The final rule related to the six Defense Federal Acquisition Regulation Supplement (DFARS) contractor business systems – Accounting, Earned Value Management, Estimating, Material Management, and Accounting, Property Management, and Purchasing – was adopted into law in February 2012 (DFARS Clause 252.242-7005, Contractor Business Systems). In addition to other implementation requirements, if a contractor is CAS-covered, the law requires Government Contracting Officers to withhold up to 10% of payments if any of these business systems contains a ‘significant deficiency.’ After several years of real-world experience with these requirements, we are now seeing the implications of how non-compliance can detrimentally affect contractors.
Department of Defense (DOD) Withholding Contractor Payments
A February 2017 Bloomberg article describes how the DOD withheld almost $210 million in billings from Sikorsky Aircraft (Capaccio, 2017), which was purchased by Lockheed Martin in November 2015. According to the Defense Contract Management Agency (DCMA), this is the largest Government contractor payment withholding ever.
A withholding of this magnitude, and the reason for the action, would be devastating to any contractor. The Sikorsky withholding stems from deficiencies in two of the six DFARS contractor business systems: Estimating and Earned Value Management. According to DFARS 252.242-7005, a significant deficiency relative to DFARS business systems is defined as “a shortcoming in the system that materially affects the ability of officials of the Department of Defense to rely upon information produced by the system that is needed for management purposes.”
Fortunately, a withholding can be decreased or removed entirely if a contractor acts quickly to remedy its identified deficiencies. Essentially, the contractor is given 45 days to “either correct the deficiencies or submit an acceptable corrective action plan showing milestones and actions to eliminate the deficiencies.” In the scenario discussed above, Lockheed Martin responded by issuing a corrective action plan for Sikorsky for both of the cited business systems which, according to Lockheed Martin, DCMA has approved. After final approval of the plan by the associated Contracting Officer, the withholding amount will be reduced to 2% of associated billings. In situations such as this, the approved corrective action plans must be strictly adhered to or the contractor risks having the withholding amount reverted to the initial percentage.
The majority of the Sikorsky withholding was related to deficiencies with its Estimating System, with payment being withheld beginning in April 2014. The withholding grew over time, reaching its peak in January 2017. The Sikorsky case provides an excellent example of how ignoring business system non-compliances can lead to substantial sums being withheld by the Government and the associated challenges in terms of both financial and past performance issues.
How You Can Use This Information
The failure to maintain and use the six DFARS business systems can result in significant financial penalties for contractors. Without question, it is worth the time and effort to keep these systems compliant. This is especially true since more new Government solicitations require acceptable business systems as a prerequisite for participation. Government contractors must familiarize themselves with the requirements of DFARS Clause 252.242-7005, Contractor Business Systems. If a business system deficiency is identified, the contractor must immediately draft a thorough corrective action plan for submission to and approval by the Government. Accordingly, compliance with all DFARS business systems requirements, as well as implementation of appropriate preventative measures, are two ways to help ensure position your company remains competitive in the Government contract marketplace.
What does CohnReznick Think?
CohnReznick appreciates the opportunity to help Government contractors identify potential solutions for various situations or challenges they may face. Toward that end, we have several resources you should look into:
- CohnReznick Insights (cohnreznick.com/insights): Provides CohnReznick’s latest insights on business trends, regulatory developments, and economic issues. You can subscribe to receive Insights e-newsletters by email.
- CohnReznick Website (cohnreznick.com): In addition to Insights, our website provides extensive information about all aspects of Accounting and Assurance, Tax, and Advisory services.
- CohnReznick GovCon360 (govcon360.com): Keeps you up-to-date on the ever-changing regulatory environment that is government contracting. From reference materials to educational presentations and thought leadership pieces on industry matters, GovCon360 is a valuable resource for the Government contracting professional.
Capaccio, A. (2017, February 13). Pentagon Holds Back Funds From Sikorsky Over Business Systems. Retrieved February 22, 2017, from https://www.bloomberg.com/news/articles/2017-02-13/pentagon-holds-back-funds-from-sikorsky-over-business-systems