2. 1 1 MANAGEMENT AND FINANCIAL CHALLENGES OF PROPOSED DFARS RULE ON PAYMENT WITHHOLDING OF CONTRACTORS' BUSINESS SYSTEMS DEFICIENCES Breakout Session # 609 Name: Stan Soloway, President & CEO Professional Services Council Date July 20, 2010 Time 4:00 - 5:15 PM

3. 2 What We Recognize Industry business systems are important to ensuring the integrity of the billing, performance measurement, and payment processes Some business systems assessments involve complex, inter-related elements Government needs the ability to hold companies accountable, including withholding payments, for inadequate systems

4. 3 Why We Are Concerned The government has always had the right and ability to withhold payments due to poor performance, inadequate systems, etc. Thus, the rule is an unnecessary over-reach The proposed rule would replace ACO judgment to determine the degree of risk with an indiscriminate mandate of ten percent—and rising BCA has long held that withholding must be related to the potential harm to the government The proposed rule nonetheless mandates withholds whether or not the inadequacy is significant or material –No relation to possible risk from unallowable costs –No recognition that not all deficiencies pose the same risk –No recognition that each deficiency is unique and that some may be irrelevant to the covered contract and/or apply only to a minor portion of the contractor’s business

5. 4 The Rule Could Have Numerous, Highly Problematic Consequences The proposed rule grossly under-estimates the financial impact on contractors (and should be considered a major rulemaking under the law) Withholdings could become a near certainty for most contractors Cash flow shortages--particularly for small and mid-tier firms, will require financing and associated costs just to sustain performance Already evident staffing shortages could prevent timely review and validation of corrective actions—a concern also prominent with regard to DCAA’s “pass/fail” policy—resulting in de facto suspensions/ineligibility for many

6. 5 What Should Be Done The rule should be substantially redrawn –Focus/provide guidance on the most critical elements of each business system, rather than blanket assumptions –Establish clear standards against which all systems are to be measured and evaluated –Require the demonstration of materiality and significant risk before considering withholding (ACO authority) –Require that remedies for identified deficiencies be recommended by reviewing authority –For other than the most severe deficiencies, allow companies to certify they have implemented corrective action pending ACO or other reviews