Defense Federal Acquisition Regulation Supplement; Business Systems Compliance (DFARS Case 2012-D042), 41172-41185 [2014-16390]

Download as PDF 41172 Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules FIPS# Lake Michigan ........................................................................................................................................................................ Lake Huron ............................................................................................................................................................................. Lake St. Clair .......................................................................................................................................................................... Lake Erie ................................................................................................................................................................................ Lake Ontario ........................................................................................................................................................................... St. Lawrence River above St. Regis ...................................................................................................................................... 92 93 94 96 97 98 1 Effective May 16, 2002, analog radio and television broadcast stations, analog cable systems and wireless cable systems may upgrade their existing EAS equipment to add these marine area location codes on a voluntary basis until the equipment is replaced. All models of EAS equipment manufactured after August 1, 2003, must be capable of receiving and transmitting these marine area location codes. EAS Participants that install or replace their EAS equipment after February 1, 2004, must install equipment that is capable of receiving and transmitting these location codes. 4. Amend § 11.51 by revising paragraph (d) to read as follows: ■ § 11.51 EAS code and attention signal transmission requirements. sroberts on DSK5SPTVN1PROD with PROPOSALS * * * * * (d) Analog and digital television broadcast stations shall transmit a visual message containing the Originator, Event, Location and the valid time period of an EAS message. Effective June 30, 2012, visual messages derived from CAP-formatted EAS messages shall contain the Originator, Event, Location and the valid time period of the message and shall be constructed in accordance with section 3.6 of the ‘‘ECIG Recommendations for a CAP EAS Implementation Guide, Version 1.0’’ (May 17, 2010), except that if the EAS Participant has deployed an Intermediary Device to meet its CAPrelated obligations, this requirement shall be effective June 30, 2015, and until such date shall be subject to the general requirement to transmit a visual message containing the Originator, Event, Location and the valid time period of the EAS message. If the message is a video crawl, it shall be displayed: (1) At the top of the television screen or where it will not interfere with other visual messages or otherwise block other important visual content on the screen, (2) At a speed that can be read by viewers, (3) Continuously throughout the duration of any EAS activation, (4) In a font sized appropriately for legibility, (5) In a manner where lines of any video crawl not overlap with one another, and are adequately positioned so they do not run off the edge of the video screen. * * * * * ■ 6. Amend § 11.61 by revising paragraph (a)(3)(iv) to read as follows: § 11.61 * Tests of EAS procedures. * * (a) * * * (3) * * * VerDate Mar<15>2010 * * 17:37 Jul 14, 2014 Jkt 232001 (iv) Test results as required by the Commission shall be logged by all EAS Participants into the EAS Test Reporting System (ETRS) as follows. (A) EAS Participants shall provide the identifying information required by Form One initially no later than 60 days after the effective date of this Subsection, and shall renew the Form One information on a yearly basis or as required by any revision of the EAS Participant’s State EAS Plan filed pursuant to § 11.21. (B) ‘‘Day of test’’ data as required by Form Two shall be filed in the ETRS within 24 hours of any nationwide test or as otherwise required by the Public Safety and Homeland Security Bureau. (C) Detailed post-test data as required by Form Three shall be filed in the ETRS within forty five (45) days following any nationwide test or as otherwise required by the Public Safety and Homeland Security Bureau. * * * * * [FR Doc. 2014–16417 Filed 7–14–14; 8:45 am] BILLING CODE 6712–01–P DEPARTMENT OF DEFENSE Defense Acquisition Regulations System 48 CFR Parts 215, 242, and 252 RIN 0750–AI20 Defense Federal Acquisition Regulation Supplement; Business Systems Compliance (DFARS Case 2012–D042) Defense Acquisition Regulations System, Department of Defense (DoD). ACTION: Proposed rule. AGENCY: DoD is proposing to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to ensure appropriate contractor accountability for adequate contractor business systems. In addition to the request for written comments on this proposed rule, DoD will hold a public SUMMARY: PO 00000 Frm 00028 Fmt 4702 Sfmt 4702 meeting to hear the views of interested parties. DATES: Comment Date: Comments on the proposed rule should be submitted in writing to the address shown below on or before September 15, 2014, to be considered in the formation of a final rule. Public Meeting Date: The public meeting will be held at the Mark Center Auditorium, 4800 Mark Center Drive, Alexandria, VA 22350–3603, on August 18, 2014, from 2 p.m. to 4 p.m., local time. Submission of comments: You may submit comments, identified by DFARS Case 2012–D042, using any of the following methods: Regulations.gov: http:// www.regulations.gov. Submit comments via the Federal eRulemaking portal by inserting ‘‘DFARS Case 2012–D042’’ under the heading ‘‘Enter keyword or ID’’ and selecting ‘‘Search.’’ Select the link ‘‘Submit a Comment’’ that corresponds with ‘‘DFARS Case 2012– D042.’’ Follow the instructions provided at the ‘‘Submit a Comment’’ screen. Please include your name, company name (if any), and ‘‘DFARS Case 2012– D042’’ on your attached document. Follow the instructions for submitting comments. Email: osd.dfars@mail.mil. Include DFARS Case 2012–D042 in the subject line of the message. Fax: 571–372–6094. Mail: Defense Acquisition Regulations System, Attn: Mr. Mark Gomersall, OUSD(AT&L)DPAP(DARS), Room 3B941, 3060 Defense Pentagon, Washington, DC 20301–3060. Comments received generally will be posted without change to http:// www.regulations.gov, including any personal information provided. To confirm receipt of your comment(s), please check 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, Defense Acquisition ADDRESSES: E:\FR\FM\15JYP1.SGM 15JYP1 Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules Regulations System, OUSD(AT&L)DPAP(DARS), Room 3B941, 3060 Defense Pentagon, Washington, DC 20301–3060. Telephone 571–372–6099. SUPPLEMENTARY INFORMATION: sroberts on DSK5SPTVN1PROD with PROPOSALS I. Background 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. In response to a U.S. Government Accountability Office report (GAO–12–83) issued on November 3, 2011, Defense Contract Management Agency: Amid Ongoing Efforts to Rebuild Capacity, Several Factors Present Challenges in Meeting Its Mission, DoD agreed to consider alternative approaches to audit contractor business systems. II. Discussion and Analysis To improve the efficiency and effectiveness of auditing contractor business systems, DoD is proposing to amend the DFARS to entrust contractors with the capability to demonstrate compliance with DFARS system criteria for contractors’ accounting systems, estimating systems, and material management and accounting systems, based on contractors’ self-evaluations and audits by independent Certified Public Accountants (CPAs) of their choosing. Government auditors will perform overviews of the results of contractor self-evaluations and CPA audits. Individuals wishing to attend the public meeting should register by August 11, 2014, to ensure adequate room accommodations and to facilitate entry into the Mark Center building. Interested parties may register at the Web site, http://www.acq.osd.mil/dpap/ dars/business_systems_ compliance.html by providing the following information: • Company or organization name. • Names and email addresses of persons planning to attend. • Identify if desiring to make a presentation; limited to a 10-minute presentation per company or organization. One valid government-issued photo identification card will be required in order to enter the building. Non-U.S. citizens may use their valid passport as photo identification. Attendees are encouraged to arrive at least one hour early to accommodate security procedures. Transportation information for the Mark Center may be obtained at http:// www.whs.mil/our-services/ VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 transportation/getting-mark-center. Accommodations for parking at the Mark Center will not be available, but may be found in the surrounding areas. If you wish to make a presentation, please submit an electronic copy of your presentation to osd.dfars@mail.mil no later than August 13, 2014. Files must not exceed 19MB. Please cite ‘‘Public Meeting—Contractor Business Systems Compliance’’ in all correspondence related to this public meeting. When submitting presentations, provide the presenter’s name, organization affiliation, telephone number, and email address on the cover page. There will be no transcription of the public meeting. Submitted presentations will be the only record. Special accommodations: The public meeting is physically accessible to people with disabilities. Requests for reasonable accommodations, sign language interpretation or other auxiliary aids should be directed to Mark Gomersall at 571–372–6099, at least 10 working days prior to the meeting date. The TTY number for further information is: 1–800–877–8339. When the operator answers the call, let them know the agency is the Department of Defense; the point of contact is Mark Gomersall at 571–372–6099. III. Executive Orders 12866 and 13563 Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is not a significant regulatory action and, therefore, was not subject to review under section 6(b) of E.O. 12866, Regulatory Planning and Review, dated September 30, 1993. This rule is not a major rule under 5 U.S.C. 804. IV. Regulatory Flexibility Act DoD has prepared an initial regulatory flexibility analysis consistent with 5 U.S.C. 603. A copy of the analysis may be obtained from the point of contact specified herein. The analysis is summarized as follows: The objective of the rule is to improve the efficiency and effectiveness of auditing contractor business systems by entrusting contractors with the capability to demonstrate compliance PO 00000 Frm 00029 Fmt 4702 Sfmt 4702 41173 with the Defense Federal Acquisition Regulation Supplement (DFARS) system criteria for contractors’ accounting systems, estimating systems, and material management and accounting systems, based on contractors’ selfevaluations and audits by independent Certified Public Accountants (CPAs) of their choosing. The requirements of the rule will apply to solicitations and contracts that include the contract clause for the applicable defined contractor business system. The rule will apply to solicitations and contracts that are with large businesses for the purposes of reporting for estimating systems, and material management and accounting systems. For reporting on accounting systems, the rule will apply to contractors who are subject to the Cost Accounting Standards (CAS) under 41 U.S.C. chapter 15, as implemented in regulations found at 48 CFR 9903.201– 1 (see the FAR Appendix), other than for contracts with educational institutions, Federally Funded Research and Development Centers operated by educational institutions, or University Associated Research Centers. Since contracts and subcontracts with small businesses are exempt from CAS requirements, DoD estimates that this rule will have no impact on small businesses. DoD, however, invites comments from small business concerns and other interested parties on the expected impact of this rule on small entities. DoD will also consider comments from small entities concerning the existing regulations in subparts affected by this rule in accordance with 5 U.S.C. 610. Interested parties must submit such comments separately and should cite 5 U.S.C. 610 (DFARS Case 2012–D042) in correspondence. V. Paperwork Reduction Act The Paperwork Reduction Act (44 U.S.C. chapter 38) applies. The proposed rule contains information collection requirements. Accordingly, DoD has submitted a request for approval of a new information collection requirement concerning Defense Federal Acquisition Regulation Supplement; Business Systems Compliance (DFARS Case 2012–D042) to the Office of Management and Budget. A. Public reporting burden for this collection of information is estimated to average 2.87 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. E:\FR\FM\15JYP1.SGM 15JYP1 41174 Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules The annual reporting burden estimated as follows: Respondents: 2,953. Responses per respondent: 1. Total annual responses: 2,953. Average hours per response: 2.87. Total annual burden hours: 8,468. B. Request for Comments Regarding Paperwork Burden. Written comments and recommendations on the proposed information collection, including suggestions for reducing this burden, should be sent to Ms. Jasmeet Seehra at the Office of Management and Budget, Desk Officer for DoD, Room 10236, New Executive Office Building, Washington, DC 20503, or email Jasmeet_K._Seehra@ omb.eop.gov, with a copy to the Defense Acquisition Regulations System, Attn: Mark Gomersall, OUSD(AT&L)DPAP/ DARS, Room 3B941, 3060 Defense Pentagon, Washington, DC 20301–3060. Comments can be received from 30 to 60 days after the date of this notice, but comments to OMB will be most useful if received by OMB within 30 days after the date of this notice. Public comments are particularly invited on: whether this collection of information is necessary for the proper performance of functions of the DFARS, and will have practical utility; whether our estimate of the public burden of this collection of information is accurate, and based on valid assumptions and methodology; ways to enhance the quality, utility, and clarity of the information to be collected; and ways in which we can minimize the burden of the collection of information on those who are to respond, through the use of appropriate technological collection techniques or other forms of information technology. To request more information on this proposed information collection or to obtain a copy of the proposal and associated collection instruments, please write to the Defense Acquisition Regulations System, Attn: Mark Gomersall, OUSD(AT&L)DPAP/DARS, Room 3B941, 3060 Defense Pentagon, Washington, DC 20301–3060, or e-mail osd.dfars@mail.mil. Include DFARS Case 2012–D042 in the subject line of the message. sroberts on DSK5SPTVN1PROD with PROPOSALS List of Subjects in 48 CFR Parts 215, 242, and 252 Government procurement. Amy G. Williams, Deputy, Defense Acquisition Regulations System. Therefore, 48 CFR parts 215, 242, and 252 are proposed to be amended as follows: VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 1. The authority citation for parts 215, 242, and 252 continues to read as follows: ■ Authority: 41 U.S.C. 1303 and 48 CFR chapter 1. PART 215—CONTRACTING BY NEGOTIATION 2. Revise section 215.407–5–70 to read as follows: ■ 215.407–5–70 Disclosure, maintenance, and review requirements. (a) Definitions. As used in this section— Acceptable estimating system, contractor, contractor’s certified public accountant (CPA), CPA audit, estimating system, and significant deficiency are defined in the clause at 252.215–7002, Cost Estimating System Requirements. (b) Applicability. A contractor, other than a small business concern, is subject to the estimating system disclosure, maintenance, review, annual reporting, triennial CPA audit, and documentation requirements in the clause at 252.215– 7002, Cost Estimating System Requirements, if— (1) In its preceding fiscal year, the contractor received DoD prime contracts or subcontracts totaling $50 million or more for which certified cost or pricing data were required; or (2) In its preceding fiscal year, the contractor received DoD prime contracts or subcontracts totaling $10 million or more (but less than $50 million) for which certified cost or pricing data were required and the contracting officer, with concurrence or at the request of the ACO, determines it to be in the best interest of the Government (e.g., significant estimating problems are believed to exist or the contractor’s sales are predominantly Government). (c) Policy. DoD policy is for all contractors to have acceptable estimating systems that consistently produce well-supported proposals that are acceptable as a basis for negotiation of fair and reasonable prices. (d) Procedures. (1) The contracting officer shall— (i) Through use of the clause at 252.215–7002, Cost Estimating System Requirements, apply the disclosure, maintenance, review, annual reporting, triennial CPA audit, and documentation requirements to contractors, other than small business concerns, meeting the criteria in paragraph (b)(1) of this section; (ii) Consider whether to apply the disclosure, maintenance, review, annual reporting, triennial CPA audit, and documentation requirements to PO 00000 Frm 00030 Fmt 4702 Sfmt 4702 contractors, other than small business concerns, under paragraph (b)(2) of this section; and (iii) Not apply the disclosure, maintenance, review, annual reporting, triennial CPA audit, and documentation requirements to small business concerns. (2) The cognizant contracting officer, in consultation with the Government auditor, for contractors subject to paragraph (b) of this section, shall— (i) Determine the acceptability of the contractor’s estimating system and disclosure, and approve or disapprove the system; and (ii) Pursue correction of any deficiencies. (3) Triennial CPA audit requirement. For contractors subject to paragraph (b) of this section, and paragraph (d)(8) of the clause at 252.215–7002, the cognizant contracting officer shall— (i) Upon receipt of the contractor’s CPA’s audit strategy, risk assessment, and audit plan (program), request a review from the Government auditor, and notify the contractor of any potential issues identified by the Government auditor regarding their reasonableness. Early notification of potential issues may decrease the likelihood of the contractor incurring unreasonable costs. However, review of the contractor’s CPA’s audit strategy, risk assessment, and audit plan (program) does not constitute the contracting officer’s approval; and (ii) Upon receipt of the contractor’s CPA audit report, request the Government auditor’s assessment of the CPA audit report and related documentation. (4) In evaluating the acceptability of a contractor’s estimating system, the contracting officer, in consultation with the Government auditor, shall determine whether the contractor’s estimating system complies with the system criteria for an acceptable estimating system in the clause at 252.215–7002. In making that determination, the contracting officer shall consider— (i) The contractor’s estimating system disclosure, annual report on the estimating system’s compliance with the system criteria and the audit report by the contractor’s CPA, as required in the clause at 252.215–7002, if applicable; and (ii) Any other findings and recommendations reported by the Government auditor including the assessment of the contractor’s CPA audit report and related documentation, if applicable. (e) Accelerated audit requirement. The contracting officer, in consultation E:\FR\FM\15JYP1.SGM 15JYP1 sroberts on DSK5SPTVN1PROD with PROPOSALS Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules with the Government auditor, may require contractors subject to the triennial CPA audit requirement in the clause at 252.215–7002 to provide an out-of-cycle CPA audit report prior to the triennial CPA audit period based on a risk assessment of the contractor’s past experience and current vulnerability. (f) Disposition of findings—(1) Reporting of findings by the Government auditor. The Government auditor shall document findings and recommendations in a report to the contracting officer regarding any identified significant estimating system deficiencies. The report shall describe the deficiencies in sufficient detail to allow the contracting officer to understand the deficiencies. (2) Initial determination. (i) The contracting officer shall review all findings and recommendations from the Government auditor and contractor and, if there are no significant deficiencies and the contractor as complied with the applicable reporting and audit requirements in paragraphs (d)(5) and (6) of the clause at 252.215–7002, shall promptly notify the contractor, in writing, that the contractor’s estimating system is acceptable and approved; or (ii) If the contracting officer finds that there are one or more significant deficiencies (as defined in the clause at 252.215–7002 due to the contractor’s failure to meet one or more of the estimating system criteria in the clause at 252.215–7002, or that the contractor has failed to comply with the applicable reporting and audit requirements in accordance with the clause at 252.215– 7002, the contracting officer shall— (A)(1) Promptly make an initial written determination on any significant deficiencies and notify the contractor, in writing, providing a description of each significant deficiency in sufficient detail to allow the contractor to understand the deficiency; or (2) Promptly make an initial written determination on the contractor’s failure to comply with the applicable reporting and audit requirements and notify the contractor, in writing, providing sufficient information to allow the contractor to understand what action needs to be taken to comply; (B) Request the contractor to respond, in writing, to the initial determination within 30 days; and (C) Promptly evaluate the contractor’s responses to the initial determination, in consultation with the Government auditor or functional specialist, and make a final determination. (3) Final determination. (i) The contracting officer shall make a final determination and notify the contractor, in writing, that— VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 (A) The contractor’s estimating system is acceptable and approved, and no significant deficiencies remain, and the contractor has complied with the applicable reporting and audit requirements in accordance with the clause at 252.215–7002; or (B) Significant deficiencies remain, or the contractor has failed to comply with the applicable reporting and audit requirements. The notice shall identify any remaining significant deficiencies or noncompliance with the applicable reporting and audit requirements, and indicate the adequacy of any proposed or completed corrective action. The contracting officer shall— (1) Request that the contractor, within 45 days of receipt of the final determination, either correct the deficiencies or submit an acceptable corrective action plan showing milestones and actions to eliminate the deficiencies and comply with the applicable reporting and audit requirements; (2) Disapprove the system in accordance with the clause at 252.215– 7002; and (3) Withhold payments in accordance with the clause at 252.242–7005 if the clause is included in the contract. (ii) Follow the procedures relating to monitoring a contractor’s corrective action and the correction of significant deficiencies in PGI 215.407–5–70(f). (g) System approval. The contracting officer shall promptly approve a previously disapproved estimating system and notify the contractor when the contracting officer determines that there are no remaining significant deficiencies or noncompliance with the applicable reporting and audit requirements. (h) Contracting officer notifications. The cognizant contracting officer shall promptly distribute copies of a determination to approve a system, to disapprove a system and withhold payments, or to approve a previously disapproved system and release