[Federal Register Volume 79, Number 135 (Tuesday, July 15, 2014)]
[Proposed Rules]
[Pages 41172-41185]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-16390]
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DEPARTMENT OF DEFENSE
Defense Acquisition Regulations System
48 CFR Parts 215, 242, and 252
RIN 0750-AI20
Defense Federal Acquisition Regulation Supplement; Business
Systems Compliance (DFARS Case 2012-D042)
AGENCY: Defense Acquisition Regulations System, Department of Defense
(DoD).
ACTION: Proposed rule.
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SUMMARY: DoD is proposing to amend the Defense Federal Acquisition
Regulation Supplement (DFARS) to ensure appropriate contractor
accountability for adequate contractor business systems. In addition to
the request for written comments on this proposed rule, DoD will hold a
public meeting to hear the views of interested parties.
DATES: Comment Date: Comments on the proposed rule should be submitted
in writing to the address shown below on or before September 15, 2014,
to be considered in the formation of a final rule.
Public Meeting Date: The public meeting will be held at the Mark
Center Auditorium, 4800 Mark Center Drive, Alexandria, VA 22350-3603,
on August 18, 2014, from 2 p.m. to 4 p.m., local time.
ADDRESSES: Submission of comments: You may submit comments, identified
by DFARS Case 2012-D042, using any of the following methods:
Regulations.gov: http://www.regulations.gov. Submit comments via
the Federal eRulemaking portal by inserting ``DFARS Case 2012-D042''
under the heading ``Enter keyword or ID'' and selecting ``Search.''
Select the link ``Submit a Comment'' that corresponds with ``DFARS Case
2012-D042.'' Follow the instructions provided at the ``Submit a
Comment'' screen. Please include your name, company name (if any), and
``DFARS Case 2012-D042'' on your attached document. Follow the
instructions for submitting comments.
Email: [email protected]. Include DFARS Case 2012-D042 in the
subject line of the message.
Fax: 571-372-6094.
Mail: Defense Acquisition Regulations System, Attn: Mr. Mark
Gomersall, OUSD(AT&L)DPAP(DARS), Room 3B941, 3060 Defense Pentagon,
Washington, DC 20301-3060.
Comments received generally will be posted without change to http://www.regulations.gov, including any personal information provided. To
confirm receipt of your comment(s), please check www.regulations.gov
approximately two to three days after submission to verify posting
(except allow 30 days for posting of comments submitted by mail).
FOR FURTHER INFORMATION CONTACT: Mr. Mark Gomersall, Defense
Acquisition
[[Page 41173]]
Regulations System, OUSD(AT&L)DPAP(DARS), Room 3B941, 3060 Defense
Pentagon, Washington, DC 20301-3060. Telephone 571-372-6099.
SUPPLEMENTARY INFORMATION:
I. Background
Contractor business systems and internal controls are the first
line of defense against waste, fraud, and abuse. Weak control systems
increase the risk of unallowable and unreasonable costs on Government
contracts. In response to a U.S. Government Accountability Office
report (GAO-12-83) issued on November 3, 2011, Defense Contract
Management Agency: Amid Ongoing Efforts to Rebuild Capacity, Several
Factors Present Challenges in Meeting Its Mission, DoD agreed to
consider alternative approaches to audit contractor business systems.
II. Discussion and Analysis
To improve the efficiency and effectiveness of auditing contractor
business systems, DoD is proposing to amend the DFARS to entrust
contractors with the capability to demonstrate compliance with DFARS
system criteria for contractors' accounting systems, estimating
systems, and material management and accounting systems, based on
contractors' self-evaluations and audits by independent Certified
Public Accountants (CPAs) of their choosing. Government auditors will
perform overviews of the results of contractor self-evaluations and CPA
audits.
Individuals wishing to attend the public meeting should register by
August 11, 2014, to ensure adequate room accommodations and to
facilitate entry into the Mark Center building. Interested parties may
register at the Web site, http://www.acq.osd.mil/dpap/dars/business_systems_compliance.html by providing the following information:
Company or organization name.
Names and email addresses of persons planning to attend.
Identify if desiring to make a presentation; limited to a
10-minute presentation per company or organization.
One valid government-issued photo identification card will be
required in order to enter the building. Non-U.S. citizens may use
their valid passport as photo identification. Attendees are encouraged
to arrive at least one hour early to accommodate security procedures.
Transportation information for the Mark Center may be obtained at
http://www.whs.mil/our-services/transportation/getting-mark-center.
Accommodations for parking at the Mark Center will not be available,
but may be found in the surrounding areas.
If you wish to make a presentation, please submit an electronic
copy of your presentation to [email protected] no later than August
13, 2014. Files must not exceed 19MB. Please cite ``Public Meeting--
Contractor Business Systems Compliance'' in all correspondence related
to this public meeting. When submitting presentations, provide the
presenter's name, organization affiliation, telephone number, and email
address on the cover page. There will be no transcription of the public
meeting. Submitted presentations will be the only record.
Special accommodations: The public meeting is physically accessible
to people with disabilities. Requests for reasonable accommodations,
sign language interpretation or other auxiliary aids should be directed
to Mark Gomersall at 571-372-6099, at least 10 working days prior to
the meeting date.
The TTY number for further information is: 1-800-877-8339. When the
operator answers the call, let them know the agency is the Department
of Defense; the point of contact is Mark Gomersall at 571-372-6099.
III. Executive Orders 12866 and 13563
Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess
all costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). E.O.
13563 emphasizes the importance of quantifying both costs and benefits,
of reducing costs, of harmonizing rules, and of promoting flexibility.
This is not a significant regulatory action and, therefore, was not
subject to review under section 6(b) of E.O. 12866, Regulatory Planning
and Review, dated September 30, 1993. This rule is not a major rule
under 5 U.S.C. 804.
IV. Regulatory Flexibility Act
DoD has prepared an initial regulatory flexibility analysis
consistent with 5 U.S.C. 603. A copy of the analysis may be obtained
from the point of contact specified herein. The analysis is summarized
as follows:
The objective of the rule is to improve the efficiency and
effectiveness of auditing contractor business systems by entrusting
contractors with the capability to demonstrate compliance with the
Defense Federal Acquisition Regulation Supplement (DFARS) system
criteria for contractors' accounting systems, estimating systems, and
material management and accounting systems, based on contractors' self-
evaluations and audits by independent Certified Public Accountants
(CPAs) of their choosing. The requirements of the rule will apply to
solicitations and contracts that include the contract clause for the
applicable defined contractor business system.
The rule will apply to solicitations and contracts that are with
large businesses for the purposes of reporting for estimating systems,
and material management and accounting systems. For reporting on
accounting systems, the rule will apply to contractors who are subject
to the Cost Accounting Standards (CAS) under 41 U.S.C. chapter 15, as
implemented in regulations found at 48 CFR 9903.201-1 (see the FAR
Appendix), other than for contracts with educational institutions,
Federally Funded Research and Development Centers operated by
educational institutions, or University Associated Research Centers.
Since contracts and subcontracts with small businesses are exempt from
CAS requirements, DoD estimates that this rule will have no impact on
small businesses. DoD, however, invites comments from small business
concerns and other interested parties on the expected impact of this
rule on small entities.
DoD will also consider comments from small entities concerning the
existing regulations in subparts affected by this rule in accordance
with 5 U.S.C. 610. Interested parties must submit such comments
separately and should cite 5 U.S.C. 610 (DFARS Case 2012-D042) in
correspondence.
V. Paperwork Reduction Act
The Paperwork Reduction Act (44 U.S.C. chapter 38) applies. The
proposed rule contains information collection requirements.
Accordingly, DoD has submitted a request for approval of a new
information collection requirement concerning Defense Federal
Acquisition Regulation Supplement; Business Systems Compliance (DFARS
Case 2012-D042) to the Office of Management and Budget.
A. Public reporting burden for this collection of information is
estimated to average 2.87 hours per response, including the time for
reviewing instructions, searching existing data sources, gathering and
maintaining the data needed, and completing and reviewing the
collection of information.
[[Page 41174]]
The annual reporting burden estimated as follows:
Respondents: 2,953.
Responses per respondent: 1.
Total annual responses: 2,953.
Average hours per response: 2.87.
Total annual burden hours: 8,468.
B. Request for Comments Regarding Paperwork Burden. Written
comments and recommendations on the proposed information collection,
including suggestions for reducing this burden, should be sent to Ms.
Jasmeet Seehra at the Office of Management and Budget, Desk Officer for
DoD, Room 10236, New Executive Office Building, Washington, DC 20503,
or email [email protected], with a copy to the Defense
Acquisition Regulations System, Attn: Mark Gomersall, OUSD(AT&L)DPAP/
DARS, Room 3B941, 3060 Defense Pentagon, Washington, DC 20301-3060.
Comments can be received from 30 to 60 days after the date of this
notice, but comments to OMB will be most useful if received by OMB
within 30 days after the date of this notice.
