Pentagon issues new rule for contractor business systems

June 5, 2011

The Defense Department has issued a new rule meant to ensure that contractor business systems such as accounting and estimating programs comply with government requirements.

The regulation — which is an interim rule but went into effect in mid-May — is the Pentagon’s third try at implementing new rules for these kinds of business systems.

In the latest version, the Defense Department makes clear that it is focused on “significant” deficiencies, meaning shortcomings in the systems that materially affect the Pentagon’s ability to rely on the information. Additionally, the regulation caps the total percentage that can be withheld from contractors with troubled systems at 10 percent — and at 5 percent when the deficiencies are only in one business system.

The rule does not apply to small businesses.

The Defense Department has stressed the importance of the policy as a key part of preventing waste, fraud and abuse.

“Weak control systems increase the risk of unallowable and unreasonable costs on Government contracts,” the Pentagon stated in its announcement of the new rule, adding that the clarified regulation will make the Defense Contract Audit Agency and the Defense Contract Management Agency more effective.

Alan Chvotkin, executive vice president and counsel at the Professional Services Council, an industry association, said the new version of the regulation represents a significant improvement over prior versions, which he said were not specific enough about what constituted a violation and had disproportionately harsh punishments.

“I was outraged at the first proposed rule, I was disappointed in the second proposed rule and I am cautious about the third rule,” he said. “We’re putting in place a more understandable and a more appropriate set of requirements.”

But D. Grayson Yeargin, a partner in Nixon Peabody’s government investigations and white-collar practice, said contractors remain concerned about the rule’s enforcement and whether it will be limited to significant problems.

“This rule has been met with a lot of hostility from the contractors from the beginning,” Yeargin said.

Chvotkin said he was concerned that the interim rule became effective immediately, even though the comment period has just begun.

The Pentagon, which cited “urgent and compelling reasons” as the motivation behind approving an interim rule, is accepting comments through July 18 that will be considered in readying a final rule.

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