DCMA mandatory requirements that are not appropriate for CMO Commander/Center Director deviation approval authority are preceded by the Letters "ND" - See Deviations - FAR, DFARS, DoD Directive, Other Regulatory/Government Documents and DCMA Instructions

1.  Determine the Acceptability of the Contractor's Business Systems. The appropriate Corporate Administrative Contracting Officer (CACO), Divisional Administrative Contracting Officer (DACO) or Administrative Contracting Officer (ACO), in consultation with the functional specialist or auditor shall determine the acceptability of the Contractor's business systems in accordance with the terms and conditions of the applicable business system clause and approve or disapprove the system. For Contractors who have a CACO or DACO assigned, the CACO or DACO is responsible for determining the acceptability of the Contractor's business systems for the corporate or specific business segment/division and should coordinate determinations with the ACO(s) assigned for contract administration when implementing a payment withhold.   For Contractors who have an assigned CACO; the CACO is responsible for determining the acceptability of any corporate-level business system. There are many instances whereby reviews are conducted on business segments that are contractor site-specific.  If that site is part of a larger business segment that has an assigned DACO, the DACO is responsible for determining  the acceptability of the business system. Although the site may have a cognizant ACO, if it is under a business segment with an assigned DACO, the DACO is the responsible Contracting Officer.  If there is no assigned DACO, the ACO is responsible for determining the acceptability of the business system.  When the acronym CO is used in this instruction, it refers to the appropriate CACO, DACO or ACO responsible for determining the acceptability of the Contractor’s business system and approving or disapproving the system.

    1.1. Contractor Business Systems are defined as accounting, earned value management (EVM), estimating, material management and accounting (MMA), property management, and purchasing systems.

        1.1.1. In accordance with paragraph 2.3.1 and 2.5.3.1 of the DCMA Contracts - Initial Receipt and Review Instruction, for contracts administered using the MOCAS system the ACO shall manually input MOCAS R9 Code "30" for each contract that contains DFARS Clause 252.242-7005, Contractor Business Systems. When the ACO withholds payments as a result of a final determination to disapprove a Contractor's business system, the ACO shall request the CMO trusted Agent to input MOCAS Special Provision Code "U".  The MOCAS Special Provision Code should only be input for those contracts where a payment withhold has been implemented.

    1.2. The requirements and procedures specifically related to each of the individual business systems, with the exception of accounting systems, are contained in the respective linked DCMA Instructions referenced in paragraph 1.1 above. The requirements and procedures for Contractor accounting systems are contained in DFARS 242.75, CONTRACTOR ACCOUNTING SYSTEMS.

    1.3. DCMA functional specialists responsible for preparing business systems reports shall summarize findings using the Business Systems Analysis Summary document and forward both the summary document and business system report to the CO for review. The BSAS is designed to assist the cognizant CO in identifying the significant deficiencies.  This is an internal DCMA document intended for use by Contracting Officers in making business system determinations. It is not to be used to replace or supplement the CO’s Initial Determination letter nor shall it be used as correspondence. If significant deficiencies are identified in a business system reviewed by DCMA, the functional specialist shall drafta complete and attach a draft Level III or IV Contract Action Report Request (CAR) and attach it to their BSAS (See Chapter 4 of the Corrective Action Process Instruction) and document in the CMO CAR log (see Chapter 3, Section 3.8 of the Corrective Action Process Instruction). The CAR shall be printed and marked “draft” and sent to the CO.  NOTE:  The CAR shall not be released to the Contractor or submitted in the CAR eTool at this time.  For any non-significant findings, the functional specialist shall pursue corrective action, as appropriate (see Chapter 4, Section 4.1.1 of the Corrective Action Process Instruction; for contract property see, contract property Instruction, paragraph 10.4.)  Upon the receipt of an audit or applicable business systems report, the CO shall review all findings from the functional specialist or auditor, including any recommendations concerning significant deficiencies.  The BSAS should not declare findings as significant or not significant—this responsibility rests squarely on the CO, or recommend disapproval of the system. 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. Note: DCAA will issue business systems audits that will address the contractor’s compliance with the DFARS systems criteria. DCAA Internal Control Audit Planning Summary (ICAPs) and Flash Reports will be replaced by Deficiency Reports. Flash Reports or individual Internal Control Audit Planning Summary (ICAPS) Deficiency Reports will be issued when significant deficiencies are identified. The Deficiency Reports will state the noncompliance with the DFARS system criteria when sufficient evidence supporting the deficiency is obtained.  The previous individual Internal Control Audit Planning Summary (ICAPs) and Flash Reports have been consolidated based on recent DCAA policy changes. See DCAA Audit Guidance and Audit Management Guidance Memorandum for Regional Directors # 12-PPS-009(R) and Audit Guidance on Auditing Contractor Business Systems and Contractor Compliance with DFARS 252.242-7006, Accounting System Administration #12-PAS-012(R) on the DCAA website. could contain findings that may be considered significant deficiencies/material weaknesses, which could lead to a Contracting Officer decision to disapprove the applicable system. The CO should evaluate the Flash Report or the ICAPS report Deficiency Report to determine if there is sufficient information to make a determination of significant deficiency.