Public comments are particularly invited on: whether this
collection of information is necessary for the proper performance of
functions of the DFARS, and will have practical utility; whether our
estimate of the public burden of this collection of information is
accurate, and based on valid assumptions and methodology; ways to
enhance the quality, utility, and clarity of the information to be
collected; and ways in which we can minimize the burden of the
collection of information on those who are to respond, through the use
of appropriate technological collection techniques or other forms of
information technology.
To request more information on this proposed information collection
or to obtain a copy of the proposal and associated collection
instruments, please write to the Defense Acquisition Regulations
System, Attn: Mark Gomersall, OUSD(AT&L)DPAP/DARS, Room 3B941, 3060
Defense Pentagon, Washington, DC 20301-3060, or e-mail
[email protected]. Include DFARS Case 2012-D042 in the subject line of
the message.
List of Subjects in 48 CFR Parts 215, 242, and 252
Government procurement.
Amy G. Williams,
Deputy, Defense Acquisition Regulations System.
Therefore, 48 CFR parts 215, 242, and 252 are proposed to be
amended as follows:
0
1. The authority citation for parts 215, 242, and 252 continues to read
as follows:
Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.
PART 215--CONTRACTING BY NEGOTIATION
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2. Revise section 215.407-5-70 to read as follows:
215.407-5-70 Disclosure, maintenance, and review requirements.
(a) Definitions. As used in this section--
Acceptable estimating system, contractor, contractor's certified
public accountant (CPA), CPA audit, estimating system, and significant
deficiency are defined in the clause at 252.215-7002, Cost Estimating
System Requirements.
(b) Applicability. A contractor, other than a small business
concern, is subject to the estimating system disclosure, maintenance,
review, annual reporting, triennial CPA audit, and documentation
requirements in the clause at 252.215-7002, Cost Estimating System
Requirements, if--
(1) In its preceding fiscal year, the contractor received DoD prime
contracts or subcontracts totaling $50 million or more for which
certified cost or pricing data were required; or
(2) In its preceding fiscal year, the contractor received DoD prime
contracts or subcontracts totaling $10 million or more (but less than
$50 million) for which certified cost or pricing data were required and
the contracting officer, with concurrence or at the request of the ACO,
determines it to be in the best interest of the Government (e.g.,
significant estimating problems are believed to exist or the
contractor's sales are predominantly Government).
(c) Policy. DoD policy is for all contractors to have acceptable
estimating systems that consistently produce well-supported proposals
that are acceptable as a basis for negotiation of fair and reasonable
prices.
(d) Procedures. (1) The contracting officer shall--
(i) Through use of the clause at 252.215-7002, Cost Estimating
System Requirements, apply the disclosure, maintenance, review, annual
reporting, triennial CPA audit, and documentation requirements to
contractors, other than small business concerns, meeting the criteria
in paragraph (b)(1) of this section;
(ii) Consider whether to apply the disclosure, maintenance, review,
annual reporting, triennial CPA audit, and documentation requirements
to contractors, other than small business concerns, under paragraph
(b)(2) of this section; and
(iii) Not apply the disclosure, maintenance, review, annual
reporting, triennial CPA audit, and documentation requirements to small
business concerns.
(2) The cognizant contracting officer, in consultation with the
Government auditor, for contractors subject to paragraph (b) of this
section, shall--
(i) Determine the acceptability of the contractor's estimating
system and disclosure, and approve or disapprove the system; and
(ii) Pursue correction of any deficiencies.
(3) Triennial CPA audit requirement. For contractors subject to
paragraph (b) of this section, and paragraph (d)(8) of the clause at
252.215-7002, the cognizant contracting officer shall--
(i) Upon receipt of the contractor's CPA's audit strategy, risk
assessment, and audit plan (program), request a review from the
Government auditor, and notify the contractor of any potential issues
identified by the Government auditor regarding their reasonableness.
Early notification of potential issues may decrease the likelihood of
the contractor incurring unreasonable costs. However, review of the
contractor's CPA's audit strategy, risk assessment, and audit plan
(program) does not constitute the contracting officer's approval; and
(ii) Upon receipt of the contractor's CPA audit report, request the
Government auditor's assessment of the CPA audit report and related
documentation.
(4) In evaluating the acceptability of a contractor's estimating
system, the contracting officer, in consultation with the Government
auditor, shall determine whether the contractor's estimating system
complies with the system criteria for an acceptable estimating system
in the clause at 252.215-7002. In making that determination, the
contracting officer shall consider--
(i) The contractor's estimating system disclosure, annual report on
the estimating system's compliance with the system criteria and the
audit report by the contractor's CPA, as required in the clause at
252.215-7002, if applicable; and
(ii) Any other findings and recommendations reported by the
Government auditor including the assessment of the contractor's CPA
audit report and related documentation, if applicable.
(e) Accelerated audit requirement. The contracting officer, in
consultation
[[Page 41175]]
with the Government auditor, may require contractors subject to the
triennial CPA audit requirement in the clause at 252.215-7002 to
provide an out-of-cycle CPA audit report prior to the triennial CPA
audit period based on a risk assessment of the contractor's past
experience and current vulnerability.
(f) Disposition of findings--(1) Reporting of findings by the
Government auditor. The Government auditor shall document findings and
recommendations in a report to the contracting officer regarding any
identified significant estimating system deficiencies. The report shall
describe the deficiencies in sufficient detail to allow the contracting
officer to understand the deficiencies.
(2) Initial determination. (i) The contracting officer shall review
all findings and recommendations from the Government auditor and
contractor and, if there are no significant deficiencies and the
contractor as complied with the applicable reporting and audit
requirements in paragraphs (d)(5) and (6) of the clause at 252.215-
7002, shall promptly notify the contractor, in writing, that the
contractor's estimating system is acceptable and approved; or
(ii) If the contracting officer finds that there are one or more
significant deficiencies (as defined in the clause at 252.215-7002 due
to the contractor's failure to meet one or more of the estimating
system criteria in the clause at 252.215-7002, or that the contractor
has failed to comply with the applicable reporting and audit
requirements in accordance with the clause at 252.215-7002, the
contracting officer shall--
(A)(1) Promptly make an initial written determination on any
significant deficiencies and notify the contractor, in writing,
providing a description of each significant deficiency in sufficient
detail to allow the contractor to understand the deficiency; or
(2) Promptly make an initial written determination on the
contractor's failure to comply with the applicable reporting and audit
requirements and notify the contractor, in writing, providing
sufficient information to allow the contractor to understand what
action needs to be taken to comply;
(B) Request the contractor to respond, in writing, to the initial
determination within 30 days; and
(C) Promptly evaluate the contractor's responses to the initial
determination, in consultation with the Government auditor or
functional specialist, and make a final determination.
(3) Final determination. (i) The contracting officer shall make a
final determination and notify the contractor, in writing, that--
(A) The contractor's estimating system is acceptable and approved,
and no significant deficiencies remain, and the contractor has complied
with the applicable reporting and audit requirements in accordance with
the clause at 252.215-7002; or
(B) Significant deficiencies remain, or the contractor has failed
to comply with the applicable reporting and audit requirements. The
notice shall identify any remaining significant deficiencies or
noncompliance with the applicable reporting and audit requirements, and
indicate the adequacy of any proposed or completed corrective action.
The contracting officer shall--
(1) Request that the contractor, within 45 days of receipt of the
final determination, either correct the deficiencies or submit an
acceptable corrective action plan showing milestones and actions to
eliminate the deficiencies and comply with the applicable reporting and
audit requirements;
(2) Disapprove the system in accordance with the clause at 252.215-
7002; and
(3) Withhold payments in accordance with the clause at 252.242-7005
if the clause is included in the contract.
(ii) Follow the procedures relating to monitoring a contractor's
corrective action and the correction of significant deficiencies in PGI
215.407-5-70(f).
(g) System approval. The contracting officer shall promptly approve
a previously disapproved estimating system and notify the contractor
when the contracting officer determines that there are no remaining
significant deficiencies or noncompliance with the applicable reporting
and audit requirements.
(h) Contracting officer notifications. The cognizant contracting
officer shall promptly distribute copies of a determination to approve
a system, to disapprove a system and withhold payments, or to approve a
previously disapproved system and release withheld payments to the
Government auditor, payment office, affected contracting officers at
the buying activities, and cognizant contracting officers in contract
administration activities.
PART 242--CONTRACT ADMINISTRATION AND AUDIT SERVICES
242.7000 and 242.7001 [Redesignated as 242.7001 and 242.7003]
0
3. Redesignate sections 242.7000 and 242.7001 as sections 242.7001 and
242.7003, respectively.
0
4. Revise newly redesignated section 242.7001 to read as follows:
242.7001 Definitions.
As used in this subpart--
Acceptable contractor business systems, contractor business
systems, contractor's certified public accountant (CPA), and CPA audit
are defined in the clause at 252.242-7005, Contractor Business Systems.
