Contractor Business Systems: Out With the Old, In With the New (Terminology)

On January 17, 2025, the Department of Defense (DoD) issued a final rule replacing the term “significant deficiency” in the Defense Federal Acquisition Regulation Supplement (DFARS) with the term “material weakness” for use in reviews of contractor business systems.  Effective immediately, a material weakness is defined as “a deficiency or combination of deficiencies in the internal control over information in contractor business systems, such that there is a reasonable possibility that a material misstatement of such information will not be prevented, or detected and corrected, on a timely basis.  A reasonable possibility exists when the likelihood of an event occurring is probable or more than remote but less than likely.” 

This new term aligns with generally accepted auditing standards and clarifies the seriousness of assessed deficiencies in a contractor’s business systems, which include a contractor’s accounting, estimating, purchasing, material management & accounting, earned value management, and property management systems.  We previously reported on the proposed rule here.