withheld payments to the Government auditor, payment office, affected contracting officers at the buying activities, and cognizant contracting officers in contract administration activities. PART 242—CONTRACT ADMINISTRATION AND AUDIT SERVICES 242.7000 and 242.7001 [Redesignated as 242.7001 and 242.7003] 3. Redesignate sections 242.7000 and 242.7001 as sections 242.7001 and 242.7003, respectively. ■ 4. Revise newly redesignated section 242.7001 to read as follows: ■ PO 00000 Frm 00031 Fmt 4702 Sfmt 4702 242.7001 41175 Definitions. As used in this subpart— Acceptable contractor business systems, contractor business systems, contractor’s certified public accountant (CPA), and CPA audit are defined in the clause at 252.242–7005, Contractor Business Systems. Covered contract means 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) (10 U.S.C. 2302 note, as amended by section 816 of Public Law 112–81). Significant deficiency is defined in the clause at 252.242–7005, Contractor Business Systems. ■ 5. Add section 242.7002 to read as follows: 242.7002 Contractor business systems deficiencies. (a) Determination to withhold payments. If the contracting officer makes a final determination to disapprove a contractor’s business system in accordance with the clause at 252.242–7005, Contractor Business Systems, the contracting officer shall— (1) In accordance with agency procedures, identify one or more covered contracts containing the clause at 252.242–7005 from which payments will be withheld. When identifying the covered contracts from which to withhold payments, the contracting officer shall ensure that the total amount of payment withholding under 252.242– 7005 does not exceed 10 percent of progress payments, performance-based payments, and interim payments under cost-reimbursement, labor-hour, and time-and-materials contracts billed under each of the identified covered contracts. Similarly, the contracting officer shall ensure that the total amount of payment withholding under the clause at 252.242–7005 for each business system does not exceed five percent of progress payments, performance-based payments, and interim payments under costreimbursement, labor-hour, and timeand-materials contracts billed under each of the identified covered contracts. The contracting officer has the sole discretion to identify the covered contracts from which to withhold payments; (2) Promptly notify the contractor, in writing, of the contracting officer’s determination to implement payment withholding in accordance with the clause at 252.242–7005. The notice of payment withholding shall be included in the contracting officer’s written final determination for the contractor E:\FR\FM\15JYP1.SGM 15JYP1 sroberts on DSK5SPTVN1PROD with PROPOSALS 41176 Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules business system and shall inform the contractor that— (i) Payments shall be withheld from the contract or contracts identified in the written determination in accordance with the clause at 252.242–7005 until the contracting officer determines that there are no remaining significant deficiencies and that the contractor has complied with the applicable reporting and audit requirements in accordance with the applicable business system clause identified in 242.7003(b); and (ii) The contracting officer reserves the right to take other actions within the terms and conditions of the contract; and (3) Provide all contracting officers administering the selected contracts from which payments will be withheld, a copy of the determination. The contracting officer shall also provide a copy of the determination to the Government auditor; payment office; affected contracting officers at the buying activities; and cognizant contracting officers in contract administration activities. (b) Monitoring contractor’s corrective action. The contracting officer, in consultation with the Government auditor or functional specialist, shall monitor the contractor’s progress in correcting the deficiencies. The contracting officer shall notify the contractor of any decision to decrease or increase the amount of payment withholding in accordance with the clause at 252.242–7005. (c) Correction of significant deficiencies and reporting. (1) If the contractor notifies the contracting officer that the contractor has corrected the significant deficiencies and, if applicable, provides the contractor’s CPA audit report on the effectiveness of the corrective actions, the contracting officer shall review the correction to verify that the deficiencies have been corrected. If the contracting officer determines that the contractor has corrected all significant deficiencies and provided the contractor’s report on compliance with the system criteria, including the CPA audit report, if applicable, the contracting officer shall discontinue the withholding of payments, release any payments previously withheld, and approve the system, unless other significant deficiencies remain. (2) Prior to the determination that the deficiencies have been corrected, the contracting officer may discontinue withholding payments pending the determination, and release any payments previously withheld, if the contractor submits evidence that the significant deficiencies have been VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 corrected, and the contracting officer, in consultation with the Government auditor or functional specialist, determines that there is a reasonable expectation that the corrective actions have been implemented and are expected to correct the significant deficiencies. (3) Within 90 days of receipt of the contractor notification that the contractor has corrected the significant deficiencies and, if applicable, the contractor’s CPA audit report on the effectiveness of the corrective actions, the contracting officer shall— (i) Make a determination that— (A) The contractor has corrected all significant deficiencies as directed by the contracting officer’s final determination in accordance with paragraph (c)(1) of this section; (B) There is a reasonable expectation that the corrective actions have been implemented in accordance with paragraph (c)(2) of this section; or (C) The contractor has not corrected all significant deficiencies as directed by the contracting officer’s final determination in accordance with paragraph (c)(1) of this section, or there is not a reasonable expectation that the corrective actions have been implemented in accordance with paragraph (c)(2) of this section; and (ii) Reduce withholding directly related to the significant deficiencies covered under the corrective action plan by at least 50 percent of the amount being withheld from progress payments and performance-based payments, and direct the contractor, in writing, to reduce the percentage withheld on interim cost vouchers by at least 50 percent, until the contracting officer makes a determination in accordance with paragraph (c)(3)(i) of this section. (4) If, at any time, the contracting officer determines that the contractor has failed to correct the significant deficiencies identified in the contractor’s notification, the contracting officer will continue, reinstate, or increase withholding from progress payments and performance-based payments, and direct the contractor, in writing, to continue, reinstate, or increase the percentage withheld on interim cost vouchers to the percentage initially withheld, until the contracting officer determines that the contractor has corrected all significant deficiencies as directed by the contracting officer’s final determination. (d) For sample formats for written notifications of contracting officer determinations to initiate payment withholding, reduce payment withholding, and discontinue payment withholding in accordance with the PO 00000 Frm 00032 Fmt 4702 Sfmt 4702 clause at 252.242–7005. See PGI 242.7002. ■ 6. In newly redsignated section 242.7003, revise paragraph (a) to read as follows: 242.7003 Contract clause. * * * * * (a) The resulting contract will be a covered contract as defined in 242.7001; and * * * * * ■ 7. Revise sections 242.7201, 242.7202, and 242.7203 to read as follows: 242.7201 Definitions. As used in this subpart— Acceptable material management and accounting system, contractor, contractor’s certified public accountant (CPA), CPA audit, material management and accounting system, qualifying sales, significant deficiency, and valid timephased requirements are defined in the clause at 252.242–7004, Material Management and Accounting System. 242.7202 Policy. (a) DoD policy is for its contractors to have an MMAS that conforms to the standards in paragraph (h) of the clause at 252.242–7004, Material Management and Accounting System, so that the system— (1) Reasonably forecasts material requirements; (2) Ensures the costs of purchased and fabricated material charged or allocated to a contract are based on valid timephased requirements; and (3) Maintains a consistent, equitable, and unbiased logic for costing of material transactions. (b) Criteria for conducting reviews. Conduct an MMAS review in accordance with paragraph (d) of the clause at 252.242.7004, when— (1) The contractor is a large business; (2) Has $50 million in qualifying sales to the Government; and (3) The cognizant contracting officer, with advice from the Government auditor or cognizant functional specialist, determines an MMAS review is needed based on a risk assessment of the contractor’s past experience, current vulnerability, and the following risk factors: (i) FAR 42.302 surveillance activities indicate the contractor has not complied with the criteria in 252.242.7004. (ii) There are changes to the contractor’s MMAS system. (iii) The contractor’s MMAS system is new. (iv) The contractor’s MMAS system has not been reviewed within a 36month period. (c) Contractors subject to the triennial CPA audit requirement in the clause at E:\FR\FM\15JYP1.SGM 15JYP1 Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules 252.242–7004, may be required to provide an out-of-cycle CPA audit report prior to the triennial CPA audit reporting period based on a risk assessment of the contractor’s past experience and current vulnerability. (d) The cognizant contracting officer, in consultation with the Government auditor and cognizant functional specialist, if appropriate, shall— (1) Determine the acceptability of the contractor’s MMAS and approve or disapprove the system; and (2) Pursue correction of any deficiencies. sroberts on DSK5SPTVN1PROD with PROPOSALS 242.7203 Procedures. (a) Triennial CPA audit requirement. For contractors subject to paragraph (f) of the clause at 252.242–7004, Material Management and Accounting System, the cognizant contracting officer shall— (1) Upon receipt of the contractor’s CPA’s audit strategy, risk assessment, and audit plan (program), request a review from the Government auditor, and notify the contractor of any potential issues identified by the Government auditor regarding their reasonableness. Early notification of potential issues may decrease the likelihood of the contractor incurring unreasonable costs. However, review of the contractor’s CPA’s audit strategy, risk assessment, and audit plan (program) does not constitute the contracting officer’s approval; and (2) Upon receipt of the contractor’s CPA audit report, request the Government auditor’s assessment of the CPA audit report and related documentation. (b) In evaluating the acceptability of the contractor’s MMAS, the contracting officer, in consultation with the Government auditor and functional specialist, if appropriate, shall determine whether the contractor’s MMAS complies with the system criteria for an acceptable MMAS as required in the clause at 252.242–7004. In making that determination, the contracting officer shall consider— (1) The contractor’s report on the MMAS’s compliance with the system criteria and the audit report by the contractor’s CPA, as required in the clause at 252.242–7004; and (2) Any other findings and recommendations reported by the Government auditor including the assessment of the contractor’s CPA audit report and related documentation, if applicable. (c) Disposition of findings—(1) Reporting of findings by the Government auditor. The Government auditor or functional specialist shall document findings and recommendations in a VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 report to the contracting officer regarding any identified significant MMAS deficiencies. The report shall describe the deficiencies in sufficient detail to allow the contracting officer to understand the deficiencies. (2) Initial determination. (i) The contracting officer shall review all findings and recommendations from the Government auditor and contractor and, if there are no significant deficiencies and the contractor has complied with the applicable reporting and audit requirements in paragraph (d) of the clause at 252.242–7004, shall promptly notify the contractor, in writing, that the contractor’s MMAS is acceptable and approved. (ii) If the contracting officer finds that there are one or more significant deficiencies (as defined in the clause at 252.242–7004 due to the contractor’s failure to meet one or more of the MMAS system criteria in the clause at 252.242–7004, or that the contractor has failed to comply with the applicable reporting and audit requirements in accordance with the clause at 252.242– 7004, the contracting officer shall— (A)(1) Promptly make an initial written determination on any significant deficiencies and notify the contractor, in writing, providing a description of each significant deficiency in sufficient detail to allow the contractor to understand the deficiency; or (2) Promptly make an initial written determination on the contractor’s failure to comply with the applicable reporting and audit requirements and notify the contractor, in writing, providing sufficient information to allow the contractor to understand what action needs to be taken to comply; (B) Request the contractor to respond, in writing, to the initial determination within 30 days; and (C) Promptly evaluate the contractor’s response to the initial determination in consultation with the Government auditor or functional specialist, and make a final determination. (3) Final determination. (i) The contracting officer shall make a final determination and notify the contractor that— (A) The contractor’s MMAS is acceptable and approved, and no deficiencies remain, and the contractor has complied with the applicable reporting and audit requirements in accordance with the clause at 252.242– 7004; or (B) Significant deficiencies remain, or the contractor has failed to comply with the applicable reporting and audit requirements. The notice shall identify any remaining significant deficiencies or noncompliance with the applicable PO 00000 Frm 00033 Fmt 4702 Sfmt 4702 41177 reporting and audit requirements and indicate the adequacy of any proposed or completed corrective action. The contracting officer shall— (1) Request that the contractor, within 45 days of receipt of the final determination, either correct the deficiencies or submit an acceptable corrective action plan showing milestones and actions to eliminate the deficiencies and comply with the applicable reporting and audit requirements; (2) Disapprove the system in accordance with the clause at 252.242– 7004; and (3) Withhold payments in accordance with the clause at 252.242–7005, Contractor Business Systems, if the clause is included in the contract. (ii) Follow the procedures relating to monitoring a contractor’s corrective action and the correction of significant deficiencies in PGI 242.7203. (d) System approval. The contracting officer shall promptly approve a previously disapproved MMAS and notify the contractor when the contracting officer determines that there are no remaining significant deficiencies or noncompliance with the applicable reporting and audit requirements. (e) Contracting officer notifications. The cognizant contracting officer shall promptly distribute copies of a determination to approve a system, to disapprove a system and withhold payments, or to approve a previously disapproved system and release withheld payments to the Government auditor, payment office, affected contracting officers at the buying activities, and cognizant contracting officers in contract administration activities. ■ 8. Revise sections 242.7501 and 242.7502 to read as follows: 242.7501 Definitions. As used in this subpart— Acceptable accounting system, accounting system, contractor’s certified public account (CPA), CPA audit, and significant deficiency are defined in the clause at 252.242–7006, Accounting System Administration. 242.7502 Policy. DoD policy is for contractors receiving cost-reimbursement, incentive type, time-and-materials, or labor-hour contracts, or contracts which provide for progress payments based on costs or on a percentage or stage of completion, to— (a) Maintain an acceptable accounting system; and (b) If applicable, comply with the annual reporting, triennial CPA audit, and documentation requirements E:\FR\FM\15JYP1.SGM 15JYP1 41178 Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules required in the clause at 252.242–7006, Accounting System Administration. 242.7503 [Redesignated as 242.7504] 9. Redesignate section 242.7503 as section 242.7504. ■ 10. Add a new section 242.7503 to read as follows: ■ sroberts on DSK5SPTVN1PROD with PROPOSALS 242.7503 Procedures. (a) The cognizant contracting officer, in consultation with the Government auditor or functional specialist, shall— (1) Determine the acceptability of a contractor’s accounting system and approve or disapprove the system; and (2) Pursue correction of any deficiencies. (b) Triennial CPA audit requirement. For contractors subject to paragraph (h) of the clause at 252.242–7006, the cognizant contracting officer shall— (1) Upon receipt of the contractor’s CPA’s audit strategy, risk assessment, and audit plan (program), request a review from the Government auditor and notify the contractor of any potential issues identified by the Government auditor regarding their reasonableness. Early notification of potential issues may decrease the likelihood of the contractor incurring unreasonable costs. However, review of the contractor’s CPA’s audit strategy, risk assessment, and audit plan (program) does not constitute the contracting officer’s approval; and (2) Upon receipt of the contractor’s CPA audit report, request the Government auditor’s assessment of the CPA audit report and related documentation. (c) In evaluating the acceptability of a contractor’s accounting system, the contracting officer, in consultation with the Government auditor or functional specialist, shall determine whether the contractor’s accounting system complies with the system criteria for an acceptable accounting system in the clause at 252.242–7006. In making that determination the contracting officer shall consider— (1) The contractor’s annual report on the accounting system’s compliance with the system criteria and the audit report by the contractor’s CPA as required in the clause at 252.242–7006, if applicable; and (2) Any other findings and recommendations reported by the Government auditor including the assessment of the contractor’s CPA audit report and related documentation, if applicable. (d) Accelerated audit requirement. The contracting officer, in consultation with the Government auditor, may require contractors subject to the VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 triennial CPA audit requirement in the clause at 252.242–7006 to provide an out-of-cycle CPA audit report prior to the triennial CPA audit period based on a risk assessment of the contractor’s past experience and current vulnerability. (e) Disposition of findings—(1) Reporting of findings by the Government auditor. The Government auditor shall document findings and recommendations in a report to the contracting officer regarding any identified significant accounting system deficiencies. The report shall describe the deficiencies in sufficient detail to allow the contracting officer to understand the deficiencies. Follow the procedures at PGI 242.7503 for reporting of deficiencies. (2) Initial determination. (i) The contracting officer shall review all findings and recommendations from the Government auditor and contractor and, if there are no significant deficiencies and the contractor has complied with the applicable reporting and audit requirements in paragraphs (e) and (f) of the clause at 252.242–7006, shall promptly notify the contractor, in writing, that the accounting system is acceptable and approved. (ii) If the contracting officer finds that there are one or more significant deficiencies (as defined in the clause at 252.242–7006 due to the contractor’s failure to meet one or more of the estimating system criteria in the clause at 252.242–7006, or that the contractor has failed to comply with the applicable reporting and audit requirements in accordance with the clause at 252.242– 7006, the contracting officer shall— (A)(1) Promptly make an initial written determination on any significant deficiencies and notify the contractor, in writing, providing a description of each significant deficiency in sufficient detail to allow the contractor to understand the deficiency; or (2) Promptly make an initial written determination on the contractor’s failure to comply with the applicable reporting and audit requirements and notify the contractor, in writing, providing sufficient information to allow the contractor to understand what action needs to be taken to comply; (B) Request the contractor to respond, in writing, to the initial determination within 30 days; and (C) Promptly evaluate the contractor‘s response to the initial determination, in consultation with the Government auditor or functional specialist, and make a final determination. (3) Final determination. (i) The contracting officer shall make a final determination and notify the contractor, in writing, that— PO 00000 Frm 00034 Fmt 4702 Sfmt 4702 (A) The contractor’s accounting system is acceptable and approved, and no significant deficiencies remain, and the contractor has complied with the applicable reporting and audit requirements in accordance with the clause at 252.242–7006, or (B) Significant deficiencies remain, or the contractor has failed to comply with the applicable reporting and audit requirements. The notice shall identify any remaining significant deficiencies or noncompliance with the applicable reporting and audit requirements, and indicate the adequacy of any proposed or completed corrective action. The contracting officer shall— (1) Request that the contractor, within 45 days of receipt of the final determination, either correct the deficiencies or submit an acceptable corrective action plan showing milestones and actions to eliminate the deficiencies and comply with the applicable reporting and audit requirements; (2) Disapprove the system in accordance with the clause at 252.242– 7006; and (3) Withhold payments in accordance with the clause at 252.242–7005, Contractor Business Systems, if the clause is included in the contract. (ii) Follow the procedures relating to monitoring a contractor’s corrective action and the correction of significant deficiencies in PGI 242.7503. (f) System approval. The contracting officer shall promptly approve a previously disapproved accounting system and notify the contractor when the contracting officer determines that there are no remaining significant deficiencies or noncompliance with the applicable reporting and audit requirements. (g) Contracting officer notifications. The cognizant contracting officer shall promptly distribute copies of a determination to approve a system, to disapprove a system and withhold payments, or to approve a previously disapproved system and release withheld payments to the Government auditor, payment office, affected contracting officers at the buying activities, and cognizant contracting officers in contract administration activities. (h) Mitigating the risk of accounting system deficiencies on specific proposals. (1) Field pricing teams shall discuss identified accounting system deficiencies and their impact in all reports on contractor proposals until the deficiencies are resolved. (2) The contracting officer responsible for negotiation of a proposal generated by an accounting system with an E:\FR\FM\15JYP1.SGM 15JYP1 Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules identified deficiency shall evaluate whether the deficiency impacts the negotiations. If it does not, the contracting officer should proceed with negotiations. If it does, the contracting officer should consider other alternatives, for example— (i) Allowing the contractor additional time to correct the accounting system deficiency and submit a corrected proposal; (ii) Considering another type of contract; (iii) Using additional cost analysis techniques to determine the reasonableness of the cost elements affected by the accounting system’s deficiency; (iv) Reducing the negotiation objective for profit or fee; or (v) Including a contract (reopener) clause that provides for adjustment of the contract amount after award. (3) The contracting officer who incorporates a reopener clause into the contract is responsible for negotiating price adjustments required by the clause. Any reopener clause necessitated by an accounting system deficiency should— (i) Clearly identify the amounts and items that are in question at the time of negotiation; (ii) Indicate a specific time or subsequent event by which the contractor will submit a supplemental proposal, including certified cost or pricing data, identifying the cost impact adjustment necessitated by the deficient accounting system; (iii) Provide for the contracting officer to adjust the contract price unilaterally if the contractor fails to submit the supplemental proposal; and (iv) Provide that failure of the Government and the contractor to agree to the price adjustment shall be a dispute under the Disputes clause. 