Defense Federal Acquisition Regulation Supplement; Business Systems-Definition and Administration, 28856-28879 [2011-11691]

Agencies

• Defense Acquisition Regulations System
• DEPARTMENT OF DEFENSE

[Federal Register Volume 76, Number 96 (Wednesday, May 18, 2011)]
[Rules and Regulations]
[Pages 28856-28879]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11691]



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Vol. 76

Wednesday,

No. 96

May 18, 2011

Part II





Department of Defense





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Defense Acquisition Regulations System



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48 CFR Parts 215, 234, 242 et al.



Defense Federal Acquisition Regulation Supplement; Business Systems--
Definition and Administration; Interim Rule

Federal Register / Vol. 76 , No. 96 / Wednesday, May 18, 2011 / Rules 
and Regulations

[[Page 28856]]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 215, 234, 242, 244, 245, and 252

[DFARS Case 2009-D038]
RIN 0750-AG58


Defense Federal Acquisition Regulation Supplement; Business 
Systems--Definition and Administration

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Interim rule with request for comments.

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SUMMARY: DoD is amending the Defense Federal Acquisition Regulation 
Supplement (DFARS) to improve the effectiveness of DoD oversight of 
contractor business systems.

DATES: Effective date: May 18, 2011.
    Comment date: Comments on the interim rule should be submitted in 
writing to the address shown below on or before July 18, 2011, to be 
considered in the formation of the final rule.
    Applicability date: This rule applies to solicitations issued on or 
after May 18, 2011. Contracting officers are encouraged, to the extent 
feasible, to amend existing solicitations (including solicitations for 
delivery orders and task orders) in accordance with FAR 1.108(d), in 
order to include the clause at DFARS 252.242-7005, Contractor Business 
Systems, as applicable, in contracts (including delivery orders and 
task orders) to be awarded on or after May 18, 2011, and shall amend 
existing solicitations (including delivery orders and task orders) in 
accordance with FAR 1.108(d), in order to include the clause at DFARS 
252.242-7005, Contractor Business Systems, as applicable, in contracts 
to be awarded on or after August 16, 2011.

ADDRESSES: You may submit comments, identified by DFARS Case 2009-D038, 
using any of the following methods:
    [cir] Regulations.gov: https://www.regulations.gov. Submit comments 
via the Federal eRulemaking portal by inputting ``DFARS Case 2009-
D038'' under the heading ``Enter keyword or ID'' and selecting 
``Search.'' Select the link ``Submit a Comment'' that corresponds with 
``DFARS Case 2009-D038.'' Follow the instructions provided at the 
``Submit a Comment'' screen. Please include your name, company name (if 
any), and ``DFARS Case 2009-D038'' on your attached document.
    [cir] E-mail: dfars@osd.mil. Include DFARS Case 2009-D038 in the 
subject line of the message.
    [cir] Fax: 703-602-0350.
    [cir] Mail: Defense Acquisition Regulations System, Attn: Mr. Mark 
Gomersall, OUSD (AT&L) DPAP (DARS), Room 3B855, 3060 Defense Pentagon, 
Washington, DC 20301-3060.
    Comments received generally will be posted without change to https://www.regulations.gov, including any personal information provided. To 
confirm receipt of your comment(s), please check https://www.regulations.gov approximately two to three days after submission to 
verify posting (except allow 30 days for posting of comments submitted 
by mail).

FOR FURTHER INFORMATION CONTACT: Mr. Mark Gomersall, 703-602-0302.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published an initial proposed rule for Business Systems--
Definition and Administration (DFARS Case 2009-D038) in the Federal 
Register on January 15, 2010 (75 FR 2457). Based on the comments 
received and subsequent revisions to the proposed rule, DoD published a 
second proposed rule on December 3, 2010 (75 FR 75550). The public 
comment period closed January 10, 2011. On January 7, 2011, the Ike 
Skelton National Defense Authorization Act (NDAA) for Fiscal Year (FY) 
2011 was signed into law (Pub. L. 111-383). NDAA section 893, 
Contractor Business Systems, set forth statutory requirements for the 
improvement of contractor business systems to ensure that such systems 
provide timely, reliable information for the management of DoD 
programs. Based on the comments received, the requirements of the NDAA, 
and subsequent revisions to the proposed rule, DoD is publishing this 
interim rule with request for comments.
    Contractor business systems and internal controls are the first 
line of defense against waste, fraud, and abuse. Weak control systems 
increase the risk of unallowable and unreasonable costs on Government 
contracts. To improve the effectiveness of Defense Contract Management 
Agency (DCMA) and Defense Contract Audit Agency (DCAA) oversight of 
contractor business systems, DoD is clarifying the definition and 
administration of contractor business systems as follows:
    A. DoD is defining contractor business systems as accounting 
systems, estimating systems, purchasing systems, earned value 
management systems (EVMS), material management and accounting systems 
(MMAS), and property management systems.
    B. DoD is implementing compliance enforcement mechanisms in the 
form of a business systems clause which includes payment withholding 
that allows contracting officers to withhold a percentage of payments, 
under certain conditions, when a contractor's business system contains 
significant deficiencies. Payments could be withheld on--
     Interim payments under--
    [cir] Cost-reimbursement contracts;
    [cir] Incentive type contracts;
    [cir] Time-and-materials contracts;
    [cir] Labor-hour contracts;
     Progress payments; and
     Performance-based payments.

II. Discussion and Analysis

A. Analysis of Public Comments

    The comments received in response to the second proposed rule have 
been analyzed and dispositioned as discussed below. The comments 
received were grouped under 34 general topics. A summary of the 
comments follows:
1. Business Systems
a. Earned Value Management Systems (EVMS)
    The following comments were submitted concerning Earned Value 
Management Systems (EVMS):
    Comment: Some respondents expressed concern over disapproval of EVM 
systems if the system is not validated within 16 months since DCMA is 
not currently able to meet this timeline.
    Response: The rule requires contracting officers to determine the 
acceptability of the contractor's earned value management system in 
consultation with the functional specialist and auditor. Contracting 
officers are expected to consider all facts at their disposal when 
making such determinations. However, circumstances outside of a 
contractor's control may inhibit the initial validation of a 
contractor's EVMS. Therefore, 234.201(7)(iii)(A)(2)(ii) has been 
revised to state that the system will be disapproved ``when initial 
validation is not successfully completed within the timeframe approved 
by the contracting officer * * *''
    Comment: Conditions for disapproval of an EVM system are 
inconsistent where the definition of an acceptable EVMS means that the 
system generally complies with system criteria while the identification 
of a single deficiency can make a system unacceptable. Furthermore, 
while some respondents expressed concern that EVM system deficiencies 
are related to ill-defined

