The DFARS Business Systems Rule: Six System Requirements

DFARS

While the need for such a rule and the effectiveness of the Defense Federal Acquisition Regulation Supplement (DFARS) Business Systems rule in achieving its intended objectives has been widely debated, there are several provisions of the rule which are of the utmost importance to all government contractors and several others which have limited application among small to mid-size contractors.

The Rule encompasses six system requirements via the Contractor Business Systems clause at DFARS 252.242-7005 including adherence to the following criteria:

  • Accounting systems: In theory, all contractors with contracts subject to (FAR) Part 31, Contract Cost Principles and Procedures, and/or Cost Accounting Standards (CAS) are required to maintain an acceptable accounting system. In practice, contractors submitting proposals are frequently asked to provide proof of adequacy of their accounting systems in accordance with the criteria identified in SF 1408 The Pre-Award Accounting System Adequacy Checklist. Typically, this is accomplished via evidence of a past accounting system adequacy review by Government auditors, attestation by an independent CPA firm, a letter from a CPA describing the characteristics of their respective cost accounting systems and whether such a system would be adequate or in some instances even self-certification. At a very high level, a contractor’s accounting system must be designed to properly account for direct and indirect costs, allocate such costs to appropriate final cost objectives (the contract), and segregate unallowable costs within the system.
  • Cost estimating systems – Small to mid-sized contractors rarely are tasked with verifying the adequacy of their cost estimating systems.  However, it is in the best interest of all contractors to understand how cost data is derived and used in bids and proposals.  A cost estimating system should provide verifiable and supported source data by using sound estimating techniques (consistently applied) coupled with good judgment.  The cost estimating system should be documented via policies and procedures used to prepare cost proposals.
  • Contractor property management systems – If a contractor is required to steward Government property, the contractor may be tasked with the control and management of said property. An acceptable property management system requires contractors to maintain adequate records of Government-owned property. The requirements of a property management system are similar to those required by regulations governing the administration of government grants.
  • Contractor purchasing systems – Purchasing system reviews are much more common for small and mid-sized contractors. Very simply put, a purchasing system must ensure that an appropriate set of procurement policies and procedures are established, that controls exist to ensure compliance with those policies, and that appropriate flow down clauses are included in all subcontract agreements.  A prime contractor, as part of its evaluation of prospective subcontractors, should also consider the adequacy of that subcontractor’s accounting system.
  • Earned Value Management Systems (EVMS) – Certain contractors are required to employ an EVMS that complies with American National Standards Institute/Electronic Alliance Standard 748 (ANSI/EIA 748). In addition to having an Earned Value system, a contractor must implement policies and procedures over inputs and outputs from the system to ensure proper scheduling and reporting.
  • Material Management and Accounting Systems (MMAS) – This requirement is generally only applicable to large business contractors that received DoD prime contracts or subcontracts totaling $40 million or more in the preceding fiscal year for specific contract types.

Do you still have questions about the Defense Federal Acquisition Regulation Supplement (DFARS) Business Systems rule, its requirements, and its impact on your business? Give us a call at 301-564-3636 or message us.