Government Contracts Legal Forum : Government Contracts Lawyers & Attorneys for Litigation & Counseling

The US Court of Federal Claims recently granted preliminary injunctive relief against a Federal contractor for an organizational conflict of interest, in a decision casting a deeply skeptical eye on an awardee’s improper access to competitor information--and the government’s lackadaisical attempt to police the impropriety.

The case, Netstar-1 Gov’t Consulting, Inc. v. United States, centered on a program management support services contract with the US Department of Homeland Security Immigration and Customs Enforcement (ICE) Office of Chief Information Officer. ICE awarded ALON, Inc. the contract. Both ALON and the protestor, NetStar-1, had performed previous related ICE contracts.

NetStar-1 alleged ALON used its previous access to ICE data – including NetStar-1’s labor categories, job categories, and labor rates – to improperly craft a winning proposal. The Federal Acquisition Regulations (FAR) definition of an organizational conflict of interest (OCI) includes situations where competitors have unequal access to procurement-related information, thereby giving one or more offerors an unfair bidding advantage. Judge Francis M. Allegra held that the facts established ALON had an OCI. ALON argued no unequal access existed because both firms had access to NetStar-1’s data—an argument the judge dismissed as “frivolous.” But it was the government’s conduct that drew much of his ire.

NetStar-1 alleged the ICE contracting officer (CO) involved failed to adequately mitigate the OCI. The FAR requires CO’s to “analyze planned acquisitions in order to (1) [i]dentify and evaluate potential organizational conflicts of interest as early in the acquisition process as possible; and (2) [a]void, neutralize, or mitigate significant potential conflicts before contract award.” In this case, the CO failed to make pre-award identification of ALON’s prior access to proprietary NetStar-1 data. “[E]ven more remarkable,” Judge Allegra noted, was that ALON’s other ICE contracts – negotiated by the same CO -- had clauses specifically warning that ALON would have future OCIs.

Judge Allegra continued: “The mitigation plan adopted by the contracting officer has some interesting features.” (One can almost hear the judge’s “ahem” come off the page.) The CO had obtained declarations from ALON employees saying they had not obtained NetStar-1 data. However, it turned out that the CO sought declarations from the wrong people—she never contacted the dozen ALON employees who actually had access to the data. Furthermore, the court found that the CO relied on incomplete non-disclosure statements from ALON and verbal pledges by the company. “Indeed, if the latter were enough, one must wonder why the drafters of the FAR bothered to develop an extensive set of rules to deal with such conflicts,” wrote Judge Allegra in his May 27, 2011 opinion.  

Based on these facts, the court concluded NetStar-1 had demonstrated the likelihood of success on the merits, the key requirement for obtaining preliminary injunctions. The court also found the three other injunction factors weighing in NetStar-1’s favor. The court enjoined the contract and set dates for a merits trial. The case demonstrates not only the imperative that Federal contractors to investigate competitors’ potential OCI’s, but also the need to demand that the government honor its FAR policing duties. Timely government contracts counseling can alert contractors to precisely such issues.  

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With legislation to extend the GAO’s protest jurisdiction over civilian agency task and delivery order procurements stalled in Congress, GAO has concluded that its protest jurisdiction over those procurements will not only continue after the May 27, 2011 sunset date, but will expand.  The Federal Acquisition Streamlining Act (“FASA”) limited GAO’s protest jurisdiction to protests on the “ground that the order increases the scope, period or maximum value of the contract under which the order is issued” or involving orders in excess of $10 million. 10 U.S.C. § 2304c(e)(4) (Department of Defense (“DoD”)); 41 U.S.C. § 253j(e) (civilian agency). Since the 2008 amendments to FASA, GAO has enjoyed exclusive jurisdiction over protests of both DoD and civilian agency task and delivery orders. The amended clauses included sunset provisions with a date of May 27, 2011. While the FY 2011 NDAA extended Title 10’s grant of jurisdiction to September 30, 2016, no similar extension was passed to extend Title 41 jurisdiction past the May 27 sunset date.

On May 23, 2011, Technatomy Corporation protested the award of a task order issued by DISA under a GSA ID/IQ contract. Shortly thereafter, DISA filed a Motion to Dismiss arguing that GAO’s jurisdiction over civilian task order procurements sunsetted by operation of law on May 27, 2011, citing 41 U.S.C § 253j(e).

