DoD Finalizes Business Systems Rule

The Department of Defense has finalized, with changes, the interim rule (DFARS Case 2009-D038) that amended the DFARS to improve the effectiveness of DoD oversight over contractor business systems. The final rule, effective February 24, clarifies the definition and administration of contractor business systems, which consist of systems for: accounting, estimating, purchasing, earned value management, material management and accounting, and property management. The rule incorporates criteria for each business system, which identify the aspects of the system that materially affect DoD’s ability to rely on the information produced by the contractor.

The business systems clause, DFARS 252.242-7005, implements compliance enforcement mechanisms that allow contracting officers to withhold a percentage of payments when a contractor’s business system contains a significant deficiency. As defined in the clause, a “significant deficiency” means a shortcoming in the contractor’s system that materially affects DoD’s ability to rely on information produced by the system.

The clause applies to contracts that are subject to the Cost Accounting Standards (41 USC 1501, and following),  as implemented in the CAS regulations found at 48 CFR Parts 9900 through 9904. The clause, as revised, contains a self-deleting provision if CAS does not apply.

Payments can be withheld on interim payments under cost-reimbursement contracts, incentive type contracts, time-and-materials contracts, and labor-hour contracts. The CO can also withhold progress payments and performance-based payments.

Pursuant to DFARS 252.242-7005(f), the government will discontinue payment withholding if the CO determines, based on evidence submitted by the contractor, that there is a reasonable expectation the contractor has taken corrective actions that are expected to remedy the significant deficiencies identified in the contractor notification. The CO will then release any payments previously withheld that were directly related to those deficiencies.


About George Gullo

George Gullo is an attorney editor in the Government Contracts group at Wolters Kluwer Legal & Regulatory U.S. George serves as the principal editor of Cost Accounting Standards Guide and supports all of the group’s print and electronic publications, as well as legal research tools, including the Government Contracts Reporter, Board of Contract Appeals Decisions, and the FAR and DFARS Matrix Smart Charts. With more than 25 years experience in the legal publishing industry, including more than 15 years in the government contracts area, George also has a background in legal and business transactions. He is a graduate of DePaul University College of Law and a licensed Illinois attorney.
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