing, of the Contracting
Officer’s final determination concerning—
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or
completed corrective action; and
(iii) System disapproval, if the Contracting
Officer determines that one or more
significant deficiencies remain.
(f) If the Contractor receives the
Contracting Officer’s final determination of
significant deficiencies, the Contractor shall,
within 45 days of receipt of the final
determination, either correct the significant
deficiencies or submit an acceptable
corrective action plan showing milestones
and actions to eliminate the significant
deficiencies.
(g) Withholding payments. If the
Contracting Officer makes a final
determination to disapprove the Contractor’s
estimating system, and the contract includes
the clause at 252.242–7005, Contractor
Business Systems, the Contracting Officer
will withhold payments in accordance with
that clause.

(End of clause)
■ 16. Revise section 252.234–7002 to
read as follows:
252.234–7002
System.

Earned Value Management

As prescribed in 234.203(2), use the
following clause:

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EARNED VALUE MANAGEMENT
SYSTEM (MAY 2011)
(a) Definitions. As used in this clause—
Acceptable earned value management
system means an earned value management
system that generally complies with system
criteria in paragraph (b) of this clause.
Earned value management system means
an earned value management system that
complies with the earned value management
system guidelines in the ANSI/EIA–748.
Significant deficiency means a shortcoming
in the system that materially affects the
ability of officials of the Department of
Defense to rely upon information produced
by the system that is needed for management
purposes.
(b) System criteria. In the performance of
this contract, the Contractor shall use—
(1) An Earned Value Management System
(EVMS) that complies with the EVMS
guidelines in the American National
Standards Institute/Electronic Industries
Alliance Standard 748, Earned Value
Management Systems (ANSI/EIA–748); and
(2) Management procedures that provide
for generation of timely, reliable, and
verifiable information for the Contract
Performance Report (CPR) and the Integrated
Master Schedule (IMS) required by the CPR
and IMS data items of this contract.
(c) If this contract has a value of $50
million or more, the Contractor shall use an
EVMS that has been determined to be
acceptable by the Cognizant Federal Agency
(CFA). If, at the time of award, the
Contractor’s EVMS has not been determined
by the CFA to be in compliance with the
EVMS guidelines as stated in paragraph (b)(1)
of this clause, the Contractor shall apply its
current system to the contract and shall take
necessary actions to meet the milestones in
the Contractor’s EVMS plan.
(d) If this contract has a value of less than
$50 million, the Government will not make
a formal determination that the Contractor’s
EVMS complies with the EVMS guidelines in
ANSI/EIA–748 with respect to the contract.
The use of the Contractor’s EVMS for this
contract does not imply a Government
determination of the Contractor’s compliance
with the EVMS guidelines in ANSI/EIA–748
for application to future contracts. The
Government will allow the use of a
Contractor’s EVMS that has been formally
reviewed and determined by the CFA to be
in compliance with the EVMS guidelines in
ANSI/EIA–748.
(e) The Contractor shall submit notification
of any proposed substantive changes to the
EVMS procedures and the impact of those
changes to the CFA. If this contract has a
value of $50 million or more, unless a waiver
is granted by the CFA, any EVMS changes
proposed by the Contractor require approval
of the CFA prior to implementation. The CFA
will advise the Contractor of the acceptability
of such changes as soon as practicable
(generally within 30 calendar days) after
receipt of the Contractor’s notice of proposed
changes. If the CFA waives the advance
approval requirements, the Contractor shall
disclose EVMS changes to the CFA at least
14 calendar days prior to the effective date
of implementation.

