You have an opportunity to comment, please use it. However, the only real way to prevent this proposed rule from becoming finalized it to contact your Congressional Representative loudly and
often.  Because this is another attempt to kill capitalization by the Obama administration.

Click here for a copy of the Fed Reg announcing this proposed rule

Of course nothing in the proposed rule, as described in the Federal Register, defines what manufacturing readiness and processes are and how that will be measured/determined during the source selection process.

Most likely DoD is floating this rule out there to get major manufactures input, through their comments, on how this would work, and what the parameters should be.

While most major prime contractors would be able to address this potential issue, it is the subcontractors on such MDAP that need to be concerned about the proposed rule.  Because it would not be the CO obtaining this information during the source selection process, but the prime obtaining the information from prospective subcontractors.  This could expose the subcontractors intellectual property as it relates to its manufacturing processes, to the prime.

This could put the subcontractor at a significant negotiating disadvantage with the prime.  Another area, from this administration, in a long line of new risks being faced by subcontractors.

Tim Di Guiseppe

Click here for a copy of the Federal Register and info on where to submit comments

Click here for  a copy of the White Paper

Under this propose rule the DoD IG wants to supplement the FAR with a DFARS Clause that would make it mandatory for all DoD contractors (regardless of size or adequacy of internal ethics and conduct programs) to display the DoD IG hotline posters. 

Comments on the proposed rule should be submitted in writing to the address shown below on or before May 10, 2011, to be considered in the formation of the final rule.

My guess is that regardless of any comments against this propose rule, it will be implemented, so be prepared to post the additional posters and for DCAA to ensure such posters are posted during their audits. 

Click here for a link to the Federal Register

Click here for a link to the Federal Registor for DFARS Case 2009-D031

1. High-Visibility Procurement & Audit Issues
2. DCAA and Access to Contractor Records
3. Proposed DFARS Rule – Withholding Payments to DoD Contractors
4. Contractor Business Systems and Internal Controls
5. Ensuring a Compliant Cost Accounting System
6. Prime Contractor Management of Subcontractors
7. Interim Rule to Increase Competition in Major Defense Acquisition Programs (MDAP)
8. How to Survive a DCAA Audit

Click here for a copy of the PowerPoint document

This rule will make it very difficult for contractors to hold on to proprietary technical data.  It is the government’s way of obtaining all the technical data developed during a contractor’s Independent Research and Development efforts in coming up with new or improved MDAP products. 

Obtaining this data will allow the government to release the technical data in subsequent RFPs to the developing contractor’s competitors; thereby putting that contractor at a financial disadvantage.  Through this process the contractor’s competitors will obtain all the necessary technical data to produce the product without incurring any of the development expense.

 The potential back lash to DoD is that contractors refuse to incur the cost of research to create new or improved MDAP products knowing that DoD will just release the technical data to its competitors on future RFPs.

For further information please contact Tim Di Guiseppe at TD Government Solutions, tim.diguiseppe@tdgovernmentsolutions.biz

www.tdgovernmentsolutions.biz  

Office 814-535-7046

Cell 814-242-2410

Fax 814-260-4222

Click link to obtain a PDF of this Article

As we briefly noted in our January 2010 newsletter, DPAP (Defense Procurement and Acquisition Policy) has proposed a rule to address contractor business systems. The Federal Register (Vol. 75, No. 10, January 15, 2010) issued a proposed amendment to DFARS to improve the effectiveness of DoD oversight of contractor business systems (internal controls). The proposed rule defines contractor business systems and will implement compliance enforcement mechanisms which include withholding payments for business systems which contain deficiencies. Of particular note, interested parties should submit comments in writing on or before March 16, 2010.

In terms of the impetus for this proposed rule, it is clearly aimed at resolving the alleged dysfunctional relationship between DCAA and DCMA as reported by the Commission on Wartime Contracting (CWC). Most recently, the CWC Special Report on Contractor Business Systems, dated September 21, 2009 (available at www.wartimecontracting.gov) reported five systemic problems, and number one is the ―divergent and often contradictory behaviors (DCAA and DCMA) sending mixed messages to contractors‖. This is an obvious embarrassment to the DoD and by all indications the reason for the petulant response in the form of the proposed DFARS rule.

Regardless of the fact that the proposed rule is attributable to the issues solely attributed to wartime contracting, it is a much broader proposed rule and it will likely result in changes to the regulatory requirements relative to all DoD contractor internal controls or as coined by the CWC, ―business systems‖. In addition to the definition of six business systems (estimating, purchasing, property management, earned value management systems, material management and accounting systems) , the proposed rule includes enforcement provisions which range from 5% to 100% withholdings applied to contractor invoices (public vouchers and progress payments).

On a positive note, the rule clearly assigns the decision making authority to the contracting officer who would rely on DCAA audits to make a decision as to the adequacy of a business system. Applied to the overall accounting system the expectation is stated in terms of the system providing reasonable assurance that laws and regulations will be complied with, data is reliable, and risk of misallocations and mischarges are minimized (other systems have system specific criteria delineated in the proposed rule). However, the rule fails to define any measurable objective standards unless such standards already exist (e.g. MMAS or Material Management and Accounting Systems which does have for example a specific ―desirable‖ level of inventory accuracy of 95%).