242.7504 [Amended] 11. In newly redsignated section 242.7504, remove the bracket at the end of paragraph (b). ■ PART 252—SOLICITATION PROVISIONS AND CONTRACT CLAUSES 12. Amend section 252.215–7002 by— a. Removing the clause date ‘‘(DEC 2012)’’ and adding in its place ‘‘(DATE)’’; ■ b. Revising paragraphs (a) and (b); ■ c. Amending paragraph (c) introductory text by removing ‘‘a large business’’ and adding ‘‘other than a small business concern’’ in its place; ■ d. Revising paragraph (d) heading and adding paragraphs (d)(5) through (9); sroberts on DSK5SPTVN1PROD with PROPOSALS ■ ■ VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 e. Revising paragraphs (e) and (f); and f. Amending paragraph (g) by removing ‘‘252.242–7005,’’ and adding ‘‘DFARS 252.242–7005,’’ in its place. The revisions read as follows: ■ ■ 252.215–7002 Cost Estimating System Requirements. * * * * * (a) Definitions. As used in this clause— Acceptable estimating system means an estimating system that complies with the system criteria in paragraph (d) of this clause, and provides for a system that— (i) Is maintained, reliable, and consistently applied; (ii) Produces verifiable, supportable, documented, and timely cost estimates that are an acceptable basis for negotiation of fair and reasonable prices; (iii) Is consistent with and integrated with the Contractor’s related management systems; and (iv) Is subject to applicable financial control systems. Contractor means a business unit as defined in FAR 2.101. Contractor’s Certified Public Accountant (CPA) means an independent certified public accountant, in public practice and not directly employed as an employee by the Contractor, performing audits for the Contractor in accordance with U.S. generally accepted government auditing standards (GAGAS) as issued by the Government Accountability Office. CPA audit means an examination of the Contractor’s compliance with the applicable system criteria in paragraph (d)(4) of this clause performed by the Contractor’s CPA in accordance with GAGAS for examination attestation engagements. Estimating system means the Contractor’s policies, procedures, and practices for budgeting and planning controls, and generating estimates of costs and other data included in proposals submitted to customers in the expectation of receiving contract awards. Estimating system includes the Contractor’s— (i) Organizational structure; (ii) Established lines of authority, duties, and responsibilities; (iii) Internal controls and managerial reviews; (iv) Flow of work, coordination, and communication; and (v) Budgeting, planning, estimating methods, techniques, accumulation of historical costs, and other analyses used to generate cost estimates. Significant deficiency means a shortcoming in the system that materially affects the ability of officials PO 00000 Frm 00035 Fmt 4702 Sfmt 4702 41179 of the Department of Defense to rely upon information produced by the system that is needed for management purposes. (b) General. The Contractor shall— (1) Establish, maintain, and comply with an acceptable estimating system; and (2) Make available to the Government, upon request, the results of internal or external reviews or monitoring that have been conducted to ensure compliance with the system criteria in (d)(4) of this clause and established estimating policies and procedures. * * * * * (d) System and reporting requirements. * * * (5) Annual reporting requirements. (i) The Contractor shall provide to the Contracting Officer and Government auditor within the 6-month period following the expiration of the Contractor’s fiscal year, and annually thereafter, a report regarding compliance with the system criteria in paragraph (d)(4) of this clause as of the end of the Contractor’s most recent fiscal year. The Contractor shall have the report signed by an individual of the Contractor’s organization at a level no lower than a vice president or chief financial officer of the reporting business segment. (ii) The report shall include— (A) A statement that the Contractor has evaluated the estimating system’s compliance with the system criteria in paragraph (d)(4) of this clause; (B) The Contractor’s assessment of the estimating system’s compliance with the system criteria in paragraph (d)(4) of this clause, including a statement as to whether or not the system complies in all material respects, and disclosure of any significant deficiencies with sufficient information for the Government to understand the deficiencies; and (C) The status of any significant deficiencies disclosed as part of the Contractor’s assessment or, if applicable, in the Contractor’s CPA audit report as required in paragraph (d)(6) of this clause, including a corrective action plan with milestones and actions to eliminate any significant deficiencies that have not been corrected as of the date of the Contractor’s report. (6) Triennial CPA audit requirement. (i) In the first year in which the Contractor is required to provide the annual report as required in paragraph (d)(5) of this clause, and every three years thereafter, or more frequently if directed by the Contracting Officer, in addition to the items in paragraph E:\FR\FM\15JYP1.SGM 15JYP1 sroberts on DSK5SPTVN1PROD with PROPOSALS 41180 Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules (d)(5)(ii) of this clause, the Contractor’s annual report shall include an audit report on the Contractor’s CPA’s examination of the Contractor’s compliance with the system criteria in paragraph (d)(4) of this clause as of the end of the most recent fiscal year. (ii) The examination shall be performed in accordance with GAGAS for examination attestation engagements, and the CPA audit report shall include sufficient information regarding any reported significant deficiencies for the Government to understand the deficiencies. (7) CPA selection. If paragraph (d)(6) of this clause is applicable, the Contractor shall reasonably ensure that the CPA firm performing the audit is— (i) Independent and objective with respect to the audited entity by obtaining and reviewing a written representation from the firm that the firm (and the assigned engagement team)— (A) Is independent and objective with respect to the audited entity; (B) Will remain independent throughout the audit; (C) Has not performed any nonaudit services for the audited entity that impair the auditors’ independence for the subject audit; and (D) Will disclose any independence issues discovered; and (ii) Qualified to perform the audit by obtaining and reviewing— (A) Information about key engagement team members regarding professional qualifications and experience, including valid CPA licenses or certificates in good standing, and current knowledge and experience in the type of work to be done; and (B) The firm’s most recent peer review report, in accordance with the American Institute of Certified Public Accountants (AICPA) Peer Review Program, or equivalent. (8) Contractor submission of audit plan. The Contractor shall provide the Contractor’s CPA’s audit strategy, risk assessment, and audit plan (program), upon completion, for the audits required in paragraphs (d)(6) and (f)(2) of this clause, to the cognizant contracting officer and Government auditor for review if— (i) The Contractor has received Department of Defense (DoD) prime contracts or subcontracts, totaling $100 million or more for which certified cost or pricing data were required during the fiscal year to which the Contractor’s CPA audit report applies; or (ii) Requested by the Contracting Officer, in consultation with the Government auditor. VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 (9) Documentation requirements. (i) If paragraphs (d)(5) and (6) of this clause are applicable, the Contractor shall maintain and make available to the Government upon request— (A) Documentation to provide reasonable support for the assessment of the estimating system as required in paragraphs (d)(5)(ii)(B) of this clause; and (B) Information considered in the selection of a CPA as required in paragraph (d)(7) of this clause, if applicable. (ii) The Contractor shall arrange for Government access to the working papers supporting the CPA audit reports required in paragraphs (d)(6) and (f)(2) of this clause, and documentation supporting the Contractor’s CPA’s independence, objectivity and qualifications. (e) Significant deficiencies or failure to comply with applicable reporting and audit requirements. (1) The Contracting Officer will provide an initial determination to the Contractor, in writing, of any significant deficiencies or the Contractor’s failure to comply with the applicable reporting and audit requirements in paragraphs (d)(5) and (6) of this clause. The initial determination will describe the deficiency in sufficient detail to allow the Contractor to understand the deficiency and provide sufficient information on the noncompliance with the applicable reporting and audit requirements to allow the Contractor to understand what action needs to be taken to comply. (2) The Contractor shall respond within 30 days to a written initial determination from the Contracting Officer that identifies significant deficiencies in the Contractor’s estimating system or the Contractor’s failure to comply with the applicable reporting and audit requirements in paragraphs (d)(5) and (6) of this clause. If the Contractor disagrees with the initial determination, the Contractor shall state, in writing, its rationale for disagreeing. (3) The Contracting Officer will evaluate the Contractor’s response and notify the Contractor, in writing, of the Contracting Officer’s final determination concerning— (i) Remaining significant deficiencies; (ii) Remaining noncompliance with the applicable reporting and audit requirements; (iii) The adequacy of any proposed or completed corrective action; and (iv) System disapproval, if the Contracting Officer determines that one or more significant deficiencies remain or the Contractor has failed to comply PO 00000 Frm 00036 Fmt 4702 Sfmt 4702 with the applicable reporting and audit requirements. (f) If the Contractor receives the Contracting Officer’s final determination of significant deficiencies or the Contractor’s failure to comply with the applicable reporting and audit requirements in accordance with paragraphs (d)(5) and (6) of this clause, the Contractor shall— (1) Within 45 days of receipt of the final determination, either correct the significant deficiencies or submit an acceptable corrective action plan showing milestones and actions to eliminate the significant deficiencies, and comply with the applicable reporting and audit requirements; and (2) If the significant deficiencies were reported in the Contractor’s annual report, or the Contractor’s CPA audit report, provide the Contractor’s CPA’s opinion regarding the effectiveness of the corrective actions— (i) As a part of the triennial CPA audit report as required in paragraph (d)(6) of this clause; or (ii) In a separate audit report on the Contractor’s CPA’s examination of the effectiveness of the corrective action performed in accordance with GAGAS for examination attestation engagements. * * * * * ■ 13. Amend section 252.242–7004 by— ■ a. Removing the clause date ‘‘(MAY 2011)’’ and adding in its place ‘‘(DATE)’’; ■ b. Revising paragraph (a); ■ c. Amending paragraph (b)(2) by removing ‘‘paragraph (e)’’ and adding ‘‘paragraph (h)’’ in its place; ■ d. Revising paragraph (c)(2); ■ e. Redesignating paragraphs (d) through (g) as paragraphs (h) through (k), respectively, and adding new paragraphs (d) through (g); and ■ f. Revising the newly redesignated paragraphs (i) and (j). The revisions and additions read as follows: 252.242–7004 Material Management and Accounting System. * * * * * (a) Definitions. As used in this clause— Acceptable material management and accounting system means a MMAS that generally complies with the applicable system criteria in paragraph (h) of this clause. Contractor means a business unit as defined in FAR 2.101. Contractor’s Certified Public Accountant (CPA) means an independent certified public accountant, in public practice and not directly employed as an employee by E:\FR\FM\15JYP1.SGM 15JYP1 sroberts on DSK5SPTVN1PROD with PROPOSALS Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules the Contractor, performing audits for the Contractor in accordance with U.S. generally accepted government auditing standards (GAGAS), as issued by the Government Accountability Office. CPA audit means an examination of the Contractor’s compliance with the applicable system criteria in paragraph (h) of this clause performed by the Contractor’s CPA in accordance with GAGAS for examination attestation engagements. Material management and accounting system (MMAS) means the Contractor’s system or systems for planning, controlling, and accounting for the acquisition, use, issuing, and disposition of material. Material management and accounting systems may be manual or automated. They may be stand-alone systems or they may be integrated with planning, engineering, estimating, purchasing, inventory, accounting, or other systems. Qualifying sales means sales for which cost or pricing data were required under 10 U.S.C. 2306a, as implemented in FAR 15.403, or that are contracts priced on other than a firm-fixed-price or fixed-price with economic price adjustment basis. Sales include prime contracts, subcontracts, and modifications to such contracts and subcontracts. Significant deficiency means 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. Valid time-phased requirements means material that is— (i) Needed to fulfill the production plan, including reasonable quantities for scrap, shrinkage, yield, etc.; and (ii) Charged/billed to contracts or other cost objectives in a manner consistent with the need to fulfill the production plan. * * * * * (c) * * * (2) Provide to the Administrative Contracting Officer (ACO), upon request, the results of internal or external reviews or monitoring that have been conducted to ensure compliance with the system criteria in paragraph (h) of this clause and established MMAS policies, procedures, and operating instructions; and * * * * * (d) Triennial CPA reporting and audit requirements. (1) If the Contractor is other than small business concern, has $50 million of qualifying sales to the Government during the preceding fiscal year, and the Contracting Officer VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 requests an MMAS review, the Contractor shall— (i) Provide to the Contracting Officer and Government auditor within the 6month period following the expiration of the Contractor’s fiscal year, a report regarding the Contractor’s compliance with the system criteria in paragraph (h) of this clause as of the end of the Contractor’s most recent fiscal year; and (ii) Have the report signed by an individual of the Contractor’s organization at a level no lower than a vice president or chief financial officer of the reporting business segment. (2) The report shall include— (i) A statement that the Contractor has evaluated the MMAS’s compliance with the system criteria in paragraph (h) of this clause; (ii) The Contractor’s assessment of the MMAS’s compliance with the system criteria in paragraph (h) of this clause, including a statement as to whether or not the system complies in all material respects and disclosure of any significant deficiencies with sufficient information for the Government to understand the deficiencies; (iii) An audit report on the Contractor’s CPA’s examination of the Contractor’s compliance with the system criteria in paragraph (h) of this clause as of the end of the most recent fiscal year. The examination shall be performed in accordance with GAGAS for examination attestation engagements. The CPA audit report shall include sufficient information regarding any reported significant deficiencies for the Government to understand the deficiencies; and (iv) The status of any significant deficiencies disclosed as part of the Contractor’s assessment or in the Contractor’s CPA audit report, including a corrective action plan with milestones and actions to eliminate any significant deficiencies that have not been corrected as of the date of the Contractor’s report. (e) CPA selection. If paragraph (d) of this clause is applicable, the Contractor shall reasonably ensure that the CPA firm performing the audit is— (1) Independent and objective with respect to the audited entity by obtaining and reviewing a written representation from the firm that the firm (and the assigned engagement team)— (i) Is independent and objective with respect to the audited entity; (ii) Will remain independent throughout the audit; (iii) Has not performed any nonaudit services for the audited entity that impair the auditors’ independence for the subject audit; and PO 00000 Frm 00037 Fmt 4702 Sfmt 4702 41181 (iv) Will disclose any independence issues discovered; and (2) Qualified to perform the audit by obtaining and reviewing— (i) Information about key engagement team members regarding professional qualifications and experience, including valid CPA licenses or certificates in good standing, and current knowledge and experience in the type of work to be done; and (ii) The firm’s most recent peer review report, in accordance with the American Institute of Certified Public Accountants (AICPA) Peer Review Program, or equivalent. (f) Contractor submission of audit plan. The Contractor shall provide the Contractor’s CPA’s audit strategy, risk assessment, and audit plan (program), upon completion, for the audits required in paragraphs (d)(2)(iii) and (j)(2) of this clause, to the cognizant contracting officer and Government auditor for review if— (1) The Contractor has more than $100 million in qualifying sales to the Government during the fiscal year to which the Contractor’s CPA audit report applies; or (2) Requested by the Contracting Officer, in consultation with the Government auditor. (g) Documentation requirements. (1) If paragraph (d) of this clause is applicable, the Contractor shall maintain and make available to the Government upon request— (i) Documentation to provide reasonable support for the assessment of the MMAS as required in paragraph (d)(2)(ii) of this clause; and (ii) Information considered in the selection of a CPA as required in paragraph (e) of this clause. (2) The Contractor shall arrange for Government access to the working papers supporting the CPA audit reports as required in paragraphs (d)(2)(iii) and (j)(2) of this clause, and documentation supporting the CPA’s independence, objectivity, and qualifications. * * * * * (i) Significant deficiencies or failure to comply with applicable reporting and audit requirements. (1) The Contracting Officer will provide an initial determination to the Contractor, in writing, of any significant deficiencies or the Contractor’s failure to comply with the applicable reporting and audit requirements in paragraph (d) of this clause. The initial determination will describe the deficiency in sufficient detail to allow the Contractor to understand the deficiency and provide sufficient information on the noncompliance with the applicable E:\FR\FM\15JYP1.SGM 15JYP1 sroberts on DSK5SPTVN1PROD with PROPOSALS 41182 Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules reporting and audit requirements to allow the Contractor to understand what action needs to be taken to comply. (2) The Contractor shall respond within 30 days to a written initial determination from the Contracting Officer that identifies significant deficiencies in the Contractor’s MMAS or the Contractor’s failure to comply with the applicable reporting and audit requirements in paragraph (d) of this clause. If the Contractor disagrees with the initial determination, the Contractor shall state, in writing, its rationale for disagreeing. (3) The Contracting Officer will evaluate the Contractor’s response and notify the Contractor, in writing, of the Contracting Officer’s final determination concerning— (i) Remaining significant deficiencies; (ii) Remaining noncompliance with the applicable reporting and audit requirements; (iii) The adequacy of any proposed or completed corrective action; and (iv) System disapproval if the Contracting Officer determines that one or more significant deficiencies remain or the Contractor has failed to comply with the applicable reporting and audit requirements. (j) If the Contractor receives the Contracting Officer’s final determination of significant deficiencies or the Contractor’s failure to comply with the applicable reporting and audit requirements in accordance with paragraph (d) of this clause, the Contractor shall— (1) Within 45 days of receipt of the final determination, either correct the significant deficiencies or submit an acceptable corrective action plan showing milestones and actions to eliminate the significant deficiencies, and comply with the applicable reporting and audit requirements; and (2) If the significant deficiencies were reported in the Contractor’s annual report, or the Contractor’s CPA audit report as required in paragraph (d) of this clause, provide the Contractor’s CPA’s opinion regarding the effectiveness of the corrective actions— (i) As a part of the triennial CPA audit report required in paragraph (d) of this clause; or (ii) In a separate audit report on the Contractor’s CPA’s examination of the effectiveness of the corrective action performed in accordance with GAGAS for examination attestation engagements. * * * * * ■ 14. Amend section 252.242–7005 by— ■ a. In the introductory text, removing ‘‘242.7001’’ and adding ‘‘242.7003’’ in its place; VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 b. Removing the clause date ‘‘(FEB 2012)’’ and adding in its place ‘‘(DATE)’’; ■ c. Amending paragraph (b) by— ■ i. Revising the definition of ‘‘Contractor business systems’’; and ■ ii. Adding, in alphabetical order, definitions for ‘‘Contractor’s Certified Public Account (CPA)’’ and ‘‘CPA audit’’. ■ d. Revising paragraph (d); ■ e. Revising paragraphs (e)(1) and (2); ■ f. Revising paragraphs (f)(1), (f)(2) introductory text, and (f)(2)(i); ■ g. Amending paragraph (f)(iv) by removing ‘‘Contractor has corrected the significant deficiencies’’ and adding ‘‘Contractor has corrected the significant deficiencies and, if applicable, the Contractor’s CPA audit report on the effectiveness of the corrective actions’’ in its place; and ■ h. Adding paragraph (g). The additions and revisions read as follows: ■ 252.242–7005 Systems. Contractor Business * * * * * (b) * * * Contractor business systems means— (i) Accounting system, if this contract includes the clause at DFARS 252.242– 7006, Accounting System Administration; (ii) Earned value management system, if this contract includes the clause at DFARS 252.234–7002, Earned Value