        1.3.1.   If there are no significant deficiencies, the CO shall issue a final determination, notifying the Contractor in writing that the system is acceptable and approved. in accordance with the terms and conditions of the applicable business system clause and approved.  In such cases, there is no need for an initial determination.  If significant deficiencies exists, the CO shall initiate an initial The initial determination should be issued within 10 days of receiving the audit or functional specialist report. The CMO Contracts Director and/or the DACO/CACO Group Director shall approve the notice before issuance. After notifying the Contractor, the CO shall record the status of the approved business system in the Contract Business Analysis Repository (CBAR) eTool. See paragraph 1.5 of this instruction.        

        1.3.2 (ND) If the CO determines that there are one or more significant deficiencies, the CO shall --

          1.3.2.1. Issue an initial written determination on any significant deficiencies and notify the Contractor in writing, providing a description of each significant deficiency in sufficient detail to allow the Contractor to understand the deficiencies.  It is recommended that the CO obtain local counsel review of the initial determination.  The CMO Contracts Director and/or the DACO/CACO Group Director shall approve the initial determination before issuance. When a CACO/DACO/ACO network exists, the CO responsible for issuing the initial determination shall notify all COs within the network prior to issuing the initial determination to the contractor. The initial determination should be made within 10 days of receiving the audit or functional specialist report. 

          1.3.2.2. Request the Contractor to respond in writing to the initial determination within 30 days.

          1.3.2.3. (ND) Rejection of advice from the functional specialist or auditor on Business Systems is subject to Board of Review requirements.    

          1.3.2.4. Attach a the unsigned draft Level III or IV CAR clearly marked “draft” to the initial determination letter for significant deficiencies identified in the Contractors Earned Value Management, Material Management and Accounting, Property Management or Purchasing System. Note, since DCAA Audit reports are tracked and managed in the Contract Audit Follow-Up (CAFU) system, they are not subject to the CAR process (see Chapter 3, Section 3.1.1 and Chapter 4 of the Corrective Action Process Instruction).

    1.4. Within 30 days of receiving the Contractor's response to the initial determination, the CO should evaluate the response in consultation with the auditor or functional specialist and make a final determination. Within 30 days of receiving the Contractor's response to the initial determination, the CO should evaluate the response in consultation with the auditor or functional specialist and make a final determination. If the final determination is not issued within 30 days after receiving the contractor’s response, the CO on a weekly basis shall document the file with dates and actions taken until an approval/disapproval decision is made.  In addition, the CO shall routinely update the contractor on the status of the issuance of the final determination. If it is anticipated that it will take more than 30 days to issue the final determination, the CO shall obtain the approval of the Contracts Director or the Cost/Price Center Team Leader.  If it is anticipated that it will take more than 45 days to issue the final determination, the CO shall obtain the approval of the DCMA Operations Contracts Director or the DACO/CACO Group Director.

