Authors: Paul Bailey, Brittany Gallo, Brian Stine, Alyssa Bacchus.

The DFARS is an ever-evolving regulation, with each new rule or revision aimed at allowing for more efficient and successful government contracts. The Business Systems Rule implemented in 2012 improved the effectiveness of DoD oversight of government contractors to ensure contractor systems provide timely, reliable information for the management of DoD programs. This rule established pivitol criteria for contracts, including payment withholdings for significant deficiencies and the permission for government review and approval of business systems.

• Six business systems impacted: Accounting System, Earned Value Management System (EVMS), Estimating System, Material Management and Accounting System (MMAS), Property Management System, Purchasing System.

Most recently, there was a shift in language from “significant deficiency” to “material weakness”. Section 806 of the Fiscal Year 2021 National Defense Authorization Act (NDAA) amended Section 893 of the NDAA for FY 2011 to delete the term “significant deficiency” and replace it with “material weakness” (DFARS Case 2021-D006). The Final Rule was published January 17, 2025 (90 FR 5725).

This change provides clearer guidelines for auditors and contractors during compliance audits of contractor business systems.

What does this mean?

• “Material weakness” aligns closer with the Generally Accepted Auditing Standards (GAAS), providing more clarity to the DoD and contractors when evaluating contractor business systems.
• Does not impose any new requirements on contracts at or below the Simplified Acquisition Threhold (SAT), commercial products (including COTS items), or commercial services.
• Does not impose any new reporting, recordkeeping, or other compliance requirements.
• For contracts awarded prior to the published Final Rule, Defense Pricing and Contracting (DPC) may need to issue a Class Deviation for contracts awarded prior to 17 January to be subject to the updated language.