14. Significant Deficiency

Comment: A respondent expressed concern that DCAA has not updated its guidance to reflect the definition of significant deficiency. According to the respondent, DCAA has not issued audit guidance to align its definition of significant deficiency to that in the NDAA and interim rule. DCAA's latest guidance in its MRD 08-PAS-011(R) dated March 2, 2008, starts out defining a significant deficiency as a "potential unallowable cost that is not clearly immaterial." However, in MRD 08-PAS-043(R) dated December 19, 2008, DCAA clarified its guidance that "DCAA only performs audits of contractor systems that are material to Government contract costs" and that a contractor's "failure to accomplish any applicable control objective should be reported as a significant deficiency/material weakness." The respondent stated that DCAA's clarification changes the criteria from a "potential unallowable cost that is not clearly immaterial" to if any deficiency is found during an audit, it is reported and the system is rated as inadequate. The respondent expressed concern that DCAA's guidance is constantly changing with no oversight body to regulate its audit policies.

Response: DCAA is in the process of updating its guidance and will report significant deficiencies in accordance with the definition of significant deficiency in this rule, as set forth in section 893 of the NDAA for FY 2011. Additionally, contracting officers will administer this rule according to the requirements in section 893 of the NDAA for FY 2011, as implemented in this rule.

Comment: A respondent recommended that the following language be added to the contractor business systems clauses: "Significant deficiencies are characterized by all of the following: (1) The system is not compliant to contract requirements; (2) There is significant net harm to the Government resulting in mismanagement, and schedule and cost impacts to the contracts covered by the business system; (3) The corrections to the system are worthwhile, and the related future benefits are clearly and substantially greater than the cost to correct; (4) The net harm to the contractor or the Government caused by the flaws in the business systems must exceed five million dollars; and (5) Deficiencies must be directly related to contract management."

Response: The respondent's suggested language exceeds the definition of "significant deficiency" in the NDAA for FY 2011 and has not been added to this rule.

Comment: With respect to the language relating to the finding of a significant deficiency by the contracting officer, the interim rule states: "The initial determination by the Government will describe the deficiency in sufficient detail to allow the contractor to understand the deficiency." A respondent suggested that this language be expanded to include a specific explanation as to how the deficiency identified was determined to be a significant deficiency and further, why information produced by the business system under review is considered not to be reliable in accordance with the requirements of the enabling legislation, the NDAA for FY 2011, which defines a significant deficiency as "A shortcoming in the system that materially affects the ability of DoD to rely upon information produced."

Response: "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. The contracting officer's significant deficiency determination will describe the significant deficiency in sufficient detail to allow the contractor to understand the deficiency. This rule incorporates criteria for each business system, which define the aspects of the system that materially affect the ability of DoD to rely on information produced. Determinations of significant deficiencies will be based on the contractor's failure to comply with the business system criteria.