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(f) The Government will schedule
integrated baseline reviews as early as
practicable, and the review process will be
conducted not later than 180 calendar days
after—
(1) Contract award;
(2) The exercise of significant contract
options; and
(3) The incorporation of major
modifications.
During such reviews, the Government and
the Contractor will jointly assess the
Contractor’s baseline to be used for
performance measurement to ensure
complete coverage of the statement of work,
logical scheduling of the work activities,
adequate resourcing, and identification of
inherent risks.
(g) The Contractor shall provide access to
all pertinent records and data requested by
the Contracting Officer or duly authorized
representative as necessary to permit
Government surveillance to ensure that the
EVMS complies, and continues to comply,
with the performance criteria referenced in
paragraph (b) of this clause.
(h) When indicated by contract
performance, the Contractor shall submit a
request for approval to initiate an over-target
baseline or over-target schedule to the
Contracting Officer. The request shall include
a top-level projection of cost and/or schedule
growth, a determination of whether or not
performance variances will be retained, and
a schedule of implementation for the
rebaselining. The Government will
acknowledge receipt of the request in a
timely manner (generally within 30 calendar
days).
(i) Significant deficiencies. (1) The
Contracting Officer will provide an initial
determination to the Contractor, in writing,
on any significant deficiencies. The initial
determination will describe the deficiency in
sufficient detail to allow the Contractor to
understand the deficiency.
(2) The Contractor shall respond within 30
days to a written initial determination from
the Contracting Officer that identifies
significant deficiencies in the Contractor’s
EVMS. If the Contractor disagrees with the
initial determination, the Contractor shall
state, in writing, its rationale for disagreeing.
(3) The Contracting Officer will evaluate
the Contractor’s response and notify the
Contractor, in writing, of the Contracting
Officer’s final determination concerning—
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or
completed corrective action;
(iii) System noncompliance, when the
Contractor’s existing EVMS fails to comply
with the earned value management system
guidelines in the ANSI/EIA–748; and
(iv) System disapproval, if initial EVMS
validation is not successfully completed
within the timeframe approved by the
Contracting Officer, or if the Contracting
Officer determines that the Contractor’s
earned value management system contains
one or more significant deficiencies in highrisk guidelines in ANSI/EIA–748 standards
(guidelines 1, 3, 6, 7, 8, 9, 10, 12, 16, 21, 23,
26, 27, 28, 30, or 32). When the Contracting
Officer determines that the existing earned
value management system contains one or

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more significant deficiencies in one or more
of the remaining 16 guidelines in ANSI/EIA–
748 standards, the contracting officer will use
discretion to disapprove the system based on
input received from functional specialists
and the auditor.
(4) If the Contractor receives the
Contracting Officer’s final determination of
significant deficiencies, the Contractor shall,
within 45 days of receipt of the final
determination, either correct the significant
deficiencies or submit an acceptable
corrective action plan showing milestones
and actions to eliminate the significant
deficiencies.
(j) Withholding payments. If the
Contracting Officer makes a final
determination to disapprove the Contractor’s
EVMS, and the contract includes the clause
at 252.242–7005, Contractor Business
Systems, the Contracting Officer will
withhold payments in accordance with that
clause.
(k) With the exception of paragraphs (i)
and (j) of this clause, the Contractor shall
require its subcontractors to comply with
EVMS requirements as follows:
(1) For subcontracts valued at $50 million
or more, the following subcontractors shall
comply with the requirements of this clause:
[Contracting Officer to insert names of
subcontractors (or subcontracted effort if
subcontractors have not been selected)
designated for application of the EVMS
requirements of this clause.]
lllllllllllllllllllll
lllllllllllllllllllll
lllllllllllllllllllll
lllllllllllllllllllll
(2) For subcontracts valued at less than $50
million, the following subcontractors shall
comply with the requirements of this clause,
excluding the requirements of paragraph (c)
of this clause:
[Contracting Officer to insert names of
subcontractors (or subcontracted effort if
subcontractors have not been selected)
designated for application of the EVMS
requirements of this clause.]
lllllllllllllllllllll
lllllllllllllllllllll
lllllllllllllllllllll
lllllllllllllllllllll

(End of clause)
■ 17. Revise section 252.242–7004 to
read as follows:
252.242–7004 Material Management and
Accounting System.

As prescribed in 242.7204, use the
following clause:
MATERIAL MANAGEMENT AND
ACCOUNTING SYSTEM (MAY 2011)
(a) Definitions. As used in this clause—
(1) Material management and accounting
system (MMAS) means the Contractor’s
system or systems for planning, controlling,
and accounting for the acquisition, use,
issuing, and disposition of material. Material
management and accounting systems may be
manual or automated. They may be stand-