The DPAP website has also publicized its creation of a subcommittee on ―Contractor Business Systems Issues‖ whose focus areas include the assessment of the need for standards (such as those published for Earned Value Management Systems (EVMS)) for the various business systems. Unfortunately and inexplicably DPAP has disconnected the critical issue of defining the standards for measuring business systems from the DFARS rule making process on business systems. The DFARS proposed rule appears to have a placeholder for the outcome of the subcommittee with respect to standards for business systems; hence, public comments on the DFARS proposed rule are in something of a vacuum with respect to the full, ultimate context of the DFARS rule. We are left to comment on a proposed rule arguably missing its most critical component; analogous to voting on a government referendum and only knowing part of the referendum while deferring to a government subcommittee to ―fill in the blank‖ at a later date.

As it relates to standards which would otherwise define business systems requirements for an accounting system, the proposed rule essentially incorporates the SF1408 criteria (Standard Form 1408 which is currently used to document a government/DCAA assessment of a contractor’s accounting system before awarding a contract to a contractor). Before listing the 17 requirements, the proposed rule includes the statement, ―including but not limited to, as applicable‖ (with respect to the list of 17 criteria). Open-ended regulations simply cannot result in consistent interpretations, particularly when the government audit agency (DCAA) freely interprets and applies requirements over and above any stated requirements (see related discussion in the article on Bid Protest).

In many cases, the first obstacle or issue will continue to be the question of ―as applicable‖ because most DCAA auditors view applicability in the broad context of government contracting and not in the narrow context of the specific contract or solicitation to which the instant SF 1408 evaluation applies. Ultimately, government contractors will continue to face DCAA’s free-wheeling interpretations of requirements over and above the stated requirements because the wording of the proposed rule simply opens the door to a much more expansive definition of accounting system requirements.

As it pertains to the ominous withhold (enforcement) provisions, these are viewed by DPAP as necessary presumably because DCMA has asserted that current regulations do not provide for administrative withholds in contrast to interpretations by DCAA (another DCAA interpretation which appears to be inconsistent with and more unfavorable to contractors than the actual regulation; imagine that). The proposed withholds are 10% for a business system (with one or more deficiency) up to 50% for more than one business system (i.e. five or six business systems, each with one or more uncorrected deficiency would result in a mandatory withhold of 50% of all government public voucher or progress payments). And of course, the ultimate withhold of 100% of contractor payments for deficiencies ―highly likely‖ to lead to improper contract payments‖. As proposed a contractor could find itself without any government payments (100% withholds) based upon no actual mischarges or overbillings, but merely a deficiency which is ―highly likely to lead to‖ improper contract payments. If a system deficiency is ―highly likely‖ to lead to improper contract payments, even a moderately skilled auditor should be able to uncover the actual overpayments as opposed to effecting a rule which imposed an arbitrary 100% withhold.

There are provisions to reduce withholds to 5% wherein a contractor has prepared an acceptable corrective action plan, but not fully implemented that plan. Of course the corrective action plan must be acceptable which is defined nowhere within the proposed rule.

Unless we’ve missed the exemption, the DFARS proposed rule will be applicable to all DoD contracts (large business or small business) although the proposed rule specifically asks for comments from small entities as to the expected impact on those small entities (we are not sure why DPAP introduced the otherwise undefined terminology of small entities instead of using the more tradition reference to small business). No doubt, small entities will be receptive to the proposed rule and the idea of investing hundreds of thousands for business systems solely to be able to obtain DOD contracts; well maybe not so receptive.

Of passing note, FAR 52.203-13 imposed internal controls requirements, but only on contracts in excess of $5 million and not applicable to small businesses. By implication and by no means unique to this particular DFARS proposed rule, DOD contractors are once again going to be held to a higher standard than are government contractors in general.

There is significantly more to the proposed rule which can be accessed by going to the Federal Register regulations.gov and search for DARS-2010-0001-0001. All DoD contractors are encouraged to read the proposed rule and to comment on the proposed rule. Certainly Beason & Nalley will be submitting comments with respect to the DFARS proposed rule.

Click here for a copy of the article

Click here to view Case

Army fixed price contract for aircraft maintenance with option years.

The government moves for summary judgment arguing that appellant’s claim for $26,061,962.00 for alleged mistakes during the submission of proposals is barred by the six year statute of limitations set forth in the CDA. The Board denies the motion to dismiss for the base year claim “without further development of the record about when appellant knew or should have known of the alleged mistakes in the backup sheets for the FPR.” With respect to the option years, the Board finds the “claim is subject to the continuing claim doctrine which we have determined to have application to government contract cases.” and that the claim was filed less than six years from the exercise of the first option and is therefore properly before the Board.

Click this link for the Obama memorandom to agency execs

OMB Guidance – Better Contract Planning

OMB memo – Improving the use of Contractor Performance Information

OMB memo – Improving Government Acquisition