[[Page 28857]]

contractual requirements, other respondents indicated that criteria for 
disapproval of an EVM system are too strict and should be more 
subjective.
    Response: The rule requires contracting officers to determine the 
acceptability of the contractor`s earned value management system in 
consultation with the functional specialist and auditor. Contracting 
officers are expected to consider all facts at their disposal when 
making such determinations. Section 893 of the FY11 NDAA requires 
systems to be disapproved when there is a shortcoming in the system 
that affects materially the ability of DoD officials to rely on 
information produced by the system for management purposes. This 
interim rule is consistent with this requirement. In the case of EVM 
systems, this means the system has one or more significant deficiencies 
due to the contractor's failure to comply with the system criteria in 
the clause at 252.234-7002, Earned Value Management System. Since a 
system will only be disapproved when a significant deficiency exists, a 
system with deficiencies that do not materially affect the Government's 
ability to rely on information produced by the system is considered an 
acceptable system in accordance with the definition at 252.234-7002. 
Therefore, this rule is not inconsistent with the definition of an 
acceptable EVMS.
b. Estimating System
    The following comments were submitted concerning estimating 
systems:
    Comment: The respondent indicated that it is unreasonable for an 
acceptable estimating system to include controls for the contractor to 
compare projected results to actual results and analyze the 
differences. This is a major change in policy concerning fixed-price 
contracts and will open the door to wholesale Government access to 
contractor costs during fixed-price contract performance.
    Response: This interim rule sets forth specific criteria for 
maintaining an acceptable estimating system. It is not unreasonable for 
a contractor to establish and maintain an acceptable estimating system 
that would include controls for the contractor to compare projected 
results to actual results and analyze any differences. Such controls 
provide a valuable metric for demonstrating the accuracy of estimates 
produced by the system. Systems that consistently produce accurate 
estimates with a reasonable degree of confidence can significantly 
reduce the number of Government resources required to review cost and 
price proposals. Accurate estimates also provide substantial advantages 
to the contractor by allowing a more accurate forecast of the projected 
rate of return. This existing requirement was relocated from 215.407-5-
70 to the clause at 252.215-7002, Cost Estimating System Requirements.
c. Accounting Systems
    The following comments were submitted regarding accounting systems:
    Comment: The respondent recommended deleting the phrase ``or 
functional specialist'' from 242.7502(d)(2)(ii)(C). The respondent 
recommended that the 45 day period be extended to a 60 day period for a 
contractor to correct a deficiency or submit a corrective action plan 
as is currently in the DFARS. The policy at 242.7502(d)(2)(ii)(A) 
should include a requirement that the contracting officer's 
notification to the contractor include ``sufficient detail to allow the 
contractor to understand the deficiencies and the potential impact to 
the Government'' as is required in other system deficiency 
notifications. Finally, the respondent recommended that DCAA focus on 
the adequacy of a contractor's accounting system rather than the 
adequacy of the contractor's control environment and overall accounting 
system controls.
    Response: The term functional specialist needs to be retained. When 
specialized expertise is required, the interim rule requires 
contracting officers to consult with auditors and other individuals 
with specialized experience, as necessary, to ensure a full 
understanding of issues. For example, certain issues relating to 
forecasted costs may require the expertise of engineers, price 
analysts, and others, to understand or evaluate the contractor's 
business system. It is not necessary to extend the 45 day period to 60 
days. The contractor will be notified formally of deficiencies at the 
completion of the audit, and will be allowed 30 days to respond to the 
contracting officer's initial determination. The contractor will be 
well aware that a deficiency may need to be corrected and a corrective 
action plan may be needed well before that 45 day period begins. For 
clarity, the language pertaining to ``sufficient detail'' in a 
contracting officer's notification has been revised to state that a 
contracting officer's notification will provide ``a description of each 
significant deficiency in sufficient detail to allow the contractor to 
understand the deficiency.'' DCAA will be reporting significant 
deficiencies in accordance with the new business systems rule.
    Comment: The rule requires periodic monitoring of the accounting 
system but does not provide a definition of what the expectation or 
frequency of the accounting system reviews should be. Furthermore, the 
rule fails to recognize leading practices implemented in industry 
through continuous monitoring and exception reporting.
    Response: The size and complexity of companies and their processes, 
operations, and accounting systems capabilities vary. Therefore, it is 
not feasible to establish specific requirements regarding the extent or 
frequency of periodic monitoring.
    Comment: The respondent expressed concern that immaterial audit 
issues resulting from CAS 405 noncompliance audit reports will be 
considered significant, resulting in payment withholding and disputes. 
The respondent recommended eliminating accounting system criterion 
number 12 from the rule since remedies already exist through the 
application of the CAS administration clause as well as the Allowable 
Cost and Payment clause at FAR 52.216-7.
    Response: The rule establishes criteria for an acceptable 
accounting system to provide reasonable assurance that applicable laws 
and regulations are complied with, accounting system and cost data are 
reliable, risk of misallocations and mischarges are minimized, and 
contract allocations and charges are consistent with billing 
procedures. An essential characteristic of an adequate accounting 
system for Government contract costing is the ability of the system to 
identify and exclude unallowable costs from costs charged to Government 
contracts. The remedies provided in the CAS administration clause and 
the Allowable Cost and Payment clause at FAR 52.216-7 do not replace 
the need for this essential control within a contractor's accounting 
system.
    Comment: Accounting system criterion number 17 introduces the 
subjective and undefined terms ``adequate'' and ``reliable'' with 
regard to accounting systems providing data to be used to support 
follow-on acquisitions. It is not appropriate to tie the basis of 
estimates for proposals to the accounting system. Including this 
criterion in the accounting system and estimating system criteria is 
redundant.
    Response: The variation and complexity of business systems is such 
that it is not practical to eliminate subjective terms entirely. While 
the terms ``adequate'' and ``reliable'' imply a degree of subjectivity, 
they are sufficiently common to enable reasonable parties to agree on 
the set of