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alone systems or they may be integrated with
planning, engineering, estimating,
purchasing, inventory, accounting, or other
systems.
(2) Valid time-phased requirements means
material that is—
(i) Needed to fulfill the production plan,
including reasonable quantities for scrap,
shrinkage, yield, etc.; and
(ii) Charged/billed to contracts or other
cost objectives in a manner consistent with
the need to fulfill the production plan.
(3) Contractor means a business unit as
defined in section 31.001 of the Federal
Acquisition Regulation (FAR).
(4) Acceptable material management and
accounting system means a MMAS that
generally complies with the system criteria in
paragraph (d) of this clause.
(5) Significant deficiency means a
shortcoming in the system that materially
affects the ability of officials of the
Department of Defense to rely upon
information produced by the system that is
needed for management purposes.
(b) General. The Contractor shall—
(1) Maintain an MMAS that—
(i) Reasonably forecasts material
requirements;
(ii) Ensures that costs of purchased and
fabricated material charged or allocated to a
contract are based on valid time-phased
requirements; and
(iii) Maintains a consistent, equitable, and
unbiased logic for costing of material
transactions; and
(2) Assess its MMAS and take reasonable
action to comply with the MMAS standards
in paragraph (e) of this clause.
(c) Disclosure and maintenance
requirements. The Contractor shall—
(1) Have policies, procedures, and
operating instructions that adequately
describe its MMAS;
(2) Provide to the Administrative
Contracting Officer (ACO), upon request, the
results of internal reviews that it has
conducted to ensure compliance with
established MMAS policies, procedures, and
operating instructions; and
(3) Disclose significant changes in its
MMAS to the ACO at least 30 days prior to
implementation.
(d) System criteria. The MMAS shall have
adequate internal controls to ensure system
and data integrity, and shall—
(1) Have an adequate system description
including policies, procedures, and operating
instructions that comply with the Federal
Acquisition Regulation and Defense Federal
Acquisition Regulation Supplement;
(2) Ensure that costs of purchased and
fabricated material charged or allocated to a
contract are based on valid time-phased
requirements as impacted by minimum/
economic order quantity restrictions.
(i) A 98 percent bill of material accuracy
and a 95 percent master production schedule
accuracy are desirable as a goal in order to
ensure that requirements are both valid and
appropriately time-phased.
(ii) If systems have accuracy levels below
these, the Contractor shall provide adequate
evidence that—
(A) There is no material harm to the
Government due to lower accuracy levels;
and

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(B) The cost to meet the accuracy goals is
excessive in relation to the impact on the
Government;
(3) Provide a mechanism to identify,
report, and resolve system control
weaknesses and manual override. Systems
should identify operational exceptions, such
as excess/residual inventory, as soon as
known;
(4) Provide audit trails and maintain
records (manual and those in machine–
readable form) necessary to evaluate system
logic and to verify through transaction testing
that the system is operating as desired;
(5) Establish and maintain adequate levels
of record accuracy, and include
reconciliation of recorded inventory
quantities to physical inventory by part
number on a periodic basis. A 95 percent
accuracy level is desirable. If systems have an
accuracy level below 95 percent, the
Contractor shall provide adequate evidence
that—
(i) There is no material harm to the
Government due to lower accuracy levels;
and
(ii) The cost to meet the accuracy goal is
excessive in relation to the impact on the
Government;
(6) Provide detailed descriptions of
circumstances that will result in manual or
system generated transfers of parts;
(7) Maintain a consistent, equitable, and
unbiased logic for costing of material
transactions as follows:
(i) The Contractor shall maintain and
disclose written policies describing the
transfer methodology and the loan/pay-back
technique.
(ii) The costing methodology may be
standard or actual cost, or any of the
inventory costing methods in 48 CFR
9904.411–50(b). The Contractor shall
maintain consistency across all contract and
customer types, and from accounting period
to accounting period for initial charging and
transfer charging.
(iii) The system should transfer parts and
associated costs within the same billing
period. In the few instances where this may
not be appropriate, the Contractor may
accomplish the material transaction using a
loan/pay-back technique. The ‘‘loan/pay-back
technique’’ means that the physical part is
moved temporarily from the contract, but the
cost of the part remains on the contract. The
procedures for the loan/pay-back technique
must be approved by the ACO. When the
technique is used, the Contractor shall have
controls to ensure—
(A) Parts are paid back expeditiously;
(B) Procedures and controls are in place to
correct any overbilling that might occur;
(C) Monthly, at a minimum, identification
of the borrowing contract and the date the
part was borrowed; and
(D) The cost of the replacement part is
charged to the borrowing contract;
(8) Where allocations from common
inventory accounts are used, have controls
(in addition to those in paragraphs (d)(2) and
(7) of this clause) to ensure that—
(i) Reallocations and any credit due are
processed no less frequently than the routine
billing cycle;

