21.  Contract Applicability

Comment: A number of respondents questioned the application of this rule against cost type contracts while other respondents questioned the application of this rule against fixed-price contracts. Additionally, some respondents expressed concern about the application of the rule to commercial contracts and construction contracts. Other respondents suggested that payment withholdings should only be applied to contracts which fall under the business system found to be deficient, and only to contracts administered by the contracting officer making the determination decision.

Response: The Government is at risk when a contractor's business systems contain significant deficiencies, regardless of contract type. Accordingly, it is appropriate for the contracting officer to withhold payments to protect the interest of the Government. Contracts awarded under FAR part 12 regulations will generally be exempt from the requirements of this rule. A system deficiency may result in application of a payment withholding against all contracts that contain the business systems clause. The rule has been tailored to comply with section 893 of the FY11 NDAA. DoD has interpreted the definition of "covered contract" to include CAS-covered cost type contracts as well as CAS-covered fixed-price type contracts and performance-based contracts since section 893 also allows up to 10 percent of progress payments and performance-based payments to be withheld. The interim rule provides the contracting officer with the sole discretion to withhold payments from one or more contracts containing the clause at 252.242-7005, Contractor Business Systems. To ensure consistency, it is DoD policy that only one contracting officer, normally an ACO, has the responsibility and authority for approval, disapproval, and general oversight of contractor business systems. When the cognizant contracting officer renders a determination to approve or disapprove a system and withhold payments, all contracting officers with contracts affected by the determination are required to abide by the cognizant contracting officer's decision. The rule complies with this long-established practice.