       1.4.1. The CO shall notify the Contractor in writing that (a) the system is acceptable and approved and shall close not finalize the Level III or IV CAR related to the specific Contractor business system. The Level III or IV CAR shall then be cancelled in the CAR eTool.  The CO shall document the CMO CAR log with the status (see Chapter 3, Section 3.8 of the Corrective Action Process Instruction)., or (b) If the system is disapproved then the CO shall finalize the Level III or IV CAR in the CAR eTool  and attached it to the final determination in accordance with the applicable system clause and request the Contractor is requested within 45 days to correct the deficiencies or submit an acceptable corrective action plan (CAP) (see paragraph 3.5 of this Instruction).  An acceptable CAP will address the cause of the significant deficiency; include milestones and action(s) to eliminate the significant deficiency, and target date(s) for implementation of planned action.  See CAP Sample that may be provided to the Contractor. If the system is disapproved, the ACO shall withhold payments in accordance with DFARS 252.242-7005, Contractor Business Systems, if the clause is included in the contract.  See paragraph 3 of this Instruction, Apply Payment Withhold.  See Tools & Additional Guidance section of this Instruction for a sample final determination notice or DFARS Procedures Guidance and Information (PGI) 242.7000(1) for a sample format for written final determinations for implementing payment withholding.

          1.4.1.2 An Earned Value Business System will not be approved or disapproved in accordance with Department of Defense FAR Supplement (DFARS) 252.234-7002 (c) (Earned Value Management System), if the contractor does not have contracts valued at $50 million.  However, a CAR shall be drafted and coordinated if significant deficiencies are identified (See DCMA Memorandum #12-137).

       1.4.2. Review of CO’s Final Determination.

          1.4.2.1. When a CACO/DACO/ACO network exists, the CO responsible for making the final determination shall obtain all COs concurrence within the network prior to notifying the Contractor of the final determination.  Obtaining all COs concurrence within the network will ensure consistent treatment of like Contractor business system issues throughout a company. 

          1.4.2.2. The CMO Contracts Director or the Director of the CACO/DACO Division of the Cost and Pricing Center shall approve the final determination before issuance (see paragraph 1.4.2.3 for higher-level review of a final determination that disapproves a business system).

          1.4.2.3. Contractor Business Systems Review Panel. When the COs final determination disapproves a business system in accordance with the applicable business system clause, the CO shall obtain a higher-level review from the Contractor Business Systems Review Panel prior to notifying the Contractor in writing that the system is disapproved. The CO shall submit, via email to the DCMA-AQ Contractor Business Systems Policy process advocate, a copy of the functional specialist or auditor report, Contractor’s response to the initial determination, and final determination notice, as approved by the CMO Contracts Director and/or the Director of the CACO/DACO Division of the Cost and Pricing Center.

               1.4.2.3.1. The purpose of the Panel review is to ensure --

- Significant deficiencies identified in the CO’s initial determination notification and the Contractor’s response have been fully evaluated and discussed by the CO and functional specialist or auditor, and CMO Contracts Director or Director of the CACO/DACO Division of the Cost and Pricing Center, and

- Consistent application of business system criteria and policy requirements.

               1.4.2.3.2. The Panel will be composed of the following individuals –

- Chair: Director, Contracts Policy
- Member: Contractor Business Systems Policy Process Advocate
- Member: Specific Business System Policy Process Advocate (e.g., Estimating System Policy)
- Member: Operations Representative (Cost/Pricing Center Representative for CACOs/DACOs)
- Member: Legal Representative (DCMA-GC)
- DCAA HQ Representative, as applicable

               1.4.2.3.3. The DCMA-AQ Contractor Business Systems Policy Process Advocate shall acknowledge receipt of the CO’s submission via email, promptly distribute CO documents to appropriate Panel members, and schedule a Panel meeting, preferably within 3 days after receiving the CO’s submission. When the Panel completes their review, the DCMA-AQ Contractor Business Systems Policy Process Advocate shall send a “concur” or “non-concur” email notice to the CO. If the CO receives a non-concur from the Panel, the CO shall review Panel recommendations prior to notifying the Contractor in writing of the final determination. The Panel’s recommendations and opinions are advisory and shall be considered by the CO prior to disapproving a business system. If the CO elects not to follow the Panel’s advice, the CO shall document their reason for not following the advice and notify the DCMA-AQ Contractor Business Systems Policy Process Advocate.

       1.4.3. After notifying the Contractor, the CO shall record the status of the approved or disapproved business system in the Contract Business Analysis Repository (CBAR) eTool.  See paragraph 1.5 of this instruction.