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(ii) Inventories retained for requirements
that are not under contract are not allocated
to contracts; and
(iii) Algorithms are maintained based on
valid and current data;
(9) Have adequate controls to ensure that
physically commingled inventories that may
include material for which costs are charged
or allocated to fixed-price, costreimbursement, and commercial contracts do
not compromise requirements of any of the
standards in paragraphs (d)(1) through (8) of
this clause. Government-furnished material
shall not be—
(i) Physically commingled with other
material; or
(ii) Used on commercial work; and
(10) Be subjected to periodic internal
reviews to ensure compliance with
established policies and procedures.
(e) Significant deficiencies. (1) The
Contracting Officer will provide an initial
determination to the Contractor, in writing,
of any significant deficiencies. The initial
determination will describe the deficiency in
sufficient detail to allow the Contractor to
understand the deficiency.
(2) The Contractor shall respond within 30
days to a written initial determination from
the Contracting Officer that identifies
significant deficiencies in the Contractor’s
MMAS. If the Contractor disagrees with the
initial determination, the Contractor shall
state, in writing, its rationale for disagreeing.
(3) The Contracting Officer will evaluate
the Contractor’s response and notify the
Contractor, in writing, of the Contracting
Officer’s final determination concerning—
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or
completed corrective action; and
(iii) System disapproval if the Contracting
Officer determines that one or more
significant deficiencies remain.
(f) If the Contractor receives the
Contracting Officer’s final determination of
significant deficiencies, the Contractor shall,
within 45 days of receipt of the final
determination, either correct the significant
deficiencies or submit an acceptable
corrective action plan showing milestones
and actions to eliminate the significant
deficiencies.
(g) Withholding payments. If the
Contracting Officer makes a final
determination to disapprove the Contractor’s
MMAS, and the contract includes the clause
at 252.242–7005, Contractor Business
Systems, the Contracting Officer will
withhold payments in accordance with that
clause.

(End of clause)
■ 18. Add section 252.242–7005 to read
as follows
252.242–7005
Systems.

Contractor Business

As prescribed in 242.7001, use the
following clause:
CONTRACTOR BUSINESS SYSTEMS
(MAY 2011)
(a) Definitions. As used in this clause—
Acceptable contractor business systems
means contractor business systems that

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comply with the terms and conditions of the
applicable business system clauses listed in
the definition of ‘‘contractor business
systems’’ in this clause.
Contractor business systems means—
(1) Accounting system, if this contract
includes the clause at 252.242–7006,
Accounting System Administration;
(2) Earned value management system, if
this contract includes the clause at 252.234–
7002, Earned Value Management System;
(3) Estimating system, if this contract
includes the clause at 252.215–7002, Cost
Estimating System Requirements;
(4) Material management and accounting
system, if this contract includes the clause at
252.242–7004, Material Management and
Accounting System;
(5) Property management system, if this
contract includes the clause at 252.245–7003,
Contractor Property Management System
Administration; and
(6) Purchasing system, if this contract
includes the clause at 252.244–7001,
Contractor Purchasing System
Administration.
Significant deficiency, in the case of a
contractor business system, means a
shortcoming in the system that materially
affects the ability of officials of the
Department of Defense to rely upon
information produced by the system that is
needed for management purposes.
(b) General. The Contractor shall establish
and maintain acceptable business systems in
accordance with the terms and conditions of
this contract.
(c) Significant deficiencies. (1) The
Contractor shall respond, in writing, within
30 days to an initial determination that there
are one or more significant deficiencies in
one or more of the Contractor’s business
systems.
(2) The Contracting Officer will evaluate
the Contractor’s response and notify the
Contractor, in writing, of the final
determination as to whether the Contractor’s
business system contains significant
deficiencies. If the Contracting Officer
determines that the Contractor’s business
system contains significant deficiencies, the
final determination will include a notice to
withhold payments.
(d) Withholding payments. (1) If the
Contracting Officer issues the final
determination with a notice to withhold
payments for significant deficiencies in a
contractor business system required under
this contract, the Contracting Officer will
withhold five percent of amounts due from
progress payments and performance-based
payments, and direct the Contractor, in
writing, to withhold five percent from its
billings on interim cost vouchers on cost,
labor-hour, and time-and-materials contracts
until the Contracting Officer has determined
that the Contractor has corrected all
significant deficiencies as directed by the
contracting officer’s final determination. The
Contractor shall, within 45 days of receipt of
the notice, either correct the deficiencies or
submit an acceptable corrective action plan
showing milestones and actions to eliminate
the deficiencies.
(2) If the Contractor submits an acceptable
corrective action plan within 45 days of