Covered contract means a contract that is subject to the Cost
Accounting Standards under 41 U.S.C. chapter 15, as implemented in
regulations found at 48 CFR 9903.201-1 (see the FAR Appendix) (10
U.S.C. 2302 note, as amended by section 816 of Public Law 112-81).
Significant deficiency is defined in the clause at 252.242-7005,
Contractor Business Systems.
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5. Add section 242.7002 to read as follows:
242.7002 Contractor business systems deficiencies.
(a) Determination to withhold payments. If the contracting officer
makes a final determination to disapprove a contractor's business
system in accordance with the clause at 252.242-7005, Contractor
Business Systems, the contracting officer shall--
(1) In accordance with agency procedures, identify one or more
covered contracts containing the clause at 252.242-7005 from which
payments will be withheld. When identifying the covered contracts from
which to withhold payments, the contracting officer shall ensure that
the total amount of payment withholding under 252.242-7005 does not
exceed 10 percent of progress payments, performance-based payments, and
interim payments under cost-reimbursement, labor-hour, and time-and-
materials contracts billed under each of the identified covered
contracts. Similarly, the contracting officer shall ensure that the
total amount of payment withholding under the clause at 252.242-7005
for each business system does not exceed five percent of progress
payments, performance-based payments, and interim payments under cost-
reimbursement, labor-hour, and time-and-materials contracts billed
under each of the identified covered contracts. The contracting officer
has the sole discretion to identify the covered contracts from which to
withhold payments;
(2) Promptly notify the contractor, in writing, of the contracting
officer's determination to implement payment withholding in accordance
with the clause at 252.242-7005. The notice of payment withholding
shall be included in the contracting officer's written final
determination for the contractor
[[Page 41176]]
business system and shall inform the contractor that--
(i) Payments shall be withheld from the contract or contracts
identified in the written determination in accordance with the clause
at 252.242-7005 until the contracting officer determines that there are
no remaining significant deficiencies and that the contractor has
complied with the applicable reporting and audit requirements in
accordance with the applicable business system clause identified in
242.7003(b); and
(ii) The contracting officer reserves the right to take other
actions within the terms and conditions of the contract; and
(3) Provide all contracting officers administering the selected
contracts from which payments will be withheld, a copy of the
determination. The contracting officer shall also provide a copy of the
determination to the Government auditor; payment office; affected
contracting officers at the buying activities; and cognizant
contracting officers in contract administration activities.
(b) Monitoring contractor's corrective action. The contracting
officer, in consultation with the Government auditor or functional
specialist, shall monitor the contractor's progress in correcting the
deficiencies. The contracting officer shall notify the contractor of
any decision to decrease or increase the amount of payment withholding
in accordance with the clause at 252.242-7005.
(c) Correction of significant deficiencies and reporting.
(1) If the contractor notifies the contracting officer that the
contractor has corrected the significant deficiencies and, if
applicable, provides the contractor's CPA audit report on the
effectiveness of the corrective actions, the contracting officer shall
review the correction to verify that the deficiencies have been
corrected. If the contracting officer determines that the contractor
has corrected all significant deficiencies and provided the
contractor's report on compliance with the system criteria, including
the CPA audit report, if applicable, the contracting officer shall
discontinue the withholding of payments, release any payments
previously withheld, and approve the system, unless other significant
deficiencies remain.
(2) Prior to the determination that the deficiencies have been
corrected, the contracting officer may discontinue withholding payments
pending the determination, and release any payments previously
withheld, if the contractor submits evidence that the significant
deficiencies have been corrected, and the contracting officer, in
consultation with the Government auditor or functional specialist,
determines that there is a reasonable expectation that the corrective
actions have been implemented and are expected to correct the
significant deficiencies.
(3) Within 90 days of receipt of the contractor notification that
the contractor has corrected the significant deficiencies and, if
applicable, the contractor's CPA audit report on the effectiveness of
the corrective actions, the contracting officer shall--
(i) Make a determination that--
(A) The contractor has corrected all significant deficiencies as
directed by the contracting officer's final determination in accordance
with paragraph (c)(1) of this section;
(B) There is a reasonable expectation that the corrective actions
have been implemented in accordance with paragraph (c)(2) of this
section; or
(C) The contractor has not corrected all significant deficiencies
as directed by the contracting officer's final determination in
accordance with paragraph (c)(1) of this section, or there is not a
reasonable expectation that the corrective actions have been
implemented in accordance with paragraph (c)(2) of this section; and
(ii) Reduce withholding directly related to the significant
deficiencies covered under the corrective action plan by at least 50
percent of the amount being withheld from progress payments and
performance-based payments, and direct the contractor, in writing, to
reduce the percentage withheld on interim cost vouchers by at least 50
percent, until the contracting officer makes a determination in
accordance with paragraph (c)(3)(i) of this section.
(4) If, at any time, the contracting officer determines that the
contractor has failed to correct the significant deficiencies
identified in the contractor's notification, the contracting officer
will continue, reinstate, or increase withholding from progress
payments and performance-based payments, and direct the contractor, in
writing, to continue, reinstate, or increase the percentage withheld on
interim cost vouchers to the percentage initially withheld, until the
contracting officer determines that the contractor has corrected all
significant deficiencies as directed by the contracting officer's final
determination.
(d) For sample formats for written notifications of contracting
officer determinations to initiate payment withholding, reduce payment
withholding, and discontinue payment withholding in accordance with the
clause at 252.242-7005. See PGI 242.7002.
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6. In newly redsignated section 242.7003, revise paragraph (a) to read
as follows:
242.7003 Contract clause.
* * * * *
(a) The resulting contract will be a covered contract as defined in
242.7001; and
* * * * *
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7. Revise sections 242.7201, 242.7202, and 242.7203 to read as follows:
242.7201 Definitions.
As used in this subpart--
Acceptable material management and accounting system, contractor,
contractor's certified public accountant (CPA), CPA audit, material
management and accounting system, qualifying sales, significant
deficiency, and valid time-phased requirements are defined in the
clause at 252.242-7004, Material Management and Accounting System.
242.7202 Policy.
(a) DoD policy is for its contractors to have an MMAS that conforms
to the standards in paragraph (h) of the clause at 252.242-7004,
Material Management and Accounting System, so that the system--
(1) Reasonably forecasts material requirements;
(2) Ensures the costs of purchased and fabricated material charged
or allocated to a contract are based on valid time-phased requirements;
and
(3) Maintains a consistent, equitable, and unbiased logic for
costing of material transactions.
(b) Criteria for conducting reviews. Conduct an MMAS review in
accordance with paragraph (d) of the clause at 252.242.7004, when--
(1) The contractor is a large business;
(2) Has $50 million in qualifying sales to the Government; and
(3) The cognizant contracting officer, with advice from the
Government auditor or cognizant functional specialist, determines an
MMAS review is needed based on a risk assessment of the contractor's
past experience, current vulnerability, and the following risk factors:
(i) FAR 42.302 surveillance activities indicate the contractor has
not complied with the criteria in 252.242.7004.
(ii) There are changes to the contractor's MMAS system.
(iii) The contractor's MMAS system is new.
(iv) The contractor's MMAS system has not been reviewed within a
36-month period.
(c) Contractors subject to the triennial CPA audit requirement in
the clause at
[[Page 41177]]
252.242-7004, may be required to provide an out-of-cycle CPA audit
report prior to the triennial CPA audit reporting period based on a
risk assessment of the contractor's past experience and current
vulnerability.
(d) The cognizant contracting officer, in consultation with the
Government auditor and cognizant functional specialist, if appropriate,
shall--
(1) Determine the acceptability of the contractor's MMAS and
approve or disapprove the system; and
(2) Pursue correction of any deficiencies.
242.7203 Procedures.
(a) Triennial CPA audit requirement. For contractors subject to
paragraph (f) of the clause at 252.242-7004, Material Management and
Accounting System, the cognizant contracting officer shall--
(1) Upon receipt of the contractor's CPA's audit strategy, risk
assessment, and audit plan (program), request a review from the
Government auditor, and notify the contractor of any potential issues
identified by the Government auditor regarding their reasonableness.
Early notification of potential issues may decrease the likelihood of
the contractor incurring unreasonable costs. However, review of the
contractor's CPA's audit strategy, risk assessment, and audit plan
(program) does not constitute the contracting officer's approval; and
(2) Upon receipt of the contractor's CPA audit report, request the
Government auditor's assessment of the CPA audit report and related
documentation.
(b) In evaluating the acceptability of the contractor's MMAS, the
contracting officer, in consultation with the Government auditor and
functional specialist, if appropriate, shall determine whether the
contractor's MMAS complies with the system criteria for an acceptable
MMAS as required in the clause at 252.242-7004. In making that
determination, the contracting officer shall consider--
(1) The contractor's report on the MMAS's compliance with the
system criteria and the audit report by the contractor's CPA, as
required in the clause at 252.242-7004; and
(2) Any other findings and recommendations reported by the
Government auditor including the assessment of the contractor's CPA
audit report and related documentation, if applicable.