    1.5. COs shall ensure the business system status in the CBAR e-tool is always current and accurate at the appropriate CAGE level. Any changes in status should be entered immediately after providing written notification of the COs determination to the Contractor.  CBAR eTool training is available via ITCSO Training Academy and access is obtained via IWAM.  Business system status information is available in CBAR on the “View Business Systems Document” page. The business system status record allows COs to enter the status information in a data entry web form and upload a narrative document (Business Systems Status Template) explaining the status of the systems.

        1.5.1. Business system status selections in CBAR include: Approved, Disapproved, Not Evaluated, or Not Applicable.  For legacy determinations, CO’s shall enter business system status as follows:

a.      Approved:  CO issued a legacy determination finding the business system to be “approved,” “adequate,” “acceptable,” or “no non-compliances found.”

b.      Disapproved:  CO issued a legacy determination finding the business system to be “disapproved.”

c.       Not Evaluated  CO’s legacy determination used terminology other than “approved” “adequate,” “acceptable,” or “no non-compliances found” or “disapproved,” then the business system status should be entered as “Not Evaluated” until a follow-up review is completed and the CO issues a final determination “approving” or “disapproving” the business system.

d.      Not Applicable: Requirement to maintain the business system does not exist.

        1.5.2. For each significant deficiency identified, the COs narrative document shall explain the position of the auditor/functional specialist, Contractor, and CO. The CO shall address the Contractor's corrective action plan and estimated time for follow-up review, as well as the actual or potential impact the deficiency has on proposed costs, billings, and estimated cost at completion and any other pertinent information that may impact contract award.  

2.  Monitor Contractor's Corrective Action.  The CO and auditor/functional specialist shall monitor the Contractor's progress in correcting deficiencies as outlined in the Contractor's CAP.  The ACO shall notify the Contractor of any decision to decrease or increase the amount of payment withholding in accordance with DFARS Clause 252.242-7005, Contractor Business Systems, (see paragraph 3 of this Instruction, Apply Payment Withhold).  The CO shall take whatever action is necessary to ensure the Contractor corrects the deficiencies. If the Contractor does not follow their corrective action plan or is not effectively implementing corrective actions, the CO shall elevate the CAR to Level IV (see Chapter 2, Section 2.1.2 of the Corrective Action Process Instruction).  Examples of actions the CO can take are: bringing the matter to the attention of higher level management, suspending progress payments (see FAR 32.503-6), implementing or increasing withholds in accordance with DFARS Clause 252.242-7005, Contractor Business Systems, if applicable, and recommending non-award of potential contracts due to disapproved business systems, if the system clauses are included in the solicitation.

     2.1. When the Contractor notifies the CO in writing that the Contractor has corrected all system deficiencies, the CO shall request the auditor or functional specialist review the correction to determine if the significant deficiencies have been resolved. 

        2.1.1. The CO shall promptly approve a previously disapproved system and notify the Contractor, in writing, when the CO determines the Contractor has corrected the significant deficiencies.  When the CO approves a previously disapproved system, the ACO shall discontinue payment withholding related to the specific Contractor business system. See paragraph 3 of this Instruction, Apply Payment Withhold. Upon system approval, the CO shall close level III or IV CARs related to the specific Contractor business system and document the CMO CAR log (see Chapter 3, Section 3.8 of the Corrective Action Process Instruction).After notifying the Contractor, the CO shall record the status of the approved business system in the Contract Business Analysis Repository (CBAR) eTool.See paragraph 1.5 of this instruction.

       2.1.2. If the CO determines that the Contractor still has significant deficiencies, the ACO will continue the withholding of payments.

3.  Apply Payment Withhold. (ND)  If the CO makes a final determination to disapprove a Contractor's business system due to the system containing significant deficiencies, the ACO shall withhold payments in accordance with DFARS Clause 252.242.7005, if the clause is included in the contract and the applicable business systems clause is included in the contract.  When a CACO/DACO/ACO network exists, the CO responsible for making the final determination shall coordinate with the ACO(s) assigned for contract administration as necessary to implement, increase, decrease, discontinue or release payment withholds.

    3.1. The COs final determination shall include a notice to withhold payments. The ACO responsible for contract administration shall establish and maintain a business system withholding tracking worksheet for each contract against which payments will be withheld.  MOCAS will not be used to track these types of withholds.  A withhold tracking spreadsheet is provided in the Tools section of this Instruction and shall be used by the ACO for purposes of tracking withholds for business systems. A separate spreadsheet should be used for each contract.The withhold tracking spreadsheet should be uploaded to the Electronic Document Workflow (EDW) contract file. 