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receipt of a notice of the Contracting Officer’s
intent to withhold payments, and the
Contracting Officer, in consultation with the
auditor or functional specialist, determines
that the Contractor is effectively
implementing such plan, the Contracting
Officer will reduce withholding directly
related to the significant deficiencies covered
under the corrective action plan, to two
percent from progress payments and
performance-based payments, and direct the
Contractor, in writing, to reduce the
percentage withheld on interim cost
vouchers to two percent until the Contracting
Officer determines the Contractor has
corrected all significant deficiencies as
directed by the Contracting Officer’s final
determination. However, if at any time, the
Contracting Officer determines that the
Contractor has failed to follow the accepted
corrective action plan, the Contracting
Officer will increase withholding from
progress payments and performance-based
payments, and direct the Contractor, in
writing, to increase the percentage withheld
on interim cost vouchers to the percentage
initially withheld, until the Contracting
Officer determines that the Contractor has
corrected all significant deficiencies as
directed by the Contracting Officer’s final
determination.
(3) Payment withhold percentage limits.
(i) The total percentage of payments
withheld on amounts due under each
progress payment, performance-based
payment, or interim cost voucher, on this
contract shall not exceed—
(A) Five percent for one or more significant
deficiencies in any single contractor business
system; and
(B) Ten percent for significant deficiencies
in multiple contractor business systems.
(ii) If this contract contains pre-existing
withholds, and the application of any
subsequent payment withholds will cause
withholding under this clause to exceed the
payment withhold percentage limits in
paragraph (d)(3)(i) of this clause, the
Contracting Officer will reduce the payment
withhold percentage in the final
determination to an amount that will not
exceed the payment withhold percentage
limits.
(4) For the purpose of this clause, payment
means any of the following payments
authorized under this contract:
(i) Interim payments under—
(A) Cost-reimbursement contracts;
(B) Incentive type contracts;
(C) Time-and-materials contracts;
(D) Labor-hour contracts.
(ii) Progress payments.
(iii) Performance-based payments.
(5) Payment withholding shall not apply to
payments on fixed-price line items where
performance is complete and the items were
accepted by the Government.
(6) The withholding of any amount or
subsequent payment to the Contractor shall
not be construed as a waiver of any rights or
remedies the Government has under this
contract.
(7) Notwithstanding the provisions of any
clause in this contract providing for interim,
partial, or other payment withholding on any
basis, the Contracting Officer may withhold

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payment in accordance with the provisions
of this clause.
(8) The payment withholding authorized in
this clause is not subject to the interestpenalty provisions of the Prompt Payment
Act.
(e) Correction of deficiencies. (1) The
Contractor shall notify the Contracting
Officer, in writing, when the Contractor has
corrected the business system’s deficiencies.
(2) Once the Contractor has notified the
Contracting Officer that all deficiencies have
been corrected, the Contracting Officer will
take one of the following actions:
(i) If the Contracting Officer determines
that the Contractor has corrected all
significant deficiencies as directed by the
Contracting Officer’s final determination, the
Contracting Officer will, as appropriate,
discontinue the withholding of progress
payments and performance-based payments,
and direct the Contractor, in writing, to
discontinue the payment withholding from
billings on interim cost vouchers under this
contract associated with the Contracting
Officer’s final determination, and authorize
the Contractor to bill for any monies
previously withheld that are not also being
withheld due to other significant
deficiencies. Any payment withholding
under this contract due to other significant
deficiencies, will remain in effect until the
Contracting Officer determines that those
significant deficiencies are corrected.
(ii) If the Contracting Officer determines
that the Contractor still has significant
deficiencies, the Contracting Officer will
continue the withholding of progress
payments and performance-based payments,
and the Contractor shall continue
withholding amounts from its billings on
interim cost vouchers in accordance with
paragraph (d) of this clause, and not bill for
any monies previously withheld.
(iii) If, within 90 days of receipt of the
Contractor notification that the Contractor
has corrected the significant deficiencies, the
Contracting Officer has not made a
determination whether the Contractor has
corrected all significant deficiencies as
directed by the Contracting Officer’s final
determination, or has not made a
determination whether there is a reasonable
expectation that the corrective actions have
been implemented, the Contracting Officer
will reduce withholding directly related to
the significant deficiencies covered under the
corrective action plan by at least 50 percent
of the amount being withheld from progress
payments and performance-based payments,
and direct the Contractor, in writing, to
reduce the percentage withheld on interim
cost vouchers by at least 50 percent, until the
Contracting Officer makes a determination
whether the Contractor has corrected all
significant deficiencies as directed by the
Contracting Officer’s final determination, or
has made a determination whether there is a
reasonable expectation that the corrective
actions have been implemented.
(iv) At any time after the Contracting
Officer reduces or discontinues the
withholding of progress payments and
performance-based payments, or directs the
Contractor to reduce or discontinue the
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interim cost vouchers under this contract, if
the Contracting Officer determines that the
Contractor has failed to correct the significant
deficiencies identified in the Contractor’s
notification, the Contracting Officer will
reinstate or increase withholding from
progress payments and performance-based
payments, and direct the Contractor, in
writing, to reinstate or increase the
percentage withheld on interim cost
vouchers to the percentage initially withheld,
until the Contracting Officer determines that
the Contractor has corrected all significant
deficiencies as directed by the Contracting
Officer’s final determination.