Management System; (iii) Estimating system, if this contract includes the clause at DFARS 252.215– 7002, Cost Estimating System Requirements; (iv) Material management and accounting system, if this contract includes the clause at DFARS 252.242– 7004, Material Management and Accounting System; (v) Property management system, if this contract includes the clause at DFARS 252.245–7003, Contractor Property Management System Administration; and (vi) Purchasing system, if this contract includes the clause at DFARS 252.244– 7001, Contractor Purchasing System Administration. Contractor’s Certified Public Accountant (CPA) means an independent certified public accountant, in public practice and not directly employed as an employee by the Contractor, performing audits for the Contractor in accordance with U.S. generally accepted government auditing standards (GAGAS) as issued by the Government Accountability Office. CPA audit means an examination of the Contractor’s compliance with the PO 00000 Frm 00038 Fmt 4702 Sfmt 4702 applicable system criteria in the applicable business system clause in DFARS 242.7003(b) performed by the Contractor’s CPA in accordance with GAGAS for examination attestation engagements. * * * * * (d) Significant deficiencies or failure to comply with reporting and audit requirements. (1) The Contractor shall respond, in writing, within 30 days to an initial determination of— (i) One or more significant deficiencies in one or more of the Contractor’s business systems; or (ii) Failure to comply with the applicable reporting and audit requirements in the applicable business system clause listed in the definition of ‘‘contractor business systems’’ in paragraph (b) of this clause. (2) The Contracting Officer will evaluate the Contractor’s response and notify the Contractor, in writing, of the final determination as to whether— (i) The Contractor’s business system contains significant deficiencies; or (ii) The Contractor has failed to comply with the applicable reporting and audit requirements in the applicable business system clause listed in the definition of ‘‘contractor business systems’’ in paragraph (b) of this clause. (3) If the Contracting Officer determines that the Contractor’s business system contains significant deficiencies or that the contractor has failed to comply with the applicable reporting and audit requirements, the final determination will include a notice to withhold payments. (e) Withholding payments. (1) If the Contracting Officer issues the final determination with a notice to withhold payments for significant deficiencies in a contractor business system, or for the Contractor’s failure to comply with the applicable reporting and audit requirements in the applicable business system clause listed in the definition of ‘‘contractor business systems’’ in paragraph (b) of this clause required under this contract, the Contracting Officer will withhold five percent of amounts due from progress payments and performance-based payments, and direct the Contractor, in writing, to withhold five percent from its billings on interim cost vouchers on costreimbursement, labor-hour, and timeand-materials contracts until the Contracting Officer has determined that the Contractor has corrected all significant deficiencies and complied with the applicable reporting and audit requirements as directed by the Contracting Officer’s final determination. E:\FR\FM\15JYP1.SGM 15JYP1 sroberts on DSK5SPTVN1PROD with PROPOSALS Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules (2) If the final determination with a notice to withhold payments is for significant deficiencies in a Contractor business system— (i) The Contractor shall, within 45 days of receipt of the notice, either correct the deficiencies or submit an acceptable corrective action plan showing milestones and actions to eliminate the deficiencies; and (ii)(A) If the Contractor submits an acceptable corrective action plan within 45 days of receipt of a notice of the Contracting Officer’s intent to withhold payments, and the Contracting Officer, in consultation with the Government auditor or functional specialist, determines that the Contractor is effectively implementing such plan, the Contracting Officer will reduce withholding directly related to the significant deficiencies covered under the corrective action plan, to two percent from progress payments and performance-based payments, and direct the Contractor, in writing, to reduce the percentage withheld on interim cost vouchers to two percent until the Contracting Officer determines the Contractor has corrected all significant deficiencies as directed by the Contracting Officer’s final determination. (B) If at any time the Contracting Officer determines that the Contractor has failed to follow the accepted corrective action plan, the Contracting Officer will increase withholding from progress payments and performancebased payments, and direct the Contractor, in writing, to increase the percentage withheld on interim cost vouchers to the percentage initially withheld, until the Contracting Officer determines that the Contractor has corrected all significant deficiencies as directed by the Contracting Officer’s final determination. * * * * * (f) Correction of deficiencies. (1) The Contractor shall notify the Contracting Officer, in writing, when the Contractor has corrected the business system’s deficiencies, and shall provide the Contractor’s CPA audit report on the effectiveness of the corrective actions, if required by the applicable business system clause listed in the definition of ‘‘contractor business systems’’ in paragraph (b) of this clause. (2) Once the Contractor has notified the Contracting Officer that all deficiencies have been corrected and, if applicable, provided the Contractor’s CPA audit report on the effectiveness of the corrective actions, the Contracting Officer will take one of the following actions: VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 (i) If the Contracting Officer determines that the Contractor has corrected all significant deficiencies as directed by the Contracting Officer’s final determination, the Contracting Officer will, as appropriate, discontinue the withholding of progress payments and performance-based payments, and direct the Contractor, in writing, to discontinue the payment withholding from billings on interim cost vouchers under this contract associated with the Contracting Officer’s final determination, and authorize the Contractor to bill for any monies previously withheld that are not also being withheld due to other significant deficiencies, or noncompliance with applicable reporting and audit requirements in the applicable business system clause listed in the definition of ‘‘contractor business systems’’ in paragraph (b) of this clause. Any payment withholding under this contract due to other significant deficiencies or noncompliance with applicable reporting and audit requirements, will remain in effect until the Contracting Officer determines that those significant deficiencies and noncompliances are corrected. * * * * * (g) Compliance with applicable reporting and audit requirements. When the Contractor has, as directed by the Contracting Officer’s final determination, provided the Contractor’s report on compliance with the system criteria, including, if applicable, the Contractor’s CPA audit report as required in the applicable business system clause listed in the definition of ‘‘contractor business systems’’ in paragraph (b) of this clause, the Contracting Officer will, as appropriate, discontinue the withholding of progress payments and performance-based payments, and direct the Contractor, in writing, to discontinue the payment withholding from billings on interim cost vouchers under this contract associated with the Contracting Officer’s final determination, and authorize the Contractor to bill for any monies previously withheld that are not also being withheld due to significant deficiencies or other noncompliance with applicable reporting and audit requirements. Any payment withholding under this contract due to significant deficiencies or other noncompliance with applicable reporting and audit requirements, will remain in effect until the Contracting Officer determines that those significant deficiencies and noncompliances are corrected. PO 00000 Frm 00039 Fmt 4702 Sfmt 4702 41183 15. Amend section 252.242–7006 by— a. In the introductory text, removing ‘‘242.7503’’ and adding ‘‘242.7504’’ in its place; ■ b. Removing the clause date ‘‘(FEB 2012)’’ and adding in its place ‘‘(DATE)’’; ■ c. In paragraph (a) removing the numerical paragraph designations of (1) through (3) for the definition paragraphs, and adding, in alphabetical order, definitions for ‘‘Contractor’s Certified Public Account (CPA)’’ and ‘‘CPA audit’’; ■ d. Revising paragraph (b); ■ e. Redesignating paragraphs (d), (e) and (f) as paragraphs (j), (k) and (l), respectively; ■ f. Adding new paragraphs (d) through (i); ■ g. Revising the newly redesignated paragraphs (j) and (k); and ■ h. Amending the newly redesignated paragraph (l) by removing ‘‘252.242– 7005’’ and adding ‘‘DFARS 252.242– 7005’’ in its place. The revisions and additions read as follows: ■ ■ 252.242–7006 Accounting System Administration. * * * * * (a) * * * Contractor’s Certified Public Accountant (CPA) means an independent certified public accountant, in public practice and not directly employed as an employee by the Contractor, performing audits for the Contractor in accordance with U.S. generally accepted government auditing standards (GAGAS) as issued by the Government Accountability Office. CPA audit means an examination of the Contractor’s compliance with the applicable system criteria in paragraph (c) of this clause performed by the Contractor’s CPA in accordance with GAGAS for examination attestation engagements. * * * * * (b) General. The Contractor shall— (1) Establish and maintain an acceptable accounting system; and (2) Make available to the Government, upon request, the results of internal or external reviews or monitoring that have been conducted to ensure compliance with the system criteria in (c) and established accounting system policies and procedures. * * * * * (d) Applicability. (1) Paragraph (e) of this clause applies if, in the Contractor’s fiscal year preceding the period in which the annual report as required in paragraph (e) is due to the Government, the Contractor had a covered contract as defined in DFARS 242.7001 (other than E:\FR\FM\15JYP1.SGM 15JYP1 sroberts on DSK5SPTVN1PROD with PROPOSALS 41184 Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules contracts with educational institutions or Federally Funded Research and Development Centers (FFRDCs) operated by educational institutions). (2) Paragraph (f) of this clause applies if, in the Contractor’s fiscal year preceding the period in which the Contractor’s CPA audit report as required in paragraph (f) is due to the Government, the Contractor had a covered contract as defined in DFARS 242.7001 (other than contracts with educational institutions or Federally Funded Research and Development Centers (FFRDCs) operated by educational institutions). (e) Annual reporting requirements. (1) The Contractor shall provide to the Contracting Officer and Government auditor within the 6-month period following the expiration of the Contractor’s fiscal year, and annually thereafter, a report regarding compliance with the system criteria in paragraph (c) of this clause as of the end of the Contractor’s most recent fiscal year. The Contractor shall have the report signed by an individual of the Contractor’s organization at a level no lower than a vice president or chief financial officer of the reporting business segment. (2) The report shall include— (i) A statement that the Contractor has evaluated the accounting system’s compliance with the system criteria in paragraph (c) of this clause; (ii) The Contractor’s assessment of the accounting system’s compliance with the system criteria in paragraph (c) of this clause, including a statement as to whether or not the system complies in all material respects, and disclosure of any significant deficiencies with sufficient information for the Government to understand the deficiencies; and (iii) The status of any significant deficiencies disclosed as part of the Contractor’s assessment or, if applicable, in the Contractor’s CPA audit report required in paragraph (f) of this clause, including a corrective action plan with milestones and actions to eliminate any significant deficiencies that have not been corrected as of the date of the Contractor’s report. (f) Triennial CPA audit requirement. (1) In the first year in which the Contractor is required to provide the annual report as required in paragraph (e) of this clause, and every three years thereafter, or more frequently if directed by the Contracting Officer, in addition to the items in paragraphs (e)(2)(i), (ii), and (iii) of this clause, the Contractor’s annual report shall include an audit report on the Contractor’s CPA’s examination of the Contractor’s VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 compliance with the system criteria in paragraph (c) of this clause as of the end of the Contractor’s most recent fiscal year. (2) The examination shall be performed in accordance with GAGAS for examination attestation engagements, and the CPA audit report shall include sufficient information regarding any reported significant deficiencies for the Government to understand the deficiencies. (g) CPA selection. If paragraph (f) of this clause is applicable, the Contractor shall reasonably ensure that the CPA firm performing the audit is— (1) Independent and objective with respect to the audited entity by obtaining and reviewing a written representation from the firm that the firm (and the assigned engagement team)— (i) Is independent and objective with respect to the audited entity; (ii) Will remain independent throughout the audit; (iii) Has not performed any nonaudit services for the audited entity that impair the auditors’ independence for the subject audit; and (iv) Will disclose any independence issues discovered; and (2) Qualified to perform the audit by obtaining and reviewing— (i) Information about key engagement team members regarding professional qualifications and experience, including valid CPA licenses or certificates in good standing, and current knowledge and experience in the type of work to be done; and (ii) The firm’s most recent peer review report, in accordance with the American Institute of Certified Public Accountants (AICPA) Peer Review Program, or equivalent. (h) Contractor submission of audit plan. The Contractor shall provide the Contractor’s CPA’s audit strategy, risk assessment, and audit plan (program), upon completion, for the audits as required in paragraphs (f) and (k)(2) of this clause to the cognizant contracting officer and Government auditor for review if— (1) The Contractor has more than $100 million in cost incurred on costreimbursement and incentive type contracts, and amounts billed on time and material and labor hour contracts during the Contractor’s fiscal year to which the Contractor’s CPA audit report applies; or (2) Requested by the Contracting Officer, in consultation with the Government auditor. (i) Documentation requirements. (1) If paragraphs (e) and (f) of this clause are applicable, the Contractor shall PO 00000 Frm 00040 Fmt 4702 Sfmt 4702 maintain and make available to the Government upon request— (i) Documentation to provide reasonable support for the assessment of the accounting system as required in paragraph (e)(2)(ii) of this clause; and (ii) Information considered in the selection of a CPA as required in paragraph (g) of this clause, if applicable. (2) The Contractor shall arrange for Government access to the working papers supporting the CPA audit reports as required in paragraphs (f) and (k)(2) of this clause, and documentation supporting the CPA’s independence, objectivity, and qualifications. (j) Significant deficiencies or failure to comply with applicable reporting and audit requirements. (1) The Contracting Officer will provide an initial determination to the Contractor, in writing, of any significant deficiencies or the Contractor’s failure to comply with the applicable reporting and audit requirements in paragraphs (e) and (f) of this clause. The initial determination will describe the deficiency in sufficient detail to allow the Contractor to understand the deficiency and provide sufficient information on the noncompliance with the applicable reporting and audit requirements to allow the Contractor to understand what action needs to be taken to comply. (2) The Contractor shall respond within 30 days to a written initial determination from the Contracting Officer that identifies significant deficiencies in the Contractor’s accounting system or the Contractor’s failure to comply with the applicable reporting and audit requirements in paragraphs (e) and (f) of this clause. If the Contractor disagrees with the initial determination, the Contractor shall state, in writing, its rationale for disagreeing. (3) The Contracting Officer will evaluate the Contractor’s response and notify the Contractor, in writing, of the Contracting Officer’s final determination concerning— (i) Remaining significant deficiencies; (ii) Remaining noncompliance with the applicable reporting and audit requirements; (iii) The adequacy of any proposed or completed corrective action; and (v) System disapproval, if the Contracting Officer determines that one or more significant deficiencies remain or the Contractor has failed to comply with the applicable reporting and audit requirements. (k) If the Contractor receives the Contracting Officer’s final determination of significant deficiencies or the Contractor’s failure to comply with the E:\FR\FM\15JYP1.SGM 15JYP1 Federal Register / Vol. 79, No. 135 / Tuesday, July 15, 2014 / Proposed Rules applicable reporting and audit requirements in accordance with paragraphs (e) and (f) of this clause, the Contractor shall— (1) Within 45 days of receipt of the final determination, either correct the significant deficiencies or submit an acceptable corrective action plan showing milestones and actions to eliminate the significant deficiencies, and comply with the applicable reporting and audit requirements; and (2) If the significant deficiencies were reported in the Contractor’s annual report, or the Contractor’s CPA audit report, provide the Contractor’s CPA’s opinion regarding the effectiveness of the corrective actions— (i) As a part of the triennial CPA audit report as required in paragraph (f) of this clause; or (ii) In a separate audit report on the Contractor’s CPA’s examination of the effectiveness of the corrective action performed in accordance with GAGAS for examination attestation engagements. * * * * * [FR Doc. 2014–16390 Filed 7–11–14; 4:15 pm] BILLING CODE 5001–06–P DEPARTMENT OF TRANSPORTATION Pipeline and Hazardous Materials Safety Administration 49 CFR Parts 171, 172, 173, and 177 [Docket No. PHMSA–2011–0345 (HM–233D)] RIN 2137–AE86 Hazardous Materials: Requirements for the Safe Transportation of Bulk Explosives (RRR) Pipeline and Hazardous Materials Safety Administration (PHMSA), DOT. ACTION: Notice of proposed rulemaking (NPRM). AGENCY: The Pipeline and Hazardous Materials Safety Administration is proposing to amend the Hazardous Materials Regulations by establishing standards for the safe transportation of bulk explosives. This rulemaking would be responsive to two petitions for rulemaking submitted by industry representatives: P–1557 concerning the continued use of renewal applications, and P–1583 concerning the incorporation of an industry standard publication. Further, developing these requirements would provide wider access to the regulatory flexibility currently only offered by special permit and competent authorities. sroberts on DSK5SPTVN1PROD with PROPOSALS SUMMARY: VerDate Mar<15>2010 17:37 Jul 14, 2014 Jkt 232001 The requirements of this proposed rule would mirror the majority of provisions contained in nine widely used or longstanding special permits that have established safety records. These proposed revisions are intended to eliminate the need for future renewal requests, thus reducing paperwork burdens and facilitating commerce while maintaining an appropriate level of safety. As proposed, the requirements would authorize the transportation of certain explosives, ammonium nitrates, ammonium nitrate emulsions, and other specific hazardous materials in bulk packagings, which are not otherwise authorized under the regulations. These hazardous materials are used in blasting operations on specialized vehicles, known as multipurpose bulk trucks, which are used as mobile work platforms to create blends of explosives that are unique for each blast site. Finally, this rulemaking addresses the construction of new multipurpose bulk trucks. DATES: Comments must be submitted by September 15, 2014. To the extent possible, PHMSA will consider latefiled comments as a final rule is developed. You may submit comments by identification of the docket number (PHMSA–2011–0345 (HM–233D)) by any of the following methods: • Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the online instructions for submitting comments. • Fax: 1–202–493–2251. • Mail: Docket Operations, U.S. Department of Transportation, West Building, Ground Floor, Room W12– 140, Routing Symbol M–30, 1200 New Jersey Avenue SE., Washington, DC 20590. • Hand Delivery: To Docket Operations, Room W12–140 on the ground floor of the West Building, 1200 New Jersey Avenue SE., Washington, DC 20590, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. Instructions: All submissions must include the agency name and docket number for this notice at the beginning of the comment. All comments received will be posted without change to the Federal Docket Management System (FDMS), including any personal information. Docket: For access to the dockets to read background documents (including the Regulatory Impact Analysis (RIA)) or comments received, go to http:// www.regulations.gov or DOT’s Docket Operations Office (see ADDRESSES). ADDRESSES: PO 00000 Frm 00041 Fmt 4702 Sfmt 4702 41185 FOR FURTHER INFORMATION CONTACT: Matthew Nickels, Standards and Rulemaking Division, Office of Hazardous Materials Safety, Pipeline and Hazardous Materials Safety Administration, U.S. Department of Transportation, telephone (202) 366– 8553, 1200 New Jersey Avenue SE., Washington, DC 20590. SUPPLEMENTARY INFORMATION: Table of Contents I. Executive Summary II. Background III. Summary Review of Proposed Amendments IV. Regulatory Analyses and Notices A. Statutory/Legal Authority for this Rulemaking B. Executive Order 13610, Executive Order 13563, Executive Order 12866, and DOT Regulatory Policies and Procedures C. Executive Order 13132 D. Executive Order 13175 E. Regulatory Flexibility Act, Executive Order 13272, and DOT Procedures and Policies F. Paperwork Reduction Act G. Regulatory Identifier Number (RIN) H. Unfunded Mandates Reform Act I. Environmental Assessment and Finding of No Significant Impact J. Privacy Act K. Executive Order 13609 and International Trade Analysis L. National Technology Transfer and Advancement Act V. List of Subjects I. Executive Summary In this notice of proposed rulemaking (NPRM), the Pipeline and Hazardous Materials Safety Administration (PHMSA) proposes to amend the Hazardous Materials Regulations (HMR) by establishing standards for the safe transportation of bulk explosives. This rulemaking would be responsive to two petitions for rulemaking submitted by industry representatives: P–1557, concerning the continued use of renewal applications, and P–1583, concerning the incorporation of an industry standard publication. Further, developing these requirements would provide wider access to the regulatory flexibility currently offered only by special permit and competent authority approvals. These proposed revisions are intended to eliminate the need for future renewal requests of nine special permits (the transportation of certain explosives, ammonium nitrates, ammonium nitrate emulsions, and other specific hazardous materials in bulk packaging) that have established safety records. The revisions would reduce paperwork burdens and facilitate commerce while maintaining a appropriate level of safety. E:\FR\FM\15JYP1.SGM 15JYP1

