When defense companies fail to perform as expected, the Pentagon will now withhold up to 10 percent of payments if it finds “significant” shortcomings in their performance.
The new provision, which went into effect August 16, is intended to protect taxpayers from overbilling by defense contractors. More than $30 billion has been wasted or lost to fraud from U.S.-funded Iraq and Afghanistan contracts, or about one in every six dollars of the $192.5 billion spent on contracts and grants from 2002 to 2011, according to a commission recently authorized by Congress.
The provision requires all new contracts to include language that outlines the ability for the Pentagon to withhold payments due to six outlined business systems used to track performance and cost of weapons programs or services that can be used to gauge waste. An example is the “Earned Value Management” system used to determine whether companies are meeting cost and schedule goals.
The initial draft allowed the Pentagon to withhold as much as 20 percent of billings. Yet after industry complaints, that was cut to a 10 percent maximum.
“These changes are long overdue and reflect potential risk associated with longstanding and continuing contractor business system deficiencies,” said commission co-chairman Michael Thibault.
About 20,000 contractors working under jurisdiction of the Defense Contract Management Agency “can be subject to withholds provided the clauses are in their contracts and a determination has been made that a system is disapproved,” agency spokeswoman Jacqueline Noble told Bloomberg.
If the Pentagon determines a payment should be withheld, five percent of progress payments and other performance-based disbursements would be halted and the contractor would withhold submitting five percent of billings for cost, labor-hours and time and materials contracts, she said.
Industry groups are already seeing these clauses included in new solicitations said Alan Chvotkin, executive vice president of the Professional Services Council.