GAO denied that motion, ruling that the sunset provisions in 41 U.S.C. § 253j(e) jurisdiction did not remove GAO’s jurisdiction over civilian agency order procurements. Technatomy Corp., B-405140, June 14, 2011. Instead, GAO ruled that all of 41 U.S.C. § 253j(e) sunsetted, thereby eliminating any restrictions on GAO’s civilian agency task order jurisdiction, effectively reverting back to its pre-FASA, Competition in Contracting Act of 1984 (“CICA”) jurisdiction. Under CICA, GAO’s authority to hear bid protests made no distinction between contracts versus task or delivery orders, and did not require such orders to exceed $10 million. Additionally, under CICA, jurisdiction of these protests was not exclusively limited to GAO. By announcing a reversion to this CICA jurisdiction, the Technatomy decision means that GAO now asserts that it can hear a challenge over any civilian task or delivery order award, regardless of dollar figure, and that GAO’s jurisdiction over these protests is no longer exclusive.

Notably, to the extent that the Court of Federal Claims agrees with GAO’s interpretation of the § 253j(e) sunset clause, the Court’s existing jurisdiction over bid protests under the Tucker Act would not prevent it from hearing protests of civilian agency task and delivery order procurements.

Also of note in this decision is GAO’s analysis of whether the protest of this DISA task order award decision properly falls under Title 10 or Title 41 jurisdiction. The underlying contract vehicle, GSA VETS, was with GSA, a civilian agency. However, the task order competition was conducted by DISA, a DoD agency. Thus, there was a question of whether GAO’s jurisdiction over the protested task order award was authorized under Title 10 or Title 41. GAO’s interpreted the statutory language of Title 41 §§ 3101(c), 4103, to dictate that jurisdiction over task or delivery orders is determined by the agency issuing the underlying contract. As GSA issued the underlying contract, jurisdiction over the task order was authorized by Title 41, not Title 10.

With this ruling, GAO has potentially opened the door to new protests previously barred by the strict jurisdictional limits of § 253j(e), such as task order awards less than $10 million. Additionally, since the previously parallel jurisdiction over DoD task and delivery orders under Title 10 was extended on January 7, 2011 to run through September 30, 2016, this means that – for the time being – GAO will have broader jurisdiction over civilian task and delivery order procurements than they have over DoD task order procurements. It will be interesting to see if GAO’s decision spurs Congress to reinstate § 253j(e), but in the meantime GAO, and potentially the Court of Federal Claims, may entertain a broader protest jurisdiction over civilian task and delivery order procurements.

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The Recovery Act and the funds it has made available under various federal grant programs have brought renewed attention to domestic preference provisions. Contractors familiar with the longstanding Buy American Act restriction on federal procurement and the Trade Agreements Act exception have found themselves confronted by a dizzying array of much less well-known, and often significantly different, Buy American type provisions applicable to federal grant and loan programs used to fund both domestic and international projects. These restrictions vary program to program in terms of the scope of the restriction, the method for determining country of origin for a product, and how foreign content is evaluated. Some of the major grant or loan programs with Buy American restrictions include:

• Recovery Act grants and financial assistance for public works projects by state and local government entities;
• Federal Aviation Funds for airport improvement and other programs;
• Federal Highway Funds for the construction of highways;
• Federal Transit Funds for various mass transit projects;
• The Foreign Military Financing Program administered by DoD;
• U.S. Agency for International Development grants and contracts funded under the Foreign Assistance Act; and
• Procurements funded by the U.S. Export-Import Bank.

These federally-funded programs provide significant business opportunities for contractors, but also present challenges in terms of navigating and complying with a myriad of domestic preference regimes. During the webinar, we will provide an explanation of the domestic preference restrictions associated with each of these programs, as well as practical advice for ensuring compliance, given the realities and global-sourcing pressures of the commercial marketplace.

On Tuesday, June 21st, from 2:00 pm to 3:30 pm EDT, please join Angela Styles, Alan Gourley, and Addie Cliffe, government contract practitioners from Crowell & Moring, for a discussion of these programs and compliance issues. Click here to register.

