The “Business Systems Rule” was established by the Department of Defense in 2011 and six mandatory business system requirements were documented in the Defense Federal Acquisition Regulation Supplement (DFARS) § 242.70 (76 Fed. Reg. 28.856, May 11, 2011).
Three of the business systems, accounting and billing, estimating and material management (MMAS), were placed under the cognizance of the Defense Contract Audit Agency (DCAA) while the purchasing, government property and earned value (EVMS) systems were assigned to the Defense Contract Management Agency (DCMA). Since then, contractors have seen the need to declare the adequacy of their business systems in responding to requests for proposal for cost-reimbursement, incentive type, time-and-material and labor hour contracts.
Contractor business systems produce critical data
A recent Government Accountability Office (GAO) report to Congress (GAO-19-212) established that contractor business systems produce critical data that contracting officers use to help negotiate and manage defense contracts. These systems and their related internal controls act as important safeguards against fraud, waste and abuse. The 2018 National Defense Authorization Act (NDAA) contained a provision that GAO evaluate how the Department of Defense (DOD) implemented these business systems requirements and as a result, the DOD and DCMA agreed to develop a mechanism to increase oversight and improve management of contractor business systems audits and determinations.
The success of these DCAA efforts relies on their ability to shift efforts away from their audit of contractor incurred cost submissions. To this end, DCAA is developing a solicitation to contract the incurred cost audits to public accounting firms that is to be released in early 2019. This would allow them to move significant hours to the performance of business systems audits.
DCAA has already made estimating system audits a priority in 2018 with a finding of 78% deficiencies. They plan to significantly increase their accounting system efforts in 2019 and 2020. The close relationship of accounting to estimating consistency established by FAR 31.201-1 and CAS 401 may not bode well for the accounting system findings.
Recent guidelines indicate subject business systems, once reviewed, should be evaluated every three years. If a contractor/subcontractor has never had an audit performed by DCAA or has made changes to their accounting and estimating systems and processes, it is recommended that they be proactive and have self-assessment/mock-reviews of each performed in advance of a DCAA audit. Keep in mind even the best system of process and internal controls will not be found adequate if not supported by thorough and complete written policies and procedures.
