RCGI-Applicability of DFARS Business System Rules to Small BusinessesWe have recently had to deal with issues related to DCAA applying DFARS business system rules in DFARS 252.242-7006 Accounting System Administration in its evaluation of small business client accounting systems. The DFARS business system rules were never intended to be applied to small businesses. Further, the limited resources of a small business make it very difficult for a small business to fully comply with all 18 of the specific criteria contained in the business system rules. DFARS 252.242-7005 regarding the applicability of the business system rules states:

“Use the clause at 252.242-7005, Contractor Business Systems, in solicitations and contracts (other than in contracts with educational institutions, Federally Funded Research and Development Centers (FFRDCs), or University Associated Research Centers (UARCs) operated by educational institutions) when—

  • (a) The resulting contract will be a covered contract as defined in 242.7000(a); and
  • (b) The solicitation or contract includes any of the following clauses:

A covered contract as defined in 242.7000(a) is a “contract that is subject to the Cost Accounting Standards”.

A small business is exempt from Cost Accounting Standards and therefore is not subject to the business system rules.

DCAA Decision to Choose Both Conditions

DCAA took the position, as supported by their Regional Office, that they could apply 252.242-7006 criteria because the clause is included in the contract. DCAA’s position ignores the first requirement for applicability for the contract to be a covered contract, choosing to ignore this requirement.  In our opinion, the language clearly requires both the contract to be covered “and” the clause to be included in the contract, not one or the other.

Settling the Issue with the Contracting Officer

In most cases, this issue can be easily resolved with the contracting officer. However, resolving the issue can often be unnecessarily time consuming and expensive for a small business. In addition, some contracting officers are simply unwilling to disagree with a DCAA position. Finally, the cost of fighting it would likely be prohibitive for a small business, even though they ultimately should win the argument.

How to Avoid Application of 252.242-7006

We recommend small businesses avoid this problem completely by taking the following steps:

  1. Carefully review the clauses included in the contract prior to signing it. While most of the clauses are pretty boilerplate, it is simply not worth the risk that the contract includes an inappropriate clause that could result in unnecessary requirements being placed on your company. Although it may sound simple, we constantly find cases where a client improperly assumed that all of the clauses in the contract were just standard and that the government knew what it was doing when it included them in the contract.
  2. Review any existing contracts to ensure they do not improperly contain any of the DFARS clauses listed above. If you should discover that one of these clauses was improperly included, request a modification of the contract to remove the clause; ideally, prior to a DCAA audit.

Redstone Here to Provide Support

If needed, the Redstone team is happy to assist with determining whether these or other clauses are properly included in the contract and with understanding the requirements and impact of specific contract clauses included in your contracts. Additionally, if your organization is in the midst of a DCAA audit, our professionals can help you prepare for the audit, carefully preparing the necessary responses and guiding your team through the process.

Written by Robert Eldridge

Robert Eldridge Robert (Bob) Eldridge is a Director with Redstone Government Consulting Inc. He provides Government Contract Consulting services to our Government contractors primarily related to compliance with Federal Acquisition Regulations and Cost Accounting Standards, equitable adjustment claims, and business systems. Prior to joining Redstone Government Consulting, Bob served in a number of capacities with DCAA for over 32 years. Upon his retirement, Bob was a Regional Audit Manager with DCAA. Bob began his DCAA career in 1981 as an auditor-trainee with the Pratt & Whitney Resident Office in West Palm Beach, Florida. Bob served two three year tours at the Defense Contract Audit Institute teaching multiple contract audit courses including “Auditing Internal Controls”, “Technical Management of Audits”, and “Advanced Cost Accounting Standards” and writing Agency courses on Cost Accounting Standards and Equitable Adjustment Claims. He returned to the Eastern Region in 1999, holding various audit positions before ultimately becoming a Regional Audit Manager in February 2007. As Chief of the Eastern Region Quality Assurance Division, Bob was heavily involved in developing DCAA guidance related to auditor consideration of internal controls and risk assessment preparation. In 2012, Bob was assigned to the U.S. Senate Committee for Homeland Security and Governmental Affairs, serving as a subject matter expert on a wide range of federal contract and grant matters for Senator Susan Collins. During Bob’s tenure with DCAA, he had overall management responsibility for audits performed by over 200 employees. He was directly involved in conducting or managing a wide variety of compliance audits, including: forward pricing proposals, incurred cost submissions, business system internal controls, Cost Accounting Standards, claims, and defective pricing. Bob was also directly involved in complex quantitative methods applications, particularly regression analysis and improvement curve applications. Bob currently specializes in assisting clients with more complex DCAA audit issues related to business system internal controls and Disclosure Statements and with developing and maintaining government compliant accounting and estimating systems. Bob also provides expert advice on compliance with FAR cost principles and Cost Accounting Standards and assists with the more complex forward pricing proposals and equitable adjustment claims.

About Redstone GCI

Redstone Government Consultants are a team of the most senior industry veterans and the brightest new talent in the industry. Many have held senior government positions including leadership roles in the DCAA. Our new talents bring significant accounting and software experience along with fresh perspectives, inspiration and energy to our team. Through our leadership and combined experience, we provide a unique perspective, bringing both government and contractor proficiencies to bear and ensuring rock-solid government compliance for our clients.

Topics: Business Systems Review, Small Business Compliance