(End of clause)
■ 19. Add section 252.242–7006 to read
as follows:
252.242–7006 Accounting System
Administration.

As prescribed in 242.7503, use the
following clause:

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ACCOUNTING SYSTEM
ADMINISTRATION (MAY 2011)
(a) Definitions. As used in this clause—
(1) Acceptable accounting system means a
system that complies with the system criteria
in paragraph (c) of this clause to provide
reasonable assurance that—
(i) Applicable laws and regulations are
complied with;
(ii) The accounting system and cost data
are reliable;
(iii) Risk of misallocations and mischarges
are minimized; and
(iv) Contract allocations and charges are
consistent with billing procedures.
(2) Accounting system means the
Contractor’s system or systems for accounting
methods, procedures, and controls
established to gather, record, classify,
analyze, summarize, interpret, and present
accurate and timely financial data for
reporting in compliance with applicable
laws, regulations, and management
decisions, and may include subsystems for
specific areas such as indirect and other
direct costs, compensation, billing, labor, and
general information technology.
(3) Significant deficiency means a
shortcoming in the system that materially
affects the ability of officials of the
Department of Defense to rely upon
information produced by the system that is
needed for management purposes.
(b) General. The Contractor shall establish
and maintain an acceptable accounting
system. Failure to maintain an acceptable
accounting system, as defined in this clause,
shall result in the withholding of payments
if the contract includes the clause at
252.242–7005, Contractor Business Systems,
and also may result in disapproval of the
system.
(c) System criteria. The Contractor’s
accounting system shall provide for—
(1) A sound internal control environment,
accounting framework, and organizational
structure;
(2) Proper segregation of direct costs from
indirect costs;
(3) Identification and accumulation of
direct costs by contract;

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(4) A logical and consistent method for the
accumulation and allocation of indirect costs
to intermediate and final cost objectives;
(5) Accumulation of costs under general
ledger control;
(6) Reconciliation of subsidiary cost
ledgers and cost objectives to general ledger;
(7) Approval and documentation of
adjusting entries;
(8) Periodic monitoring of the system;
(9) A timekeeping system that identifies
employees’ labor by intermediate or final cost
objectives;
(10) A labor distribution system that
charges direct and indirect labor to the
appropriate cost objectives;
(11) Interim (at least monthly)
determination of costs charged to a contract
through routine posting of books of account;
(12) Exclusion from costs charged to
Government contracts of amounts which are
not allowable in terms of Federal Acquisition
Regulation (FAR) part 31, Contract Cost
Principles and Procedures, and other contract
provisions;
(13) Identification of costs by contract line
item and by units (as if each unit or line item
were a separate contract), if required by the
contract;
(14) Segregation of preproduction costs
from production costs, as applicable;
(15) Cost accounting information, as
required—
(i) By contract clauses concerning
limitation of cost (FAR 52.232–20), limitation
of funds (FAR 52.232–22), or allowable cost
and payment (FAR 52.216–7); and
(ii) To readily calculate indirect cost rates
from the books of accounts;
(16) Billings that can be reconciled to the
cost accounts for both current and
cumulative amounts claimed and comply
with contract terms;
(17) Adequate, reliable data for use in
pricing follow-on acquisitions; and
(18) Accounting practices in accordance
with standards promulgated by the Cost
Accounting Standards Board, if applicable,
otherwise, Generally Accepted Accounting
Principles.
(d) Significant deficiencies. (1) The
Contracting Officer will provide an initial
determination to the Contractor, in writing,
on any significant deficiencies. The initial
determination will describe the deficiency in
sufficient detail to allow the Contractor to
understand the deficiency.
(2) The Contractor shall respond within 30
days to a written initial determination from
the Contracting Officer that identifies
significant deficiencies in the Contractor’s
accounting system. If the Contractor
disagrees with the initial determination, the
Contractor shall state, in writing, its rationale
for disagreeing.
(3) The Contracting Officer will evaluate
the Contractor’s response and notify the
Contractor, in writing, of the Contracting
Officer’s final determination concerning—
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or
completed corrective action; and
(iii) System disapproval, if the Contracting
Officer determines that one or more
significant deficiencies remain.
(e) If the Contractor receives the
Contracting Officer’s final determination of

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significant deficiencies, the Contractor shall,
within 45 days of receipt of the final
determination, either correct the significant
deficiencies or submit an acceptable
corrective action plan showing milestones
and actions to eliminate the significant
deficiencies.
(f) Withholding payments. If the
Contracting Officer makes a final
determination to disapprove the Contractor’s
accounting system, and the contract includes
the clause at 252.242–7005, Contractor
Business Systems, the Contracting Officer
will withhold payments in accordance with
that clause.