Agencies

[Federal Register Volume 79, Number 135 (Tuesday, July 15, 2014)]
[Proposed Rules]
[Pages 41172-41185]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-16390]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 215, 242, and 252

RIN 0750-AI20


Defense Federal Acquisition Regulation Supplement; Business 
Systems Compliance (DFARS Case 2012-D042)

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

ACTION: Proposed rule.

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SUMMARY: DoD is proposing to amend the Defense Federal Acquisition 
Regulation Supplement (DFARS) to ensure appropriate contractor 
accountability for adequate contractor business systems. In addition to 
the request for written comments on this proposed rule, DoD will hold a 
public meeting to hear the views of interested parties.

DATES: Comment Date: Comments on the proposed rule should be submitted 
in writing to the address shown below on or before September 15, 2014, 
to be considered in the formation of a final rule.
    Public Meeting Date: The public meeting will be held at the Mark 
Center Auditorium, 4800 Mark Center Drive, Alexandria, VA 22350-3603, 
on August 18, 2014, from 2 p.m. to 4 p.m., local time.

ADDRESSES: Submission of comments: You may submit comments, identified 
by DFARS Case 2012-D042, using any of the following methods:
    Regulations.gov: http://www.regulations.gov. Submit comments via 
the Federal eRulemaking portal by inserting ``DFARS Case 2012-D042'' 
under the heading ``Enter keyword or ID'' and selecting ``Search.'' 
Select the link ``Submit a Comment'' that corresponds with ``DFARS Case 
2012-D042.'' Follow the instructions provided at the ``Submit a 
Comment'' screen. Please include your name, company name (if any), and 
``DFARS Case 2012-D042'' on your attached document. Follow the 
instructions for submitting comments.
    Email: osd.dfars@mail.mil. Include DFARS Case 2012-D042 in the 
subject line of the message.
    Fax: 571-372-6094.
    Mail: Defense Acquisition Regulations System, Attn: Mr. Mark 
Gomersall, OUSD(AT&L)DPAP(DARS), Room 3B941, 3060 Defense Pentagon, 
Washington, DC 20301-3060.
    Comments received generally will be posted without change to http://www.regulations.gov, including any personal information provided. To 
confirm receipt of your comment(s), please check 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, Defense 
Acquisition

[[Page 41173]]

Regulations System, OUSD(AT&L)DPAP(DARS), Room 3B941, 3060 Defense 
Pentagon, Washington, DC 20301-3060. Telephone 571-372-6099.

SUPPLEMENTARY INFORMATION: 

I. Background

    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. In response to a U.S. Government Accountability Office 
report (GAO-12-83) issued on November 3, 2011, Defense Contract 
Management Agency: Amid Ongoing Efforts to Rebuild Capacity, Several 
Factors Present Challenges in Meeting Its Mission, DoD agreed to 
consider alternative approaches to audit contractor business systems.

II. Discussion and Analysis

    To improve the efficiency and effectiveness of auditing contractor 
business systems, DoD is proposing to amend the DFARS to entrust 
contractors with the capability to demonstrate compliance with DFARS 
system criteria for contractors' accounting systems, estimating 
systems, and material management and accounting systems, based on 
contractors' self-evaluations and audits by independent Certified 
Public Accountants (CPAs) of their choosing. Government auditors will 
perform overviews of the results of contractor self-evaluations and CPA 
audits.
    Individuals wishing to attend the public meeting should register by 
August 11, 2014, to ensure adequate room accommodations and to 
facilitate entry into the Mark Center building. Interested parties may 
register at the Web site, http://www.acq.osd.mil/dpap/dars/business_systems_compliance.html by providing the following information:
     Company or organization name.
     Names and email addresses of persons planning to attend.
     Identify if desiring to make a presentation; limited to a 
10-minute presentation per company or organization.
    One valid government-issued photo identification card will be 
required in order to enter the building. Non-U.S. citizens may use 
their valid passport as photo identification. Attendees are encouraged 
to arrive at least one hour early to accommodate security procedures.
    Transportation information for the Mark Center may be obtained at 
http://www.whs.mil/our-services/transportation/getting-mark-center. 
Accommodations for parking at the Mark Center will not be available, 
but may be found in the surrounding areas.
    If you wish to make a presentation, please submit an electronic 
copy of your presentation to osd.dfars@mail.mil no later than August 
13, 2014. Files must not exceed 19MB. Please cite ``Public Meeting--
Contractor Business Systems Compliance'' in all correspondence related 
to this public meeting. When submitting presentations, provide the 
presenter's name, organization affiliation, telephone number, and email 
address on the cover page. There will be no transcription of the public 
meeting. Submitted presentations will be the only record.
    Special accommodations: The public meeting is physically accessible 
to people with disabilities. Requests for reasonable accommodations, 
sign language interpretation or other auxiliary aids should be directed 
to Mark Gomersall at 571-372-6099, at least 10 working days prior to 
the meeting date.
    The TTY number for further information is: 1-800-877-8339. When the 
operator answers the call, let them know the agency is the Department 
of Defense; the point of contact is Mark Gomersall at 571-372-6099.

III. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is not a significant regulatory action and, therefore, was not 
subject to review under section 6(b) of E.O. 12866, Regulatory Planning 
and Review, dated September 30, 1993. This rule is not a major rule 
under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

    DoD has prepared an initial regulatory flexibility analysis 
consistent with 5 U.S.C. 603. A copy of the analysis may be obtained 
from the point of contact specified herein. The analysis is summarized 
as follows:
    The objective of the rule is to improve the efficiency and 
effectiveness of auditing contractor business systems by entrusting 
contractors with the capability to demonstrate compliance with the 
Defense Federal Acquisition Regulation Supplement (DFARS) system 
criteria for contractors' accounting systems, estimating systems, and 
material management and accounting systems, based on contractors' self-
evaluations and audits by independent Certified Public Accountants 
(CPAs) of their choosing. The requirements of the rule will apply to 
solicitations and contracts that include the contract clause for the 
applicable defined contractor business system.
    The rule will apply to solicitations and contracts that are with 
large businesses for the purposes of reporting for estimating systems, 
and material management and accounting systems. For reporting on 
accounting systems, the rule will apply to contractors who are subject 
to the Cost Accounting Standards (CAS) under 41 U.S.C. chapter 15, as 
implemented in regulations found at 48 CFR 9903.201-1 (see the FAR 
Appendix), other than for contracts with educational institutions, 
Federally Funded Research and Development Centers operated by 
educational institutions, or University Associated Research Centers. 
Since contracts and subcontracts with small businesses are exempt from 
CAS requirements, DoD estimates that this rule will have no impact on 
small businesses. DoD, however, invites comments from small business 
concerns and other interested parties on the expected impact of this 
rule on small entities.
    DoD will also consider comments from small entities concerning the 
existing regulations in subparts affected by this rule in accordance 
with 5 U.S.C. 610. Interested parties must submit such comments 
separately and should cite 5 U.S.C. 610 (DFARS Case 2012-D042) in 
correspondence.

V. Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. chapter 38) applies. The 
proposed rule contains information collection requirements. 
Accordingly, DoD has submitted a request for approval of a new 
information collection requirement concerning Defense Federal 
Acquisition Regulation Supplement; Business Systems Compliance (DFARS 
Case 2012-D042) to the Office of Management and Budget.
    A. Public reporting burden for this collection of information is 
estimated to average 2.87 hours per response, including the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information.

[[Page 41174]]

    The annual reporting burden estimated as follows:
    Respondents: 2,953.
    Responses per respondent: 1.
    Total annual responses: 2,953.
    Average hours per response: 2.87.
    Total annual burden hours: 8,468.
    B. Request for Comments Regarding Paperwork Burden. Written 
comments and recommendations on the proposed information collection, 
including suggestions for reducing this burden, should be sent to Ms. 
Jasmeet Seehra at the Office of Management and Budget, Desk Officer for 
DoD, Room 10236, New Executive Office Building, Washington, DC 20503, 
or email Jasmeet_K._Seehra@omb.eop.gov, with a copy to the Defense 
Acquisition Regulations System, Attn: Mark Gomersall, OUSD(AT&L)DPAP/
DARS, Room 3B941, 3060 Defense Pentagon, Washington, DC 20301-3060. 
Comments can be received from 30 to 60 days after the date of this 
notice, but comments to OMB will be most useful if received by OMB 
within 30 days after the date of this notice.
    Public comments are particularly invited on: whether this 
collection of information is necessary for the proper performance of 
functions of the DFARS, and will have practical utility; whether our 
estimate of the public burden of this collection of information is 
accurate, and based on valid assumptions and methodology; ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and ways in which we can minimize the burden of the 
collection of information on those who are to respond, through the use 
of appropriate technological collection techniques or other forms of 
information technology.
    To request more information on this proposed information collection 
or to obtain a copy of the proposal and associated collection 
instruments, please write to the Defense Acquisition Regulations 
System, Attn: Mark Gomersall, OUSD(AT&L)DPAP/DARS, Room 3B941, 3060 
Defense Pentagon, Washington, DC 20301-3060, or e-mail 
osd.dfars@mail.mil. Include DFARS Case 2012-D042 in the subject line of 
the message.

List of Subjects in 48 CFR Parts 215, 242, and 252

    Government procurement.

Amy G. Williams,
Deputy, Defense Acquisition Regulations System.
    Therefore, 48 CFR parts 215, 242, and 252 are proposed to be 
amended as follows:

0
1. The authority citation for parts 215, 242, and 252 continues to read 
as follows:

    Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

PART 215--CONTRACTING BY NEGOTIATION

0
2. Revise section 215.407-5-70 to read as follows:


215.407-5-70  Disclosure, maintenance, and review requirements.

    (a) Definitions. As used in this section--
    Acceptable estimating system, contractor, contractor's certified 
public accountant (CPA), CPA audit, estimating system, and significant 
deficiency are defined in the clause at 252.215-7002, Cost Estimating 
System Requirements.
    (b) Applicability. A contractor, other than a small business 
concern, is subject to the estimating system disclosure, maintenance, 
review, annual reporting, triennial CPA audit, and documentation 
requirements in the clause at 252.215-7002, Cost Estimating System 
Requirements, if--
    (1) In its preceding fiscal year, the contractor received DoD prime 
contracts or subcontracts totaling $50 million or more for which 
certified cost or pricing data were required; or
    (2) In its preceding fiscal year, the contractor received DoD prime 
contracts or subcontracts totaling $10 million or more (but less than 
$50 million) for which certified cost or pricing data were required and 
the contracting officer, with concurrence or at the request of the ACO, 
determines it to be in the best interest of the Government (e.g., 
significant estimating problems are believed to exist or the 
contractor's sales are predominantly Government).
    (c) Policy. DoD policy is for all contractors to have acceptable 
estimating systems that consistently produce well-supported proposals 
that are acceptable as a basis for negotiation of fair and reasonable 
prices.
    (d) Procedures. (1) The contracting officer shall--
    (i) Through use of the clause at 252.215-7002, Cost Estimating 
System Requirements, apply the disclosure, maintenance, review, annual 
reporting, triennial CPA audit, and documentation requirements to 
contractors, other than small business concerns, meeting the criteria 
in paragraph (b)(1) of this section;
    (ii) Consider whether to apply the disclosure, maintenance, review, 
annual reporting, triennial CPA audit, and documentation requirements 
to contractors, other than small business concerns, under paragraph 
(b)(2) of this section; and
    (iii) Not apply the disclosure, maintenance, review, annual 
reporting, triennial CPA audit, and documentation requirements to small 
business concerns.
    (2) The cognizant contracting officer, in consultation with the 
Government auditor, for contractors subject to paragraph (b) of this 
section, shall--
    (i) Determine the acceptability of the contractor's estimating 
system and disclosure, and approve or disapprove the system; and
    (ii) Pursue correction of any deficiencies.
    (3) Triennial CPA audit requirement. For contractors subject to 
paragraph (b) of this section, and paragraph (d)(8) of the clause at 
252.215-7002, the cognizant contracting officer shall--
    (i) Upon receipt of the contractor's CPA's audit strategy, risk 
assessment, and audit plan (program), request a review from the 
Government auditor, and notify the contractor of any potential issues 
identified by the Government auditor regarding their reasonableness. 
Early notification of potential issues may decrease the likelihood of 
the contractor incurring unreasonable costs. However, review of the 
contractor's CPA's audit strategy, risk assessment, and audit plan 
(program) does not constitute the contracting officer's approval; and
    (ii) Upon receipt of the contractor's CPA audit report, request the 
Government auditor's assessment of the CPA audit report and related 
documentation.
    (4) In evaluating the acceptability of a contractor's estimating 
system, the contracting officer, in consultation with the Government 
auditor, shall determine whether the contractor's estimating system 
complies with the system criteria for an acceptable estimating system 
in the clause at 252.215-7002. In making that determination, the 
contracting officer shall consider--
    (i) The contractor's estimating system disclosure, annual report on 
the estimating system's compliance with the system criteria and the 
audit report by the contractor's CPA, as required in the clause at 
252.215-7002, if applicable; and
    (ii) Any other findings and recommendations reported by the 
Government auditor including the assessment of the contractor's CPA 
audit report and related documentation, if applicable.
    (e) Accelerated audit requirement. The contracting officer, in 
consultation

[[Page 41175]]

with the Government auditor, may require contractors subject to the 
triennial CPA audit requirement in the clause at 252.215-7002 to 
provide an out-of-cycle CPA audit report prior to the triennial CPA 
audit period based on a risk assessment of the contractor's past 
experience and current vulnerability.
    (f) Disposition of findings--(1) Reporting of findings by the 
Government auditor. The Government auditor shall document findings and 
recommendations in a report to the contracting officer regarding any 
identified significant estimating system deficiencies. The report shall 
describe the deficiencies in sufficient detail to allow the contracting 
officer to understand the deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
all findings and recommendations from the Government auditor and 
contractor and, if there are no significant deficiencies and the 
contractor as complied with the applicable reporting and audit 
requirements in paragraphs (d)(5) and (6) of the clause at 252.215-
7002, shall promptly notify the contractor, in writing, that the 
contractor's estimating system is acceptable and approved; or
    (ii) If the contracting officer finds that there are one or more 
significant deficiencies (as defined in the clause at 252.215-7002 due 
to the contractor's failure to meet one or more of the estimating 
system criteria in the clause at 252.215-7002, or that the contractor 
has failed to comply with the applicable reporting and audit 
requirements in accordance with the clause at 252.215-7002, the 
contracting officer shall--
    (A)(1) Promptly make an initial written determination on any 
significant deficiencies and notify the contractor, in writing, 
providing a description of each significant deficiency in sufficient 
detail to allow the contractor to understand the deficiency; or
    (2) Promptly make an initial written determination on the 
contractor's failure to comply with the applicable reporting and audit 
requirements and notify the contractor, in writing, providing 
sufficient information to allow the contractor to understand what 
action needs to be taken to comply;
    (B) Request the contractor to respond, in writing, to the initial 
determination within 30 days; and
    (C) Promptly evaluate the contractor's responses to the initial 
determination, in consultation with the Government auditor or 
functional specialist, and make a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (A) The contractor's estimating system is acceptable and approved, 
and no significant deficiencies remain, and the contractor has complied 
with the applicable reporting and audit requirements in accordance with 
the clause at 252.215-7002; or
    (B) Significant deficiencies remain, or the contractor has failed 
to comply with the applicable reporting and audit requirements. The 
notice shall identify any remaining significant deficiencies or 
noncompliance with the applicable reporting and audit requirements, and 
indicate the adequacy of any proposed or completed corrective action. 
The contracting officer shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies and comply with the applicable reporting and 
audit requirements;
    (2) Disapprove the system in accordance with the clause at 252.215-
7002; and
    (3) Withhold payments in accordance with the clause at 252.242-7005 
if the clause is included in the contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of significant deficiencies in PGI 
215.407-5-70(f).
    (g) System approval. The contracting officer shall promptly approve 
a previously disapproved estimating system and notify the contractor 
when the contracting officer determines that there are no remaining 
significant deficiencies or noncompliance with the applicable reporting 
and audit requirements.
    (h) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to approve 
a system, to disapprove a system and withhold payments, or to approve a 
previously disapproved system and release withheld payments to the 
Government auditor, payment office, affected contracting officers at 
the buying activities, and cognizant contracting officers in contract 
administration activities.