(c) Disposition of findings--(1) Reporting of findings by the
Government auditor. The Government auditor or functional specialist
shall document findings and recommendations in a report to the
contracting officer regarding any identified significant MMAS
deficiencies. The report shall describe the deficiencies in sufficient
detail to allow the contracting officer to understand the deficiencies.
(2) Initial determination. (i) The contracting officer shall review
all findings and recommendations from the Government auditor and
contractor and, if there are no significant deficiencies and the
contractor has complied with the applicable reporting and audit
requirements in paragraph (d) of the clause at 252.242-7004, shall
promptly notify the contractor, in writing, that the contractor's MMAS
is acceptable and approved.
(ii) If the contracting officer finds that there are one or more
significant deficiencies (as defined in the clause at 252.242-7004 due
to the contractor's failure to meet one or more of the MMAS system
criteria in the clause at 252.242-7004, or that the contractor has
failed to comply with the applicable reporting and audit requirements
in accordance with the clause at 252.242-7004, the contracting officer
shall--
(A)(1) Promptly make an initial written determination on any
significant deficiencies and notify the contractor, in writing,
providing a description of each significant deficiency in sufficient
detail to allow the contractor to understand the deficiency; or
(2) Promptly make an initial written determination on the
contractor's failure to comply with the applicable reporting and audit
requirements and notify the contractor, in writing, providing
sufficient information to allow the contractor to understand what
action needs to be taken to comply;
(B) Request the contractor to respond, in writing, to the initial
determination within 30 days; and
(C) Promptly evaluate the contractor's response to the initial
determination in consultation with the Government auditor or functional
specialist, and make a final determination.
(3) Final determination. (i) The contracting officer shall make a
final determination and notify the contractor that--
(A) The contractor's MMAS is acceptable and approved, and no
deficiencies remain, and the contractor has complied with the
applicable reporting and audit requirements in accordance with the
clause at 252.242-7004; or
(B) Significant deficiencies remain, or the contractor has failed
to comply with the applicable reporting and audit requirements. The
notice shall identify any remaining significant deficiencies or
noncompliance with the applicable reporting and audit requirements and
indicate the adequacy of any proposed or completed corrective action.
The contracting officer shall--
(1) Request that the contractor, within 45 days of receipt of the
final determination, either correct the deficiencies or submit an
acceptable corrective action plan showing milestones and actions to
eliminate the deficiencies and comply with the applicable reporting and
audit requirements;
(2) Disapprove the system in accordance with the clause at 252.242-
7004; and
(3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the
contract.
(ii) Follow the procedures relating to monitoring a contractor's
corrective action and the correction of significant deficiencies in PGI
242.7203.
(d) System approval. The contracting officer shall promptly approve
a previously disapproved MMAS and notify the contractor when the
contracting officer determines that there are no remaining significant
deficiencies or noncompliance with the applicable reporting and audit
requirements.
(e) Contracting officer notifications. The cognizant contracting
officer shall promptly distribute copies of a determination to approve
a system, to disapprove a system and withhold payments, or to approve a
previously disapproved system and release withheld payments to the
Government auditor, payment office, affected contracting officers at
the buying activities, and cognizant contracting officers in contract
administration activities.
0
8. Revise sections 242.7501 and 242.7502 to read as follows:
242.7501 Definitions.
As used in this subpart--
Acceptable accounting system, accounting system, contractor's
certified public account (CPA), CPA audit, and significant deficiency
are defined in the clause at 252.242-7006, Accounting System
Administration.
242.7502 Policy.
DoD policy is for contractors receiving cost-reimbursement,
incentive type, time-and-materials, or labor-hour contracts, or
contracts which provide for progress payments based on costs or on a
percentage or stage of completion, to--
(a) Maintain an acceptable accounting system; and
(b) If applicable, comply with the annual reporting, triennial CPA
audit, and documentation requirements
[[Page 41178]]
required in the clause at 252.242-7006, Accounting System
Administration.
242.7503 [Redesignated as 242.7504]
0
9. Redesignate section 242.7503 as section 242.7504.
0
10. Add a new section 242.7503 to read as follows:
242.7503 Procedures.
(a) The cognizant contracting officer, in consultation with the
Government auditor or functional specialist, shall--
(1) Determine the acceptability of a contractor's accounting system
and approve or disapprove the system; and
(2) Pursue correction of any deficiencies.
(b) Triennial CPA audit requirement. For contractors subject to
paragraph (h) of the clause at 252.242-7006, the cognizant contracting
officer shall--
(1) Upon receipt of the contractor's CPA's audit strategy, risk
assessment, and audit plan (program), request a review from the
Government auditor and notify the contractor of any potential issues
identified by the Government auditor regarding their reasonableness.
Early notification of potential issues may decrease the likelihood of
the contractor incurring unreasonable costs. However, review of the
contractor's CPA's audit strategy, risk assessment, and audit plan
(program) does not constitute the contracting officer's approval; and
(2) Upon receipt of the contractor's CPA audit report, request the
Government auditor's assessment of the CPA audit report and related
documentation.
(c) In evaluating the acceptability of a contractor's accounting
system, the contracting officer, in consultation with the Government
auditor or functional specialist, shall determine whether the
contractor's accounting system complies with the system criteria for an
acceptable accounting system in the clause at 252.242-7006. In making
that determination the contracting officer shall consider--
(1) The contractor's annual report on the accounting system's
compliance with the system criteria and the audit report by the
contractor's CPA as required in the clause at 252.242-7006, if
applicable; and
(2) Any other findings and recommendations reported by the
Government auditor including the assessment of the contractor's CPA
audit report and related documentation, if applicable.
(d) Accelerated audit requirement. The contracting officer, in
consultation with the Government auditor, may require contractors
subject to the triennial CPA audit requirement in the clause at
252.242-7006 to provide an out-of-cycle CPA audit report prior to the
triennial CPA audit period based on a risk assessment of the
contractor's past experience and current vulnerability.
(e) Disposition of findings--(1) Reporting of findings by the
Government auditor. The Government auditor shall document findings and
recommendations in a report to the contracting officer regarding any
identified significant accounting system deficiencies. The report shall
describe the deficiencies in sufficient detail to allow the contracting
officer to understand the deficiencies. Follow the procedures at PGI
242.7503 for reporting of deficiencies.
(2) Initial determination. (i) The contracting officer shall review
all findings and recommendations from the Government auditor and
contractor and, if there are no significant deficiencies and the
contractor has complied with the applicable reporting and audit
requirements in paragraphs (e) and (f) of the clause at 252.242-7006,
shall promptly notify the contractor, in writing, that the accounting
system is acceptable and approved.
(ii) If the contracting officer finds that there are one or more
significant deficiencies (as defined in the clause at 252.242-7006 due
to the contractor's failure to meet one or more of the estimating
system criteria in the clause at 252.242-7006, or that the contractor
has failed to comply with the applicable reporting and audit
requirements in accordance with the clause at 252.242-7006, the
contracting officer shall--
(A)(1) Promptly make an initial written determination on any
significant deficiencies and notify the contractor, in writing,
providing a description of each significant deficiency in sufficient
detail to allow the contractor to understand the deficiency; or
(2) Promptly make an initial written determination on the
contractor's failure to comply with the applicable reporting and audit
requirements and notify the contractor, in writing, providing
sufficient information to allow the contractor to understand what
action needs to be taken to comply;
(B) Request the contractor to respond, in writing, to the initial
determination within 30 days; and
(C) Promptly evaluate the contractor`s response to the initial
determination, in consultation with the Government auditor or
functional specialist, and make a final determination.
(3) Final determination. (i) The contracting officer shall make a
final determination and notify the contractor, in writing, that--
(A) The contractor's accounting system is acceptable and approved,
and no significant deficiencies remain, and the contractor has complied
with the applicable reporting and audit requirements in accordance with
the clause at 252.242-7006, or
(B) Significant deficiencies remain, or the contractor has failed
to comply with the applicable reporting and audit requirements. The
notice shall identify any remaining significant deficiencies or
noncompliance with the applicable reporting and audit requirements, and
indicate the adequacy of any proposed or completed corrective action.
The contracting officer shall--
(1) Request that the contractor, within 45 days of receipt of the
final determination, either correct the deficiencies or submit an
acceptable corrective action plan showing milestones and actions to
eliminate the deficiencies and comply with the applicable reporting and
audit requirements;
(2) Disapprove the system in accordance with the clause at 252.242-
7006; and
(3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the
contract.
(ii) Follow the procedures relating to monitoring a contractor's
corrective action and the correction of significant deficiencies in PGI
242.7503.
(f) System approval. The contracting officer shall promptly approve
a previously disapproved accounting system and notify the contractor
when the contracting officer determines that there are no remaining
significant deficiencies or noncompliance with the applicable reporting
and audit requirements.
