Notwithstanding recent amendments to its earlier proposed rule, the Department of Defense (DoD) is poised to begin withholding payments under cost reimbursable and time and materials contracts whenever it finds contractors’ business systems deficient. This proposed rule represents a significant change in the contracting environment for companies performing work for DoD.

As originally proposed, the Defense Federal Acquisition Regulations Supplement (DFARS) rule would have allowed contracting officers to withhold 10%, 50% or even 100% of contractor payments when the contracting officer decides that a contractor’s “business systems” are “deficient.”

Amendments now lower the amounts that can be withheld, but even as amended the proposed rule would impose new compliance requirements that are difficult to understand on their face. Without clear criteria in the proposed rule, contractors face potentially substantial compliance costs in addition to severe monetary penalties for noncompliance.