A proposed rule published in the most recent edition of the Federal Register takes aim at Department of Defense (DOD) contractors with deficient business systems. The rule, which seeks to reduce "the risk of unallowable and unreasonable costs on Government contracts," would allow contracting officers to withhold a percentage of payments from contractors with deficiencies in specific business systems.

Contractors would have to certify that systems for accounting, estimating, purchasing, earned value management, material management, and property management were defect-free. The draft rule defines what would constitute a sound business system in each category. The rule would only affect contractors entering into a cost reimbursement, incentive-type, time-and-materials, or labor-hour contract.

In a recent article, Robert Brodsky of Government Executive summarized the rule as follows:

If companies fail to fix documented problems, or do not submit a corrective action plan within 45 days, then contracting officers could immediately begin withholding 10 percent of the payments under the contract...If firms submit an acceptable corrective action plan but do not completely remedy the identified deficiencies, then contracting officers could withhold 5 percent of each payment.

These penalties could pile up quickly if a contractor had multiple deficient systems and did not address them in a timely manner.

The proposed rule seems to stem directly from work the Wartime Contracting Commission did over the summer. During a hearing in August, the commission examined the role that deficient business systems play in the enormous waste, fraud, and abuse in Iraq and Afghanistan contracting.

The question, of course, is whether this regulation, if implemented, will actually encourage affected contractors to fix their deficient business systems. In a perfect world, I would say that the rule would provide enough incentive to correct deficiencies, but this is DOD contracting we're talking about.

I think the largest impediment to the effectiveness of this rule will be the lack of an adequate oversight structure within Defense to carry it out. As long as a culture of complacency rules within contracting oversight where too few personnel have to review too many contracts, this rule will change little.

Image by Flickr user hugovk used under a Creative Commons license.