(g) Contracting officer notifications. The cognizant contracting
officer shall promptly distribute copies of a determination to approve
a system, to disapprove a system and withhold payments, or to approve a
previously disapproved system and release withheld payments to the
Government auditor, payment office, affected contracting officers at
the buying activities, and cognizant contracting officers in contract
administration activities.
(h) Mitigating the risk of accounting system deficiencies on
specific proposals. (1) Field pricing teams shall discuss identified
accounting system deficiencies and their impact in all reports on
contractor proposals until the deficiencies are resolved.
(2) The contracting officer responsible for negotiation of a
proposal generated by an accounting system with an
[[Page 41179]]
identified deficiency shall evaluate whether the deficiency impacts the
negotiations. If it does not, the contracting officer should proceed
with negotiations. If it does, the contracting officer should consider
other alternatives, for example--
(i) Allowing the contractor additional time to correct the
accounting system deficiency and submit a corrected proposal;
(ii) Considering another type of contract;
(iii) Using additional cost analysis techniques to determine the
reasonableness of the cost elements affected by the accounting system's
deficiency;
(iv) Reducing the negotiation objective for profit or fee; or
(v) Including a contract (reopener) clause that provides for
adjustment of the contract amount after award.
(3) The contracting officer who incorporates a reopener clause into
the contract is responsible for negotiating price adjustments required
by the clause. Any reopener clause necessitated by an accounting system
deficiency should--
(i) Clearly identify the amounts and items that are in question at
the time of negotiation;
(ii) Indicate a specific time or subsequent event by which the
contractor will submit a supplemental proposal, including certified
cost or pricing data, identifying the cost impact adjustment
necessitated by the deficient accounting system;
(iii) Provide for the contracting officer to adjust the contract
price unilaterally if the contractor fails to submit the supplemental
proposal; and
(iv) Provide that failure of the Government and the contractor to
agree to the price adjustment shall be a dispute under the Disputes
clause.
242.7504 [Amended]
0
11. In newly redsignated section 242.7504, remove the bracket at the
end of paragraph (b).
PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
0
12. Amend section 252.215-7002 by--
0
a. Removing the clause date ``(DEC 2012)'' and adding in its place
``(DATE)'';
0
b. Revising paragraphs (a) and (b);
0
c. Amending paragraph (c) introductory text by removing ``a large
business'' and adding ``other than a small business concern'' in its
place;
0
d. Revising paragraph (d) heading and adding paragraphs (d)(5) through
(9);
0
e. Revising paragraphs (e) and (f); and
0
f. Amending paragraph (g) by removing ``252.242-7005,'' and adding
``DFARS 252.242-7005,'' in its place.
The revisions read as follows:
252.215-7002 Cost Estimating System Requirements.
* * * * *
(a) Definitions. As used in this clause--
Acceptable estimating system means an estimating system that
complies with the system criteria in paragraph (d) of this clause, and
provides for a system that--
(i) Is maintained, reliable, and consistently applied;
(ii) Produces verifiable, supportable, documented, and timely cost
estimates that are an acceptable basis for negotiation of fair and
reasonable prices;
(iii) Is consistent with and integrated with the Contractor's
related management systems; and
(iv) Is subject to applicable financial control systems.
Contractor means a business unit as defined in FAR 2.101.
Contractor's Certified Public Accountant (CPA) means an independent
certified public accountant, in public practice and not directly
employed as an employee by the Contractor, performing audits for the
Contractor in accordance with U.S. generally accepted government
auditing standards (GAGAS) as issued by the Government Accountability
Office.
CPA audit means an examination of the Contractor's compliance with
the applicable system criteria in paragraph (d)(4) of this clause
performed by the Contractor's CPA in accordance with GAGAS for
examination attestation engagements.
Estimating system means the Contractor's policies, procedures, and
practices for budgeting and planning controls, and generating estimates
of costs and other data included in proposals submitted to customers in
the expectation of receiving contract awards. Estimating system
includes the Contractor's--
(i) Organizational structure;
(ii) Established lines of authority, duties, and responsibilities;
(iii) Internal controls and managerial reviews;
(iv) Flow of work, coordination, and communication; and
(v) Budgeting, planning, estimating methods, techniques,
accumulation of historical costs, and other analyses used to generate
cost estimates.
Significant deficiency means a shortcoming in the system that
materially affects the ability of officials of the Department of
Defense to rely upon information produced by the system that is needed
for management purposes.
(b) General. The Contractor shall--
(1) Establish, maintain, and comply with an acceptable estimating
system; and
(2) Make available to the Government, upon request, the results of
internal or external reviews or monitoring that have been conducted to
ensure compliance with the system criteria in (d)(4) of this clause and
established estimating policies and procedures.
* * * * *
(d) System and reporting requirements. * * *
(5) Annual reporting requirements. (i) The Contractor shall provide
to the Contracting Officer and Government auditor within the 6-month
period following the expiration of the Contractor's fiscal year, and
annually thereafter, a report regarding compliance with the system
criteria in paragraph (d)(4) of this clause as of the end of the
Contractor's most recent fiscal year. The Contractor shall have the
report signed by an individual of the Contractor's organization at a
level no lower than a vice president or chief financial officer of the
reporting business segment.
(ii) The report shall include--
(A) A statement that the Contractor has evaluated the estimating
system's compliance with the system criteria in paragraph (d)(4) of
this clause;
(B) The Contractor's assessment of the estimating system's
compliance with the system criteria in paragraph (d)(4) of this clause,
including a statement as to whether or not the system complies in all
material respects, and disclosure of any significant deficiencies with
sufficient information for the Government to understand the
deficiencies; and
(C) The status of any significant deficiencies disclosed as part of
the Contractor's assessment or, if applicable, in the Contractor's CPA
audit report as required in paragraph (d)(6) of this clause, including
a corrective action plan with milestones and actions to eliminate any
significant deficiencies that have not been corrected as of the date of
the Contractor's report.
(6) Triennial CPA audit requirement. (i) In the first year in which
the Contractor is required to provide the annual report as required in
paragraph (d)(5) of this clause, and every three years thereafter, or
more frequently if directed by the Contracting Officer, in addition to
the items in paragraph
[[Page 41180]]
(d)(5)(ii) of this clause, the Contractor's annual report shall include
an audit report on the Contractor's CPA's examination of the
Contractor's compliance with the system criteria in paragraph (d)(4) of
this clause as of the end of the most recent fiscal year.
(ii) The examination shall be performed in accordance with GAGAS
for examination attestation engagements, and the CPA audit report shall
include sufficient information regarding any reported significant
deficiencies for the Government to understand the deficiencies.
(7) CPA selection. If paragraph (d)(6) of this clause is
applicable, the Contractor shall reasonably ensure that the CPA firm
performing the audit is--
(i) Independent and objective with respect to the audited entity by
obtaining and reviewing a written representation from the firm that the
firm (and the assigned engagement team)--
(A) Is independent and objective with respect to the audited
entity;
(B) Will remain independent throughout the audit;
(C) Has not performed any nonaudit services for the audited entity
that impair the auditors' independence for the subject audit; and
(D) Will disclose any independence issues discovered; and
(ii) Qualified to perform the audit by obtaining and reviewing--
(A) Information about key engagement team members regarding
professional qualifications and experience, including valid CPA
licenses or certificates in good standing, and current knowledge and
experience in the type of work to be done; and
(B) The firm's most recent peer review report, in accordance with
the American Institute of Certified Public Accountants (AICPA) Peer
Review Program, or equivalent.
(8) Contractor submission of audit plan. The Contractor shall
provide the Contractor's CPA's audit strategy, risk assessment, and
audit plan (program), upon completion, for the audits required in
paragraphs (d)(6) and (f)(2) of this clause, to the cognizant
contracting officer and Government auditor for review if--
(i) The Contractor has received Department of Defense (DoD) prime
contracts or subcontracts, totaling $100 million or more for which
certified cost or pricing data were required during the fiscal year to
which the Contractor's CPA audit report applies; or
(ii) Requested by the Contracting Officer, in consultation with the
Government auditor.
(9) Documentation requirements. (i) If paragraphs (d)(5) and (6) of
this clause are applicable, the Contractor shall maintain and make
available to the Government upon request--
(A) Documentation to provide reasonable support for the assessment
of the estimating system as required in paragraphs (d)(5)(ii)(B) of
this clause; and
(B) Information considered in the selection of a CPA as required in
paragraph (d)(7) of this clause, if applicable.
(ii) The Contractor shall arrange for Government access to the
working papers supporting the CPA audit reports required in paragraphs
(d)(6) and (f)(2) of this clause, and documentation supporting the
Contractor's CPA's independence, objectivity and qualifications.
(e) Significant deficiencies or failure to comply with applicable
reporting and audit requirements. (1) The Contracting Officer will
provide an initial determination to the Contractor, in writing, of any
significant deficiencies or the Contractor's failure to comply with the
applicable reporting and audit requirements in paragraphs (d)(5) and
(6) of this clause. The initial determination will describe the
deficiency in sufficient detail to allow the Contractor to understand
the deficiency and provide sufficient information on the noncompliance
with the applicable reporting and audit requirements to allow the
Contractor to understand what action needs to be taken to comply.