(End of clause)
■ 20. Add section 252.244–7001 to read
as follows:
252.244–7001 Contractor Purchasing
System Administration.

As prescribed in 244.305–71, insert
the following clause:
CONTRACTOR PURCHASING
SYSTEM ADMINISTRATION (MAY
2011)
(a) Definitions. As used in this clause—
Acceptable purchasing system means a
purchasing system that complies with the
system criteria in paragraph (c) of this clause.
Purchasing system means the Contractor’s
system or systems for purchasing and
subcontracting, including make-or-buy
decisions, the selection of vendors, analysis
of quoted prices, negotiation of prices with
vendors, placing and administering of orders,
and expediting delivery of materials.
Significant deficiency means a shortcoming
in the system that materially affects the
ability of officials of the Department of
Defense to rely upon information produced
by the system that is needed for management
purposes.
(b) General. The Contractor shall establish
and maintain an acceptable purchasing
system. Failure to maintain an acceptable
purchasing system, as defined in this clause,
may result in disapproval of the system by
the Contracting Officer and/or withholding of
payments.
(c) System criteria. The Contractor’s
purchasing system shall—
(1) Have an adequate system description
including policies, procedures, and
purchasing practices that comply with the
Federal Acquisition Regulation (FAR) and
the Defense Federal Acquisition Regulation
Supplement (DFARS);
(2) Ensure that all applicable purchase
orders and subcontracts contain all
flowdown clauses, including terms and
conditions and any other clauses needed to
carry out the requirements of the prime
contract;
(3) Maintain an organization plan that
establishes clear lines of authority and
responsibility;
(4) Ensure all purchase orders are based on
authorized requisitions and include a
complete and accurate history of purchase
transactions to support vendor selected, price
paid, and document the subcontract/
purchase order files which are subject to
Government review;

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(5) Establish and maintain adequate
documentation to provide a complete and
accurate history of purchase transactions to
support vendors selected and prices paid;
(6) Apply a consistent make-or-buy policy
that is in the best interest of the Government;
(7) Use competitive sourcing to the
maximum extent practicable, and ensure
debarred or suspended contractors are
properly excluded from contract award;
(8) Evaluate price, quality, delivery,
technical capabilities, and financial
capabilities of competing vendors to ensure
fair and reasonable prices;
(9) Require management level justification
and adequate cost or price analysis, as
applicable, for any sole or single source
award;
(10) Perform timely and adequate cost or
price analysis and technical evaluation for
each subcontractor and supplier proposal or
quote to ensure fair and reasonable
subcontract prices;
(11) Document negotiations in accordance
with FAR 15.406–3;
(12) Seek, take, and document
economically feasible purchase discounts,
including cash discounts, trade discounts,
quantity discounts, rebates, freight
allowances, and company-wide volume
discounts;
(13) Ensure proper type of contract
selection and prohibit issuance of cost-plusa-percentage-of-cost subcontracts;
(14) Maintain subcontract surveillance to
ensure timely delivery of an acceptable
product and procedures to notify the
Government of potential subcontract
problems that may impact delivery, quantity,
or price;
(15) Document and justify reasons for
subcontract changes that affect cost or price;
(16) Notify the Government of the award of
all subcontracts that contain the FAR and
DFARS flowdown clauses that allow for
Government audit of those subcontracts, and
ensure the performance of audits of those
subcontracts;
(17) Enforce adequate policies on conflict
of interest, gifts, and gratuities, including the
requirements of the Anti-Kickback Act;
(18) Perform internal audits or
management reviews, training, and maintain
policies and procedures for the purchasing
department to ensure the integrity of the
purchasing system;
(19) Establish and maintain policies and
procedures to ensure purchase orders and
subcontracts contain mandatory and
applicable flowdown clauses, as required by
the FAR and DFARS, including terms and
conditions required by the prime contract
and any clauses required to carry out the
requirements of the prime contract;
(20) Provide for an organizational and
administrative structure that ensures
effective and efficient procurement of
required quality materials and parts at the
best value from responsible and reliable
sources;
(21) Establish and maintain selection
processes to ensure the most responsive and
responsible sources for furnishing required
quality parts and materials and to promote
competitive sourcing among dependable
suppliers so that purchases are reasonably

