January 25, 2022

By Paul Calabrese, Principal

Government contractors with Cost Accounting Standards (CAS) contracts may be subject to the “Contractor Business Systems” clause, DFARS 252.242-7005. The clause states upfront that it “only” applies to contracts that are subject to the CAS per FAR 9903.201-1, which usually involves large contractors. Under FAR 9903.201-1b, the regulation provides exemptions to CAS, the most common of which is that the entity is a small business concern. To have modified CAS-coverage, a contractor would have a procurement that would not be a small business, a negotiated contract or subcontract with a potential value for all option periods greater than $7.5 million, or full CAS-coverage of greater than $50 million.

Though small government contractors are not subject to DFARS 252.242-7005, when responding to solicitations that include business systems, they should consider the compliance criteria for each business system as stipulated in the applicable DFARS clause shown in the next paragraph. Moreover, they should engage a business systems expert to either review their capability to operate business systems or assist them with developing a plan to manage future contracts that will be subject to a business systems clause.

DoD Business Systems and Thresholds

The compliance requirements for the six DoD business systems are prescribed in their respective DFARS clauses.

  • Accounting System Administration – DFARS 252.242-7006
  • Estimating Systems – DFARS 252.215-7002
  • Contractor Purchasing System Review (CPSR) – DFARS 252.244-7001
  • Property Management System – DFARS 252.245-7003
  • Material Management & Accounting System – DFARS 252.242-7004
  • Earned Value Management System – DFARS 252.234-7002

Some of the six business systems have thresholds and some do not. The Accounting System Administration has no threshold and is more involved than the SF Form 1408. Within DoD, the Defense Contract Audit Agency (DCAA) is generally requested to perform a “Pre-Award Survey of Prospective Contractor Accounting System” using the SF Form 1408 checklist for first-time prime contractors with a cost-reimbursable contract such as Cost-Plus Fixed Fee (CPFF). The SF 1408 checklist requirements are significantly less than that of the Accounting System Administration because there may be no requirement for substantive testing. It is more a review of the cost accounting structures in place to include policies and procedures. Contractors should be aware that USAID will use the more involved criteria from the DFARS Accounting System Administration for their first-time awardees.

Upon review, a business system with a “significant deficiency” means that the deficiency materially impacts the ability of DoD management to rely on the data generated from the system. If the system is deemed to have a significant deficiency, there is a formal process to resolve the matter including withholding of 5% of various types of invoice payments until the matter is resolved. The contractor has 45 days after receiving a notice from the contracting officer to either correct the deficiencies or submit an action plan to eliminate the system deficiencies.

Does a Business Systems Review Make Sense for You?

Several recent federal agency contract solicitations are now offering additional evaluation points for approved contractor business systems, including Accounting System Administration, Estimating System, CPSR, and Earned Value Management System. The solicitations also permit a review of these systems by an independent public accountant with most solicitation windows being 45-60 days to respond to the RFP.

While many small government contractors have sought quick-turnaround reviews to earn additional evaluation points, most are not required to undergo a review and may be wasting time and money. Generally speaking, small businesses are not expected by federal agencies to have the capability to manage an estimating or purchasing system, nor are they subject to CAS. The smallest of firms would not have contracts or subcontracts with significant cost or pricing data, or significant sized subcontracting effort. Because their contracts tend to be Time and Material and not CPFF, they are not subject to the additional compliance requirements in operating a CPFF contract and have not had a SF 1408 review of their job costing system. Most small contractors do not have specialized policies and procedures (PnP) for cost estimating, purchasing, or subcontract administration, nor do they have at least a 12-month history of contracts operating under established PnPs. Many use QuickBooks on a cash basis vs. working with a qualified accountant to operate a job cost system on an accrual basis to properly assign cost to the appropriate fiscal year. Finally, some small contractors have never had a financial statement compilation, review, or audit performed and may have never worked with a public accounting firm.

Small businesses should carefully consider any request for an estimating or purchasing system review because they would have a high probability of failure. Most of these specialized reviews are quite costly due to a plethora of business standards that necessitates a time-consuming review. Before larger firms consider a review, they will engage subject matter experts as consultants to help them establish the appropriate PnPs for a compliant control environment prior to performing a specific business system review. This review would not be performed until at least 12 months of documentation is available after the PnPs were implemented.

Planning for Future Implementation of DoD Business Systems

Small government contractors with plans to grow their business should begin working now with a public accounting firm that specializes in government contracting. Their goal should include compliance with all (18) requirements in the DFARS 252.242-7006 Accounting System Administration as a foundation for DCAA and USAID compliant accounting systems and future implementation of estimating or purchasing systems. By establishing an early relationship with a specialized accounting firm, the government contractor will also have access to tax planning, outsourced compliance support, outsourced accounting, audit and assurance, and business consulting to assist them with the growth of their business.

Next Steps

If your growing government contracting business is not currently required to maintain DoD business systems or ready to perform a system(s) review, there are steps you can take now to position your organization optimally for future contracts. Contact a CPA who specialized in government contractors to discuss your organization’s growth plan and create a strategy for developing future business systems.

Paul H. Calabrese

Principal, Outsourced Accounting & Advisory Services