(2) The Contractor shall respond within 30 days to a written
initial determination from the Contracting Officer that identifies
significant deficiencies in the Contractor's estimating system or the
Contractor's failure to comply with the applicable reporting and audit
requirements in paragraphs (d)(5) and (6) of this clause. If the
Contractor disagrees with the initial determination, the Contractor
shall state, in writing, its rationale for disagreeing.
(3) The Contracting Officer will evaluate the Contractor's response
and notify the Contractor, in writing, of the Contracting Officer's
final determination concerning--
(i) Remaining significant deficiencies;
(ii) Remaining noncompliance with the applicable reporting and
audit requirements;
(iii) The adequacy of any proposed or completed corrective action;
and
(iv) System disapproval, if the Contracting Officer determines that
one or more significant deficiencies remain or the Contractor has
failed to comply with the applicable reporting and audit requirements.
(f) If the Contractor receives the Contracting Officer's final
determination of significant deficiencies or the Contractor's failure
to comply with the applicable reporting and audit requirements in
accordance with paragraphs (d)(5) and (6) of this clause, the
Contractor shall--
(1) Within 45 days of receipt of the final determination, either
correct the significant deficiencies or submit an acceptable corrective
action plan showing milestones and actions to eliminate the significant
deficiencies, and comply with the applicable reporting and audit
requirements; and
(2) If the significant deficiencies were reported in the
Contractor's annual report, or the Contractor's CPA audit report,
provide the Contractor's CPA's opinion regarding the effectiveness of
the corrective actions--
(i) As a part of the triennial CPA audit report as required in
paragraph (d)(6) of this clause; or
(ii) In a separate audit report on the Contractor's CPA's
examination of the effectiveness of the corrective action performed in
accordance with GAGAS for examination attestation engagements.
* * * * *
0
13. Amend section 252.242-7004 by--
0
a. Removing the clause date ``(MAY 2011)'' and adding in its place
``(DATE)'';
0
b. Revising paragraph (a);
0
c. Amending paragraph (b)(2) by removing ``paragraph (e)'' and adding
``paragraph (h)'' in its place;
0
d. Revising paragraph (c)(2);
0
e. Redesignating paragraphs (d) through (g) as paragraphs (h) through
(k), respectively, and adding new paragraphs (d) through (g); and
0
f. Revising the newly redesignated paragraphs (i) and (j).
The revisions and additions read as follows:
252.242-7004 Material Management and Accounting System.
* * * * *
(a) Definitions. As used in this clause--
Acceptable material management and accounting system means a MMAS
that generally complies with the applicable system criteria in
paragraph (h) of this clause.
Contractor means a business unit as defined in FAR 2.101.
Contractor's Certified Public Accountant (CPA) means an independent
certified public accountant, in public practice and not directly
employed as an employee by
[[Page 41181]]
the Contractor, performing audits for the Contractor in accordance with
U.S. generally accepted government auditing standards (GAGAS), as
issued by the Government Accountability Office.
CPA audit means an examination of the Contractor's compliance with
the applicable system criteria in paragraph (h) of this clause
performed by the Contractor's CPA in accordance with GAGAS for
examination attestation engagements.
Material management and accounting system (MMAS) means the
Contractor's system or systems for planning, controlling, and
accounting for the acquisition, use, issuing, and disposition of
material. Material management and accounting systems may be manual or
automated. They may be stand-alone systems or they may be integrated
with planning, engineering, estimating, purchasing, inventory,
accounting, or other systems.
Qualifying sales means sales for which cost or pricing data were
required under 10 U.S.C. 2306a, as implemented in FAR 15.403, or that
are contracts priced on other than a firm-fixed-price or fixed-price
with economic price adjustment basis. Sales include prime contracts,
subcontracts, and modifications to such contracts and subcontracts.
Significant deficiency means a shortcoming in the system that
materially affects the ability of officials of the Department of
Defense to rely upon information produced by the system that is needed
for management purposes.
Valid time-phased requirements means material that is--
(i) Needed to fulfill the production plan, including reasonable
quantities for scrap, shrinkage, yield, etc.; and
(ii) Charged/billed to contracts or other cost objectives in a
manner consistent with the need to fulfill the production plan.
* * * * *
(c) * * *
(2) Provide to the Administrative Contracting Officer (ACO), upon
request, the results of internal or external reviews or monitoring that
have been conducted to ensure compliance with the system criteria in
paragraph (h) of this clause and established MMAS policies, procedures,
and operating instructions; and
* * * * *
(d) Triennial CPA reporting and audit requirements. (1) If the
Contractor is other than small business concern, has $50 million of
qualifying sales to the Government during the preceding fiscal year,
and the Contracting Officer requests an MMAS review, the Contractor
shall--
(i) Provide to the Contracting Officer and Government auditor
within the 6-month period following the expiration of the Contractor's
fiscal year, a report regarding the Contractor's compliance with the
system criteria in paragraph (h) of this clause as of the end of the
Contractor's most recent fiscal year; and
(ii) Have the report signed by an individual of the Contractor's
organization at a level no lower than a vice president or chief
financial officer of the reporting business segment.
(2) The report shall include--
(i) A statement that the Contractor has evaluated the MMAS's
compliance with the system criteria in paragraph (h) of this clause;
(ii) The Contractor's assessment of the MMAS's compliance with the
system criteria in paragraph (h) of this clause, including a statement
as to whether or not the system complies in all material respects and
disclosure of any significant deficiencies with sufficient information
for the Government to understand the deficiencies;
(iii) An audit report on the Contractor's CPA's examination of the
Contractor's compliance with the system criteria in paragraph (h) of
this clause as of the end of the most recent fiscal year. The
examination shall be performed in accordance with GAGAS for examination
attestation engagements. The CPA audit report shall include sufficient
information regarding any reported significant deficiencies for the
Government to understand the deficiencies; and
(iv) The status of any significant deficiencies disclosed as part
of the Contractor's assessment or in the Contractor's CPA audit report,
including a corrective action plan with milestones and actions to
eliminate any significant deficiencies that have not been corrected as
of the date of the Contractor's report.
(e) CPA selection. If paragraph (d) of this clause is applicable,
the Contractor shall reasonably ensure that the CPA firm performing the
audit is--
(1) Independent and objective with respect to the audited entity by
obtaining and reviewing a written representation from the firm that the
firm (and the assigned engagement team)--
(i) Is independent and objective with respect to the audited
entity;
(ii) Will remain independent throughout the audit;
(iii) Has not performed any nonaudit services for the audited
entity that impair the auditors' independence for the subject audit;
and
(iv) Will disclose any independence issues discovered; and
(2) Qualified to perform the audit by obtaining and reviewing--
(i) Information about key engagement team members regarding
professional qualifications and experience, including valid CPA
licenses or certificates in good standing, and current knowledge and
experience in the type of work to be done; and
(ii) The firm's most recent peer review report, in accordance with
the American Institute of Certified Public Accountants (AICPA) Peer
Review Program, or equivalent.
(f) Contractor submission of audit plan. The Contractor shall
provide the Contractor's CPA's audit strategy, risk assessment, and
audit plan (program), upon completion, for the audits required in
paragraphs (d)(2)(iii) and (j)(2) of this clause, to the cognizant
contracting officer and Government auditor for review if--
(1) The Contractor has more than $100 million in qualifying sales
to the Government during the fiscal year to which the Contractor's CPA
audit report applies; or
(2) Requested by the Contracting Officer, in consultation with the
Government auditor.
(g) Documentation requirements. (1) If paragraph (d) of this clause
is applicable, the Contractor shall maintain and make available to the
Government upon request--
(i) Documentation to provide reasonable support for the assessment
of the MMAS as required in paragraph (d)(2)(ii) of this clause; and
(ii) Information considered in the selection of a CPA as required
in paragraph (e) of this clause.
(2) The Contractor shall arrange for Government access to the
working papers supporting the CPA audit reports as required in
paragraphs (d)(2)(iii) and (j)(2) of this clause, and documentation
supporting the CPA's independence, objectivity, and qualifications.
* * * * *
(i) Significant deficiencies or failure to comply with applicable
reporting and audit requirements. (1) The Contracting Officer will
provide an initial determination to the Contractor, in writing, of any
significant deficiencies or the Contractor's failure to comply with the
applicable reporting and audit requirements in paragraph (d) of this
clause. The initial determination will describe the deficiency in
sufficient detail to allow the Contractor to understand the deficiency
and provide sufficient information on the noncompliance with the
applicable
[[Page 41182]]
reporting and audit requirements to allow the Contractor to understand
what action needs to be taken to comply.
(2) The Contractor shall respond within 30 days to a written
initial determination from the Contracting Officer that identifies
significant deficiencies in the Contractor's MMAS or the Contractor's
failure to comply with the applicable reporting and audit requirements
in paragraph (d) of this clause. If the Contractor disagrees with the
initial determination, the Contractor shall state, in writing, its
rationale for disagreeing.
