Contractors prepare for new rules on their business systems

A new defense acquisition regulation finalized in February means the Pentagon can withhold a percentage of payments on designated contracts if a company’s business systems — from accounting to purchasing to estimating systems — don’t meet government requirements.

The Pentagon says the regulation is meant to ensure the systems’ accuracy and prevent fraud, but contractor representatives said many companies are worried about how the rule will actually be used.

Timothy Callahan, executive director for contracts at the Defense Contract Management Agency.

(Jeffrey MacMillan/Capital Business) - Alan Chvotkin, executive vice president and counsel, Professional Services Council.

Software firm Compusearch last week convened experts to discuss the new rule:

Timothy Callahan
Executive director for contracts at the Defense Contract Management Agency

Callahan said the new regulation aims to ensure that business systems act as “the first line of defense against fraud, waste and abuse in Department of Defense contracts.”

Still, he said the government has put in place a review board to provide another layer of consideration before a business system is determined deficient.

“The end game is not to disapprove business systems and withhold payments,” Callahan said. “Our desired outcome is for the contractors to have systems that are approved so we can rely upon the information that’s produced to help us manage our programs more effectively.”

He said contractors should be engaged throughout the process, and “there should be no surprises.”

At this point, Callahan noted, “we have had very few disapprovals of business systems.”

Robert A. Burton

Partner, Venable

As a former government official, Burton said he used to think regulations were “perfect.” But now that he’s a contracting attorney, he understands the complexity of making regulations work as envisioned.

In particular, Burton said contractors are concerned that the Defense Contract Audit Agency, which audits contractor business systems, has a reputation for moving aggressively.

“In the short span of time we’ve been dealing with this, [there are] instances in which I don’t think that it’s necessarily been fairly implemented,” he said. “I think contractors rightly need to be very concerned about this.”

Alan Chvotkin

Executive vice president and counsel, Professional Services Council

Chvotkin offered a more upbeat review, explaining that PSC, an industry group, has seen improvements in the regulation over time from a focus on simply withholding contractor fees to an approach that prioritizes fixing the systems.

“The first [version of the] rule in my view was a withholding rule first, then ask questions later,” he said. “The rule has been flipped and it now provides for contractor engagement and response at every opportunity. So it has really moved to a compliance rule rather than a withholding rule.”

He said the details of the rule have been made more clear, and “contractors that have been engaged in the process ... should not be surprised about what their obligations are.”

Robin Schulze

Director in Baker Tilly Virchow Krause’s government contractor advisory services practice

Schulze expressed concern that contractors could face a hefty price to make sure their systems comply.

Contractors’ “overhead rates are all going to go skyrocket again, and at a time when the [Defense] Department’s trying to make sure that they get things cheaper,” she said. “You can’t keep adding regulations that require compliance and not expect there to be an associated cost with that.”

Still, she said contractors will likely adjust. “The longer some of these processes are in place, the more comfortable the folks will get with it,” Schulze said.