Business Systems and Contractor Purchasing System Reviews

By: Curt Smith, Manager and Susan Moser, Partner

The Business Systems Rules (Contractor Business Systems – DFARS 242.70,252.242.7005) list six contractor business systems which are subject to a determination of adequacy per the terms and conditions described in the applicable business system clauses. Per these rules, the Department of Defense (“DoD”) will conduct audits or reviews of adequacy of these systems and if significant system deficiencies are identified and not corrected, DoD may withhold a percentage of payment. The rules apply to Cost Accounting Standards (“CAS”)-covered contracts only. The six systems are:

• Accounting
• Estimating
• Material Management Accounting System (“MMAS”)
• Purchasing
• Government Property
• Earned Value Management

The first three of the six contractor systems are audited by the Defense Contract Audit Agency (“DCAA”). The remaining three are reviewed (not audited) by the Defense Contract Management Agency (“DCMA”). Per 252.242.7005(d)(2), it is the sole purview of the contracting officer (“CO”) to determine system adequacy.

DCMA performs contractor purchasing system reviews (“CPSR”) upon request of the contracting officer, in consideration of the threshold and contract subjectivity to CAS. However, DCMA will also perform them at the request of contractors who request them for various reasons. First and foremost is a contract requirement. Defense Federal Acquisition Regulation Supplement (“DFARS”)252.242.7005 is typically included in DoD contracts and requires withhold of payment for business systems with significant deficiencies for all contract types except fixed price contracts or CLINs. Second, some solicitations award bonus evaluation points for an approved system (e.g., General Services Administration Government-wide Acquisition Contracts solicitations). Third, an approved system reduces or eliminates the need for advance notification and consent requirements found in Federal Acquisition Regulation (“FAR”) 52.244-2 Subcontracts. Finally, an approved system creates overall credibility with government customers.

The threshold for a purchasing system review in FAR 44.302 is currently set at $25 million in qualified sales to the government. The government will reassess every three years if another CPSR is necessary following an initial determination of adequacy. DCMA has recommended, and DoD has proposed, raising the threshold to $50 million. DCMA estimates that the higher threshold will reduce the number of contractor reviews by approximately 20 percent, while reducing the value of contract dollars covered by CSPRs by only 2 percent.

The main criteria for an acceptable contractor purchasing system are found in DFARS 252.244‐7001(c) which lists 24 system criteria. Grouped by type, the criteria consist of the following:

• Procurement Planning/Market Research (2 Criteria)
• Conflict of Interest/Misconduct (1 Criterion)
• Competition (2 Criteria)
• Negotiated Procurement (1 Criterion)
• Cost or Pricing Data and Price Reasonableness (5 Criteria)
• Source Selection (3 Criteria)
• Contract Formation and Content (3 Criteria)
• Foreign Purchasing and Performance (3 Criteria)
• Procurement Administration (4 Criteria)

However, DCMA does not limit the review to the criteria found in DFARS 252.244-7001. DCMA also utilizes the clauses and criteria found in:

• FAR part 44 –Subcontracting Policies & Procedures;
• DFARS part 244 –Subcontracting Policies & Procedures;
• FAR 52.244-2 –Subcontracts; and
• Clauses associated with DFARS 252.244-7001 such as 252.246-7007 Contractor Counterfeit Electronic Part Detection and Avoidance System and Subpart 244.4–Subcontracts for Commercial Items.

If your purchasing system is selected for review, expect DCMA to be thorough. The DCMA CPSR “checklist” contains over 50 items (specific policies) to be examined with space to indicate presence or absence and adequacy. DCMA will review purchasing policy and procedures documents, sales data and a list of all eligible procurement actions awarded during the review period, and a sample of purchase orders and subcontracts at various award levels (identified after start of the review).

Our recommendation in preparing for a CPSR is to start developing an approvable purchasing system immediately. Building a compliant system is a long, complex process. It is important to draft written policies and procedures that address the 24 DFARS criteria and extensive DCMA checklist. In those policies and procedures, be sure to include processes and evidence demonstrating how your system operates and identify team responsibilities. Also, maintain evidence of annual procurement training such that it is readily available upon request. Finally, you must prepare for the effort associated with supporting a year’s worth of purchasing files, which the government team samples and reviews to evaluate compliance with written purchasing policies and procedures.

Here is a quick checklist for preparation for a CPSR.

• Understand the clauses that are in your contracts
• Brief your prime contracts
• Maintain a robust training program
• Keep your policies and procedures current
• Maintain a strong vendor rating system
• Utilize the internal review process
• Review the CPSR Guidebook

And remember – DCMA will be thorough!

It is becoming more often that evaluation points for multiple award RFPs are being awarded to contractors having established business systems. The time to start developing a purchasing system is not when the RFP is issued. If you have any questions or would like help with business systems and CPSRs, do not hesitate to contact a member of Cherry Bekaert’s Government Contractor Services group for assistance.