(3) The Contracting Officer will evaluate the Contractor's response
and notify the Contractor, in writing, of the Contracting Officer's
final determination concerning--
(i) Remaining significant deficiencies;
(ii) Remaining noncompliance with the applicable reporting and
audit requirements;
(iii) The adequacy of any proposed or completed corrective action;
and
(iv) System disapproval if the Contracting Officer determines that
one or more significant deficiencies remain or the Contractor has
failed to comply with the applicable reporting and audit requirements.
(j) If the Contractor receives the Contracting Officer's final
determination of significant deficiencies or the Contractor's failure
to comply with the applicable reporting and audit requirements in
accordance with paragraph (d) of this clause, the Contractor shall--
(1) Within 45 days of receipt of the final determination, either
correct the significant deficiencies or submit an acceptable corrective
action plan showing milestones and actions to eliminate the significant
deficiencies, and comply with the applicable reporting and audit
requirements; and
(2) If the significant deficiencies were reported in the
Contractor's annual report, or the Contractor's CPA audit report as
required in paragraph (d) of this clause, provide the Contractor's
CPA's opinion regarding the effectiveness of the corrective actions--
(i) As a part of the triennial CPA audit report required in
paragraph (d) of this clause; or
(ii) In a separate audit report on the Contractor's CPA's
examination of the effectiveness of the corrective action performed in
accordance with GAGAS for examination attestation engagements.
* * * * *
0
14. Amend section 252.242-7005 by--
0
a. In the introductory text, removing ``242.7001'' and adding
``242.7003'' in its place;
0
b. Removing the clause date ``(FEB 2012)'' and adding in its place
``(DATE)'';
0
c. Amending paragraph (b) by--
0
i. Revising the definition of ``Contractor business systems''; and
0
ii. Adding, in alphabetical order, definitions for ``Contractor's
Certified Public Account (CPA)'' and ``CPA audit''.
0
d. Revising paragraph (d);
0
e. Revising paragraphs (e)(1) and (2);
0
f. Revising paragraphs (f)(1), (f)(2) introductory text, and (f)(2)(i);
0
g. Amending paragraph (f)(iv) by removing ``Contractor has corrected
the significant deficiencies'' and adding ``Contractor has corrected
the significant deficiencies and, if applicable, the Contractor's CPA
audit report on the effectiveness of the corrective actions'' in its
place; and
0
h. Adding paragraph (g).
The additions and revisions read as follows:
252.242-7005 Contractor Business Systems.
* * * * *
(b) * * *
Contractor business systems means--
(i) Accounting system, if this contract includes the clause at
DFARS 252.242-7006, Accounting System Administration;
(ii) Earned value management system, if this contract includes the
clause at DFARS 252.234-7002, Earned Value Management System;
(iii) Estimating system, if this contract includes the clause at
DFARS 252.215-7002, Cost Estimating System Requirements;
(iv) Material management and accounting system, if this contract
includes the clause at DFARS 252.242-7004, Material Management and
Accounting System;
(v) Property management system, if this contract includes the
clause at DFARS 252.245-7003, Contractor Property Management System
Administration; and
(vi) Purchasing system, if this contract includes the clause at
DFARS 252.244-7001, Contractor Purchasing System Administration.
Contractor's Certified Public Accountant (CPA) means an independent
certified public accountant, in public practice and not directly
employed as an employee by the Contractor, performing audits for the
Contractor in accordance with U.S. generally accepted government
auditing standards (GAGAS) as issued by the Government Accountability
Office.
CPA audit means an examination of the Contractor's compliance with
the applicable system criteria in the applicable business system clause
in DFARS 242.7003(b) performed by the Contractor's CPA in accordance
with GAGAS for examination attestation engagements.
* * * * *
(d) Significant deficiencies or failure to comply with reporting
and audit requirements. (1) The Contractor shall respond, in writing,
within 30 days to an initial determination of--
(i) One or more significant deficiencies in one or more of the
Contractor's business systems; or
(ii) Failure to comply with the applicable reporting and audit
requirements in the applicable business system clause listed in the
definition of ``contractor business systems'' in paragraph (b) of this
clause.
(2) The Contracting Officer will evaluate the Contractor's response
and notify the Contractor, in writing, of the final determination as to
whether--
(i) The Contractor's business system contains significant
deficiencies; or
(ii) The Contractor has failed to comply with the applicable
reporting and audit requirements in the applicable business system
clause listed in the definition of ``contractor business systems'' in
paragraph (b) of this clause.
(3) If the Contracting Officer determines that the Contractor's
business system contains significant deficiencies or that the
contractor has failed to comply with the applicable reporting and audit
requirements, the final determination will include a notice to withhold
payments.
(e) Withholding payments. (1) If the Contracting Officer issues the
final determination with a notice to withhold payments for significant
deficiencies in a contractor business system, or for the Contractor's
failure to comply with the applicable reporting and audit requirements
in the applicable business system clause listed in the definition of
``contractor business systems'' in paragraph (b) of this clause
required under this contract, the Contracting Officer will withhold
five percent of amounts due from progress payments and performance-
based payments, and direct the Contractor, in writing, to withhold five
percent from its billings on interim cost vouchers on cost-
reimbursement, labor-hour, and time-and-materials contracts until the
Contracting Officer has determined that the Contractor has corrected
all significant deficiencies and complied with the applicable reporting
and audit requirements as directed by the Contracting Officer's final
determination.
[[Page 41183]]
(2) If the final determination with a notice to withhold payments
is for significant deficiencies in a Contractor business system--
(i) The Contractor shall, within 45 days of receipt of the notice,
either correct the deficiencies or submit an acceptable corrective
action plan showing milestones and actions to eliminate the
deficiencies; and
(ii)(A) If the Contractor submits an acceptable corrective action
plan within 45 days of receipt of a notice of the Contracting Officer's
intent to withhold payments, and the Contracting Officer, in
consultation with the Government auditor or functional specialist,
determines that the Contractor is effectively implementing such plan,
the Contracting Officer will reduce withholding directly related to the
significant deficiencies covered under the corrective action plan, to
two percent from progress payments and performance-based payments, and
direct the Contractor, in writing, to reduce the percentage withheld on
interim cost vouchers to two percent until the Contracting Officer
determines the Contractor has corrected all significant deficiencies as
directed by the Contracting Officer's final determination.
(B) If at any time the Contracting Officer determines that the
Contractor has failed to follow the accepted corrective action plan,
the Contracting Officer will increase withholding from progress
payments and performance-based payments, and direct the Contractor, in
writing, to increase the percentage withheld on interim cost vouchers
to the percentage initially withheld, until the Contracting Officer
determines that the Contractor has corrected all significant
deficiencies as directed by the Contracting Officer's final
determination.
* * * * *
(f) Correction of deficiencies. (1) The Contractor shall notify the
Contracting Officer, in writing, when the Contractor has corrected the
business system's deficiencies, and shall provide the Contractor's CPA
audit report on the effectiveness of the corrective actions, if
required by the applicable business system clause listed in the
definition of ``contractor business systems'' in paragraph (b) of this
clause.
(2) Once the Contractor has notified the Contracting Officer that
all deficiencies have been corrected and, if applicable, provided the
Contractor's CPA audit report on the effectiveness of the corrective
actions, the Contracting Officer will take one of the following
actions:
(i) If the Contracting Officer determines that the Contractor has
corrected all significant deficiencies as directed by the Contracting
Officer's final determination, the Contracting Officer will, as
appropriate, discontinue the withholding of progress payments and
performance-based payments, and direct the Contractor, in writing, to
discontinue the payment withholding from billings on interim cost
vouchers under this contract associated with the Contracting Officer's
final determination, and authorize the Contractor to bill for any
monies previously withheld that are not also being withheld due to
other significant deficiencies, or noncompliance with applicable
reporting and audit requirements in the applicable business system
clause listed in the definition of ``contractor business systems'' in
paragraph (b) of this clause. Any payment withholding under this
contract due to other significant deficiencies or noncompliance with
applicable reporting and audit requirements, will remain in effect
until the Contracting Officer determines that those significant
deficiencies and noncompliances are corrected.
* * * * *
(g) Compliance with applicable reporting and audit requirements.
When the Contractor has, as directed by the Contracting Officer's final
determination, provided the Contractor's report on compliance with the
system criteria, including, if applicable, the Contractor's CPA audit
report as required in the applicable business system clause listed in
the definition of ``contractor business systems'' in paragraph (b) of
this clause, the Contracting Officer will, as appropriate, discontinue
the withholding of progress payments and performance-based payments,
and direct the Contractor, in writing, to discontinue the payment
withholding from billings on interim cost vouchers under this contract
associated with the Contracting Officer's final determination, and
authorize the Contractor to bill for any monies previously withheld
that are not also being withheld due to significant deficiencies or
other noncompliance with applicable reporting and audit requirements.