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necessary characteristics to meet each threshold given the unique set 
of circumstances. It is not inappropriate to draw a connection between 
the basis of estimates for proposals and the accounting system. 
Achieving consistent and accurate estimates is dependent on obtaining 
accurate and reliable information, which often includes reported 
information about past results produced by the accounting system. The 
weight assigned to past results in developing estimates will vary 
depending on a variety of factors, including the similarity of past 
circumstances and the anticipated circumstances for which the estimate 
is being developed. In the case of a follow-on acquisition, as noted by 
the respondent, the circumstances are often similar, and thus actual 
results produced by the accounting system are likely to play a 
prominent role in developing the estimate. Estimators will likely 
improve accuracy when they consider the accounting system results 
during the development of their bases of estimates whether or not the 
acquisition is a follow-on acquisition.
    Comment: Referencing 242.7502(g)(2)(v), which identifies reducing 
the negotiation objective for profit or fee as a means to mitigate risk 
of accounting system deficiencies, the respondent expressed concern 
that such reductions would be punitive to contractors beyond other 
measures in the rule. The respondent recommended removal of this 
paragraph.
    Response: This interim rule does not limit the contracting 
officer's discretion to apply any and all regulatory measures, as 
warranted by the circumstances, including mitigating the risk of 
accounting system deficiencies by reducing the negotiation objective 
for profit or fee.
d. Purchasing Systems
    The following comments were submitted regarding purchasing systems:
    Comment: DFARS 252.244-7001 requires purchasing policies that 
``comply with the Federal Acquisition Regulation (FAR) and the Defense 
FAR Supplement (DFARS).'' The respondent requested that the rule 
clarify that requirements being imposed on contractors are done via 
contract clauses.
    Response: All contractual requirements are identified and 
accomplished through contract clauses. There is no need to issue such a 
clarifying statement in this rule.
    Comment: The definitions of subcontracts and purchase orders should 
be revised to exclude agreements with vendors that would normally be 
applied to a contractor's G&A expenses or indirect costs.
    Response: Because the Government reimburses contractors for its 
applicable share of indirect expenses, it would be inappropriate to 
revise the definitions of subcontracts and purchase orders to exclude 
agreements with vendors that would normally be applied to a 
contractor's G&A expenses or indirect costs.
    Comment: Purchasing system criteria under items 252.244-7001(c)(2) 
and (c)(19) in the purchasing system clause appear to be redundant.
    Response: Purchasing system criteria under 252.244-7001(c)(2) and 
(c)(19) are not redundant. The criterion under (c)(2) requires the 
contractor to include all flowdown clauses, including terms and 
conditions and any other clauses needed to carry out the requirements 
of the prime contract, in all applicable purchase orders and 
subcontracts, while the criterion under (c)(19) requires the contractor 
to establish and maintain policies and procedures to ensure the 
requirements of (c)(2) are accomplished.
    Comment: The rule should establish a threshold under purchasing 
system criterion (c)(4) for the documentation of purchase orders (e.g., 
$3,000).
    Response: Since certain requirements should apply to all purchases, 
no threshold has been added in (c)(4).
    Comment: The purchasing system criterion under item (c)(8) should 
be revised to be consistent with FAR part 15.
    Response: This rule does not conflict with the extensive language 
under FAR part 15. The wording in (c)(8) and FAR part 15 is not 
inconsistent.
    Comment: Purchasing system criteria under items (c)(10) and (c)(22) 
appear to be redundant.
    Response: Purchasing system criteria under 252.244-7001(c)(10) and 
(c)(22) are not redundant. The criterion under (c)(10) requires the 
contractor to perform timely and adequate cost or price analysis and 
technical evaluation for each subcontractor and supplier proposal or 
quote to ensure fair and reasonable subcontract prices, while the 
criterion under (c)(22) requires the contractor to establish and 
maintain procedures to ensure the requirements of (c)(10) are 
accomplished.
    Comment: Notification of subcontract awards that contain FAR and 
DFARS clauses allowing for Government audits should not be required in 
the purchasing system criterion under item (c)(16) since these clauses 
are required flowdowns on all direct-funded subcontracts.
    Response: The notification requirement under purchasing system 
criterion (c)(16) is appropriate. This criterion does not require 
flowdown of FAR and DFARS clauses, but instead establishes the 
requirement that the contractor notify the Government of the award of 
all subcontracts that contain the FAR and DFARS flowdown clauses that 
allow for Government audit of those subcontracts, and ensure the 
performance of audits of those subcontracts.
    Comment: The purchasing system criterion under item (c)(23) should 
be clarified so that the requirements are applicable to first-tier 
subcontractors.
    Response: The suggested change to (c)(23) would make it 
inconsistent with the definition in FAR 44.101. Therefore, no change 
has been made.
e. Property Systems
    The following comments were submitted regarding property systems:
    Comment: Replace the phrase ``previously unapproved'' property 
management systems with the phrase ``disapproved'' for consistency.
    Response: The phrase ``previously unapproved property management 
system'' in 245.105(e) has been replaced with the phrase ``previously 
disapproved property management system'' for consistency.
    Comment: The proposed rule property system terminology is 
inconsistent with current FAR part 45. The proposed rule provides for 
``approval/disapproval'' of a system while FAR part 45 and FAR clause 
52.245-1 use the verbiage ``adequate/inadequate.''
    Response: The language in DFARS 245 supplements the FAR language, 
and is consistent with other business system sections as well as with 
section 893 of the NDAA.
    Comment: One respondent stated that it is unclear whether the 
proposed rule uses a two-step process for approval/disapproval of a 
property system where the Government property administrator initially 
determines if a deficiency exists that would make the system 
``inadequate'' and then works with the contracting officer to determine 
if the system is ``approved/disapproved'' and whether payment 
withholding is required, or if the Government property administrator is 
acting as an agent of the cognizant contracting officer using a one-
step process. Another respondent suggested that property administrators 
should have the authority to approve contractor property management 
systems, and report system deficiencies to the cognizant contracting 
officer recommending disapproval.

