Everyone knows the first rule of business is there are risks to be taken and rewards for taking those risks. But lately, when doing business with the Defense Department and other government agencies, it’s been all risk with little reward. In the government’s appropriate zeal to protect taxpayer dollars, it has forgotten that its business relationships with contractors are two-way streets. One place this is most evident is in the Defense Department’s proposed rule governing when it’s appropriate to withhold payments from contractors because of faulty business systems.
When initially proposed in January 2010, PSC found the rule failed to fully describe the attributes of each of the six business systems that a contractor would need to comply with in order to have an “approved” system. It’s hard to follow your customer’s wishes when the customer won’t define the boundaries and standards. We also found the enforcement and penalties in that proposal were disproportionate to the deficiencies identified and the risk to the government from one or more of those deficiencies. In some cases, Defense agencies would be allowed to withhold payments in situations where government dollars were NOT at risk, and that’s a risky proposition for any business. The customers’ auditors weren’t even required to review and validate fixes and release properly earned funds in a timely manner.
While the proposal was improved significantly with the Dec. 3 revision, it still falls short in several key areas, as PSC and other industry groups spelled out in comments submitted on January 10 by the Council of Defense and Space Industry Associations.
Among the key failings of the December rule:
Among the key failings of the December rule:
1. While the attributes of each of the six systems are better defined, inconsistencies remain among the procedures for dealing with a faulty system and between the proposed rule and existing parts of the Federal Acquisition Regulation.
2. The rule still doesn’t require Defense auditors to identify actual or potential cost impacts on the government of the system deficiencies they identify, meaning that the amount being withheld could still be disproportionate to the potential harm to the government.
3. The rule allows withholdings on fixed-price contracts, which makes no sense because, by definition, accounting systems aren’t used to determine the cost to government since that price is set prior to the start of work.
A final area of concern isn’t with the rule per se, but with an agency tasked with carrying out key portions of the rule: the Defense Contract Audit Agency (DCAA). DCAA is understaffed and its employees are not following accepted, standard auditing practices. This has several obvious implications for business, such as the possibility auditors will misdiagnose a flaw or fail to conduct the appropriate follow up exams when flaws are fixed. In either case, compliant contractors would suffer needlessly, and in the end that cost of carrying unreimbursed payments would be passed on to the taxpayer as a way of mitigating risk.
Clearly establishing the key attributes of the business systems is critical for both the Defense Department and its contractors. And both the department and contractors have an interest in identifying and minimizing risk. The December rule is an improvement over the earlier version but needs further improvement. We’re willing to help make these business systems an important component of smart contracting at DoD.