PART 242--CONTRACT ADMINISTRATION AND AUDIT SERVICES


242.7000 and 242.7001  [Redesignated as 242.7001 and 242.7003]

0
3. Redesignate sections 242.7000 and 242.7001 as sections 242.7001 and 
242.7003, respectively.
0
4. Revise newly redesignated section 242.7001 to read as follows:


242.7001  Definitions.

    As used in this subpart--
    Acceptable contractor business systems, contractor business 
systems, contractor's certified public accountant (CPA), and CPA audit 
are defined in the clause at 252.242-7005, Contractor Business Systems.
    Covered contract means 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) (10 
U.S.C. 2302 note, as amended by section 816 of Public Law 112-81).
    Significant deficiency is defined in the clause at 252.242-7005, 
Contractor Business Systems.
0
5. Add section 242.7002 to read as follows:


242.7002  Contractor business systems deficiencies.

    (a) Determination to withhold payments. If the contracting officer 
makes a final determination to disapprove a contractor's business 
system in accordance with the clause at 252.242-7005, Contractor 
Business Systems, the contracting officer shall--
    (1) In accordance with agency procedures, identify one or more 
covered contracts containing the clause at 252.242-7005 from which 
payments will be withheld. When identifying the covered contracts from 
which to withhold payments, the contracting officer shall ensure that 
the total amount of payment withholding under 252.242-7005 does not 
exceed 10 percent of progress payments, performance-based payments, and 
interim payments under cost-reimbursement, labor-hour, and time-and-
materials contracts billed under each of the identified covered 
contracts. Similarly, the contracting officer shall ensure that the 
total amount of payment withholding under the clause at 252.242-7005 
for each business system does not exceed five percent of progress 
payments, performance-based payments, and interim payments under cost-
reimbursement, labor-hour, and time-and-materials contracts billed 
under each of the identified covered contracts. The contracting officer 
has the sole discretion to identify the covered contracts from which to 
withhold payments;
    (2) Promptly notify the contractor, in writing, of the contracting 
officer's determination to implement payment withholding in accordance 
with the clause at 252.242-7005. The notice of payment withholding 
shall be included in the contracting officer's written final 
determination for the contractor

[[Page 41176]]

business system and shall inform the contractor that--
    (i) Payments shall be withheld from the contract or contracts 
identified in the written determination in accordance with the clause 
at 252.242-7005 until the contracting officer determines that there are 
no remaining significant deficiencies and that the contractor has 
complied with the applicable reporting and audit requirements in 
accordance with the applicable business system clause identified in 
242.7003(b); and
    (ii) The contracting officer reserves the right to take other 
actions within the terms and conditions of the contract; and
    (3) Provide all contracting officers administering the selected 
contracts from which payments will be withheld, a copy of the 
determination. The contracting officer shall also provide a copy of the 
determination to the Government auditor; payment office; affected 
contracting officers at the buying activities; and cognizant 
contracting officers in contract administration activities.
    (b) Monitoring contractor's corrective action. The contracting 
officer, in consultation with the Government auditor or functional 
specialist, shall monitor the contractor's progress in correcting the 
deficiencies. The contracting officer shall notify the contractor of 
any decision to decrease or increase the amount of payment withholding 
in accordance with the clause at 252.242-7005.
    (c) Correction of significant deficiencies and reporting.
    (1) If the contractor notifies the contracting officer that the 
contractor has corrected the significant deficiencies and, if 
applicable, provides the contractor's CPA audit report on the 
effectiveness of the corrective actions, the contracting officer shall 
review the correction to verify that the deficiencies have been 
corrected. If the contracting officer determines that the contractor 
has corrected all significant deficiencies and provided the 
contractor's report on compliance with the system criteria, including 
the CPA audit report, if applicable, the contracting officer shall 
discontinue the withholding of payments, release any payments 
previously withheld, and approve the system, unless other significant 
deficiencies remain.
    (2) Prior to the determination that the deficiencies have been 
corrected, the contracting officer may discontinue withholding payments 
pending the determination, 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 Government auditor or functional specialist, 
determines that there is a reasonable expectation that the corrective 
actions have been implemented and are expected to correct the 
significant deficiencies.
    (3) Within 90 days of receipt of the contractor notification that 
the contractor has corrected the significant deficiencies and, if 
applicable, the contractor's CPA audit report on the effectiveness of 
the corrective actions, the contracting officer shall--
    (i) Make a determination that--
    (A) The contractor has corrected all significant deficiencies as 
directed by the contracting officer's final determination in accordance 
with paragraph (c)(1) of this section;
    (B) There is a reasonable expectation that the corrective actions 
have been implemented in accordance with paragraph (c)(2) of this 
section; or
    (C) The contractor has not corrected all significant deficiencies 
as directed by the contracting officer's final determination in 
accordance with paragraph (c)(1) of this section, or there is not a 
reasonable expectation that the corrective actions have been 
implemented in accordance with paragraph (c)(2) of this section; and
    (ii) Reduce withholding directly related to the significant 
deficiencies covered under the corrective action plan by at least 50 
percent of the amount being withheld from progress payments and 
performance-based payments, and direct the contractor, in writing, to 
reduce the percentage withheld on interim cost vouchers by at least 50 
percent, until the contracting officer makes a determination in 
accordance with paragraph (c)(3)(i) of this section.
    (4) If, at any time, the contracting officer determines that the 
contractor has failed to correct the significant deficiencies 
identified in the contractor's notification, the contracting officer 
will continue, reinstate, or increase withholding from progress 
payments and performance-based payments, and direct the contractor, in 
writing, to continue, reinstate, or increase the percentage withheld on 
interim cost vouchers to the percentage initially withheld, until the 
contracting officer determines that the contractor has corrected all 
significant deficiencies as directed by the contracting officer's final 
determination.
    (d) For sample formats for written notifications of contracting 
officer determinations to initiate payment withholding, reduce payment 
withholding, and discontinue payment withholding in accordance with the 
clause at 252.242-7005. See PGI 242.7002.
0
6. In newly redsignated section 242.7003, revise paragraph (a) to read 
as follows:


242.7003  Contract clause.

* * * * *
    (a) The resulting contract will be a covered contract as defined in 
242.7001; and
* * * * *
0
7. Revise sections 242.7201, 242.7202, and 242.7203 to read as follows:


242.7201  Definitions.

    As used in this subpart--
    Acceptable material management and accounting system, contractor, 
contractor's certified public accountant (CPA), CPA audit, material 
management and accounting system, qualifying sales, significant 
deficiency, and valid time-phased requirements are defined in the 
clause at 252.242-7004, Material Management and Accounting System.


242.7202  Policy.

    (a) DoD policy is for its contractors to have an MMAS that conforms 
to the standards in paragraph (h) of the clause at 252.242-7004, 
Material Management and Accounting System, so that the system--
    (1) Reasonably forecasts material requirements;
    (2) Ensures the costs of purchased and fabricated material charged 
or allocated to a contract are based on valid time-phased requirements; 
and
    (3) Maintains a consistent, equitable, and unbiased logic for 
costing of material transactions.
    (b) Criteria for conducting reviews. Conduct an MMAS review in 
accordance with paragraph (d) of the clause at 252.242.7004, when--
    (1) The contractor is a large business;
    (2) Has $50 million in qualifying sales to the Government; and
    (3) The cognizant contracting officer, with advice from the 
Government auditor or cognizant functional specialist, determines an 
MMAS review is needed based on a risk assessment of the contractor's 
past experience, current vulnerability, and the following risk factors:
    (i) FAR 42.302 surveillance activities indicate the contractor has 
not complied with the criteria in 252.242.7004.
    (ii) There are changes to the contractor's MMAS system.
    (iii) The contractor's MMAS system is new.
    (iv) The contractor's MMAS system has not been reviewed within a 
36-month period.
    (c) Contractors subject to the triennial CPA audit requirement in 
the clause at

[[Page 41177]]

252.242-7004, may be required to provide an out-of-cycle CPA audit 
report prior to the triennial CPA audit reporting period based on a 
risk assessment of the contractor's past experience and current 
vulnerability.
    (d) The cognizant contracting officer, in consultation with the 
Government auditor and cognizant functional specialist, if appropriate, 
shall--
    (1) Determine the acceptability of the contractor's MMAS and 
approve or disapprove the system; and
    (2) Pursue correction of any deficiencies.


242.7203  Procedures.

    (a) Triennial CPA audit requirement. For contractors subject to 
paragraph (f) of the clause at 252.242-7004, Material Management and 
Accounting System, the cognizant contracting officer shall--
    (1) Upon receipt of the contractor's CPA's audit strategy, risk 
assessment, and audit plan (program), request a review from the 
Government auditor, and notify the contractor of any potential issues 
identified by the Government auditor regarding their reasonableness. 
Early notification of potential issues may decrease the likelihood of 
the contractor incurring unreasonable costs. However, review of the 
contractor's CPA's audit strategy, risk assessment, and audit plan 
(program) does not constitute the contracting officer's approval; and
    (2) Upon receipt of the contractor's CPA audit report, request the 
Government auditor's assessment of the CPA audit report and related 
documentation.
    (b) In evaluating the acceptability of the contractor's MMAS, the 
contracting officer, in consultation with the Government auditor and 
functional specialist, if appropriate, shall determine whether the 
contractor's MMAS complies with the system criteria for an acceptable 
MMAS as required in the clause at 252.242-7004. In making that 
determination, the contracting officer shall consider--
    (1) The contractor's report on the MMAS's compliance with the 
system criteria and the audit report by the contractor's CPA, as 
required in the clause at 252.242-7004; and
    (2) Any other findings and recommendations reported by the 
Government auditor including the assessment of the contractor's CPA 
audit report and related documentation, if applicable.
    (c) Disposition of findings--(1) Reporting of findings by the 
Government auditor. The Government auditor or functional specialist 
shall document findings and recommendations in a report to the 
contracting officer regarding any identified significant MMAS 
deficiencies. The report shall describe the deficiencies in sufficient 
detail to allow the contracting officer to understand the deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
all findings and recommendations from the Government auditor and 
contractor and, if there are no significant deficiencies and the 
contractor has complied with the applicable reporting and audit 
requirements in paragraph (d) of the clause at 252.242-7004, shall 
promptly notify the contractor, in writing, that the contractor's MMAS 
is acceptable and approved.
    (ii) If the contracting officer finds that there are one or more 
significant deficiencies (as defined in the clause at 252.242-7004 due 
to the contractor's failure to meet one or more of the MMAS system 
criteria in the clause at 252.242-7004, or that the contractor has 
failed to comply with the applicable reporting and audit requirements 
in accordance with the clause at 252.242-7004, the contracting officer 
shall--
    (A)(1) Promptly make an initial written determination on any 
significant deficiencies and notify the contractor, in writing, 
providing a description of each significant deficiency in sufficient 
detail to allow the contractor to understand the deficiency; or
    (2) Promptly make an initial written determination on the 
contractor's failure to comply with the applicable reporting and audit 
requirements and notify the contractor, in writing, providing 
sufficient information to allow the contractor to understand what 
action needs to be taken to comply;
    (B) Request the contractor to respond, in writing, to the initial 
determination within 30 days; and
    (C) Promptly evaluate the contractor's response to the initial 
determination in consultation with the Government auditor or functional 
specialist, and make a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor that--
    (A) The contractor's MMAS is acceptable and approved, and no 
deficiencies remain, and the contractor has complied with the 
applicable reporting and audit requirements in accordance with the 
clause at 252.242-7004; or
    (B) Significant deficiencies remain, or the contractor has failed 
to comply with the applicable reporting and audit requirements. The 
notice shall identify any remaining significant deficiencies or 
noncompliance with the applicable reporting and audit requirements and 
indicate the adequacy of any proposed or completed corrective action. 
The contracting officer shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies and comply with the applicable reporting and 
audit requirements;
    (2) Disapprove the system in accordance with the clause at 252.242-
7004; and
    (3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of significant deficiencies in PGI 
242.7203.
    (d) System approval. The contracting officer shall promptly approve 
a previously disapproved MMAS and notify the contractor when the 
contracting officer determines that there are no remaining significant 
deficiencies or noncompliance with the applicable reporting and audit 
requirements.
    (e) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to approve 
a system, to disapprove a system and withhold payments, or to approve a 
previously disapproved system and release withheld payments to the 
Government auditor, payment office, affected contracting officers at 
the buying activities, and cognizant contracting officers in contract 
administration activities.
0
8. Revise sections 242.7501 and 242.7502 to read as follows:


242.7501  Definitions.

    As used in this subpart--
    Acceptable accounting system, accounting system, contractor's 
certified public account (CPA), CPA audit, and significant deficiency 
are defined in the clause at 252.242-7006, Accounting System 
Administration.


242.7502  Policy.

    DoD policy is for contractors receiving cost-reimbursement, 
incentive type, time-and-materials, or labor-hour contracts, or 
contracts which provide for progress payments based on costs or on a 
percentage or stage of completion, to--
    (a) Maintain an acceptable accounting system; and
    (b) If applicable, comply with the annual reporting, triennial CPA 
audit, and documentation requirements

[[Page 41178]]

required in the clause at 252.242-7006, Accounting System 
Administration.


242.7503  [Redesignated as 242.7504]

0
9. Redesignate section 242.7503 as section 242.7504.
0
10. Add a new section 242.7503 to read as follows:


242.7503  Procedures.

    (a) The cognizant contracting officer, in consultation with the 
Government auditor or functional specialist, shall--
    (1) Determine the acceptability of a contractor's accounting system 
and approve or disapprove the system; and
    (2) Pursue correction of any deficiencies.
    (b) Triennial CPA audit requirement. For contractors subject to 
paragraph (h) of the clause at 252.242-7006, the cognizant contracting 
officer shall--
    (1) Upon receipt of the contractor's CPA's audit strategy, risk 
assessment, and audit plan (program), request a review from the 
Government auditor and notify the contractor of any potential issues 
identified by the Government auditor regarding their reasonableness. 
Early notification of potential issues may decrease the likelihood of 
the contractor incurring unreasonable costs. However, review of the 
contractor's CPA's audit strategy, risk assessment, and audit plan 
(program) does not constitute the contracting officer's approval; and
    (2) Upon receipt of the contractor's CPA audit report, request the 
Government auditor's assessment of the CPA audit report and related 
documentation.
    (c) In evaluating the acceptability of a contractor's accounting 
system, the contracting officer, in consultation with the Government 
auditor or functional specialist, shall determine whether the 
contractor's accounting system complies with the system criteria for an 
acceptable accounting system in the clause at 252.242-7006. In making 
that determination the contracting officer shall consider--
    (1) The contractor's annual report on the accounting system's 
compliance with the system criteria and the audit report by the 
contractor's CPA as required in the clause at 252.242-7006, if 
applicable; and
    (2) Any other findings and recommendations reported by the 
Government auditor including the assessment of the contractor's CPA 
audit report and related documentation, if applicable.
    (d) Accelerated audit requirement. The contracting officer, in 
consultation with the Government auditor, may require contractors 
subject to the triennial CPA audit requirement in the clause at 
252.242-7006 to provide an out-of-cycle CPA audit report prior to the 
triennial CPA audit period based on a risk assessment of the 
contractor's past experience and current vulnerability.
    (e) Disposition of findings--(1) Reporting of findings by the 
Government auditor. The Government auditor shall document findings and 
recommendations in a report to the contracting officer regarding any 
identified significant accounting system deficiencies. The report shall 
describe the deficiencies in sufficient detail to allow the contracting 
officer to understand the deficiencies. Follow the procedures at PGI 
242.7503 for reporting of deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
all findings and recommendations from the Government auditor and 
contractor and, if there are no significant deficiencies and the 
contractor has complied with the applicable reporting and audit 
requirements in paragraphs (e) and (f) of the clause at 252.242-7006, 
shall promptly notify the contractor, in writing, that the accounting 
system is acceptable and approved.
    (ii) If the contracting officer finds that there are one or more 
significant deficiencies (as defined in the clause at 252.242-7006 due 
to the contractor's failure to meet one or more of the estimating 
system criteria in the clause at 252.242-7006, or that the contractor 
has failed to comply with the applicable reporting and audit 
requirements in accordance with the clause at 252.242-7006, the 
contracting officer shall--
    (A)(1) Promptly make an initial written determination on any 
significant deficiencies and notify the contractor, in writing, 
providing a description of each significant deficiency in sufficient 
detail to allow the contractor to understand the deficiency; or
    (2) Promptly make an initial written determination on the 
contractor's failure to comply with the applicable reporting and audit 
requirements and notify the contractor, in writing, providing 
sufficient information to allow the contractor to understand what 
action needs to be taken to comply;
    (B) Request the contractor to respond, in writing, to the initial 
determination within 30 days; and
    (C) Promptly evaluate the contractor`s response to the initial 
determination, in consultation with the Government auditor or 
functional specialist, and make a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (A) The contractor's accounting system is acceptable and approved, 
and no significant deficiencies remain, and the contractor has complied 
with the applicable reporting and audit requirements in accordance with 
the clause at 252.242-7006, or
    (B) Significant deficiencies remain, or the contractor has failed 
to comply with the applicable reporting and audit requirements. The 
notice shall identify any remaining significant deficiencies or 
noncompliance with the applicable reporting and audit requirements, and 
indicate the adequacy of any proposed or completed corrective action. 
The contracting officer shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the deficiencies and comply with the applicable reporting and 
audit requirements;
    (2) Disapprove the system in accordance with the clause at 252.242-
7006; and
    (3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of significant deficiencies in PGI 
242.7503.
    (f) System approval. The contracting officer shall promptly approve 
a previously disapproved accounting system and notify the contractor 
when the contracting officer determines that there are no remaining 
significant deficiencies or noncompliance with the applicable reporting 
and audit requirements.
    (g) Contracting officer notifications. The cognizant contracting 
officer shall promptly distribute copies of a determination to approve 
a system, to disapprove a system and withhold payments, or to approve a 
previously disapproved system and release withheld payments to the 
Government auditor, payment office, affected contracting officers at 
the buying activities, and cognizant contracting officers in contract 
administration activities.
    (h) Mitigating the risk of accounting system deficiencies on 
specific proposals. (1) Field pricing teams shall discuss identified 
accounting system deficiencies and their impact in all reports on 
contractor proposals until the deficiencies are resolved.
    (2) The contracting officer responsible for negotiation of a 
proposal generated by an accounting system with an