    3.2. The ACO shall identify covered contracts from which payments will be withheld and list them in the final determination or provide the list to the appropriate CACO or DACO for inclusion in the final determination notice.  For systems approved/disapproved at the CACO/DACO level, those individuals shall coordinate with the appropriate ACO(s) to identify the contracts from which payments will be withheld.  The ACO shall execute the withhold.  When a business system is disapproved, DFARS Clause 252.242-7005 requires the ACO to withhold against progress payments, performance based payments, and interim payments billed under cost, labor-hour and time and materials contracts.  Billing and payment occurs at the task/delivery order level under an Indefinite Delivery Contract (IDC); therefore, when applying a withhold to an IDC, the ACO shall apply the withhold to the IDC task/delivery order.   The respective parties should work to complete the process within 30 days of receiving the Contractor's response to the initial determination.     

       3.2.1. The ACO shall withhold payments from all contracts that contain DFARS Clause 252.242-7005, have a total contract value greater than or equal to $50 million, and contain the applicable business systems clause. If the Contractor has not received a contract(s) with a total contract value greater than or equal to $50 million and the CO determines it is necessary to protect the Government's interest, the ACO may implement payment withholding on contract(s) valued less than $50 million containing DFARS Clause 252.242-7005 and applicable business systems clause, with the approval of the CMO Contracts Director or the Director of the CACO/DACO Division of the Cost and Pricing Center.

       3.2.2. The ACO responsible for contract administration shall execute the withhold on identified contracts. The respective parties should work to complete the process within 30 days of receiving the Contractor's response to the initial determination.  It is recommended that the ACOs query MOCAS to identify contracts with R9 Code "30" (DFARS Clause 252.242-7005) and that have a total contract value greater than or equal to $50 million and that contain the applicable business systems clause.

       3.2.3. The ACO shall request the CMO Trusted Agent to input MOCAS Special Provision Code "U" for each contract from which payments will be withheld. 

    3.3.  The ACO shall withhold five percent of amounts due from progress payments and performance based payments and direct the Contractor to withhold five percent from its billings on interim cost vouchers on cost, labor-hour, and time and material contracts until the CO has determined the Contractor has corrected all significant deficiencies as directed by the COs final determination.  The withhold will only be applicable to billings submitted after the date of the final determination.  Payment withholds shall not apply to payments on fixed-price line items where performance is complete and the items or services were accepted by the Government.

    3.4. The ACO shall ensure the withhold does not exceed five percent for any single Contractor business system or 10 percent for two or more Contractor business systems that have been disapproved.  The ACO shall ensure that the total amount of payment withholding under a single contract does not exceed 10 percent of progress payments, performance based payments and interim payments billed under that contract, if DFARS Clause 252.242-7005 is included in the contract and it has been selected for payment withholding.

    3.5.  If the Contractor submits an acceptable corrective action plan (CAP) (see paragraph 1.4.1 of this Instruction) within 45 days of receipt the CO's final determination and notice of intent to withhold payments and the CO, in consultation with the auditor or functional specialist, determines the Contractor is effectively implementing this plan, the ACO will reduce withholding concerning the significant deficiencies under the CAP, to two percent of progress payments and performance-based payments, and direct the Contractor in writing to reduce the percentage withhold on interim cost vouchers to two percent until the CO has made a final determination that the Contractor has corrected all significant deficiencies.  The COs review of the CAP and determination of effective implementation of the CAP and the ACOs subsequent reduction of payment withholding should be completed within 15 days of receiving the Contractor's CAP.  The reduction is prospective and previous amounts withheld will not be reduced or released at this time.  However, if at any time the CO determines that the Contractor has failed to follow the corrective action plan, the ACO will increase the withhold back to the percentage initially withheld. Such increases in the withhold shall be prospective from the date of the letter notifying the Contractor of the increase and are subject to the withholding limitations identified in paragraph 3.4 of this Instruction.   See DFARS PGI 242.7000(b)(2) for sample format for reducing payment withholds.    