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On June 2, 2011, the Department of Justice (“DoJ”) announced a $2.7 million settlement of a False Claims Act (“FCA”) case brought against Ultralife Corporation (“Ultralife”). The complaint alleges that Ultralife violated the FCA through the submission of false claims based on “defective pricing” under three contracts with the U.S. Army to provide lithium-manganese dioxide non-rechargeable batteries.  The settlement arose out of a government investigation following a 2005 Defense Contract Audit Agency (“DCAA”) audit suggesting a potential $1.4 million pricing adjustment related to the contracts.

The settlement was first made public in April, 2011, in Ultralife’s Form 8-K filing. The Form 8-K reported that, in light of the possible treble damages and penalties associated with the pricing adjustment, the Company had decided to enter into settlement negotiations with the government. As Ultralife described in further detail: “We had certain ‘exigent’, non-bid contracts with the U.S. government, which were subject to audit and final price adjustment, which resulted in decreased margins compared with the original terms of the contracts.” The DCAA suggested the adjustment based on reductions in the cost of materials prior to the final negotiation of the contracts. This finding prompted a 2007 Department of Defense Office of Inspector General inquiry, which was later consolidated with the DCAA audit by the U.S. Attorney’s Office for the Western District of New York.

In negotiating with the Government, Ultralife took the position that the proposed adjustments could be offset with other cost increases also occurring prior to the final negotiation of the contracts. But, citing its desire to avoid further time and expenses, Ultralife agreed to a settlement with the Government to resolve the matter. In contrast to Ultralife’s description of the inquiry, the DoJ characterized it as a routine defective pricing allegation. According to the DoJ’s press release last Thursday, Ultralife provided government contracting personnel with false certifications regarding the company’s cost and pricing information for the three contracts in question; and thus, “improperly pass[ed] inflated costs on to the American taxpayers . . . .” 

Because of the settlement, the complete details will not be discovered. But Ultralife’s characterization of the matter raises several issues. Most importantly, if the Army’s need to procure the batteries was so urgent that the Army only approached Ultralife, why was it necessary for it to require the company to submit a proposal, including certified cost or pricing data? Also—assuming Ultralife’s characterization is correct—is it possible to provide defective pricing data on a “non-bid” contract? Although the answers are unknown, at the very least, this settlement should serve as a warning to those contractors who enter into such “exigent” contracts with government agencies.

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Raja Mishra contributed to this blog post.

On May 31, 2011, the government issued an interim rule that implements two key executive orders directing environmental attributes of federal procurement actions. Executive Order 13423, “Strengthening Federal Environmental, Energy, and Transportation Management,” was issued by President Bush on January 24, 2007 and set a number of different environmental goals for federal agencies related to improving energy efficiency, increasing the use of renewable energy sources, reducing water consumption intensity, reducing the quantity of toxic and hazardous chemicals and materials acquired, and ensuring that new building construction and major renovations comply with “green” guidelines. It also specifically required agencies to incorporate sustainable environmental practices in the acquisition of goods and services, including acquiring “biobased, environmentally preferable, energy-efficient, water efficient, and recycled contact products.” 

Two years later, on October 5, 2009, President Obama issued Executive Order 13514, “Federal Leadership in Environmental, Energy, and Economic Performance,” which required federal agencies to meet specific goals related to reducing greenhouse gas emissions and improving water efficiency, pollution prevention and waste elimination. It specifically required agencies to advance sustainable acquisition by ensuring that 95% of new contract actions are “energy-efficient, water-efficient, biobased, environmentally preferable and non-ozone depleting, and contain recycled content, non-toxic or less-toxic alternatives.” It also directed agencies to implement “high performance sustainable federal building design, construction, operation and management, maintenance, and deconstruction.”

Now, these requirements have been made part of the Federal Acquisition Regulation (“FAR”), and will affect agencies and contractors alike. From the agencies’ perspective, key requirements in the new FAR rule include:

(1) Considering and including sustainable acquisition requirements in synopses, acquisition planning documents, and descriptions of agency needs.

(2) Ensuring that 95% of new contract actions, including those for construction, contain requirements for products that are designated as energy-efficient, water-efficient, biobased, environmentally preferable (e.g., EPEAT-registered, non-toxic or less toxic alternatives), non-ozone depleting, or those that contain recovered materials.

