Pentagon Holds Back Contractor Funds on Business Systems

The Defense Department is withholding funds from some of its largest contractors -- led by Northrop Grumman Corp. (NOC), Boeing (BA) Co. and BAE Systems Plc (BA/) -- until they correct inadequate business systems.

The amounts held back include $19 million from BAE, $5.2 million from Boeing and $1.4 million from Northrop, according to Defense Contract Management Agency data as of Nov. 30. The agency said it also plans to withhold payments from Honeywell International Inc. (HON) and General Atomics.

The actions, following previous enforcement aimed at Lockheed Martin Corp., signal a Pentagon crackdown under a regulation that took effect in 2011 and requires contractors to meet standards for five internal systems, including one to measure a company’s progress meeting cost and schedule goals for multibillion-dollar weapons contracts.

The rule, intended to protect taxpayers from overbilling, focuses on systems that companies use to estimate costs for bids, purchase goods from subcontractors, manage government property and materials and track costs and schedule progress.

“Those business systems help protect taxpayers, and it’s nice to see DoD delay payments,” Scott Amey, general counsel for the Washington-based Project On Government Oversight, said in an e-mailed statement. “Money talks, and this effort will provide an even greater incentive for contractors to be accountable and correct deficiencies.”

Fourteen Companies

Fourteen companies on the Defense Contract Management Agency list as of Nov. 30 faced the withholding of 2 percent or 5 percent of billings from the unit found to have deficient systems. The list represented “a snapshot of one particular day and point in time,” agency spokesman Billy Ray Brown said in an e-mail.

Last month, the agency freed up $46.4 million in payments it had withheld from the space unit of Bethesda, Maryland-based Lockheed (LMT) after the company resolved issues raised by the government about a deficient system. Lockheed has received some of the payments, and the rest will be released in future billings, Brown said.

Contractors have chafed at the Defense Department withholding requirement.

“The business system rule creates a significant and often challenging compliance responsibility for DoD contractors -- and all the more challenging for larger companies with complex business operations,” Alan Chvotkin, executive vice president of the Professional Services Council, an industry trade group based in Arlington, Virginia, said in an e-mail

The agency “to its credit,” has followed a “carefully managed internal review process” to “ensure consistent interpretations and applications across all contractors and that the withholding of funds is made consistently,” Chvotkin said.

Contract Language

The August 2011 acquisition regulation requires all new defense contracts to include language spelling out the potential for withholding payments because of deficiencies such as those in management systems.

Kristin Gossel, a spokeswoman for the U.S. unit of London-based BAE, said the company and agency “jointly agreed to a corrective action plan” now in place. Randy Belote, a spokesman for Falls Church, Virginia-based Northrop, declined to comment.

Damien Mills, a spokesman for Chicago-based Boeing, said its unit in Philadelphia that builds helicopters and part of the tilt-rotor V-22 Osprey has installed an automatic system for reporting costs, replacing a manual one. “We anticipate that the new system will allow the temporary withhold to be released” soon, Mills said.

Honeywell, General Atomics

Steve Brecken, a spokesman for the aerospace unit of Morris Township, New Jersey-based Honeywell, said the company is responding to the agency’s concerns and looks “forward to sharing our progress in the next review period.” Doug Fouquet, a spokesman for San Diego-based General Atomics, said the company “has been actively engaged in making enhancements to demonstrate compliance” and the agency “has reduced the cost-withhold.”

The Pentagon rule resulted from an August 2009 hearing of a congressionally mandated Commission on Wartime Contracting where major business-system deficiencies were described within companies working in Iraq and Afghanistan.

The agency continues to withhold 5 percent of billings on contracts from United Technologies Corp.’s (UTX) Sikorsky and Pratt & Whitney units. Spokesmen for both units said corrective plans were in place.

Lockheed’s aeronautics unit also last month had its long-deficient earned-value management system re-certified triggering the incremental payment of $221.9 million in withheld funds.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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