DCAA’s March 28, 2012 memorandum summarizes DCAA’s approach to the new DFARS Contractor Business Systems rules. As we discussed in our earlier entries, the DFARS regulations and clauses call for a determination of the adequacy of a contractor’s business systems—accounting, estimating, purchasing, material management—and allow a contracting officer to withhold five percent of contract payments

The FAR Cost Principles and federal cost reimbursement contracts provide that only reasonable allowable costs are recoverable, including costs for executive compensation. A January 18, 2012 decision of the Armed Services Board of Contract Appeals rejected a government challenge to the reasonableness of compensation one contractor paid to executives and rejected the DCAA’s methodology for determining the reasonableness of the compensation. See J.F. Taylor, Inc., ASBCA Nos. 56105, 56322 (Jan. 18, 2012) [pdf].Continue Reading Fatal flaws in DCAA’s challenge to contractor executive compensation

An interim rule published by the Department of Defense authorizes DoD contracting officers to withhold payment from contractors whose business systems they deem deficient. Issued on May 18, 2011, the rule implements Section 893 of the Ike Skelton National Defense Authorization Act of 2011, which we discuss here. It authorizes COs to withhold up to ten percent of progress payments if the CO determines that the contractor’s business systems contain significant deficiencies. The new rule applies to solicitations issued on or after May 18, 2011. COs are encouraged to amend existing solicitations with the new requirements “to the extent feasible.”
Continue Reading Withholding payment for deficiencies in contractor business systems

Congress recently passed legislation (Section 893 0f the National Defense Authorization Act of 2011) requiring the Secretary of Defense to develop a program ensuring that “contractor business systems” provide timely, reliable information for the management of Department of Defense programs.  “Contractor business systems” include accounting systems, estimating systems, earned value management systems, material management and accounting systems, and property management systems. 

The program required by this legislation will set requirements for contractor business systems, establish a process for reviewing contractor business systems, and provide for disapproval of any contractor business system that has a significant deficiency.  If a contractor business system is disapproved, DoD will work with the contractor to develop a corrective action plan.  Until the system is approved, DoD may withhold up to 10 percent of progress and other payments on cost type contracts with contractors that are covered by the Cost Accounting Standards.Continue Reading New Scrutiny for “Contractor Business Systems”