(3) Making maximum use of energy-savings performance contracts (“EPSCs”).

(4) Implementing high-performance sustainable building design, construction, renovation, repair, commissioning, operation and maintenance, management, and deconstruction practices.

(5) When acquiring information technology, identifying agency requirements pursuant to EPEAT standards and policies that promote power management, double-sided printing, and other energy-efficient or environmentally preferable features, and best management practices for energy-efficient management of services and federal data centers.

The rule includes definitions of terms such as “renewable energy,” “sustainable acquisition,” “water consumption intensity,” and “greenhouse gases.”

The provisions affecting contractors include:

(1) a contract clause that requires the submission of paper documents, including proposals and reports, to be printed or copied on double-sided paper containing at least 30% postconsumer fiber, “whenever practicable” and when the information is not otherwise able to be submit electronically to the agency. Prior to this rule, there was only an agency “preference” for use of recycled paper.

(2) a contract clause requiring contractors that operate government-owned or government-leased facilities in the U.S. to comply with an agency’s environmental management system and provide monitoring and measurement information as required by the government.

Note that the interim rule removes the requirement for contractors to report and certify to toxic chemical releases, on the rationale that these reports are already required by federal environmental laws. Also, contractors should be aware that the Federal Procurement Data System (“FPDS”) will be used to collect sustainable acquisition data.

The stated goal of the rule is to leverage federal acquisition actions to foster markets for sustainable technologies and materials, products, and services. Whether the rule will accomplish this goal remains to be seen, particularly in light of shrinking private investments in these areas.

Comments on the interim rule are being accepted through August 1, 2011.

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Earlier this week the Pentagon issued a statement that cyber-attacks by a foreign nation could be considered an act of war that could elicit a traditional military response. Specifically, Pentagon spokesperson Col. Dave Lapan said that “a response to a cyber-incident or attack on the US would not necessarily be a cyber-response. All appropriate options would be on the table.” This statement comes as the United States grapples with putting together a comprehensive cybersecurity and warfare policy. The development of such a policy must involve a complete understanding of the laws and authority surrounding cyber warfare. Yet, these laws and authorities are, for the most part, uncharted waters. 

The American Bar Association has several committees dedicated to charting these waters and on June 13, 2011, at 12:00 pm EDT, the Science & Technology Law (SciTech) Section’s Homeland Security Committee, the Public Contract Law (PCL) Section’s Cybersecurity Committee and the Standing Committee on Law and National Security are co-sponsoring a joint program focusing on the emerging—and often unsettled—legal and policy issues arising out of cyber warfare. 

The panel for the joint program includes:

• Dr. Herbert S. Lin, Chief Scientist, Computer Science & Telecommunications Board, National Research Council of the National Academies & Study Director for Technology, Policy, Law, and Ethics regarding U.S. Acquisition and Use of Cyberattack Capabilities;
• Dr. Catherine Lotrionte, Executive Director, Institute for Law, Science and Global Security at Georgetown University and former Counsel to the President’s Foreign Intelligence Advisory Board at the White House;
• Suzanne Spaulding, Principal, Bingham Consulting Group and former General Cousnel for the Senate Select Committee on Intelligence and Assistant General Counsel at CIA; and
• The program will be moderated by David Z. Bodenheimer, a partner at Crowell & Moring LLP, Co-Chair of the SciTech Homeland Security Committee and Vice Co-Chair of PCL Cybersecurity Committee. 

The program will be held at the offices of Crowell & Moring LLP at 1001 Pennsylvania Ave., N.W., Washington, D.C. and lunch will be served to those attending in person. You can also attend by phone. The cost to attend (either by phone or in person) is $15. 

Please register here.

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 On April 13, 2011, the Obama administration released a draft executive order called “Disclosure of Political Spending by Government Contractors.” This executive order, if implemented, would instruct the FAR Councils to amend the FAR to require significant disclosures about contractor political contributions to be made as part of any proposal submitted by a firm seeking a federal contract. The disclosures would not only cover the contributions by the company itself, but also the company’s affiliates, the company’s political action committees, and the individual contributions of all officers and directors:

(a) All contributions or expenditures to or on behalf of federal candidates, parties or party committees made by the bidding entity, its directors or officers, or any affiliates or subsidiaries within its control; and

(b) Any contributions made to third party entities with the intention or reasonable expectation that parties would use those contributions to make independent expenditures or electioneering communications.