    3.6. If the Contractor notifies the CO that the Contractor has corrected the significant deficiencies, the CO shall request the functional specialist or auditor to review the correction to verify that the deficiencies have been corrected.  If, after verification the CO determines the Contractor has corrected all significant deficiencies directed by the COs final determination, the ACO will discontinue withholds from progress payments and performance-based payments, and direct the Contractor in writing to discontinue the payment withholding interim cost vouchers, and authorize the Contractor to bill for any monies previously withheld.  The ACO may discontinue withholding payments pending receipt of verification, and release any payments previously withheld, if the Contractor submits evidence that the significant deficiencies have been corrected and the CO, in consultation with the functional specialist or auditor, determines that there is reasonable expectation that the corrective actions have been implemented.

       3.6.1. Within 90 days of receipt of Contractor notification that the Contractor has corrected the significant deficiencies, the CO will do one of the following:

            3.6.1.1.  Make a determination if the Contractor has corrected all significant deficiencies, or

            3.6.1.2. Determine that there is a reasonable expectation that the corrective actions have been implemented.

            3.6.1.3. If the CO has not made one of the two decisions covered in 3.6.1.1 and 3.6.1.2, the ACO will reduce the withholding rate directly related to the significant deficiencies covered under the corrective action plan by at least 50% and the business system will remain disapproved until corrective actions are verified in accordance with paragraph 3.6 of this instruction and the CO makes one of the two decisions covered in 3.6.1.1 and 3.6.1.2 above.

      3.6.2.   When a CACO/DACO/ACO network exists, the CO responsible for making the determination shall obtain all other COs concurrence within the network before notifying the Contractor of the determination.  Obtaining all COs concurrence within the network will ensure consistent treatment of like Contractor business system issues throughout a company. 

    3.7.  DFARS PGI 242.7000 provides sample language for written notifications of CO determinations to initiate payment withholding, reducing payment withholding and discontinue payment withholding in accordance with DFARS Clause 252.242-7005, Contractor Business Systems.  COs shall use the format and content contained in the DFARS PGI samples.

    3.8. Payment withholding under DFARS Clause 252.242-7005 is not subject to the interest-penalty provisions of the Prompt Payment Act.    

    3.9. Administering Business System Payment Withholds in Wide Area Workflow (WAWF)

        3.9.1. When a Business System Withhold has been implemented, the ACO shall ensure the contract is not on the Post Pay Table in WAWF.  This will allow all progress payment requests to be routed to the ACO for manual review and approval. It should be noted that a Contractor CAGE Code may remain on the Direct Bill Table in WAWF, if DCAA has not withdrawn Direct Bill Authority.

       3.9.2. For requests for progress payments and performance based payments, the ACO shall reduce the amount requested by the appropriate withholding percentage and approve a lesser amount than was requested in the appropriate "Approved ($)" block.

            3.9.2.1. Approving Progress Payments in WAWF:

               3.9.2.1.1. When approving a lesser amount for progress payment, the ACO shall use the comment block on the "Miscellaneous" tab in WAWF to record the amount requested, amount withheld, amount approved and cumulative amount withheld to date, as well as the specific business system withhold percentage (e.g., Comments: Accounting System Withhold of 5% applied to this request per final determination letter date 12 Oct 11: Amount Requested =$1,842,867; Amount Withheld = $92,108; Amount Approved = $1,750,059; Total Amount Withheld to Date: $345,399).

              3.9.2.1.2. When administering progress payments under FAR Clause 52.232-16, ACOs should not confuse the implementation of a payment withhold for disapproved business systems with a reduction or suspension of progress payment action. 

                  3.9.2.1.2.1. Under DFARS Clause 252.242-7005, the ACO is required to withhold a percentage of payments when one or more of the Contractor's business systems have significant deficiencies and the CO has disapproved the system.  It is assumed the Contractor will eventually be entitled to bill for previously withheld amounts upon correction of all significant deficiencies and pending continued eligibility for contract financing (see paragraph 3.10.1 below). 

                  3.9.2.1.2.2. When administering the progress payment clause, the ACO may reduce, suspend or increase the rate of liquidation when any of the conditions listed in paragraph (c) of the clause exist.  These actions may be taken in order to protect against loss of unliquidated progress payments and ensure Contractor compliance with the terms of the progress payment clause itself.  Before exercising the Government's right to reduce or suspend progress payments, the ACO must analyze reduction or suspension actions, considering all possible effects on both the Contractor and the Government.  A detailed discussion of the proposed reduction or suspension action with both the Contractor and PCO is critical in deciding the best course of action.  Reduced or suspended payments are not "released" to the Contractor upon correction of the conditions that prompted the action. Also see paragraph 4.3, Pre-Existing Withholds, of this Instruction.