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priced and from sources that meet contractor
quality requirements;
(22) Establish and maintain procedures to
ensure performance of adequate price or cost
analysis on purchasing actions;
(23) Establish and maintain procedures to
ensure that proper types of subcontracts are
selected, and that there are controls over
subcontracting, including oversight and
surveillance of subcontracted effort; and
(24) Establish and maintain procedures to
timely notify the Contracting Officer, in
writing, if—
(i) The Contractor changes the amount of
subcontract effort after award such that it
exceeds 70 percent of the total cost of the
work to be performed under the contract, task
order, or delivery order. The notification
shall identify the revised cost of the
subcontract effort and shall include
verification that the Contractor will provide
added value; or
(ii) Any subcontractor changes the amount
of lower-tier subcontractor effort after award
such that it exceeds 70 percent of the total
cost of the work to be performed under its
subcontract. The notification shall identify
the revised cost of the subcontract effort and
shall include verification that the
subcontractor will provide added value as
related to the work to be performed by the
lower-tier subcontractor(s).
(d) Significant deficiencies. (1) The
Contracting Officer will provide notification
of initial determination to the Contractor, in
writing, of any significant deficiencies. The
initial determination will describe the
deficiency in sufficient detail to allow the
Contractor to understand the deficiency.
(2) The Contractor shall respond within 30
days to a written initial determination from
the Contracting Officer that identifies
significant deficiencies in the Contractor’s
purchasing system. If the Contractor
disagrees with the initial determination, the
Contractor shall state, in writing, its rationale
for disagreeing.
(3) The Contracting Officer will evaluate
the Contractor’s response and notify the
Contractor, in writing, of the Contracting
Officer’s final determination concerning—
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or
completed corrective action; and
(iii) System disapproval, if the Contracting
Officer determines that one or more
significant deficiencies remain.
(e) If the Contractor receives the
Contracting Officer’s final determination of
significant deficiencies, the Contractor shall,
within 45 days of receipt of the final
determination, either correct the significant
deficiencies or submit an acceptable
corrective action plan showing milestones
and actions to eliminate the deficiencies.
(f) Withholding payments. If the
Contracting Officer makes a final
determination to disapprove the Contractor’s
purchasing system, and the contract includes
the clause at 252.242–7005, Contractor
Business Systems, the Contracting Officer
will withhold payments in accordance with
that clause.

(End of clause)
■ 21. Add section 252.245–7003 to read
as follows:

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252.245–7003 Contractor Property
Management System Administration.

As prescribed in 245.107, insert the
following clause:
CONTRACTOR PROPERTY
MANAGEMENT SYSTEM
ADMINISTRATION (MAY 2011)
(a) Definitions. As used in this clause—
Acceptable property management system
means a property system that complies with
the system criteria in paragraph (c) of this
clause.
Property management system means the
Contractor’s system or systems for managing
and controlling Government property.
Significant deficiency means a shortcoming
in the system that materially affects the
ability of officials of the Department of
Defense to rely upon information produced
by the system that is needed for management
purposes.
(b) General. The Contractor shall establish
and maintain an acceptable property
management system. Failure to maintain an
acceptable property management system, as
defined in this clause, may result in
disapproval of the system by the Contracting
Officer and/or withholding of payments.
(c) System criteria. The Contractor’s
property management system shall be in
accordance with paragraph (f) of the contract
clause at Federal Acquisition Regulation
52.245–1.
(d) Significant deficiencies. (1) The
Contracting Officer will provide an initial
determination to the Contractor, in writing,
of any significant deficiencies. The initial
determination will describe the deficiency in
sufficient detail to allow the Contractor to
understand the deficiency.
(2) The Contractor shall respond within 30
days to a written initial determination from
the Contracting Officer that identifies
significant deficiencies in the Contractor’s
property management system. If the
Contractor disagrees with the initial
determination, the Contractor shall state, in
writing, its rationale for disagreeing.
(3) The Contracting Officer will evaluate
the Contractor’s response and notify the
Contractor, in writing, of the Contracting
Officer’s final determination concerning—
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or
completed corrective action; and
(iii) System disapproval, if the Contracting
Officer determines that one or more
significant deficiencies remain.
(e) If the Contractor receives the
Contracting Officer’s final determination of
significant deficiencies, the Contractor shall,
within 45 days of receipt of the final
determination, either correct the significant
deficiencies or submit an acceptable
corrective action plan showing milestones
and actions to eliminate the significant
deficiencies.
(f) Withholding payments. If the
Contracting Officer makes a final
determination to disapprove the Contractor’s
property management system, leading to a
potential risk of harm to the Government,
and the contract includes the clause at
252.242–7005, Contractor Business Systems,

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the Contracting Officer will withhold
payments in accordance with that clause.

(End of clause)
[FR Doc. 2011–11691 Filed 5–17–11; 8:45 am]

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