Any payment withholding under this contract due to significant
deficiencies or other noncompliance with applicable reporting and audit
requirements, will remain in effect until the Contracting Officer
determines that those significant deficiencies and noncompliances are
corrected.
0
15. Amend section 252.242-7006 by--
0
a. In the introductory text, removing ``242.7503'' and adding
``242.7504'' in its place;
0
b. Removing the clause date ``(FEB 2012)'' and adding in its place
``(DATE)'';
0
c. In paragraph (a) removing the numerical paragraph designations of
(1) through (3) for the definition paragraphs, and adding, in
alphabetical order, definitions for ``Contractor's Certified Public
Account (CPA)'' and ``CPA audit'';
0
d. Revising paragraph (b);
0
e. Redesignating paragraphs (d), (e) and (f) as paragraphs (j), (k) and
(l), respectively;
0
f. Adding new paragraphs (d) through (i);
0
g. Revising the newly redesignated paragraphs (j) and (k); and
0
h. Amending the newly redesignated paragraph (l) by removing ``252.242-
7005'' and adding ``DFARS 252.242-7005'' in its place.
The revisions and additions read as follows:
252.242-7006 Accounting System Administration.
* * * * *
(a) * * *
Contractor's Certified Public Accountant (CPA) means an independent
certified public accountant, in public practice and not directly
employed as an employee by the Contractor, performing audits for the
Contractor in accordance with U.S. generally accepted government
auditing standards (GAGAS) as issued by the Government Accountability
Office.
CPA audit means an examination of the Contractor's compliance with
the applicable system criteria in paragraph (c) of this clause
performed by the Contractor's CPA in accordance with GAGAS for
examination attestation engagements.
* * * * *
(b) General. The Contractor shall--
(1) Establish and maintain an acceptable accounting system; and
(2) Make available to the Government, upon request, the results of
internal or external reviews or monitoring that have been conducted to
ensure compliance with the system criteria in (c) and established
accounting system policies and procedures.
* * * * *
(d) Applicability. (1) Paragraph (e) of this clause applies if, in
the Contractor's fiscal year preceding the period in which the annual
report as required in paragraph (e) is due to the Government, the
Contractor had a covered contract as defined in DFARS 242.7001 (other
than
[[Page 41184]]
contracts with educational institutions or Federally Funded Research
and Development Centers (FFRDCs) operated by educational institutions).
(2) Paragraph (f) of this clause applies if, in the Contractor's
fiscal year preceding the period in which the Contractor's CPA audit
report as required in paragraph (f) is due to the Government, the
Contractor had a covered contract as defined in DFARS 242.7001 (other
than contracts with educational institutions or Federally Funded
Research and Development Centers (FFRDCs) operated by educational
institutions).
(e) Annual reporting requirements. (1) The Contractor shall provide
to the Contracting Officer and Government auditor within the 6-month
period following the expiration of the Contractor's fiscal year, and
annually thereafter, a report regarding compliance with the system
criteria in paragraph (c) of this clause as of the end of the
Contractor's most recent fiscal year. The Contractor shall have the
report signed by an individual of the Contractor's organization at a
level no lower than a vice president or chief financial officer of the
reporting business segment.
(2) The report shall include--
(i) A statement that the Contractor has evaluated the accounting
system's compliance with the system criteria in paragraph (c) of this
clause;
(ii) The Contractor's assessment of the accounting system's
compliance with the system criteria in paragraph (c) of this clause,
including a statement as to whether or not the system complies in all
material respects, and disclosure of any significant deficiencies with
sufficient information for the Government to understand the
deficiencies; and
(iii) The status of any significant deficiencies disclosed as part
of the Contractor's assessment or, if applicable, in the Contractor's
CPA audit report required in paragraph (f) of this clause, including a
corrective action plan with milestones and actions to eliminate any
significant deficiencies that have not been corrected as of the date of
the Contractor's report.
(f) Triennial CPA audit requirement. (1) In the first year in which
the Contractor is required to provide the annual report as required in
paragraph (e) of this clause, and every three years thereafter, or more
frequently if directed by the Contracting Officer, in addition to the
items in paragraphs (e)(2)(i), (ii), and (iii) of this clause, the
Contractor's annual report shall include an audit report on the
Contractor's CPA's examination of the Contractor's compliance with the
system criteria in paragraph (c) of this clause as of the end of the
Contractor's most recent fiscal year.
(2) The examination shall be performed in accordance with GAGAS for
examination attestation engagements, and the CPA audit report shall
include sufficient information regarding any reported significant
deficiencies for the Government to understand the deficiencies.
(g) CPA selection. If paragraph (f) of this clause is applicable,
the Contractor shall reasonably ensure that the CPA firm performing the
audit is--
(1) Independent and objective with respect to the audited entity by
obtaining and reviewing a written representation from the firm that the
firm (and the assigned engagement team)--
(i) Is independent and objective with respect to the audited
entity;
(ii) Will remain independent throughout the audit;
(iii) Has not performed any nonaudit services for the audited
entity that impair the auditors' independence for the subject audit;
and
(iv) Will disclose any independence issues discovered; and
(2) Qualified to perform the audit by obtaining and reviewing--
(i) Information about key engagement team members regarding
professional qualifications and experience, including valid CPA
licenses or certificates in good standing, and current knowledge and
experience in the type of work to be done; and
(ii) The firm's most recent peer review report, in accordance with
the American Institute of Certified Public Accountants (AICPA) Peer
Review Program, or equivalent.
(h) Contractor submission of audit plan. The Contractor shall
provide the Contractor's CPA's audit strategy, risk assessment, and
audit plan (program), upon completion, for the audits as required in
paragraphs (f) and (k)(2) of this clause to the cognizant contracting
officer and Government auditor for review if--
(1) The Contractor has more than $100 million in cost incurred on
cost-reimbursement and incentive type contracts, and amounts billed on
time and material and labor hour contracts during the Contractor's
fiscal year to which the Contractor's CPA audit report applies; or
(2) Requested by the Contracting Officer, in consultation with the
Government auditor.
(i) Documentation requirements. (1) If paragraphs (e) and (f) of
this clause are applicable, the Contractor shall maintain and make
available to the Government upon request--
(i) Documentation to provide reasonable support for the assessment
of the accounting system as required in paragraph (e)(2)(ii) of this
clause; and
(ii) Information considered in the selection of a CPA as required
in paragraph (g) of this clause, if applicable.
(2) The Contractor shall arrange for Government access to the
working papers supporting the CPA audit reports as required in
paragraphs (f) and (k)(2) of this clause, and documentation supporting
the CPA's independence, objectivity, and qualifications.
(j) Significant deficiencies or failure to comply with applicable
reporting and audit requirements. (1) The Contracting Officer will
provide an initial determination to the Contractor, in writing, of any
significant deficiencies or the Contractor's failure to comply with the
applicable reporting and audit requirements in paragraphs (e) and (f)
of this clause. The initial determination will describe the deficiency
in sufficient detail to allow the Contractor to understand the
deficiency and provide sufficient information on the noncompliance with
the applicable reporting and audit requirements to allow the Contractor
to understand what action needs to be taken to comply.
(2) The Contractor shall respond within 30 days to a written
initial determination from the Contracting Officer that identifies
significant deficiencies in the Contractor's accounting system or the
Contractor's failure to comply with the applicable reporting and audit
requirements in paragraphs (e) and (f) of this clause. If the
Contractor disagrees with the initial determination, the Contractor
shall state, in writing, its rationale for disagreeing.
(3) The Contracting Officer will evaluate the Contractor's response
and notify the Contractor, in writing, of the Contracting Officer's
final determination concerning--
(i) Remaining significant deficiencies;
(ii) Remaining noncompliance with the applicable reporting and
audit requirements;
(iii) The adequacy of any proposed or completed corrective action;
and
(v) System disapproval, if the Contracting Officer determines that
one or more significant deficiencies remain or the Contractor has
failed to comply with the applicable reporting and audit requirements.
(k) If the Contractor receives the Contracting Officer's final
determination of significant deficiencies or the Contractor's failure
to comply with the
[[Page 41185]]
applicable reporting and audit requirements in accordance with
paragraphs (e) and (f) of this clause, the Contractor shall--
(1) Within 45 days of receipt of the final determination, either
correct the significant deficiencies or submit an acceptable corrective
action plan showing milestones and actions to eliminate the significant
deficiencies, and comply with the applicable reporting and audit
requirements; and
(2) If the significant deficiencies were reported in the
Contractor's annual report, or the Contractor's CPA audit report,
provide the Contractor's CPA's opinion regarding the effectiveness of
the corrective actions--
(i) As a part of the triennial CPA audit report as required in
paragraph (f) of this clause; or
(ii) In a separate audit report on the Contractor's CPA's
examination of the effectiveness of the corrective action performed in
accordance with GAGAS for examination attestation engagements.
* * * * *
[FR Doc. 2014-16390 Filed 7-11-14; 4:15 pm]
BILLING CODE 5001-06-P