Government Contracts Monitor

Proposed Rule Would Modify DFARS Business Systems Compliance Requirements

July 30, 2014

By: Eric Whytsell

Contractor business systems and internal controls can be understood as “the first line of defense against waste, fraud and abuse.” In an attempt to strength those protections, the Department of Defense (DoD) has issued a proposed rule modifying business system compliance requirements. If adopted, the proposed rule would require covered contractors to demonstrate their compliance with certain Defense Federal Acquisition Regulation Supplement (DFARS) system criteria based on self-evaluations and independent audits that would subsequently be reviewed by Government auditors. These changes would impose a significant obligation on contractors to adequately and accurately self-assess and report on their business systems compliance.

The requirements of the proposed rule would apply to solicitations and contracts containing the required DFARS clause(s) for the applicable business system(s) (e.g., accounting, earned value management, estimating, material management and accounting, property management, purchasing). For purposes of reporting for estimating systems and material management and accounting systems, the rule will apply to solicitations and contracts with large businesses that meet specified requirements. Reporting for accounting systems will be limited to contractors subject to the Cost Accounting Standards (CAS), except for educational institutions and certain related entities. Since small businesses are not subject to the CAS, the rule is not anticipated to have any impact on small businesses.

The proposed rule would require covered contractors to annually submit a report regarding compliance with the system criteria outlined in the clause. The report would include: (1) a statement that the contractor has evaluated each system’s compliance with the system criteria; (2) the contractor’s assessment of the system’s compliance with the specified criteria; and (3) the status of any significant deficiencies disclosed as part of the assessment or in the audit report. Additionally, the report must be signed by an individual at the contractor’s organization at a level no lower than the vice president or chief financial officer of the specific business segment.

In addition to the reporting requirements, covered contractors’ accounting and estimating systems would be subject to a triennial audit by an independent contractor-selected Certified Public Accountant. Contractors would be responsible for submitting the audit report with the annual report described above.

In addition to soliciting comments on this proposed rule by September 15, 2014, the DoD has scheduled a public meeting at the Mark Center Auditorium, 4800 Mark Center Drive, Alexandria, Virginia 22350 on August 18, 2014 from 2:00 to 5:00 local time. Comments should be submitted via the Federal eRulemaking portal for DFARS Case 2012-D042. DoD will also consider comments from small entities and others concerning the existing regulations in subparts affected by this rule pursuant to 5 U.S.C. §610. Such comments concerning the expected impact on small entities should be submitted separately and should cite 5 U.S. §610 (DFARS Case 2012-D042).

J. Eric Whytsell and Katie Calogero are the attorneys responsible for the content of this article.

Attorneys