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Disapproval authority should reside with the cognizant contracting 
officer.
    Response: DFARS 245.105 is clear that Government property 
administrators are responsible for providing recommendations and 
reporting system deficiencies to the cognizant contracting officer, 
including recommendations regarding contractor property management 
system approval or disapproval. However, system approval or disapproval 
authority shall remain with the cognizant contracting officer.
2. Resources and Resolution Timing
    Comment: DCMA and DCAA are under-resourced to execute the 
requirements of the rule. DCAA does not have resources to perform 
timely follow-up audits/system reviews or coordinate in a timely manner 
with contracting officers to remove payment withholdings, and 
contracting officers do not have the training to determine if a 
deficiency makes a system inadequate. There must be accountability 
within DCAA to conduct timely follow-up audits. Respondents recommended 
that contractors should be allowed to request follow-up audits when 
deficiencies are corrected; it should be mandated that DCAA and DCMA 
perform follow-up audits within 30 days of contractor notification that 
a deficiency has been corrected; and that the rule should permit 
qualified third party auditors to provide various accreditations and 
audits, as is the case with ISO standards or CMMI approvals.
    Response: The need to have effective oversight mechanisms is 
unrelated to resources. This rule does not add additional oversight 
responsibilities onto DCAA and DCMA; it merely provides provisions to 
help protect the Government from the contractor's failure to maintain 
business systems, as is required by the terms and conditions of their 
contracts. Contracting personnel will make appropriate determinations 
in accordance with this rule. DCMA and DCAA have been working closely 
to align their resources and ensure work is complementary. The 
increased cooperation and coordination between DCAA and DCMA will 
enable us to employ audit resources where they are needed. Further, the 
rule has been revised to require the contracting officer to reduce the 
payment withholding by at least 50 percent if the contracting officer 
has not made a determination whether the contractor has corrected all 
significant deficiencies as directed by the contracting officer's final 
determination, or has not made a determination whether there is a 
reasonable expectation that the corrective actions have been 
implemented.
3. Contractor Appeals
    Comment: DoD needs a contractor appeals process for implementing 
the payment withholding. The rule should be modified to require 
discussion with the PEO and/or SAE before any payment withholding 
action is taken. Due to the vague nature of the system criteria and 
subjective nature of the audit assessments, it will be difficult for 
contractors to challenge payment withholding determinations under the 
Contract Disputes Act.
    Response: The final deficiency determination is at the sole 
discretion of the contracting officer. However, prior to making a final 
deficiency determination, contractors are afforded an opportunity to 
respond in writing within 30 days to an initial determination of 
deficiencies from the contracting officer that identifies significant 
deficiencies in any of the contractor's business systems. It is not 
necessary or appropriate to develop a dispute resolution process beyond 
that which is already available by statute and regulation. 
Additionally, other avenues of dispute resolution outside of the 
Contract Disputes Act are available for resolving disputes that may 
arise over determinations of system deficiencies. The policy set forth 
in FAR 33.204 still applies, so that informal negotiation and alternate 
dispute resolution remain available, and, in fact, are encouraged as 
alternative methods of resolving disputes.
4. Risk of Harm and Materiality of Deficiencies
    Comment: ``Risk of harm'' must be substantiated and verified. The 
final rule should define the phrase ``potential risk of harm to the 
Government'' which incorporates a nexus between the amount withheld and 
the specific harm that may accrue to the Government based on the system 
deficiency, and require that a deficiency be ``material'' or 
``significant.'' It is impossible to determine whether the proposed 
controls and remedial actions of this rule are reasonable and 
commensurate with the Government's risks. Payment withholdings are 
liquidated damages in disguise and, if excessive to the Government's 
risk, will be viewed as punitive.
    Response: The intent of the rule is to authorize payment 
withholding when the contracting officer finds that there are one or 
more significant deficiencies due to the contractor's failure to meet 
one or more of the system criteria. The rule has been revised to 
consider significant deficiencies in determining the adequacy of a 
contractor's business system and potential payment withholding in 
accordance with section 893 of the FY11 NDAA. Contract terms explicitly 
require contractors to maintain the business systems in question as a 
condition of contracting responsibility and, in some cases, eligibility 
for award. Contract prices are negotiated on the basis that contractors 
will maintain such systems, so that the Government does not need to 
maintain far more extensive inspection and audit functions than it 
already does. Failure of the contractor to maintain acceptable systems 
during contract performance deprives the Government of assurances for 
which it pays fair value. While not ``deliverable'' services under 
specific contract line items, these business systems are material 
terms, performance of which is required to ensure contracts will be 
performed on time, within cost estimates, and with appropriate 
standards of quality. The payment withholding remedy provides a measure 
of the overall contract performance of which the Government is deprived 
during the performance period, and for which the contractor should not 
receive the full financing payments. DoD is relying on the temporary 
payment withholding amounts, not as a penalty for a deficiency, but as 
representing a good-faith estimate sufficient to mitigate the 
Government's risk where the actual amounts are difficult to estimate or 
quantify. Deficiencies that do not directly relate to unallowable or 
unreasonable costs still pose risks to the Government, and may lead to 
harm that may not be calculated readily when the deficiencies are 
discovered. In most cases, the financial impact of a system deficiency 
cannot be quantified because the system produces unreliable 
information. When the financial impact of a deficiency is quantifiable, 
DoD expects contracting officers to take appropriate actions to reduce 
fees, recoup unallowable costs, or take legal action if fraudulent 
activity is involved.
5. Definition of Deficiency
    Comment: The term ``deficiency'' is not clearly defined. The rule 
should define the terms ``deficiency,'' ``significant deficiency,'' and 
``material weakness.'' One respondent suggested these definitions be 
set forth in accordance with the definitions utilized by the Public 
Company Accounting Oversight Board (PCAOB).
    Response: The interim rule has been revised to implement payment 
withholding procedures only for ``significant deficiencies,'' 
therefore, it is not necessary to define ``deficiency''.