[[Page 41179]]

identified deficiency shall evaluate whether the deficiency impacts the 
negotiations. If it does not, the contracting officer should proceed 
with negotiations. If it does, the contracting officer should consider 
other alternatives, for example--
    (i) Allowing the contractor additional time to correct the 
accounting system deficiency and submit a corrected proposal;
    (ii) Considering another type of contract;
    (iii) Using additional cost analysis techniques to determine the 
reasonableness of the cost elements affected by the accounting system's 
deficiency;
    (iv) Reducing the negotiation objective for profit or fee; or
    (v) Including a contract (reopener) clause that provides for 
adjustment of the contract amount after award.
    (3) The contracting officer who incorporates a reopener clause into 
the contract is responsible for negotiating price adjustments required 
by the clause. Any reopener clause necessitated by an accounting system 
deficiency should--
    (i) Clearly identify the amounts and items that are in question at 
the time of negotiation;
    (ii) Indicate a specific time or subsequent event by which the 
contractor will submit a supplemental proposal, including certified 
cost or pricing data, identifying the cost impact adjustment 
necessitated by the deficient accounting system;
    (iii) Provide for the contracting officer to adjust the contract 
price unilaterally if the contractor fails to submit the supplemental 
proposal; and
    (iv) Provide that failure of the Government and the contractor to 
agree to the price adjustment shall be a dispute under the Disputes 
clause.


242.7504  [Amended]

0
11. In newly redsignated section 242.7504, remove the bracket at the 
end of paragraph (b).

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
12. Amend section 252.215-7002 by--
0
a. Removing the clause date ``(DEC 2012)'' and adding in its place 
``(DATE)'';
0
b. Revising paragraphs (a) and (b);
0
c. Amending paragraph (c) introductory text by removing ``a large 
business'' and adding ``other than a small business concern'' in its 
place;
0
d. Revising paragraph (d) heading and adding paragraphs (d)(5) through 
(9);
0
e. Revising paragraphs (e) and (f); and
0
f. Amending paragraph (g) by removing ``252.242-7005,'' and adding 
``DFARS 252.242-7005,'' in its place.
    The revisions read as follows:


252.215-7002  Cost Estimating System Requirements.

* * * * *
    (a) Definitions. As used in this clause--
    Acceptable estimating system means an estimating system that 
complies with the system criteria in paragraph (d) of this clause, and 
provides for a system that--
    (i) Is maintained, reliable, and consistently applied;
    (ii) Produces verifiable, supportable, documented, and timely cost 
estimates that are an acceptable basis for negotiation of fair and 
reasonable prices;
    (iii) Is consistent with and integrated with the Contractor's 
related management systems; and
    (iv) Is subject to applicable financial control systems.
    Contractor means a business unit as defined in FAR 2.101.
    Contractor's Certified Public Accountant (CPA) means an independent 
certified public accountant, in public practice and not directly 
employed as an employee by the Contractor, performing audits for the 
Contractor in accordance with U.S. generally accepted government 
auditing standards (GAGAS) as issued by the Government Accountability 
Office.
    CPA audit means an examination of the Contractor's compliance with 
the applicable system criteria in paragraph (d)(4) of this clause 
performed by the Contractor's CPA in accordance with GAGAS for 
examination attestation engagements.
    Estimating system means the Contractor's policies, procedures, and 
practices for budgeting and planning controls, and generating estimates 
of costs and other data included in proposals submitted to customers in 
the expectation of receiving contract awards. Estimating system 
includes the Contractor's--
    (i) Organizational structure;
    (ii) Established lines of authority, duties, and responsibilities;
    (iii) Internal controls and managerial reviews;
    (iv) Flow of work, coordination, and communication; and
    (v) Budgeting, planning, estimating methods, techniques, 
accumulation of historical costs, and other analyses used to generate 
cost estimates.
    Significant deficiency means 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.
    (b) General. The Contractor shall--
    (1) Establish, maintain, and comply with an acceptable estimating 
system; and
    (2) Make available to the Government, upon request, the results of 
internal or external reviews or monitoring that have been conducted to 
ensure compliance with the system criteria in (d)(4) of this clause and 
established estimating policies and procedures.
* * * * *
    (d) System and reporting requirements. * * *
    (5) Annual reporting requirements. (i) The Contractor shall provide 
to the Contracting Officer and Government auditor within the 6-month 
period following the expiration of the Contractor's fiscal year, and 
annually thereafter, a report regarding compliance with the system 
criteria in paragraph (d)(4) of this clause as of the end of the 
Contractor's most recent fiscal year. The Contractor shall have the 
report signed by an individual of the Contractor's organization at a 
level no lower than a vice president or chief financial officer of the 
reporting business segment.
    (ii) The report shall include--
    (A) A statement that the Contractor has evaluated the estimating 
system's compliance with the system criteria in paragraph (d)(4) of 
this clause;
    (B) The Contractor's assessment of the estimating system's 
compliance with the system criteria in paragraph (d)(4) of this clause, 
including a statement as to whether or not the system complies in all 
material respects, and disclosure of any significant deficiencies with 
sufficient information for the Government to understand the 
deficiencies; and
    (C) The status of any significant deficiencies disclosed as part of 
the Contractor's assessment or, if applicable, in the Contractor's CPA 
audit report as required in paragraph (d)(6) of this clause, including 
a corrective action plan with milestones and actions to eliminate any 
significant deficiencies that have not been corrected as of the date of 
the Contractor's report.
    (6) Triennial CPA audit requirement. (i) In the first year in which 
the Contractor is required to provide the annual report as required in 
paragraph (d)(5) of this clause, and every three years thereafter, or 
more frequently if directed by the Contracting Officer, in addition to 
the items in paragraph

[[Page 41180]]

(d)(5)(ii) of this clause, the Contractor's annual report shall include 
an audit report on the Contractor's CPA's examination of the 
Contractor's compliance with the system criteria in paragraph (d)(4) of 
this clause as of the end of the most recent fiscal year.
    (ii) The examination shall be performed in accordance with GAGAS 
for examination attestation engagements, and the CPA audit report shall 
include sufficient information regarding any reported significant 
deficiencies for the Government to understand the deficiencies.
    (7) CPA selection. If paragraph (d)(6) of this clause is 
applicable, the Contractor shall reasonably ensure that the CPA firm 
performing the audit is--
    (i) Independent and objective with respect to the audited entity by 
obtaining and reviewing a written representation from the firm that the 
firm (and the assigned engagement team)--
    (A) Is independent and objective with respect to the audited 
entity;
    (B) Will remain independent throughout the audit;
    (C) Has not performed any nonaudit services for the audited entity 
that impair the auditors' independence for the subject audit; and
    (D) Will disclose any independence issues discovered; and
    (ii) Qualified to perform the audit by obtaining and reviewing--
    (A) Information about key engagement team members regarding 
professional qualifications and experience, including valid CPA 
licenses or certificates in good standing, and current knowledge and 
experience in the type of work to be done; and
    (B) The firm's most recent peer review report, in accordance with 
the American Institute of Certified Public Accountants (AICPA) Peer 
Review Program, or equivalent.
    (8) Contractor submission of audit plan. The Contractor shall 
provide the Contractor's CPA's audit strategy, risk assessment, and 
audit plan (program), upon completion, for the audits required in 
paragraphs (d)(6) and (f)(2) of this clause, to the cognizant 
contracting officer and Government auditor for review if--
    (i) The Contractor has received Department of Defense (DoD) prime 
contracts or subcontracts, totaling $100 million or more for which 
certified cost or pricing data were required during the fiscal year to 
which the Contractor's CPA audit report applies; or
    (ii) Requested by the Contracting Officer, in consultation with the 
Government auditor.
    (9) Documentation requirements. (i) If paragraphs (d)(5) and (6) of 
this clause are applicable, the Contractor shall maintain and make 
available to the Government upon request--
    (A) Documentation to provide reasonable support for the assessment 
of the estimating system as required in paragraphs (d)(5)(ii)(B) of 
this clause; and
    (B) Information considered in the selection of a CPA as required in 
paragraph (d)(7) of this clause, if applicable.
    (ii) The Contractor shall arrange for Government access to the 
working papers supporting the CPA audit reports required in paragraphs 
(d)(6) and (f)(2) of this clause, and documentation supporting the 
Contractor's CPA's independence, objectivity and qualifications.
    (e) Significant deficiencies or failure to comply with applicable 
reporting and audit requirements. (1) The Contracting Officer will 
provide an initial determination to the Contractor, in writing, of any 
significant deficiencies or the Contractor's failure to comply with the 
applicable reporting and audit requirements in paragraphs (d)(5) and 
(6) of this clause. The initial determination will describe the 
deficiency in sufficient detail to allow the Contractor to understand 
the deficiency and provide sufficient information on the noncompliance 
with the applicable reporting and audit requirements to allow the 
Contractor to understand what action needs to be taken to comply.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
significant deficiencies in the Contractor's estimating system or the 
Contractor's failure to comply with the applicable reporting and audit 
requirements in paragraphs (d)(5) and (6) of this clause. If the 
Contractor disagrees with the initial determination, the Contractor 
shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's response 
and notify the Contractor, in writing, of the Contracting Officer's 
final determination concerning--
    (i) Remaining significant deficiencies;
    (ii) Remaining noncompliance with the applicable reporting and 
audit requirements;
    (iii) The adequacy of any proposed or completed corrective action; 
and
    (iv) System disapproval, if the Contracting Officer determines that 
one or more significant deficiencies remain or the Contractor has 
failed to comply with the applicable reporting and audit requirements.
    (f) If the Contractor receives the Contracting Officer's final 
determination of significant deficiencies or the Contractor's failure 
to comply with the applicable reporting and audit requirements in 
accordance with paragraphs (d)(5) and (6) of this clause, the 
Contractor shall--
    (1) Within 45 days of receipt of the final determination, either 
correct the significant deficiencies or submit an acceptable corrective 
action plan showing milestones and actions to eliminate the significant 
deficiencies, and comply with the applicable reporting and audit 
requirements; and
    (2) If the significant deficiencies were reported in the 
Contractor's annual report, or the Contractor's CPA audit report, 
provide the Contractor's CPA's opinion regarding the effectiveness of 
the corrective actions--
    (i) As a part of the triennial CPA audit report as required in 
paragraph (d)(6) of this clause; or
    (ii) In a separate audit report on the Contractor's CPA's 
examination of the effectiveness of the corrective action performed in 
accordance with GAGAS for examination attestation engagements.
* * * * *
0
13. Amend section 252.242-7004 by--
0
a. Removing the clause date ``(MAY 2011)'' and adding in its place 
``(DATE)'';
0
b. Revising paragraph (a);
0
c. Amending paragraph (b)(2) by removing ``paragraph (e)'' and adding 
``paragraph (h)'' in its place;
0
d. Revising paragraph (c)(2);
0
e. Redesignating paragraphs (d) through (g) as paragraphs (h) through 
(k), respectively, and adding new paragraphs (d) through (g); and
0
f. Revising the newly redesignated paragraphs (i) and (j).
    The revisions and additions read as follows:


252.242-7004  Material Management and Accounting System.

* * * * *
    (a) Definitions. As used in this clause--
    Acceptable material management and accounting system means a MMAS 
that generally complies with the applicable system criteria in 
paragraph (h) of this clause.
    Contractor means a business unit as defined in FAR 2.101.
    Contractor's Certified Public Accountant (CPA) means an independent 
certified public accountant, in public practice and not directly 
employed as an employee by

[[Page 41181]]

the Contractor, performing audits for the Contractor in accordance with 
U.S. generally accepted government auditing standards (GAGAS), as 
issued by the Government Accountability Office.
    CPA audit means an examination of the Contractor's compliance with 
the applicable system criteria in paragraph (h) of this clause 
performed by the Contractor's CPA in accordance with GAGAS for 
examination attestation engagements.
    Material management and accounting system (MMAS) means the 
Contractor's system or systems for planning, controlling, and 
accounting for the acquisition, use, issuing, and disposition of 
material. Material management and accounting systems may be manual or 
automated. They may be stand-alone systems or they may be integrated 
with planning, engineering, estimating, purchasing, inventory, 
accounting, or other systems.
    Qualifying sales means sales for which cost or pricing data were 
required under 10 U.S.C. 2306a, as implemented in FAR 15.403, or that 
are contracts priced on other than a firm-fixed-price or fixed-price 
with economic price adjustment basis. Sales include prime contracts, 
subcontracts, and modifications to such contracts and subcontracts.
    Significant deficiency means 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.
    Valid time-phased requirements means material that is--
    (i) Needed to fulfill the production plan, including reasonable 
quantities for scrap, shrinkage, yield, etc.; and
    (ii) Charged/billed to contracts or other cost objectives in a 
manner consistent with the need to fulfill the production plan.
* * * * *
    (c) * * *
    (2) Provide to the Administrative Contracting Officer (ACO), upon 
request, the results of internal or external reviews or monitoring that 
have been conducted to ensure compliance with the system criteria in 
paragraph (h) of this clause and established MMAS policies, procedures, 
and operating instructions; and
* * * * *
    (d) Triennial CPA reporting and audit requirements. (1) If the 
Contractor is other than small business concern, has $50 million of 
qualifying sales to the Government during the preceding fiscal year, 
and the Contracting Officer requests an MMAS review, the Contractor 
shall--
    (i) Provide to the Contracting Officer and Government auditor 
within the 6-month period following the expiration of the Contractor's 
fiscal year, a report regarding the Contractor's compliance with the 
system criteria in paragraph (h) of this clause as of the end of the 
Contractor's most recent fiscal year; and
    (ii) Have the report signed by an individual of the Contractor's 
organization at a level no lower than a vice president or chief 
financial officer of the reporting business segment.
    (2) The report shall include--
    (i) A statement that the Contractor has evaluated the MMAS's 
compliance with the system criteria in paragraph (h) of this clause;
    (ii) The Contractor's assessment of the MMAS's compliance with the 
system criteria in paragraph (h) of this clause, including a statement 
as to whether or not the system complies in all material respects and 
disclosure of any significant deficiencies with sufficient information 
for the Government to understand the deficiencies;
    (iii) An audit report on the Contractor's CPA's examination of the 
Contractor's compliance with the system criteria in paragraph (h) of 
this clause as of the end of the most recent fiscal year. The 
examination shall be performed in accordance with GAGAS for examination 
attestation engagements. The CPA audit report shall include sufficient 
information regarding any reported significant deficiencies for the 
Government to understand the deficiencies; and
    (iv) The status of any significant deficiencies disclosed as part 
of the Contractor's assessment or in the Contractor's CPA audit report, 
including a corrective action plan with milestones and actions to 
eliminate any significant deficiencies that have not been corrected as 
of the date of the Contractor's report.
    (e) CPA selection. If paragraph (d) of this clause is applicable, 
the Contractor shall reasonably ensure that the CPA firm performing the 
audit is--
    (1) Independent and objective with respect to the audited entity by 
obtaining and reviewing a written representation from the firm that the 
firm (and the assigned engagement team)--
    (i) Is independent and objective with respect to the audited 
entity;
    (ii) Will remain independent throughout the audit;
    (iii) Has not performed any nonaudit services for the audited 
entity that impair the auditors' independence for the subject audit; 
and
    (iv) Will disclose any independence issues discovered; and
    (2) Qualified to perform the audit by obtaining and reviewing--
    (i) Information about key engagement team members regarding 
professional qualifications and experience, including valid CPA 
licenses or certificates in good standing, and current knowledge and 
experience in the type of work to be done; and
    (ii) The firm's most recent peer review report, in accordance with 
the American Institute of Certified Public Accountants (AICPA) Peer 
Review Program, or equivalent.
    (f) Contractor submission of audit plan. The Contractor shall 
provide the Contractor's CPA's audit strategy, risk assessment, and 
audit plan (program), upon completion, for the audits required in 
paragraphs (d)(2)(iii) and (j)(2) of this clause, to the cognizant 
contracting officer and Government auditor for review if--
    (1) The Contractor has more than $100 million in qualifying sales 
to the Government during the fiscal year to which the Contractor's CPA 
audit report applies; or
    (2) Requested by the Contracting Officer, in consultation with the 
Government auditor.
    (g) Documentation requirements. (1) If paragraph (d) of this clause 
is applicable, the Contractor shall maintain and make available to the 
Government upon request--
    (i) Documentation to provide reasonable support for the assessment 
of the MMAS as required in paragraph (d)(2)(ii) of this clause; and
    (ii) Information considered in the selection of a CPA as required 
in paragraph (e) of this clause.
    (2) The Contractor shall arrange for Government access to the 
working papers supporting the CPA audit reports as required in 
paragraphs (d)(2)(iii) and (j)(2) of this clause, and documentation 
supporting the CPA's independence, objectivity, and qualifications.
* * * * *
    (i) Significant deficiencies or failure to comply with applicable 
reporting and audit requirements. (1) The Contracting Officer will 
provide an initial determination to the Contractor, in writing, of any 
significant deficiencies or the Contractor's failure to comply with the 
applicable reporting and audit requirements in paragraph (d) of this 
clause. The initial determination will describe the deficiency in 
sufficient detail to allow the Contractor to understand the deficiency 
and provide sufficient information on the noncompliance with the 
applicable