The disclosure obligation would kick in any time the aggregate amount of contributions given to a single source reach $5000 and the information collected would be posted of the Data.gov website so that the public could access the information. 

In the six weeks since this draft executive order was released, there has been significant backlash from industry. A wide array of trade associations and business advocacy groups, including the Professional Services Council, the Aerospace Industries Association, and the U.S. Chamber of Commerce, have chimed in to vigorously oppose the proposed order. At the same time, watchdog groups of applauded the proposed Order as an example of increased transparency in the area of federal contracting. 

While the Obama administration has assured critics that the information collected would not be considered as part of the evaluation of proposals (beyond the threshold issue of whether the certification of full disclosure was completed), questions persist about whether the draft Order would cause exactly the situation it seeks to avoid—injecting politics into the federal contracting system by providing competitive decision-makers with information they would not otherwise have possessed in the regular course of business. Other entities are concerned about the chilling effect this draft Order would have on political contributions by individuals at the company, whose personal political interests may have little or nothing to do with the interests of the employer. 

In the last week, groups of Republicans in both the House and Senate, led by Darrell Issa (R-California) and Susan Collins (R-Maine) respectively, have introduced legislation called the Keeping Politics Out of Federal Contracting Act of 2011, which would effectively preempt the draft Obama Executive Order by prohibiting federal agencies from collecting the political contribution information of contractors and their employees as part of a federal procurement. The statute would also prohibit federal agencies from using political affiliation or contribution information received from any source as a factor in the award of federal contracts. 

We will keep our readers apprised as the situation continues to develop. 

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Terry Albertson and Linda Bruggeman contributed to this blog post.

On May 18, 2011, the DoD released an interim Business Systems rule with request for comments.  76 Fed. Reg. 28856.  Comments are due July 18, 2011.  The current version of the rule reflects comments received on the prior two proposed Business Systems rules (published January 15, 2010 and December 3, 2010), requirements in the National Defense Authorization Act for FY 2011, and additional revisions to the rule.

 Six business systems are covered by this rule:

·       Accounting System

·       Earned Value Management System ("EVMS")

·       Estimating System

·       Material Management and Accounting System ("MMAS")

·       Property Management System

·       Purchasing System

DoD characterizes these business systems as the "first line of defense against waste, fraud, and abuse."  Accordingly, DoD sees this rule as improving the effectiveness of DoD oversight of contractors and achieving more effective and efficient management of DoD programs.  Notable changes with this version of the rule include the following:

Covered Contracts – The rule makes clear that contracts covered by the withholding provisions of the Contractor Business System rule will be contracts subject to the Cost Accounting Standards, but the substantive requirements of the interim rule specifying requirements for compliant business systems are not limited to CAS –covered contracts.  Therefore, small businesses will not be subject to withholding under the rule, but they may be required to meet relevant requirements for compliant business systems.  There is also nothing in the rule that would suggest that subcontracts are covered by the withholding requirements, although they are covered by some of the systems requirements, as described below.  

"Significant Deficiency" – The interim rule defines a "significant deficiency" as "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."  This term is used throughout, and replaces phrases such as "deficiency that adversely affects the system" or "deficiency that adversely affects the system, leading to a potential risk of harm to the Government."  A determination by the government that a "significant deficiency" exists with a contractor's business system will be grounds for issuing a notice of withholding of payment and will require the contractor to submit a corrective action plan.  The rule allows for contractor response to an initial finding of a "significant deficiency" and the contracting officer ("CO") will have final authority to determine whether a "significant deficiency" exists. The CO is required to describe the deficiency in sufficient detail to allow the contractor to understand the deficiency.

