The following passages from the proposed rule will disclose some key processes and begin to suggest its penalties. For those readers unfamiliar with the terminology, an "ACO" is an Administrative Contracting Officer.
"Subpart 242.70—Business Systems
242.70X1 Business system deficiencies.
(a) Definitions. "Acceptable business systems" and "Business systems" are defined in the clause at 252.242–7XXX, Business Systems.
(b) Reporting of deficiencies. The auditor or other cognizant functional specialist shall document deficiencies in a report to the ACO. The report shall describe the deficiencies in sufficient detail to allow the contracting officer to understand what the contractor would need to correct to comply with the applicable standard or system requirement, and the potential magnitude of the risk to the Government posed by the deficiency. Follow the procedures at PGI 242.70X1(b) for reporting of deficiencies.
(1) Initial determination of deficiencies. If the ACO makes a determination that there is a system deficiency, the ACO shall provide an initial determination of deficiencies and a copy of the report to the contractor and require the contractor to submit a written response in accordance with the clause at 252.242–7XXX, Business Systems.
(2) Evaluation of contractor's response. The ACO, in consultation with the auditor or cognizant functional specialist, shall evaluate the contractor's response and make a final determination.
(3) Notification of ACO final determination. The ACO shall notify the contractor in writing of the ACO's final determination with copies provided, as applicable, to the auditor; other cognizant functional specialists; and affected contracting activities and contract administration offices. The ACO shall take one of the following actions—
(i) Withdraw the initial determination of deficiencies. The ACO shall withdraw the initial notification if the contractor has corrected all deficiencies or the ACO agrees with the contractor's written response disagreeing with the initial determination of deficiencies; or
(ii) The ACO shall notify the contractor of the ACO's decision to implement payment withholding in accordance with the clause at 252.242–7XXX, Business Systems. The notice shall—
(A) Identify any deficiencies requiring correction;
(B) Inform the contractor that—
(1) The contractor must correct the deficiencies;
(2) The contractor must submit an acceptable corrective action plan within 45 days if the deficiencies have not been corrected within that 45 day timeframe;
(3) Payments shall be withheld in accordance with 252.242–7XXX, Business Systems, until the ACO determines that all deficiencies have been corrected; and
(4) The ACO reserves the right to take other actions within the terms and conditions of the contract.
(c) Monitoring contractor's corrective action. The Government shall monitor the contractor's progress in correcting the deficiencies and shall notify the contractor of the decision to decrease or increase the amount of payment withholding in accordance with 252.242–7XXX, Business Systems.
(d) Correction of system deficiencies.
(1) If the contractor notifies the ACO that the contractor has corrected the system deficiencies, the ACO shall request the auditor or other cognizant functional specialist to review the correction to determine if the deficiencies have been resolved.
(2) The ACO shall determine if the contractor has corrected the deficiencies.
(3) If the ACO determines the contractor has corrected all deficiencies, the ACO shall discontinue withholding payments.
(e) System review matrix. Refer to the matrix at PGI 242.70X1(e) to crossreference DCAA internal control reviews and other business system audits to the list of "business systems" defined at 252.242–7XXX, Business Systems."
Note the mandate above in 242.70X1(b)(3)(ii)(B)(3) to withhold payments until all deficiencies have been corrected. Note also in 242.70X1(c) above the ability of the ACO to decrease or increase the amount of payment withholding. Then in 242.70X1(d)(3) above the ACO may discontinue withholding payments when the ACO determines the contractor has corrected all deficiencies. The proposed rule continues:
"242.70X2 Contract clause.
Use the clause at 252.242–XXXX, Business Systems, in solicitations and contracts when the solicitation or contract includes any of the following clauses:
(a) 52.244–2, Subcontracts.
(b) 52.245–1, Government Property.
(c) 252.215–7002, Cost Estimating System Requirements.
(d) 252.234–7002, Earned Value Management System.
(e) 252.242–7004, Material Management and Accounting System.
(f) 252.242–7YYY, Accounting System Administration."
* * * * *
Note the reference in 242.70X2(a) above to subcontracts. Subcontracting is addressed in several subsequent locations within the proposed rule including at the end, in the topic area of contractor purchasing systems. Before that point we see other major systems of the contractor addressed in Part 252—Solicitation Provisions and Contract Clauses. We also see in Part 252 the proposed clause at 252.242–7XXX, Business Systems, addressing some key processes and the withholding-payments penalty.