[[Page 41182]]

reporting and audit requirements to allow the Contractor to understand 
what action needs to be taken to comply.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
significant deficiencies in the Contractor's MMAS or the Contractor's 
failure to comply with the applicable reporting and audit requirements 
in paragraph (d) of this clause. If the Contractor disagrees with the 
initial determination, the Contractor shall state, in writing, its 
rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's response 
and notify the Contractor, in writing, of the Contracting Officer's 
final determination concerning--
    (i) Remaining significant deficiencies;
    (ii) Remaining noncompliance with the applicable reporting and 
audit requirements;
    (iii) The adequacy of any proposed or completed corrective action; 
and
    (iv) System disapproval if the Contracting Officer determines that 
one or more significant deficiencies remain or the Contractor has 
failed to comply with the applicable reporting and audit requirements.
    (j) If the Contractor receives the Contracting Officer's final 
determination of significant deficiencies or the Contractor's failure 
to comply with the applicable reporting and audit requirements in 
accordance with paragraph (d) of this clause, the Contractor shall--
    (1) Within 45 days of receipt of the final determination, either 
correct the significant deficiencies or submit an acceptable corrective 
action plan showing milestones and actions to eliminate the significant 
deficiencies, and comply with the applicable reporting and audit 
requirements; and
    (2) If the significant deficiencies were reported in the 
Contractor's annual report, or the Contractor's CPA audit report as 
required in paragraph (d) of this clause, provide the Contractor's 
CPA's opinion regarding the effectiveness of the corrective actions--
    (i) As a part of the triennial CPA audit report required in 
paragraph (d) of this clause; or
    (ii) In a separate audit report on the Contractor's CPA's 
examination of the effectiveness of the corrective action performed in 
accordance with GAGAS for examination attestation engagements.
* * * * *
0
14. Amend section 252.242-7005 by--
0
a. In the introductory text, removing ``242.7001'' and adding 
``242.7003'' in its place;
0
b. Removing the clause date ``(FEB 2012)'' and adding in its place 
``(DATE)'';
0
c. Amending paragraph (b) by--
0
i. Revising the definition of ``Contractor business systems''; and
0
ii. Adding, in alphabetical order, definitions for ``Contractor's 
Certified Public Account (CPA)'' and ``CPA audit''.
0
d. Revising paragraph (d);
0
e. Revising paragraphs (e)(1) and (2);
0
f. Revising paragraphs (f)(1), (f)(2) introductory text, and (f)(2)(i);
0
g. Amending paragraph (f)(iv) by removing ``Contractor has corrected 
the significant deficiencies'' and adding ``Contractor has corrected 
the significant deficiencies and, if applicable, the Contractor's CPA 
audit report on the effectiveness of the corrective actions'' in its 
place; and
0
h. Adding paragraph (g).
    The additions and revisions read as follows:


252.242-7005  Contractor Business Systems.

* * * * *
    (b) * * *
    Contractor business systems means--
    (i) Accounting system, if this contract includes the clause at 
DFARS 252.242-7006, Accounting System Administration;
    (ii) Earned value management system, if this contract includes the 
clause at DFARS 252.234-7002, Earned Value Management System;
    (iii) Estimating system, if this contract includes the clause at 
DFARS 252.215-7002, Cost Estimating System Requirements;
    (iv) Material management and accounting system, if this contract 
includes the clause at DFARS 252.242-7004, Material Management and 
Accounting System;
    (v) Property management system, if this contract includes the 
clause at DFARS 252.245-7003, Contractor Property Management System 
Administration; and
    (vi) Purchasing system, if this contract includes the clause at 
DFARS 252.244-7001, Contractor Purchasing System Administration.
    Contractor's Certified Public Accountant (CPA) means an independent 
certified public accountant, in public practice and not directly 
employed as an employee by the Contractor, performing audits for the 
Contractor in accordance with U.S. generally accepted government 
auditing standards (GAGAS) as issued by the Government Accountability 
Office.
    CPA audit means an examination of the Contractor's compliance with 
the applicable system criteria in the applicable business system clause 
in DFARS 242.7003(b) performed by the Contractor's CPA in accordance 
with GAGAS for examination attestation engagements.
* * * * *
    (d) Significant deficiencies or failure to comply with reporting 
and audit requirements. (1) The Contractor shall respond, in writing, 
within 30 days to an initial determination of--
    (i) One or more significant deficiencies in one or more of the 
Contractor's business systems; or
    (ii) Failure to comply with the applicable reporting and audit 
requirements in the applicable business system clause listed in the 
definition of ``contractor business systems'' in paragraph (b) of this 
clause.
    (2) The Contracting Officer will evaluate the Contractor's response 
and notify the Contractor, in writing, of the final determination as to 
whether--
    (i) The Contractor's business system contains significant 
deficiencies; or
    (ii) The Contractor has failed to comply with the applicable 
reporting and audit requirements in the applicable business system 
clause listed in the definition of ``contractor business systems'' in 
paragraph (b) of this clause.
    (3) If the Contracting Officer determines that the Contractor's 
business system contains significant deficiencies or that the 
contractor has failed to comply with the applicable reporting and audit 
requirements, the final determination will include a notice to withhold 
payments.
    (e) Withholding payments. (1) If the Contracting Officer issues the 
final determination with a notice to withhold payments for significant 
deficiencies in a contractor business system, or for the Contractor's 
failure to comply with the applicable reporting and audit requirements 
in the applicable business system clause listed in the definition of 
``contractor business systems'' in paragraph (b) of this clause 
required under this contract, the Contracting Officer will withhold 
five percent of amounts due from progress payments and performance-
based payments, and direct the Contractor, in writing, to withhold five 
percent from its billings on interim cost vouchers on cost-
reimbursement, labor-hour, and time-and-materials contracts until the 
Contracting Officer has determined that the Contractor has corrected 
all significant deficiencies and complied with the applicable reporting 
and audit requirements as directed by the Contracting Officer's final 
determination.

[[Page 41183]]

    (2) If the final determination with a notice to withhold payments 
is for significant deficiencies in a Contractor business system--
    (i) The Contractor shall, within 45 days of receipt of the notice, 
either correct the deficiencies or submit an acceptable corrective 
action plan showing milestones and actions to eliminate the 
deficiencies; and
    (ii)(A) If the Contractor submits an acceptable corrective action 
plan within 45 days of receipt of a notice of the Contracting Officer's 
intent to withhold payments, and the Contracting Officer, in 
consultation with the Government auditor or functional specialist, 
determines that the Contractor is effectively implementing such plan, 
the Contracting Officer will reduce withholding directly related to the 
significant deficiencies covered under the corrective action plan, to 
two percent from progress payments and performance-based payments, and 
direct the Contractor, in writing, to reduce the percentage withheld on 
interim cost vouchers to two percent until the Contracting Officer 
determines the Contractor has corrected all significant deficiencies as 
directed by the Contracting Officer's final determination.
    (B) If at any time the Contracting Officer determines that the 
Contractor has failed to follow the accepted corrective action plan, 
the Contracting Officer will increase withholding from progress 
payments and performance-based payments, and direct the Contractor, in 
writing, to increase the percentage withheld on interim cost vouchers 
to the percentage initially withheld, until the Contracting Officer 
determines that the Contractor has corrected all significant 
deficiencies as directed by the Contracting Officer's final 
determination.
* * * * *
    (f) Correction of deficiencies. (1) The Contractor shall notify the 
Contracting Officer, in writing, when the Contractor has corrected the 
business system's deficiencies, and shall provide the Contractor's CPA 
audit report on the effectiveness of the corrective actions, if 
required by the applicable business system clause listed in the 
definition of ``contractor business systems'' in paragraph (b) of this 
clause.
    (2) Once the Contractor has notified the Contracting Officer that 
all deficiencies have been corrected and, if applicable, provided the 
Contractor's CPA audit report on the effectiveness of the corrective 
actions, the Contracting Officer will take one of the following 
actions:
    (i) If the Contracting Officer determines that the Contractor has 
corrected all significant deficiencies as directed by the Contracting 
Officer's final determination, the Contracting Officer will, as 
appropriate, discontinue the withholding of progress payments and 
performance-based payments, and direct the Contractor, in writing, to 
discontinue the payment withholding from billings on interim cost 
vouchers under this contract associated with the Contracting Officer's 
final determination, and authorize the Contractor to bill for any 
monies previously withheld that are not also being withheld due to 
other significant deficiencies, or noncompliance with applicable 
reporting and audit requirements in the applicable business system 
clause listed in the definition of ``contractor business systems'' in 
paragraph (b) of this clause. Any payment withholding under this 
contract due to other significant deficiencies or noncompliance with 
applicable reporting and audit requirements, will remain in effect 
until the Contracting Officer determines that those significant 
deficiencies and noncompliances are corrected.
* * * * *
    (g) Compliance with applicable reporting and audit requirements. 
When the Contractor has, as directed by the Contracting Officer's final 
determination, provided the Contractor's report on compliance with the 
system criteria, including, if applicable, the Contractor's CPA audit 
report as required in the applicable business system clause listed in 
the definition of ``contractor business systems'' in paragraph (b) of 
this clause, the Contracting Officer will, as appropriate, discontinue 
the withholding of progress payments and performance-based payments, 
and direct the Contractor, in writing, to discontinue the payment 
withholding from billings on interim cost vouchers under this contract 
associated with the Contracting Officer's final determination, and 
authorize the Contractor to bill for any monies previously withheld 
that are not also being withheld due to significant deficiencies or 
other noncompliance with applicable reporting and audit requirements. 
Any payment withholding under this contract due to significant 
deficiencies or other noncompliance with applicable reporting and audit 
requirements, will remain in effect until the Contracting Officer 
determines that those significant deficiencies and noncompliances are 
corrected.
0
15. Amend section 252.242-7006 by--
0
a. In the introductory text, removing ``242.7503'' and adding 
``242.7504'' in its place;
0
b. Removing the clause date ``(FEB 2012)'' and adding in its place 
``(DATE)'';
0
c. In paragraph (a) removing the numerical paragraph designations of 
(1) through (3) for the definition paragraphs, and adding, in 
alphabetical order, definitions for ``Contractor's Certified Public 
Account (CPA)'' and ``CPA audit'';
0
d. Revising paragraph (b);
0
e. Redesignating paragraphs (d), (e) and (f) as paragraphs (j), (k) and 
(l), respectively;
0
f. Adding new paragraphs (d) through (i);
0
g. Revising the newly redesignated paragraphs (j) and (k); and
0
h. Amending the newly redesignated paragraph (l) by removing ``252.242-
7005'' and adding ``DFARS 252.242-7005'' in its place.
    The revisions and additions read as follows:


252.242-7006  Accounting System Administration.

* * * * *
    (a) * * *
    Contractor's Certified Public Accountant (CPA) means an independent 
certified public accountant, in public practice and not directly 
employed as an employee by the Contractor, performing audits for the 
Contractor in accordance with U.S. generally accepted government 
auditing standards (GAGAS) as issued by the Government Accountability 
Office.
    CPA audit means an examination of the Contractor's compliance with 
the applicable system criteria in paragraph (c) of this clause 
performed by the Contractor's CPA in accordance with GAGAS for 
examination attestation engagements.
* * * * *
    (b) General. The Contractor shall--
    (1) Establish and maintain an acceptable accounting system; and
    (2) Make available to the Government, upon request, the results of 
internal or external reviews or monitoring that have been conducted to 
ensure compliance with the system criteria in (c) and established 
accounting system policies and procedures.
* * * * *
    (d) Applicability. (1) Paragraph (e) of this clause applies if, in 
the Contractor's fiscal year preceding the period in which the annual 
report as required in paragraph (e) is due to the Government, the 
Contractor had a covered contract as defined in DFARS 242.7001 (other 
than

[[Page 41184]]

contracts with educational institutions or Federally Funded Research 
and Development Centers (FFRDCs) operated by educational institutions).
    (2) Paragraph (f) of this clause applies if, in the Contractor's 
fiscal year preceding the period in which the Contractor's CPA audit 
report as required in paragraph (f) is due to the Government, the 
Contractor had a covered contract as defined in DFARS 242.7001 (other 
than contracts with educational institutions or Federally Funded 
Research and Development Centers (FFRDCs) operated by educational 
institutions).
    (e) Annual reporting requirements. (1) The Contractor shall provide 
to the Contracting Officer and Government auditor within the 6-month 
period following the expiration of the Contractor's fiscal year, and 
annually thereafter, a report regarding compliance with the system 
criteria in paragraph (c) of this clause as of the end of the 
Contractor's most recent fiscal year. The Contractor shall have the 
report signed by an individual of the Contractor's organization at a 
level no lower than a vice president or chief financial officer of the 
reporting business segment.
    (2) The report shall include--
    (i) A statement that the Contractor has evaluated the accounting 
system's compliance with the system criteria in paragraph (c) of this 
clause;
    (ii) The Contractor's assessment of the accounting system's 
compliance with the system criteria in paragraph (c) of this clause, 
including a statement as to whether or not the system complies in all 
material respects, and disclosure of any significant deficiencies with 
sufficient information for the Government to understand the 
deficiencies; and
    (iii) The status of any significant deficiencies disclosed as part 
of the Contractor's assessment or, if applicable, in the Contractor's 
CPA audit report required in paragraph (f) of this clause, including a 
corrective action plan with milestones and actions to eliminate any 
significant deficiencies that have not been corrected as of the date of 
the Contractor's report.
    (f) Triennial CPA audit requirement. (1) In the first year in which 
the Contractor is required to provide the annual report as required in 
paragraph (e) of this clause, and every three years thereafter, or more 
frequently if directed by the Contracting Officer, in addition to the 
items in paragraphs (e)(2)(i), (ii), and (iii) of this clause, the 
Contractor's annual report shall include an audit report on the 
Contractor's CPA's examination of the Contractor's compliance with the 
system criteria in paragraph (c) of this clause as of the end of the 
Contractor's most recent fiscal year.
    (2) The examination shall be performed in accordance with GAGAS for 
examination attestation engagements, and the CPA audit report shall 
include sufficient information regarding any reported significant 
deficiencies for the Government to understand the deficiencies.
    (g) CPA selection. If paragraph (f) of this clause is applicable, 
the Contractor shall reasonably ensure that the CPA firm performing the 
audit is--
    (1) Independent and objective with respect to the audited entity by 
obtaining and reviewing a written representation from the firm that the 
firm (and the assigned engagement team)--
    (i) Is independent and objective with respect to the audited 
entity;
    (ii) Will remain independent throughout the audit;
    (iii) Has not performed any nonaudit services for the audited 
entity that impair the auditors' independence for the subject audit; 
and
    (iv) Will disclose any independence issues discovered; and
    (2) Qualified to perform the audit by obtaining and reviewing--
    (i) Information about key engagement team members regarding 
professional qualifications and experience, including valid CPA 
licenses or certificates in good standing, and current knowledge and 
experience in the type of work to be done; and
    (ii) The firm's most recent peer review report, in accordance with 
the American Institute of Certified Public Accountants (AICPA) Peer 
Review Program, or equivalent.
    (h) Contractor submission of audit plan. The Contractor shall 
provide the Contractor's CPA's audit strategy, risk assessment, and 
audit plan (program), upon completion, for the audits as required in 
paragraphs (f) and (k)(2) of this clause to the cognizant contracting 
officer and Government auditor for review if--
    (1) The Contractor has more than $100 million in cost incurred on 
cost-reimbursement and incentive type contracts, and amounts billed on 
time and material and labor hour contracts during the Contractor's 
fiscal year to which the Contractor's CPA audit report applies; or
    (2) Requested by the Contracting Officer, in consultation with the 
Government auditor.
    (i) Documentation requirements. (1) If paragraphs (e) and (f) of 
this clause are applicable, the Contractor shall maintain and make 
available to the Government upon request--
    (i) Documentation to provide reasonable support for the assessment 
of the accounting system as required in paragraph (e)(2)(ii) of this 
clause; and
    (ii) Information considered in the selection of a CPA as required 
in paragraph (g) of this clause, if applicable.
    (2) The Contractor shall arrange for Government access to the 
working papers supporting the CPA audit reports as required in 
paragraphs (f) and (k)(2) of this clause, and documentation supporting 
the CPA's independence, objectivity, and qualifications.
    (j) Significant deficiencies or failure to comply with applicable 
reporting and audit requirements. (1) The Contracting Officer will 
provide an initial determination to the Contractor, in writing, of any 
significant deficiencies or the Contractor's failure to comply with the 
applicable reporting and audit requirements in paragraphs (e) and (f) 
of this clause. The initial determination will describe the deficiency 
in sufficient detail to allow the Contractor to understand the 
deficiency and provide sufficient information on the noncompliance with 
the applicable reporting and audit requirements to allow the Contractor 
to understand what action needs to be taken to comply.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
significant deficiencies in the Contractor's accounting system or the 
Contractor's failure to comply with the applicable reporting and audit 
requirements in paragraphs (e) and (f) of this clause. If the 
Contractor disagrees with the initial determination, the Contractor 
shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's response 
and notify the Contractor, in writing, of the Contracting Officer's 
final determination concerning--
    (i) Remaining significant deficiencies;
    (ii) Remaining noncompliance with the applicable reporting and 
audit requirements;
    (iii) The adequacy of any proposed or completed corrective action; 
and
    (v) System disapproval, if the Contracting Officer determines that 
one or more significant deficiencies remain or the Contractor has 
failed to comply with the applicable reporting and audit requirements.
    (k) If the Contractor receives the Contracting Officer's final 
determination of significant deficiencies or the Contractor's failure 
to comply with the

[[Page 41185]]

applicable reporting and audit requirements in accordance with 
paragraphs (e) and (f) of this clause, the Contractor shall--
    (1) Within 45 days of receipt of the final determination, either 
correct the significant deficiencies or submit an acceptable corrective 
action plan showing milestones and actions to eliminate the significant 
deficiencies, and comply with the applicable reporting and audit 
requirements; and
    (2) If the significant deficiencies were reported in the 
Contractor's annual report, or the Contractor's CPA audit report, 
provide the Contractor's CPA's opinion regarding the effectiveness of 
the corrective actions--
    (i) As a part of the triennial CPA audit report as required in 
paragraph (f) of this clause; or
    (ii) In a separate audit report on the Contractor's CPA's 
examination of the effectiveness of the corrective action performed in 
accordance with GAGAS for examination attestation engagements.
* * * * *
[FR Doc. 2014-16390 Filed 7-11-14; 4:15 pm]
BILLING CODE 5001-06-P