Congress recently passed legislation (Section 893 0f the National Defense Authorization Act of 2011) requiring the Secretary of Defense to develop a program ensuring that “contractor business systems” provide timely, reliable information for the management of Department of Defense programs. “Contractor business systems” include accounting systems, estimating systems, earned value management systems, material management and accounting systems, and property management systems.
The program required by this legislation will set requirements for contractor business systems, establish a process for reviewing contractor business systems, and provide for disapproval of any contractor business system that has a significant deficiency. If a contractor business system is disapproved, DoD will work with the contractor to develop a corrective action plan. Until the system is approved, DoD may withhold up to 10 percent of progress and other payments on cost type contracts with contractors that are covered by the Cost Accounting Standards.
The legislation also requires the Secretary of Defense to ensure that the Defense Contract Audit Agency has sufficient legal resources and expertise, provided in a manner consistent with the “audit independence” of DCAA, to allow DCAA to conduct its work in compliance with DoD policies and procedures.
This legislation appears to support the DCAA’s recent initiatives to become the final arbiter on contract administration matters that historically have been within the authority of the contracting officer. Contracting officers, for example, have the authority and discretion to determine whether a contractor’s cost accounting system is adequate for purposes of performing a cost-type contract. This legislation effectively transfers that authority to DCAA, because DCAA would be the body conducting the review to determine approval or disapproval of the contractor’s business systems. In addition, while the ostensible objectives of this legislation—improving the quality of contractors’ business systems—are laudable, complying with system requirements will inevitably increase the cost of contract performance. Contractors will have to adopt increasingly complex business systems to meet separate requirements for each type of system.