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The rule is has been revised to define ``significant deficiency'' as a 
shortcoming in the business system that affects materially the ability 
of officials of the Department of Defense to rely upon information 
produced by the system that is needed for management purposes, in 
accordance with section 893 of the NDAA. DoD will use the definition of 
``significant deficiency'' in section 893 over the PCAOB definition. 
The term ``material weakness'' is not used in this rule.
6. System Approval Duration and Narrowly Focused Follow-up Audits
    Comment: The rule should implement an approval duration for each 
business system, and require follow-up audits to narrowly focus on 
previously-identified deficiencies.
    Response: While DCAA may perform a narrowly focused follow-up 
audit, imposing a required business system approval duration and/or 
specifically limiting the scope of the DCAA follow-up audit in this 
rule would not be appropriate since, at any time after approval, 
contractor conditions could change rendering the previously-reported 
opinion as not current. DCAA policy is to report only deficiencies 
determined to be significant deficiencies in accordance with the 
definition of significant deficiency set forth in this rule and 
generally accepted Government auditing standards.
7. Contracting Officer/ACO References
    Comment: The rule should reference ``ACO'' in lieu of ``contracting 
officer'' since ACOs will have the primary responsibility to approve 
contractor business systems.
    Response: The contract administration functions in FAR 42.302 are 
sometimes performed by procurement contracting offices. Since 
procurement contracting offices are sometimes responsible for the 
approval and disapproval of contractor business systems, the term 
``ACO'' has been replaced by ``contracting officer'' for accuracy.
8. Subjective Assessments and Vague Standards
    Comment: The revised proposed rule includes incomplete and 
ambiguous definitions of acceptable business systems, and fails to 
address the concern with subjective assessments and vague standards, 
which will lead to inconsistent treatment within DCAA and DCMA.
    Response: The rule incorporates criteria that are already used by 
the Government under existing authority to evaluate the adequacy of 
contractor business systems. For example, the criteria for estimating 
systems are currently located in the DFARS at 215.407-5-70(d)(2). Given 
that these system criteria have been used for many years to assess 
contractor business systems, a reasonable person should be able to 
easily interpret and understand what is required to maintain an 
acceptable system. Each significant deficiency must be determined on 
its own set of facts and ultimately decided by the contracting officer. 
Inconsistent treatment of deficiencies is speculative.
9. Approval To Withhold Payments
    Comment: The authority to order a payment withholding should be 
vested at a higher level than the contracting officer because many 
contracting officers do not have sufficient training or expertise in 
the full spectrum of business systems covered by the rule. Furthermore, 
contracting officers should be allowed to make independent business 
judgments without fear of DCAA elevating the matter to a formal 
disputes resolution board, unless the contracting officer has ignored 
or disregarded DCAA egregiously.
    Response: The contracting officer is the only person with the 
authority to enter into, administer, and/or terminate contracts and 
make related determinations and findings. DoD contracting personnel are 
skilled professionals. All contracting personnel are required by law to 
obtain a certification to ensure they have the requisite skills in 
contracting. When specialized expertise is required, contracting 
officers consult with auditors and other individuals with specialized 
experience, as necessary, to ensure a full understanding of issues. In 
fact, the interim rule requires such consultations. Accordingly, the 
contracting officer is the appropriate authority for making decisions 
regarding contractor business systems.
10. Other Remedies
    Comment: The DCAA audit report should recommend whether a payment 
withholding is necessary, and if not, what other protections are 
available. DoD already has numerous other contracting tools available 
to protect itself from any actual loss associated with business system 
deficiencies. The proposed clause should state that a payment 
withholding under the clause is in lieu of, and not in addition to, 
other sanctions and remedies.
    Response: The existing regulatory remedies are not an effective 
substitute for a contract clause that will mitigate the Government's 
risk while contractors correct business system deficiencies. The 
interim rule is required to supplement existing enforcement mechanisms 
and protect the Government's interests while the contractor completes 
correction of system deficiencies. DoD does not want to limit the 
contracting officer's discretion to apply any and all regulatory 
measures, as warranted by the circumstances. For example, if a 
contractor has a deficiency in its property management system, the 
contracting officer may implement a payment withholding to protect the 
Government's risk of the contractor failing to perform on the contract, 
and may also revoke the Government's assumption of liability to protect 
the Government from risk of loss of the Government's furnished 
property.
11. ``Inadequate in Part''
    Comment: The final rule should provide for ``inadequate in part'' 
determinations when minor system deficiencies will not affect the 
entire business system.
    Response: ``Inadequate in part'' determinations when minor system 
deficiencies are found are not necessary. Contractor business systems 
will only be disapproved when the contracting officer determines that 
one or more significant deficiencies materially affect the ability of 
officials of the Department of Defense to rely upon information 
produced by the system that is needed for management purposes.
12. Payment Withholdings Applied Per System or Per Deficiency
    Comment: The rule is unclear whether a 5% payment withholding is 
applied against a single deficient business system or can be applied 
for each deficiency within a single system.
    Response: Payment withholding procedures will be implemented on the 
basis of contractor business systems. While multiple payment 
withholdings may be implemented due to significant deficiencies in 
multiple contractor business systems, for clarity, the interim rule 
sets forth that the total percentage of payments withheld on amounts 
due under each progress payment, performance-based payment, or interim 
cost voucher, shall not exceed five percent for one or more significant 
deficiencies in any single contractor business system, and 10 percent 
for significant deficiencies in multiple contractor business systems.
13. DCAA/Functional Specialist Consultation
    Comment: It is unclear what is meant by ``consultation with the 
auditor or functional specialist'' in terms of a

[[Page 28861]]