Withholding – The rule provides that if a CO issues a final determination that a contractor's business system contains significant deficiencies, that final determination that there is a significant deficiency "will" include a notice of payment withholding.  However, unlike versions of the proposed rule, the CO will be required to make a final determination that a significant deficiency exists before withholding will be permitted.  The CO is directed to withhold 5% of amounts due from progress payments and performance-based payments.  Also, the CO will direct the contractor to withhold 5% from its billings on interim cost vouchers on cost, labor-hour, and time-and-materials contracts.  The withholding will continue until the CO determines that the contractor has corrected all significant deficiencies.  However, if the contractor submits, within 45 days of notice of the significant deficiency determination, a corrective action plan, the CO could determine to reduce the withholdings to 2%.  Because the withholding provisions apparently apply only to CAS-covered prime contracts, it is not clear what remedy the Government could invoke for system deficiencies on contracts and subcontracts not subject to the withholding provisions.  

Limitations on and Flexibility with Withholding – The rule establishes the ceiling on the withhold percentage as 5% for one or more significant deficiencies in any single business system and 10% for significant deficiencies in multiple business systems.  Note that payment withholding is not permitted on fixed-price line items where performance is complete and the items accepted by the government.  The interim rule also provides that the CO can identify one or more covered contracts containing the Contractor Business Systems clause (252.242-7005) from which to withhold payments.  In other words, the CO is no longer required to withhold payment from every contract containing the Contractor Business Systems clause, and the CO has the sole discretion to identify the contracts from which to withhold payments.  

Recognition of Government Delays – The interim rule recognizes, to a certain extent, that delay on the government's part occurs and takes steps to decrease the impact on contractors resulting from any such delay.  For example, normally, withholding of payments will be discontinued when the CO determines that the contractor has corrected all significant deficiencies.  Because there can be delay between when a contractor notifies its CO of a corrected significant deficiency and when the CO makes a determination that the significant deficiency is, indeed, corrected, the rule requires a reduction of the withhold percentage, by at least 50%, if 90 days has passed since the CO received notification of the correction and the CO has not yet verified that the significant deficiency has been corrected.  Nevertheless, the 50 percent withholding could continue indefinitely under the rule as promulgated, unless that contractor initiates a dispute under the CDA to seek payment.  Also, whereas the proposed rule required initial validation of an EVMS within 16 months, the interim rule allows for the CO to extend the deadline by which the initial validation must be done. 

System Approvals – The government will be permitted to issue approval of a business system only when there are no remaining significant deficiencies.  Although the rulemakers say that system approval will not be issued for "substantially corrected" systems, if the deficiencies have been corrected so that no "significant deficiencies" remain, withholding should cease.

An overview of the requirements, as set forth in the interim rule, for each of the six systems is provided below (as noted above, these substantive requirements are not limited to CAS-covered prime contracts):

Accounting System – Contractors receiving cost-reimbursement, incentive type, time-and-materials, or labor-hour contracts, or contracts which provide for progress payments based on costs or a percentage or stage of completion, are required to maintain an accounting system.  An accounting system is required to provide for, for example, a sound internal control environment, accounting framework, and organizational structure; proper segregation of direct and indirect costs; identification and accumulation of direct costs by contract; accumulation of costs under general ledger control; periodic monitoring, and a timekeeping system that identifies employees' labor by intermediate or final cost objectives.  If a CO determines that an accounting system deficiency affected a contractor's proposal, the CO can allow the contractor additional time to correct the deficiency, consider another type of contract (e.g., fixed-price incentive instead of a firm-fixed-price contract), use additional cost analysis techniques to determine cost reasonableness, or reduce the  negotiation objective for profit or fee.  It is not clear how these provisions relate to the FAR prohibition on awarding a cost-reimbursement contract in the absence of an "adequate" accounting system (see FAR 16.301-3(a)(1)).  

Earned Value Management System – The EVMS requirements apply to contractors that receive cost or incentive contracts valued at $20,000,000 or more and other contractors as determined by the CO.  The interim rule requires a contractor to use (a) an EVMS that complies with the EVMS guidelines in the American National Standards Institute/Electronic Industries Alliance Standard 748, Earned Value Management Systems (ANSI/EIA-748) and (b) management procedures that provide for generation of timely, reliable, and verifiable information for the Contract Performance Report ("CPR") and the Integrated Master Schedule ("IMS") required by the CPR and IMS data items of the contract.  If the contract has a value of $50 million or more, the contractor will be required to use an EVMS that has been deemed acceptable by the Cognizant Federal Agency ("CFA").  Any changes proposed by the contractor to its EVMS will need to be approved in advance by the CFA.  If the contract is less than $50 million, the government will not make a formal determination of compliance with ANSI/EIA-748, and advance government approval of changes will not be required.

