The Code of Federal Regulations (CFR) Title 48 Chapter 2 Subchapter G Part 242 Subpart 242.70 – Contractor Business Systems states that acceptable contractor business systems are defined in the clause at Defense Federal Acquisition Regulation Supplement (DFARS) Part 252 Subpart 252.2 Section 252.242 Subsection 252.242-7005 – Contractor Business Systems.
There are six primary contractor business systems on which the DoD (Department of Defense) Defense Contract Management Agency (DCMA) focuses for audit and approval or adequacy:
- Cost Accounting System
- Earned Value Management System (EVMS), if applicable
- Cost Estimating System
- Material Management and Accounting System (MMAS)
- Property Management System
- Purchasing or Procurement System
There are additional systems which may be subject to audit and approval such as Labor, Timekeeping, Human Resources (HR), and Payroll. Some of these systems may be considered part of, and included in, the audit of a contractor’s overall accounting system. For purposes of this discussion, the following sections generally define the six primary systems listed above.
It is important to note that a contractor cannot directly approach the DCAA (Defense Contract Audit Agency) to request an audit of any business system or anything else for that matter. Regional or local (including Corporate) contracting officers are the only officials who may task DCAA with an audit. A contractor can, however, seek out their cognizant regional or local DCMA Administrative Contracting Officer (ACO) in order to establish a relationship and seek out sponsorship or support to request a system audit. The cognizant ACO may be a CACO (Corporate ACO) or DACO (Divisional ACO) depending on the local DCMA’s organization. The only exception to this process is during a proposal. If a contractor has no current Government contracts and is bidding their first Government proposal, whether as a prime contractor or to a prime contractor, the Procurement Contracting Officer (PCO) may be approached. The prime contractor would be the appropriate entity to make the inquiry.
It is also important to note that each contracting officer must have a warrant. A warranted contracting officer is the only person authorized to make certain requests and decisions or take certain actions. Contracting officers, both PCOs and ACOs, may have assistants or representatives authorized to perform certain duties, but these are restricted to those actions not requiring a warrant. It cannot be stressed enough that a contractor must NOT take any action on a current contract without the written direction from the warranted ACO unless it is one of the tasks appropriately designated to a representative.
Cost Accounting System
This is by far the most critical business system for which a contractor should seek approval or a finding of adequate. The following lists the criteria for an adequate cost accounting system:
- Segregates direct and indirect costs
- Accumulates costs by cost element and by cost objective or contract
- Maintains homogenous indirect cost pools and allocation bases
- Controls contract costs by general ledger
- Demonstrates compliance with Generally Accepted Accounting Principles (GAAP)
- Records pre-contract costs separately
- Maintains an adequate timekeeping system
- Provides adequate labor distribution reporting
- Accounts separately for unallowable costs
- Updates or posts transactions at least monthly
- Tracks costs by Contract Line Item Number (CLIN)
- Tracks and reports costs on a cumulative basis and compares to funding
Earned Value Management System (EVMS)
The Federal Acquisition Regulation (FAR) requires an EVMS for all major acquisitions for development; however, more and more procuring agencies are moving toward EVMS for other types of contracts.
An EVMS is a program management tool for measuring project performance and progress as it relates to cost, schedule, and technical performance. It is an integrated business management system consisting of the following five areas:
- Planning, scheduling and budgeting
- Analysis and management reports
- Revisions and data maintenance
Cost Estimating System
DFARS 252.215-7002 defines an acceptable estimating system as one that:
- Provides for the use of appropriate source data
- Utilizes sound estimating techniques and good judgment
- Maintains a consistent approach
- Adheres to established policies and procedures
Basically a contractor’s cost estimating system must estimate cost consistent with the contractor’s cost accounting system, provide for checks and balances, audits, and approvals, and hold users accountable for compliance.
Material Management and Accounting System (MMAS)
DFARS 252.242-7004 defines an adequate MMAS and requires a contractor to maintain a system that:
- Reasonably forecasts material requirements
- Ensures that costs of purchased and fabricated material charged or allocated to a contract are based on valid time-phased requirements
- Maintains a consistent, equitable, and unbiased logic for costing of material transactions
Property Management System
In accordance with DFARS 252.245-7003, an acceptable contractor’s property management system is one that is established and maintained for the purpose of managing and controlling Government property and that complies with the system criteria listed in FAR Subpart 52.245-1 for the following:
- Acquisition of property
- Receipt of Government property
- Records of Government property
- Physical inventory
- Subcontractor control
- Relief of stewardship responsibility and liability
- Utilizing Government property
- Property closeout
In general a contractor must establish and maintain an acceptable property management system as failure to do so may result in the withholding of payment of invoices.
Purchasing or Procurement System
DFARS 252.244-7001 covers the administration of an adequate purchasing or procurement system. A procurement system is described as the contractor’s system for purchasing and subcontracting including the following:
- Make-or-buy decisions
- Selection of vendors
- Analysis of quoted prices
- Negotiation of prices with vendors
- Placing and administering of orders
- Expediting delivery of materials
Each of the six primary systems described above is discussed in further detail in separate topics, one for each system.