DOD seeks big penalties for IT errors

Government would withhold payment from vendors with deficient business systems

The U.S. Department of Defense has seen repeated instances of paying for critical war zone supplies that were not delivered, or double billed. At fault are, in many cases, underlying business, according to a U.S. commission that investigated these problems.

To fix this, the DOD has proposed a new rule allowing the government to withhold payment for goods and services starting at 10% for each deficiency that's identified in a business system.

But the proposed rule is raising alarm with some industry groups, including the largest IT industry group, TechAmerica, which says the move is unfair and excessive.

The problems with double billing and missing order was raised by Commission on Wartime Contracting, a group formed by Congress in 2008 to look at the more than $800 billion that has been spent to fund operations in Afghanistan and Iraq, money which pays the salaries of 240,000 contractor employees.

Orders for body armor, rifle scopes and water purification systems are just a few of the things that have been affected.

The commission reported that many internal business systems used by contractors were inadequate and without "proper incentives" some contractors may not improve them. Some of the business system deficiencies remain despite repeated audits, the commission reported last year.

But the remedy, TechAmerica says, is that the withholdings could arise to 100% of a contract and "threaten the financial solvency of many contractors," as well as reduce competition by driving some contractors out the market.

This threat of arbitrary withholdings "will impose exorbitant costs on contractors to try to develop systems that are free from even the potential from being questioned about deficiencies," wrote Trey Hodgkins, TechAmerica's vice president of national security and procurement policy.

Ray Bjorklund, vice president at consulting firm Federal Sources Inc., said traded companies "are supposed to have systems and processes that meet the requirements of Sarbanes-Oxley for adequate internal controls and financial visibility."

However, absent additional checks and balances that could be achieved through ombudsmen and other governance mechanisms, Bjorklund said he believes the proposed rule does seem too severe.

Bjorklund does see the motivation, though. "[Ultimately] cash flow manipulation is a great motivational tool for getting a contractor to perform better," he said.

Lauren Jones, principal analyst at market research firm Input Inc., said for a smaller contractor that only works on a couple of contracts at a time, the rule may cripple them. But she said it's an effort by the DOD to put some teeth in its contracting rules. "They know how critical it is to keep that mission going," she said.

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov or subscribe to Pat rick's RSS feed . His e-mail address is< /a>.

Copyright © 2010 IDG Communications, Inc.

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