The Department of Defense does not only audit transactions; on larger contracts it reviews the systems that produce them. The DFARS business systems clause requires the contractor to establish and maintain acceptable business systems in accordance with the terms and conditions of the contract 1, and it only applies to covered contracts that are subject to the Cost Accounting Standards 2.
The systems
The clause lists each system with the clause that brings it into a contract, among them the accounting system, when the contract includes DFARS 252.242-7006 3; the estimating system, with 252.215-7002 4; the material management and accounting system, with 252.242-7004 5; the property management system, with 252.245-7003 6; and the purchasing system, with 252.244-7001 7. The next lesson covers earned value management systems.
The accounting system clause shows what "acceptable" looks like in practice. Its criteria include proper segregation of direct costs from indirect costs 8, a timekeeping system that identifies employees' labor by intermediate or final cost objectives 9, and interim (at least monthly) determination of costs charged to a contract through routine posting of books of account 10.
When a system has a material weakness
The clause's definition of a material weakness begins with a deficiency or combination of deficiencies in the internal control over information in contractor business systems 11. The contractor shall respond, in writing, within 30 days to an initial determination that there are one or more material weaknesses 12.
If the final determination comes with a notice to withhold payments, the contracting officer will withhold 5 percent of amounts due from progress payments and performance-based payments, and directs the contractor to withhold 5 percent from its billings on interim cost vouchers, until the contracting officer has determined that all material weaknesses are corrected 13. The contractor must, within 45 days of receipt of the notice, either correct the weaknesses or submit an acceptable corrective action plan 14.
Worked example. Contractor V's review finds that timesheets are approved by the employees themselves and labor is posted to contracts quarterly. V answers the initial determination within 30 days, conceding the timesheet finding and showing monthly postings already in place since the fieldwork. After the final determination, it submits a corrective action plan with supervisor approval in the timekeeping tool and a monthly reconciliation, each with a date and an owner.
Getting ready
Bids2Bank's Compliance Guard has a DCAA readiness checklist, with items such as billing that can be reconciled to the cost accounts 15. It is a self-assessment, and the page says so: a DCAA or DCMA review is the authoritative determination of adequacy 16.
Run the DCAA readiness self-assessment →
Indented paragraphs are invented worked examples. Tool links open Bids2Bank and need a free account.