contracting officer's determination to discontinue withholding payments 
prior to audit verification. The language in DFARS 242.70X1 and 
252.242-7XXX should explicitly state that the contracting officer may 
discontinue withholding payments without the need to wait for a final 
audit report from DCAA.
    Response: The contracting officer is the only person with the 
authority to enter into, administer, and/or terminate contracts and 
make related determinations and findings. However, when specialized 
expertise is required, the interim rule requires contracting officers 
to consult with auditors and other individuals with specialized 
experience, as necessary, to ensure a full understanding of issues. The 
interim rule explicitly states that prior to the receipt of 
verification, the contracting officer may discontinue withholding 
payments pending receipt of verification, and release any payments 
previously withheld, if the contractor submits evidence that the 
deficiencies have been corrected, and the contracting officer, in 
consultation with the auditor or functional specialist, determines that 
there is a reasonable expectation that the corrective actions have been 
implemented and that the deficiencies no longer affect materially the 
ability of the Government to rely upon information produced by the 
system.
14. Risk Management vs. Risk Avoidance
    Comment: The proposed rule's focus on risk avoidance rather than 
risk management has the potential of significantly increasing the cost 
of business systems without corresponding benefits. To make systems 
deficiency-proof in order to avoid significant payment withholdings, 
contractors may be forced to incur unnecessary costs that would be 
disproportionate to the incremental benefits of having near perfect 
systems. DoD has failed to consider the concept of causal or beneficial 
relationships between the costs to bring business systems into 
compliance with the rule, and the benefits of protecting the Government 
from perceived risk.
    Response: DoD will only withhold payments in cases where there are 
significant deficiencies in the contractor's business systems. In such 
cases, the ability of the contractor to manage risk is questionable and 
the potential risk of harm to the Government is increased. Under the 
rule, a contractor business system may contain deficiencies that do not 
affect materially the ability of DoD officials to rely on information 
produced by the system. Accordingly, the standard for withholding 
payments is commensurate with the risk of harm to the Government. In 
the long run, both the contractor's and Government's administrative 
costs should be reduced with the reliance on efficient contractor 
business systems.
15. Large Businesses
    Comment: The revised rule improperly targets large businesses due 
to the $50M dollar contract threshold.
    Response: The $50 million contract threshold has been removed from 
the interim rule. The threshold for application of the contractor 
business systems clause is set forth in section 893 of the NDAA, which 
defines a covered contractor as one that is subject to the Cost 
Accounting Standards under 41 U.S.C. chapter 15, as implemented in 
regulations found at 48 CFR 9903.201-1 (see the FAR Appendix).
16. DCAA Audit Standards
    Comment: DCAA auditors apply a higher standard for identifying a 
deficiency in an accounting system (``less than a remote possibility 
that potential unallowable costs would be immaterial'') than set forth 
in the rule. DCAA is not able to distinguish systemic errors or 
significant deficiencies from normal human errors or minor 
deficiencies. The rule may state that it is DCAA policy to report only 
deficiencies determined to be significant deficiencies or material 
weaknesses, however the DCAA December 19, 2008 MRD (titled Audit 
Guidance on Significant Deficiencies/Material Weaknesses and Audit 
Opinions on Internal Control Systems) instructs auditors that anything 
which is subject to DCAA review should be considered significant.
    Response: DCAA will report significant deficiencies in accordance 
with the definition of significant deficiency in this rule, as set 
forth in section 893 of the NDAA and the Generally Accepted Government 
Auditing Standards (GAGAS). Based on the definition in GAGAS, a 
significant deficiency is a deficiency, or combination of deficiencies, 
that adversely affects the entity's ability to initiate, authorize, 
record, process, or report data reliably. The GAGAS definition is 
consistent with the definition of significant deficiency in the 
contractor business systems clause. Additionally, contracting officers 
will administer this rule according to the requirements in section 893 
of the NDAA.
17. Arbitrary and Punitive Payment Withholdings
    Comment: The payment withholding percentages are punitive in nature 
and represent an arbitrary estimate based on pressure to incorporate 
business systems payment withholdings into the DFARS. The amount of the 
payment withholding should be commensurate with the level of risk to 
the Government and not set at arbitrary and punitive levels.
    Response: When contractors fail to maintain business systems, as is 
required by the terms and conditions of their contracts, the payment 
withholding provisions help to protect the Government from the risks of 
overpayment, increased property losses, or nonconforming goods, among 
others, against which contractor business systems are designed to 
ensure. The interim rule would protect the Government by reducing 
contract payments temporarily during performance in an amount 
sufficient to mitigate the Government's risk. DoD is relying on the 
payment withholding amounts, not as a penalty for a deficiency, but as 
representing a good-faith estimate of the potential loss that is at 
risk where the actual amounts are difficult to estimate or quantify. 
The percentage of progress payments, performance-based payments, and 
interim payments set forth in this rule is in accordance with section 
893 of the NDAA.
18. Release of Payment Withholdings
    Comment: DCAA does not issue audits addressing ``reasonable 
expectation that the corrective actions have been implemented.'' The 
only existing audit solution is to complete the entire follow-up audit, 
which will not be performed in a timely manner due to DCAA's backlog. 
Furthermore, the rule should provide guidance to avoid perpetual 
payment withholdings when deficiencies in multiple business systems 
overlap and the timing of corrective action plans differ.
    Response: There is no requirement that DCAA issue audits addressing 
``reasonable expectation that the corrective actions have been 
implemented.'' The interim rule explicitly states that prior to the 
receipt of verification, the contracting officer may discontinue 
withholding payments pending receipt of verification, and release any 
payments previously withheld, if the contractor submits evidence that 
the significant deficiencies have been corrected, and the contracting 
officer, in consultation with the auditor or functional specialist,

[[Page 28862]]

determines that there is a reasonable expectation that the corrective 
actions have been implemented. Since payment withholding procedures 
will be implemented on the basis of contractor business systems, if 
prior to the correction of one or more significant deficiencies, other 
significant deficiencies are identified in another business system, the 
contracting officer may revise the original final determination or 
issue a subsequent determination to disapprove the latter business 
system and implement additional payment withholdings. Contracting 
officers will provide direction in their determination(s), identify the 
significant deficiencies that need to be corrected in order to approve 
each disapproved business system, and discontinue the withholding of 
payments and release any payments previously withheld. If one 
previously disapproved contractor business system is approved, but 
significant deficiencies remain in another system, the contracting 
officer will continue to withhold payments relating to the remaining 
disapproved business system until the significant deficiencies relating 
to that business system have been determined to have been corrected.
19. Multiple Compliance Regimes
    Comment: The rule provides a different set of contractor business 
systems requirements for DoD and NASA contractors than are required for 
civilian contractors.
    Response: The business systems criteria contained in the business 
systems clauses have been used in practice for several decades by 
Government personnel to assess the reliability and accuracy of 
management information produced by the applicable system. Because they 
are designed to be consistent with GAGAS, which are based on standards 
developed by the American Institute of Certified Public Accountants 
(AICPA), the system criteria are applicable equally to DoD, NASA, and 
civilian contractors.
20. NDAA Compliance
    A number of respondents, citing section 893 of the NDAA, provided 
the following recommendations:
    Comment: Contractor business system disapproval should be based on 
``significant deficiencies'' as defined in section 893 of the NDAA, and 
the maximum cap should be reduced to 10 percent in accordance with the 
NDAA.
    Response: The interim rule has been revised to reflect the language 
in section 893 of the NDAA by incorporating the statutory language 
regarding ``significant deficiencies'' and reducing the cumulative 
payment withholding percentage from 20 percent to 10 percent.
    Comment: The proposed rule mandates payment withholdings on all 
contracts, including firm-fixed price contract types, while the NDAA 
language makes payment withholdings discretionary, and permits them to 
be applied only to CAS-covered contracts and not fixed-price contract 
types. The rule should be adjusted to exclude those contract types, 
including firm-fixed-price contracts that have been discretely excluded 
by the Authorization Act.
    Response: Section 893 requires the Secretary of Defense to develop 
and initiate a program for the improvement of contractor business 
systems to ensure that such systems provide timely, reliable 
information for the management of Department of Defense programs. 
Furthermore, the statute sets forth that an appropriate official of the 
Department of Defense may withhold up to 10 percent of progress 
payments, performance-based payments, and interim payments under 
covered contracts from a covered contractor, as needed, to protect the 
interests of the Department and ensure compliance, if one or more of 
the contractor business systems of the contractor has been disapproved. 
To comply with this requirement, under the mandated DoD program for the 
improvement of contractor business systems, which includes the 
implementation of this interim rule, DoD has interpreted the definition 
of ``covered contract'' to mean a contract that is subject to the Cost 
Accounting Standards under 41 U.S.C. chapter 15, as implemented in 
regulations found at 48 CFR 9903.201-1 (see the FAR Appendix), which 
includes CAS-covered fixed-price type contracts and performance-based 
contracts, as well as cost type contracts.
    Comment: In accordance with the NDAA, the rule should identify DoD 
officials who are responsible for the approval or disapproval of 
contractor business systems. Furthermore, DoD officials must be made 
available to work with the contractor to develop corrective action 
plans and schedules for implementation.
    Response: The interim rule continues to identify cognizant 
contracting officers as the DoD officials who are responsible for the 
approval or disapproval of contractor business systems.
21. Contract Applicability
    Comment: A number of respondents questioned the application of this 
rule against cost type contracts while other respondents questioned the 
application of this rule against fixed-price contracts. Additionally, 
some respondents expressed concern about the application of the rule to 
commercial contracts and construction contracts. Other respondents 
suggested that payment withholdings should only be applied to contracts 
which fall under the business system found to be deficient, and only to 
contracts administered by the contracting officer making the 
determination decision.
    Response: The Government is at risk when a contractor's business 
systems contain significant deficiencies, regardless of contract type. 
Accordingly, it is appropriate for the contracting officer to withhold 
payments to protect the interest of the Government. Contracts awarded 
under FAR part 12 regulations will generally be exempt from the 
requirements of this rule. A system deficiency may result in 
application of a payment withholding against all contracts that contain 
the business systems clause. The rule has been tailored to comply with 
section 893 of the FY11 NDAA. DoD has interpreted the definition of 
``covered contract'' to include CAS-covered cost type contracts as well 
as CAS-covered fixed-price type contracts and performance-based 
contracts since section 893 also allows up to 10 percent of progress 
payments and performance-based payments to be withheld. The interim 
rule provides the contracting officer with the sole discretion to 
withhold payments from one or more contracts containing the clause at 
252.242-7005, Contractor Business Systems. To ensure consistency, it is 
DoD policy that only one contracting officer, normally an ACO, has the 
responsibility and authority for approval, disapproval, and general 
oversight of contractor business systems. When the cognizant 
contracting officer renders a determination to approve or disapprove a 
system and withhold payments, all contracting officers with contracts 
affected by the determination are required to abide by the cognizant 
contracting officer's decision. The rule complies with this long-
established practice.
22. DCAA/DCMA Internal Policies
    Comment: By allowing DCMA/DCAA to determine the criteria by which 
contractor business systems will be measured through their internal 
policies and procedures, it should make those internal policies and 
procedures subject to the OFPP Act public comment process.
    Response: This rule does not contain references to DCAA/DCMA 
internal policies to determine the criteria by

