RCGI-Applicability of DFARS Business System Rules to Small Businesses

We 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 Redstone Team

About Redstone GCI

Redstone GCI is a consulting firm focused on fulfilling the needs of government contractors in all areas of compliance. With a singular mission to help contractors through the multiple layers of “red tape,” we allow contractors to focus on what they do best – support their mission with the U.S. Government. We are home to a group of consultants made up of GovCon industry professionals, CPAs, attorneys, and retired government audit and acquisition professionals.

Our focus and knowledge of audit and compliance functions administered by DCAA and DCMA will always be at the heart of what we do. However, for the past decade, we’ve strategically grown to support other areas of the government contractor back-office with that same level of focus and expertise. We’ve added expertise in contracts management, subcontract administration, proposal pricing, various software systems, HR and employment law, property administration, manufacturing, data analytics/reporting, Grant specialists, M&A, and many other areas. When we see a trend in the needs of contractors, we act to ensure we can provide the best expertise in the market to fulfill those needs.

One thing our clients can be certain of is that with the Redstone GCI Team in your corner, there is no problem too big and no issue too technical for our team to tackle.

Topics: Small Business Compliance, DFARS Business Systems