"252.242–7XXX Business systems.
As prescribed in 242.70X2, use the following clause:
Business Systems (Date)
(a) Definitions. As used in this clause—
Acceptable business systems means business systems that comply with the terms and conditions of this contract.
Business systems means—
(1) Accounting system, if this contract includes the clause at 252.242–7YYY, 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 52.245–1, Government Property; and
(6) Purchasing system, if this contract includes the clause at 52.244–2, Subcontracts.
(b) General. The Contractor shall establish and maintain acceptable business systems in accordance with the terms and conditions of this contract.
(c) System deficiencies.
(1) The Contractor shall respond in writing within 30 days to an initial determination of deficiencies from the ACO that identifies deficiencies in any of the Contractor's business system.
(2) The ACO will evaluate the Contractor's response and notify the Contractor in writing of the final determination as to whether the business system contains deficiencies. If the ACO determines that the Contractor's business system contains deficiencies, the final determination will include a notice of a decision to withhold payments.
(d) Withholding payments.
(1) If the Contractor receives a final determination with a notice of the ACO's decision to withhold payments for deficiencies in a business system required under this contract, the ACO will immediately withhold ten percent of each of the Contractor's payments under this contract. 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 receipt of a notice of the ACO's intent to withhold, but has not completely corrected the identified deficiencies, the ACO will reduce the amount withheld to an amount equal to five percent of each payment until the ACO determines that the Contractor has corrected the deficiencies in the business system. However, if at any time the ACO determines that the Contractor fails to follow the accepted corrective action, the ACO will increase the amount of payment withheld to ten percent of each payment under this contract until the ACO determines that the Contractor has completely corrected the deficiencies in the business system.
(3) If the ACO is withholding payments for deficiencies in more than one business system, the cumulative percentage of payments withheld shall not exceed fifty percent on this contract.
(4) Notwithstanding any other rights or remedies of the Government under this contract, including paragraphs (d)(1) through (d)(3) of this clause, if the ACO 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 ACO will withhold up to one-hundred percent of payments until the ACO determines that the Contractor has corrected the deficiencies.
(5) 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.
(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 on any basis, the ACO may withhold payment in accordance with the provisions of this clause.
(8) The payment withholding authorized in this clause is not subject to the interest penalty provisions of the Prompt Payment Act.
(e) Correction of deficiencies.
(1) The Contractor shall notify the ACO in writing when the Contractor has corrected the business system's deficiencies.
(2) Once the Contractor has notified the ACO that deficiencies have been corrected, the ACO will take one of the following actions:
(i) If the ACO determines the Contractor has corrected all deficiencies in a business system, the ACO will discontinue the payment withholding under this contract associated with that business system and release any monies previously withheld that are not also being withheld due to deficiencies on other business systems under this contract. Any payment withholding in effect on other business systems under this contract will remain in effect until the deficiencies for those business systems are corrected.
(ii) If the ACO determines the Contractor has not corrected all deficiencies, the ACO will continue the withholding payments in accordance with paragraph (d) of this clause and not release any monies previously withheld.
(End of clause)"
Note the general requirement in 252.242–7XXX(b) above to establish and maintain acceptable business systems. Note the mandate in 252.242–7XXX(c)(2) above: "If the ACO determines that the Contractor's business system contains deficiencies, the final determination will include a notice of a decision to withhold payments." Next, note the mandate in 252.242–7XXX(d)(1) above to "immediately withhold ten percent of each of the Contractor's payments under this contract" for deficiencies in a business system. Then note 252.242–7XXX(d)(3) above explaining that deficiencies in more than one business system can justify withholding up to 50% of payments under the contract.
This already shocking proposed rule now gets worse. Note the 100% mandate in 252.242–7XXX(d)(4) above: "if the ACO 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 ACO will withhold up to one-hundred percent of payments until the ACO determines that the Contractor has corrected the deficiencies." Please note that there is no maximum time limit for withholding in this clause 252.242–7XXX. Instead, under 252.242–7XXX(e)(2)(ii) above it appears that withholding could theoretically continue indefinitely.
Most of the points noted above will be discussed later in this article. For the present, an observation appears warranted. If not earlier, then by this point it seems obvious that the decision makers behind this proposed rule would flunk our hypothetical Introduction to Procurement course. In fact, in my role as their helpful teacher I would encourage them to find a career outside the field of procurement.
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