[[Page 28863]]

which contractor business systems will be measured. Rather, as defined 
in each of the individual business system clauses in the rule, the 
definition of an acceptable system means a system that complies with 
the system criteria set forth in each clause, which have been published 
for public comment.
23. Cumulative Payment Withholdings
    Comment: The respondent questioned whether the 20 percent withhold 
in the proposed rule is in addition to other withholding remedies a 
contracting officer may assess.
    Response: In accordance with section 893 of the NDAA, the 
cumulative payment withholding percentage set forth under this interim 
rule is reduced from 20 percent to 10 percent. This interim rule does 
not limit the contracting officer's discretion to apply any and all 
regulatory measures, as warranted by the circumstances, including other 
applicable payment withholdings. 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.
24. CAS
    Comment: The respondent expressed concern that there is no 
adjudication process prior to implementation of payment withholdings 
for disagreements or disputes regarding interpretation and 
implementation of CAS. Contractors should not be subject to payment 
withholdings on matters which await the decision of the judiciary.
    Response: The finding of a significant deficiency in a business 
system results in only a temporary withholding from certain payments to 
protect the Government from potential harm. This does not constitute a 
permanent contractual decrement stemming from a CAS noncompliance. A 
contractor is not precluded from challenging any underlying CAS or 
other determinations through the contract disputes or other resolution 
processes. An additional adjudication process is not warranted for this 
rule. Furthermore, a deficiency that causes a CAS noncompliance may 
impact other business systems.
25. Dollar Limitations
    Comment: The lack of dollar limitations at the contract level will 
lead to payment withholdings that exceed the amount required to protect 
the government. The value withheld at the contract level should be 
limited to $100,000 (and at subsequent thresholds of $250,000, 
$500,000, and $1,000,000) until authorization is received from DCMA 
headquarters. The approval of payment withholdings above the thresholds 
should be based on evidence that actual risk or harm in excess of the 
limit exists.
    Response: To ensure sufficient mitigation of the Government's risk, 
the interim rule provides the contracting officer with the sole 
discretion to withhold payments from one or more contracts containing 
the clause at 252.242-7005, Contractor Business Systems. Contracting 
officers will select one or more contracts from which payments will be 
withheld. In selecting the contract or contracts from which to withhold 
payments, the contracting officer shall ensure that the total amount of 
payment withholding does not exceed 10 percent of the total amount 
billed.
26. Standard of Risk
    Comment: The respondent recommended that any final rule establish a 
clear, simple, and uniform standard of risk to the Government in the 
procedures that are applicable across all of the business systems.
    Response: The definition of a significant deficiency establishes a 
uniform standard of risk. A significant deficiency 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.
27. Payment Withholding Process
    Comment: Respondents suggested that the final rule should require 
direct communication between the contracting officer, DCAA, and the 
contractor to allow discussion relating to an identified deficiency 
before payment is withheld. The proposed clause should provide 
sufficient time for the contracting officer and contractor to address 
potential system deficiencies. The respondents recommended that the 
rule require the contracting officer to work collaboratively with the 
contractor in determining whether deficiencies exist, whether there is 
a material risk of harm, and how to resolve the deficiencies without 
resorting to a payment withholding; and allow the contractor 90 days to 
address the potential deficiencies and submit a response documenting 
its position before the contracting officer can issue a final 
determination and impose a payment withholding. Otherwise, the rule 
denies a contractor due process by allowing the contracting officer to 
issue initial determinations prior to receiving all the facts from the 
contractor.
    Response: The rule provides adequate opportunities for 
communication between the contracting officer and the contractor prior 
to the implementation of payment withholdings. The contractor will be 
notified of a preliminary finding of a deficiency during the course of 
formal system reviews and audits. This occurs before the auditor or 
functional specialist releases a report to the contractor and 
contracting officer. After receiving a report, the contracting officer 
will promptly evaluate and issue an initial determination. The 
contractor is then allowed 30 days to respond to any significant 
deficiencies. Contractors are given ample opportunity to present their 
position during system reviews. Accordingly, the requirement for a 
contractor to respond within 30 days of an initial determination is 
adequate.
28. Simplify Administrative Burden
    Comment: The rule should simplify the administrative burden for the 
accounting for payment withholdings against numerous invoices.
    Response: The interim rule provides the contracting officer with 
the sole discretion to withhold payments from one or more contracts 
containing the clause at 252.242-7005, Contractor Business Systems. The 
administrative burden for the accounting for payment withholdings 
against numerous invoices is thus simplified by not mandating that 
payment withholdings be applied against all of a contractor's available 
contracts.
29. DCAA/DCMA Roles
    Comment: One respondent suggested that the wording in 215.407-5-
70(c)(3) should be revised to state ``the auditor, on behalf of the 
cognizant contracting officer, conducts estimating system reviews'' to 
establish that the contracting officer is the lead Federal official, 
not the auditor. Respondents questioned the ability of DCAA and DCMA to 
resolve audit recommendations, and further questioned the ability of 
DCAA and DCMA to execute their duties effectively in the absence of a 
procedure for resolving different judgments regarding a deficiency.
    Response: FAR 1.6 sets forth contracting officer authority and 
responsibilities. The addition of language to DFARS 215.407-5-70 
stating that the contracting officer is the lead Federal official is 
unnecessary. The DoD memorandum dated December 4, 2009, ``Resolving 
Contract Audit Recommendations,'' clearly defines the roles and 
responsibilities of DCAA and DCMA and provides procedures for 
adjudicating differences.

