20. Nexus Between Potential Harm and Withholding

Comment: A respondent stated that one of the most significant problems with the interim rule is that it fails to require any nexus whatsoever between (a) the identified system deficiency and the potential financial harm to the Government; (b) the identified system deficiency and the nature of the specific invoices against which the withholdings will be applied; and (c) the identified system deficiency and the total amount of the withholding. The respondent stated that DCAA's audit report should provide recommendations to the contracting officer as to whether withholding payment is necessary to rotect the Government's interests, and if not, what other protections might be available to the Government. The respondent suggested that such other protections might include: (1) Closer monitoring of payment requests submitted by the contractor in light of the noted deficiency; or (2) a decrement to certain, but not all, contract payments (or a withholding less than 5 percent) that might be more commensurate with the potential financial risk to the Government. The respondent further suggested that the final rule should clarify that the contracting officer must justify, in writing, the need to withhold against certain invoices based upon: (1) The nature of the particular system deficiency; (2) the perceived impact to the Government's reliability of information generated by such system due to the particular deficiency; (3) the nature of the invoices against which the withholdings will be applied and their correlation to the perceived risks associated with the specific system deficiency; and (4) the amount of withholding necessary to adequately protect the Government's interests due to the deficiency. The respondent suggested that requiring a written withholding determination will properly protect contractors from unreasonable or punitive withholdings that are unrelated to the system deficiency as well as ensure the withholdings are tailored to the Government's interests.

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 requires contracting officers 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 NDAA for FY 2011. 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, the contractual requirements for the contractor 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 and accountability. 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 a deficient 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.