           3.9.2.2.  Approving Performance Based Payments in WAWF: When approving a lesser amount for performance based payments, the ACO shall enter "payment instructions" by ACRN and CLIN on the ACRN WS Tab in WAWF and use the Comments Block on the "Miscellaneous Information" tab in WAWF to record the amount requested, amount withheld, amount approved and cumulative amount withheld to date, as well as the specific business system withhold percentage (e.g., Comments: Accounting System Withhold of 5% applied to this request per final determination letter date 12 Oct 11: Amount Requested =$1,842,867; Amount Withheld = $92,108; Amount Approved = $1,750,059; Total Amount Withheld to Date: $345,399.)

         3.9.3. For payments under cost, labor hour, and time and material contracts, the Contractor shall apply the appropriate withholding percentage to the amount being billed and prepare a cost voucher in WAWF for the net amount due.

            3.9.3.1. The Contractor shall record amounts withheld in the CLIN description field on the Cost Voucher.  If the Contractor provides a statement of current and cumulative costs incurred, current, and cumulative amounts withheld should be reflected on the statement.

    3.10.  Discontinuation of Payment Withholding:  When discontinuing withholds taken against payments, the ACO shall issue a notice of discontinuance of payment withholding to the Contractor (see DFARS PGI 242.7000) and authorize the Contractor to bill the Government for the released amount using the same type of invoice on which the withhold was originally taken.  The ACOs notice shall identify the amount previously withheld and the amount the Contractor is authorized to bill.

        3.10.1. When authorizing the Contractor to submit a bill for previous amounts withheld against progress payments, the ACO shall validate that the Contractor is still in a position to receive progress payments (i.e., if the Contractor has completed deliveries, they may not be eligible for additional progress payments).

        3.10.2. If no other business system withholds have been applied to the contract, the ACO shall request the CMO Trusted Agent to remove the MOCAS Special Provision Code "U" from the contract.  The ACO shall ensure the contract is added to the "Post Pay" table in WAWF, unless some other contractual condition exists that requires the ACO's manual review and approval of progress payments (e.g., contract in loss condition).

4.  Other Withholding Considerations.

    4.1. Contract Closeout.  If a contract is physically complete and all necessary closeout actions are complete, the ACO may release the withhold. The ACO should determine if it is necessary to implement withholds on other contracts with the relevant clauses to protect the Government's interests. Withholds may not be "transferred" between contracts. When the ACO determines it is in the best interest of the Government to release the withhold in order to proceed with contract closeout, and a CACO/DACO network exists, the ACO shall coordinate actions with the CACO/DACO prior to releasing payment withholds or implementing a payment withhold on other contracts with relevant clauses. The CO shall notify the Contractor of any changes in payment withholding as a result of contract closeout actions.

    4.2. Cancelling Funds.  If there are withholds against contracts with funds due to cancel, the ACO may release the withhold. The ACO should determine if it is necessary to implement withholds on other contracts with the relevant clauses to protect the Government's interests.  When the ACO determines it is in the best interest of the Government to release the withhold in order to prevent funds from canceling, and a CACO/DACO network exists, the ACO shall coordinate actions with the CACO/DACO prior to releasing payment withholds or implementing a payment withhold on other contracts with relevant clauses. The CO shall notify the Contractor of any changes in payment withholding as a result of canceling funds actions.

    4.3.  Pre-Existing Withholds:  (ND) Before implementing a Contractor business system payment withhold on a contract that contains pre-existing withholds, the ACO shall consider if the application of any subsequent payment withhold will cause payment withholding under the contract to exceed payment withhold percentage limits defined in DFARS Clause 252.242-7005(e)(3)(i).  If the pre-existing withhold will cause the withholding under DFARS Clause 252.242-7005 to exceed the payment withholding percentage limitations, the ACO shall reduce the payment withhold percentage in the final determination to a percentage that will not exceed the established limits.  Payment withhold percentage limits under DFARS Clause 252.242-7005:  5% for one or more significant deficiencies in any single Contractor business system, and 10% for significant deficiencies in multiple Contractor business systems. 