Estimating System – Contractors with contracts awarded on the basis of cost or pricing data are required to maintain an estimating system that is reliable and consistent, produces verifiable, supportable, documented, and timely cost estimates, is consistent with and integrated with the contractor's related management systems, and is subject to financial controls systems.  For those contractors who received in their preceding fiscal year DoD prime contracts or subcontracts exceeding $50 million, they must disclose their estimating system in writing to the Administrative Contracting Officer ("ACO").  Additionally, the same disclosure requirement applies to those contractors who received in their preceding fiscal year DoD prime contracts or subcontracts exceeding $10 million and who were also notified by their CO that disclosure would be required.

Material Management and Accounting System –  Except for contracts awarded to small businesses, educational institutions, and nonprofit organizations, the MMAS requirements apply to non-commercial item contracts over the simplified acquisition threshold awarded on a cost-reimbursement basis or on a fixed price basis with progress payments made on the basis of incurred costs.  The interim rule requires contractors to (a) maintain an MMAS that reasonably forecasts material requirements, ensures that costs of purchased and fabricated material charged or allocated to a contract are based on valid time-phased requirements, and maintain a consistent, equitable, and unbiased logic for costing of material transactions and (b) assess its MMAS and ensure it has adequate internal controls in place to ensure system and data integrity.  The rule identifies a number of internal controls required for an MMAS, including having policies, procedures, and operating instructions describing its MMAS, ensuring that material costs are charged to a contract based on time-phased requirements identified in the rule, and implementing mechanisms to identify, report, and resolve system control weaknesses and manual override.  

Property Management System – The property management system requirements apply to cost reimbursement, time-and-material, and labor-hour type contracts as well as fixed price contracts where the Government will provide Government property.  The interim rule requires contractors' property management system, which manages and controls government property, to comply with FAR 52.245-1.  This FAR clause requires contractors to maintain a system that creates and maintains records of all government property accountable to the contract; periodically performs, records, and discloses physical inventory results; has a process to create and provide reports of discrepancies, loss, theft, damage, or destruction; and complies with property closeout requirements.

Purchasing System – The purchasing system requirements apply to cost reimbursement contracts; letter contracts, time-and-materials contracts, and labor-hour contracts over the simplified acquisition threshold; and fixed price contracts over the simplified acquisition threshold under which unpriced contract actions are anticipated.  Contractors will be required to maintain a purchasing system that meets a number of criteria set forth in the rule.  These criteria include having an adequate system description, including policies, procedures, and purchasing practices that comply with the FAR and DFARS; ensuring that all applicable purchase orders and subcontracts contain all flowdown clauses; maintaining an organization plan that establishes clear lines of authority and responsibility; ensuring all purchase orders are based on authorized requisitions; maintaining adequate documentation of the history of purchase transactions; and applying a consistent make-or-buy policy.  The rule addresses methods for the government to mitigate the risk of purchasing system deficiencies on specific proposals, which include segregating the questionable areas as a cost-reimbursable line item, including a contract reopener clause that provides for adjustment of the contract amount after award, and reducing the negotiation objective for profit or fee.  The criteria for purchasing systems in the clause DFARS 252.244-7001 Contractor Purchasing System Administration includes several new requirements that may be problematic.  Subparagraph (c)(16) of the clause requires that the purchasing system must enable the contractor to "notify" the Government of the award of all subcontracts that include flowdown clauses authorizing the Government to audit the subcontractor and "ensure the performance of audits of those subcontractors."  There is no explanation of how or when the required notice is to be provided to the Government or how the contractor is expected to "ensure the performance" of authorized Government audits.  Subparagraph (c)(24) of the clause requires that the contractor provide "timely notice" to the Government if the prime contractor changes the amount of subcontract effort after award so that it exceeds 70 percent of the value of the contract or order and to provide the same notice if any subcontractor makes such a change as to lower-tier subcontract effort.  While such situations are likely to be uncommon, it is not clear how contractors, particularly large companies with thousands of active contracts, will monitor those contracts to identify the few unusual cases that may require notification. 

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