DoD Issues Interim Rule on Contractor Business Systems

An interim rule issued by the Department of Defense revises the Defense Federal Acquisition Regulation Supplement to improve the effectiveness of DoD oversight of contractor business systems. The interim rule follows two proposed rules (¶70,020.283 and ¶70,020.260) and the enactment of the Ike Skelton National Defense Authorization Act for Fiscal Year 2011 (PL 111-383). Section 893 of the Authorization Act, Contractor Business Systems, sets forth statutory requirements for the improvement of contractor business systems to ensure the systems provide timely, reliable information for the management of DoD programs.

New Clause

According to DoD, contractor business systems and internal controls are the first line of defense against waste, fraud, and abuse, and weak control systems increase the risk of unallowable and unreasonable costs on government contracts. To improve the effectiveness of Defense Contract Management Agency and Defense Contract Audit Agency oversight of contractor business systems, DoD is implementing compliance enforcement mechanisms in the form of a new business systems clause, DFARS 252.242-7005, which requires contractors to maintain acceptable business systems and allows contracting officers to withhold a percentage of payments, under certain conditions, when a contractor’s business system contains significant deficiencies. Withholding could apply to progress payments and performance-based payments, and to interim payments under cost-reimbursement contracts, incentive type contracts, time-and-materials contracts, and labor-hour contracts. The new clause clarifies the definition and administration of contractor business systems by defining “contractor business systems” as accounting systems, estimating systems, purchasing systems, earned value management systems, material management and accounting systems, and property management systems. “Acceptable contractor business systems” are ones that comply with the terms and conditions of the applicable business system clauses listed in DFARS 252.242-7005. The procedures a CO must follow to disapprove a contractor’s business system are set forth in the clause and new DFARS Subpart 242.70, which consists of DFARS 242.7000, Contractor business deficiencies, and the prescription section at DFARS 242.7001.

Business Systems Clauses

If a contract contains the new DFARS 252.242-7005 clause, the contractor must comply with the other business systems clauses that apply to the contract. New DFARS 252.242-7006 applies to accounting systems, revised DFARS 252.234-7002 applies to earned value management systems, revised DFARS 252.215-7002 applies to estimating systems, revised DFARS 252.242-7004 applies to material management and accounting systems, new DFARS 252.245-7003 applies to property management systems, and new DFARS 252.244-7001 applies to purchasing systems. In connection with the rule, DoD has made changes to the DFARS companion resource, Procedures, Guidance, and Information, including the addition of new PGI 242.7000, Contractor business systems deficiencies, which provides further guidance on withholding payments.


A full listing of all of the DFARS and PGI provisions impacted by the interim rule appears in the regulation table below. DoD received numerous comments on the second proposed rule (¶70,020.260), and the interim rule contains an extensive discussion of these comments. The rule applies to solicitations issued on or after May 18, 2011. COs are encouraged to amend existing solicitations in accordance with FAR 1.108(d) to include the new DFARS 252.242-7005 clause, when applicable, in contracts awarded on or after May 18, 2011, and COs must amend existing solicitations to include the clause, when applicable, in contracts to be awarded on or after August 16, 2011. Comments identified by DFARS Case 2009-D038 are due August 16, 2011. For the text of the rule, see ¶70,016.645.