Taking Care of Business (Systems): DoD Proposes to Change the Definition of a Business System Deficiency

The Department of Defense (DoD) recently announced that it seeks public comments on a proposed change to the contractor business systems regime.  The proposed rule would amend the Defense Federal Acquisition Regulation Supplement (DFARS) by replacing the phrase “significant deficiency” with the new defined term “material weakness,” to mean “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.”  In addition, the term would provide that a “reasonable possibility exists when the likelihood of an event occurring is— (1) Probable; or (2) More than remote but less than likely.” 

Comments are due no later than August 26, 2024.  The full text of the notice is available here. 

The National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2011 requires that the DFARS business systems clauses implement criteria for contractors’ accounting, cost estimating, material management & accounting, earned value management, purchasing, and property management systems.  The clauses allow the government to temporarily withhold payment on a covered contract if a significant deficiency in a business system is identified.  Currently, the DFARS contractor business systems clauses define “significant deficiency” as “a shortcoming in the system that materially affects the ability of officials of the [DoD] to rely upon information produced by the system that is needed for management purposes.”  

Over the past few years, DoD has increased its focus on reviews of contractor business systems, leading to an uptick in findings of significant deficiencies.  Indeed, DCAA’s FY 2023 Report to Congress identified business systems reviews as one of DCAA’s top three priorities.  The proposed rule change, required by the FY 2021 NDAA, purports to create consistency with generally accepted auditing standards and reduce DoD and contractor confusion about the seriousness of deficiencies.