[[Page 28864]]

30. Functional Specialist
    Comment: Reference to a functional specialist under estimating 
systems should be deleted.
    Response: The contracting officer is the only person with the 
authority to enter into, administer, and/or terminate contracts and 
make related determinations and findings. However, when specialized 
expertise is required, the interim rule requires contracting officers 
to consult with auditors and other individuals with specialized 
experience, as necessary, to ensure a full understanding of issues. 
Certain issues relating to forecasted costs may require the expertise 
of engineers, price analysts, and others to understand or evaluate the 
contractor's estimating system.
31. Policies and Procedures
    Comment: The proposed rule contains inconsistent, ill-defined 
system criteria for policies and procedures. The requirement for 
policies and/or procedures is the same for all business systems and, 
therefore, the proposed rule should be consistent by using the terms 
``policies and procedures'' in all sections defining system criteria. 
The proposed rule should be revised to specify that a business system's 
criteria for policies and procedures should be in writing.
    Response: System criteria are consistent with well-established 
Government practices and procedures for assessing the contractor 
business systems. For some business systems, the DFARS language 
supplements established FAR criteria, while other business systems 
criteria are established or revised by this interim rule. Therefore, it 
would be inappropriate to attempt to force incorrect terminology into 
business systems criteria for the sake of consistency. The systems 
criteria contained in the business systems clauses have been used for 
many years by Government personnel to assess the reliability and 
accuracy of management information produced by the applicable system.
32. Impact to Industry
    Comment: One respondent commented that the proposed payment 
withholding regime will threaten the solvency of contractors and 
preclude many companies from contracting with the Government. The 
respondent indicated that the payment withholding regime will be 
particularly harsh on small businesses.
    Response: In the long run, both the contractor's and the 
Government's administrative cost should be reduced with the reliance on 
efficient contractor business systems. The rule has been revised to 
exclude small businesses in accordance with section 893 of the FY2011 
NDAA.
33. Effectiveness of This Rule
    Comment: The respondent indicated that the proposed payment 
withholding is not tailored reasonably to address the Department's 
intended goal of preventing unallowable and unreasonable costs and 
waste, fraud, and abuse and improving the effectiveness of DCAA and 
DCMA.
    Response: As noted by the respondent, contractor business systems 
play an important role in preventing waste, fraud, and abuse. 
Significant systems deficiencies place a substantial resource burden on 
DCMA and DCAA due to the increased oversight needed to protect the 
interests of the Government. The rule provides contracting officers 
with an additional tool to mitigate the Government's risk while 
contractors correct business systems deficiencies. Reliable contractor 
business systems employ internal controls to prevent unallowable and 
unreasonable costs, as well as waste, fraud, and abuse. Additionally, 
it reduces burden on Government resources, thereby allowing DCMA and 
DCAA resources to be employed more effectively.
34. Minor Corrections
    Comment: For 252.215-7002, the lead-in reference to the 
prescription should be 215.407-5-70.
    Response: Referencing 215.407-5-70 as the prescription for the 
clause at 252.215-7002 would be incorrect. DFARS 215.408(2) prescribes 
the use of the clause at 252.215-7002.
    Comment: For 252.215-7002(e) and 252.242-7004(e), change from ``on 
any system deficiency'' to ``of any system deficiency.''
    Response: Correction has been made in the interim rule.
    Comment: The respondent recommended making the phrase 
``consultation with the auditor or functional specialist'' consistent 
throughout the rule.
    Response: Where appropriate, the phrase ``consultation with the 
auditor or functional specialist'' has been made consistent throughout 
the rule.
    Comment: The respondent recommended making the phrase ``all 
findings and recommendations'' consistent throughout the rule.
    Response: Where appropriate, the phrase ``all findings and 
recommendations'' has been made consistent throughout the rule.
    Comment: The proposed rule intends to add new paragraphs (d) and 
(e) to revised 242.7203, but the text of the additional paragraphs 
denominates them at paragraphs (c) and (d).
    Response: Correction has been made in the interim rule.

B. Summary of Proposed Rule Changes

    As a result of public comments received in response to the revised 
proposed rule and the requirements set forth under section 893 of the 
NDAA, the following changes have been made to the interim rule:
    1. The term ``significant deficiency'' is defined, in accordance 
with section 893, 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. The definition of the term ``significant deficiency'' 
provides for associated changes to the rule as follows:
    (a) The term ``significant deficiency'' is used in lieu of phrases 
such as ``deficiency that adversely affects the system'' and 
``deficiency that adversely affects the system, leading to a potential 
risk of harm to the Government'' as the basis for business systems 
disapprovals and payment withholdings.
    (b) The phrases ``the potential adverse impact to the Government'' 
and ``its potential harm to the Government'' are no longer required to 
describe the detail to which significant deficiencies are described by 
auditors and functional specialists to contracting officers, and by 
contracting officers to contractors.
    2. While the proposed rule allowed for the implementation of 
payment withholdings with or without disapproval of system deficiencies 
that adversely affect the contractor's business systems, this interim 
rule sets