On October 1, 2015, the Inspector General (IG) of the Department of Defense (DoD) issued a Report titled "Evaluation of Defense Contract Management Agency Actions on Reported DoD Contractor Business System Deficiencies."
The IG evaluated DCMA's actions on DoD contractor business system deficiencies reported in 21 Defense Contract Audit Agency (DCAA) audit reports with an eye toward assessing DCMA compliance with the Defense Federal Acquisition Regulation Supplement (DFARS).
The significance of the issue is that "[c]ontractor business systems and related internal controls are the first line of defense against waste, fraud and abuse." Contractor business systems (accounting, billing, estimating) include the policies, procedures, practices and controls the contractor uses to gather, record, classify, analyze, interpret and present accurate/timely financial data for reporting in compliance with all applicable laws and regulations.
DCMA works directly with contractors to ensure that DoD services and supplies are delivered on time, at projected/estimated costs and in accordance with all performance requirements. DCMA's contracting officers are therefore responsible for such contract administrative functions as: approving or disapproving contractor business systems, determining final indirect rates on cost-reimbursement contracts, and evaluating compliance with Cost Accounting Standards.
In particular, the IG's evaluation focused on DCMA's compliance with the following:
- DFARS Clause 252.242-7005: "Contractor Business Systems"
- DFARS Clause 252.242-7006: "Accounting System Administration"
- DFARS Procedures, Guidance and Information (PGI) 242-7502: "Contractor Accounting Systems and Related Controls"
As part of the evaluation, the IG randomly selected 21 of 164 DCAA business system deficiency reports issued between July 2012 and June 2013. If DCAA uncovers a significant business deficiency during an audit of a contractor's business system(s), they are required to issue a Deficiency Report to alert the DCMA of the deficiency and to recommend corrective action. It is then incumbent upon DCMA to determine the adequacy of the business system and to take appropriate action.
The IG found that in each of the 21 cases evaluated, DCMA did not comply with one or more DFARS requirements related to business system deficiencies. For example, DCMA did not:
- Issue timely initial and final determinations
- Obtain or adequately evaluate contractor responses
- Withhold a percentage of contractor payments
The IG therefore provided the following recommendations to DCMA:
- Review the 21 cases that were the subject of the evaluation and take appropriate action on the reported deficiencies
- Better enforce the use of DCMA's business system tracking tool and consider using a Board of Review when a contracting officer has determined the deficiency is not significant
- Consider appropriate remedial actions for contracting officers that do not comply with DFARS
The IG's report was finalized with incorporation of comments provided by DCMA. In most cases, the DCMA agreed with the IG's findings and therefore we would expect to see more enforcement of the DFARS as it relates to contractor business systems particularly in cases where deficiencies have been identified by DCAA. While many of these business system requirements don't necessarily apply to small businesses, you should nonetheless be aware of these requirements if you intend to grow and/or if you work with large businesses as a subcontractor.
If you have any questions on contractor business systems, DCAA or DCMA audits, please feel free to contact us at: firstname.lastname@example.org or (808) 369-9710.