Proposed DFARS Rule: Withholding Payments to DoD Contractors 

 
The Department of Defense (DoD) is accepting comments until March 16, 2010 on a proposed DFARS rule that, if implemented, will allow a Contracting Officer (CO) to withhold 10%, 50%, or even 100% of interim payments to contractors where the CO determines that a contractor's "business systems" are deficient.  The proposed rule poses a significant business risk to DoD contractors of all sizes and continues a trend of increasing compliance burdens throughout the government contracting community.  In light of the palpable impact to contractors' bottom line, now is an important time to reevaluate the costs of compliance and either establish or review current business systems for potential deficiencies so that any corrections may be made before being threatened with withholding of payments.  

 The proposed rule defines six separate business systems and states that a CO "will immediately withhold ten percent of each of the Contractor's payments under this contract" based on the CO's determination that any of those business systems is deficient.  The business systems which could be found deficient, with the corresponding Office of Management and Budget (OMB) requirements, include:  

o       Accounting Systems (OMB Clearance 9000-0011);

o       Earned Value Management Systems (OMB Clearance Pending),

o       Estimating Systems (OMB Clearance 0704-0232),

o       Material Management and Accounting Systems (OMB Clearance 0704-        0250),

o       Property Management Systems (OMB Clearance Pending), and

o       Purchasing Systems (OMB Clearance 0704-0253).

Under the proposed rule, if a contractor submits an acceptable corrective action plan within 45 days of receipt of a notice of the CO's intent to withhold, but has not completed action to correct the identified deficiencies, the CO will reduce the amount withheld to five percent of each payment until the CO determines that the Contractor has corrected the deficiencies.  

A CO may withhold payments for deficiencies in more than one business system, but the cumulative percentage of payments withheld is limited to fifty percent of contract payments.  Nonetheless, if the CO determines that there are one or more system deficiencies that are "highly likely to lead to improper contract payments being made, or represent an unacceptable risk of loss to the Government," then the CO "will withhold up to one hundred percent of payments" until the CO determines that the contractor has corrected the deficiencies.

There are many benefits to maintaining well-functioning business systems. Phil Bail & Associates performs pre-audits of contractor Purchasing Systems.  Now might be the time to schedule a pre-audit.  262.573.3396.