The Defense Federal Acquisition Regulation Supplement (DFARS) Contractor Business Systems rule at 252.242-7005 requires contractors to manage and monitor information produced by six business systems, including:
- Accounting systems
- Estimating systems
- Purchasing systems
- Earned-value management systems
- Material management and accounting systems
- Property management systems
In September 2009, the Commission on Wartime Contracting stated that “contractor business systems … are the first line of defense against waste, fraud and abuse.”1
We have summarized the six contractor business systems below and their related DFARS compliance requirements, as dictated by the DFARS 252.242-7005, Contractor Business Systems rule.
Accounting System DFARS 252.242-7006
The purpose of the accounting system is to provide reasonable assurance that the contractor’s accounting methods, procedures, and controls produce accurate, timely, and reliable data for determining costs applicable to contracts or final cost objectives. Accounting system reviews are done on both a pre-award and post-award basis. The SF1408 pre-award survey focuses on the design effectiveness of the accounting system before award of a contract other than firm fixed price, such as cost reimbursement or time-and-materials (T&M). Post-award audits assess both the effective design and operation of the accounting system criteria of DFARS 252.242-7006, Accounting System Administration.
Purchasing System DFARS 252.244-7001
The purchasing system includes the contractor’s policies and practices for purchasing and subcontracting, including:
- Make-or-buy decisions
- Selecting vendors
- Analyzing quoted prices
- Negotiating prices with vendors
- Placing and administering orders
- Expediting delivery of materials
- Performance-based payments
Contractor Purchasing System Reviews (CPSRs), typically administered by the Defense Contract Management Agency (DCMA), evaluate the efficiency and effectiveness with which the contractor spends government funds and complies with government policy when subcontracting (Federal Acquisitions Regulations System (FAR) 44.3).
Estimating System DFARS 252.215-7002
The Estimating System includes the contractor’s policies, procedures, and practices for budgeting and planning controls, as well as generating estimates of costs and other data included in proposals requiring certified cost or pricing data. Estimating systems’ internal controls address the objectives of the Truthful Cost or Pricing Data Act, formerly known as the Truth In Negotiations Act (TINA), to reduce the risk of defective pricing. Estimating system audits, typically performed by the Defense Contract Audit Agency (DCAA), address the contractor’s ability to prepare and propose cost or pricing data based on sound, supportable cost estimates using appropriate source data, and reliable estimating techniques. DFARS 252.215-7002, Cost Estimating System Requirements includes 17 criteria that can also be applied to non-DoD contractors at contracting officer direction as “suitable standards to use in determining the acceptability of any Government contractor’s estimating system” (DCAA Audit Program 24010, Estimating System Compliance with DFARS 252.215-7002).
Earned Value Management System DFARS 252.234-7002
The Earned Value Management System (EVMS) is a program management technique for measuring program performance and progress against a baseline plan, to relate technical, time and cost performance, and to provide data for proactive decision making. Both the FAR and the DFARS use the Electronic Industries Alliance Standard 748 (EIA-748) as the source for 32 criteria across five process categories. The DoD requires EVMS compliance on major system acquisitions under cost or incentive contracts or subcontracts that exceed $20 million.
Material Management and Accounting System DFARS 252.242-7004
The Material Management and Accounting System (MMAS) includes the planning, controlling, and accounting for the acquisition, use, issuing, and disposition of material to ensure that the government-financed material acquisitions are based upon “valid time-phased requirement” – neither too early (leading to advance financing), nor too late (leading to production or supply delays). Generally applicable to manufacturing or performance-based logistics companies, the administrative contracting officer (ACO) will decide if a review will be conducted based on assessed risk factors for contractors with $40 million in prior fiscal year sales on contracts requiring certified cost or pricing data, or contracts priced on other than a firm-fixed-price or fixed-price with economic price adjustment basis.
Property Management System DFARS 252.245-7003
The contractor property management system manages government property to ensure effective and efficient control of government property in its possession. These systems manage billions of dollars’ worth of government-owned equipment in the hands of contractors. Any contractor with a covered contract including the clause FAR 52.245-1, Government Property is subject to the requirements of that clause, but DCMA will select contractors for system reviews based on determinations of risk relative to dollar volume and the sensitive nature of government property.
Government Contract Consulting for DFARS Business Systems
Government contractors are subject to audits of their business systems to determine the efficacy of internal controls and the reliability of information produced by these systems needed for management purposes. Significant deficiencies can result in withholds of up to 10% from contract billings.
Our team has extensive knowledge and experience helping government contractors understand the requirements for business systems. Whether you are considering entering the federal contracting marketplace or preparing for an impending business system audit, please reach out to learn how our government contract consulting team at FORVIS can help.
- 1 “Defense agencies must improve their oversight of contractor business systems to reduce waste, fraud, and abuse,” cybercemetery.unt.edu, September 21, 2009.