4.  Risk of Harm and Materiality of Deficiencies

Comment: "Risk of harm" must be substantiated and verified. The final rule should define the phrase "potential risk of harm to the Government" which incorporates a nexus between the amount withheld and the specific harm that may accrue to the Government based on the system deficiency, and require that a deficiency be "material" or "significant." It is impossible to determine whether the proposed controls and remedial actions of this rule are reasonable and commensurate with the Government's risks. Payment withholdings are liquidated damages in disguise and, if excessive to the Government's risk, will be viewed as punitive.

Response: The intent of the rule is to authorize payment withholding when the contracting officer finds that there are one or more significant deficiencies due to the contractor's failure to meet one or more of the system criteria. The rule has been revised to consider significant deficiencies in determining the adequacy of a contractor's business system and potential payment withholding in accordance with section 893 of the FY11 NDAA. Contract terms explicitly require contractors to maintain the business systems in question as a condition of contracting responsibility and, in some cases, eligibility for award. Contract prices are negotiated on the basis that contractors will maintain such systems, so that the Government does not need to maintain far more extensive inspection and audit functions than it already does. Failure of the contractor to maintain acceptable systems during contract performance deprives the Government of assurances for which it pays fair value. While not "deliverable" services under specific contract line items, these business systems are material terms, performance of which is required to ensure contracts will be performed on time, within cost estimates, and with appropriate standards of quality. The payment withholding remedy provides a measure of the overall contract performance of which the Government is deprived during the performance period, and for which the contractor should not receive the full financing payments. DoD is relying on the temporary payment withholding amounts, not as a penalty for a deficiency, but as representing a good-faith estimate sufficient to mitigate the Government's risk where the actual amounts are difficult to estimate or quantify. Deficiencies that do not directly relate to unallowable or unreasonable costs still pose risks to the Government, and may lead to harm that may not be calculated readily when the deficiencies are discovered. In most cases, the financial impact of a system deficiency cannot be quantified because the system produces unreliable information. When the financial impact of a deficiency is quantifiable, DoD expects contracting officers to take appropriate actions to reduce fees, recoup unallowable costs, or take legal action if fraudulent activity is involved.