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Government Contractors

Significant Proposed Changes to DFARS Business System Monitoring Requirements

On July 15, 2014, the Department of Defense (“DoD”) issued a proposed rule to amend the Defense Federal Acquisition Regulation Supplement (DFARS) on government contractor business system requirements. The comment period for the proposed change ended on September 15, 2014.

The proposed rule requires that contractors begin annual self-evaluations and reporting on their accounting system, material management and accounting system (MMAS), and estimating system, for those contractors required to maintain approved systems in accordance with the DFARS business system requirements. In addition, a Certified Public Accountant (CPA) audit is required to be performed by an independent firm of the contractor’s choosing every three years. The annual self-evaluation report and triennial CPA audit are subject to review by government auditors at any time.

The proposed rule currently has no impact on purchasing system, earned value management system (EVMS), or property management system evaluations performed by the Defense Contract Management Agency (“DCMA”), although it is unclear if the DoD will pursue similar changes to DFARS for the reviews.

If and when the proposed rule is incorporated into the DFARS, contractors subject to the business system clauses will need to consider several key items. The contractor will need to determine whether it has personnel with the knowledge and skills to adequately self-evaluate the required internal systems. Due to the potential for scrutiny by the Defense Contract Audit Agency and other government personnel, performing adequate reviews is essential. This increases the burden on the business if current personnel are tied up in backlogged incurred cost audits or other significant projects. Preparation and planning prior to implementation of the rule is key and will ensure for smoother transition into the requirement.

Whether or not additional personnel are hired as a result of the change, increased indirect costs to complete the annual self-evaluations are inevitable. Hiring an external CPA firm to perform three separate reviews within a three year period is another added expense that government contractors will bear. Additional time (and expense) spent liaising with government officials before, during, and after the self-evaluation or audit will increase efforts across the entire defense contracting community.

The proposed change could, however, present a positive opportunity for contractors. If a contactor had not been reviewing its systems in accordance with the DFARS previously, there is opportunity through self-evaluation to better understand the systems, identify opportunities for process improvements, and potentially realize cost savings and other efficiencies.

For assistance in better understanding the proposed rule or preparing your company’s accounting, MMAS or estimating system for the proposed changes, contact a member of Cherry Bekaert’s Government Contractor Services Group.

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