         4.3.1  If a contract has a pre-existing withhold under an authority other than the current DFARS CBS clause and the contract is modified to add DFARS 252.242-7005 (Contractor Business Systems), the CO shall reduce the withhold to 5%  if one system is disapproved or 10% if more than one system is disapproved.  In addition, the ACO must coordinate the reduction of the withhold with the CACO/DACO/ACO network when one exists. 

    4.4. Contractor Self-Assessments and Payment Withholding. ACO’s shall not apply payment withholds to contracts containing DFARS Clause 252.242-7005 unless the Contractor is given due process (See paragraph 6.1.3 below for instructions on evaluating findings as a result of Contractor self-assessments). When significant deficiencies are identified as a result of a Contractor self-assessment of a business system, the Contractor normally implements corrective actions. When the due process results in a disapproval of a business system and the Contractor has submitted an acceptable CAP and is effectively implementing the plan, the ACO should consider applying a 2% withhold to contracts containing the DFARS Clause 252.242-7005 and applicable business system clause. The application of this withhold considers corrective actions taken by the Contractor.

5.  Notification/Distribution.  The CO shall promptly distribute copies of the determination to approve a system, disapprove a system and withhold payments, or approve a disapproved system and release withheld payments, to: the auditor or functional specialist, affected contracting officers at the buying activities, and any other impacted CO's.  

6.  Implementation Instructions. The DFARS Contractor Business Systems policy at DFARS 242.70 and associated business systems clauses became effective on May 18, 2011.

    6.1. The procedures outlined above should be implemented immediately. The terminology going forward for all new business systems status should be approved or disapproved. 

        6.1.1. COs shall not implement a payment withhold on an individual contract unless the contract contains the clause DFARS Clause 252.242-7005, Contractor Business Systems, and the specific business system clause for which a payment withhold is being implemented. 

        6.1.2. COs shall not take withholds on contracts based on previous business system reports unless the Contractor is given due process through the procedures outlined above. If a finding in a previous report still exists and the CO determines it a significant deficiency, the CO should start the procedures above with the initial determination of significant deficiency. 

        6.1.3. Contractor Self-Assessments. In accordance with FAR or DFARS business systems clauses, Contractors are encouraged or in some cases may be required to perform self-assessments. A self-assessment process that identifies deficiencies, root causes, and implements effective corrective actions is beneficial to both the Contractor and the Government. Leveraging Contractor self-assessments may reduce audit time and potentially offers dollar savings or reductions in losses to programs.

           6.1.3.1. Reporting of Contractor Self-Assessment Findings. System deficiencies identified by the Contractor as a result of a self-assessment are generally reported to the functional specialist or auditor responsible for performing a review of the business system. When the Contractor identifies deficiencies, as a result of a self-assessment, the functional specialist or auditor should validate the accuracy of the Contractor’s findings, identifying shortcomings in the system that materially affects the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes, as well as the sufficiency of corrective actions.  If the Contractor reports system deficiencies as a result of a self-assessment to the CO, then the CO shall request the functional specialist or auditor to validate the accuracy of the Contractor's findings, identify significant deficiencies and comment on any corrective actions.

               6.1.3.1.1. If the functional specialist validates the Contractor has corrected all self-disclosed deficiencies, the results of the validation shall be documented in a report to the CO and no further action is required. If the auditor validates the Contractor has corrected all self-disclosed deficiencies, the results of the validation should be documented in a report to the CO and no further action is required.

               6.1.3.1.2. If the functional specialist finds the Contractor has not corrected the self-disclosed deficiencies and those deficiencies are considered to be shortcomings in the system that materially affects the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes, or if the corrective actions are insufficient or not being completed in a timely manner, the functional specialist shall document the findings in a report to the CO. If the auditor finds the Contractor has not corrected the self-disclosed deficiencies and those deficiencies are considered to be significant in accordance with the business system clause, or if the corrective actions are insufficient or not being completed in a timely manner, the auditor should document the findings in a report to the CO. The CO shall begin the “initial determination” process for the business system (see paragraph 1.3 of this Instruction). Since the Contractor normally implements corrective actions for findings as a result of self-assessments, the ACO shall consider the corrective actions when applying a payment withhold when a business system is disapproved (see paragraph 4.4 of this Instruction).