Contractor Business Systems (CBS) Rule Eric Fassett

Timothy Callahan Executive director for contracts at the Defense Contract Management Agency said the new regulation aims to ensure that business systems act as “the first line of defense against fraud, waste and abuse in Department of Defense contracts.” Still, he said the government has put in place a review board to provide another layer of consideration before a business system is determined deficient. “The end game is not to disapprove business systems and withhold payments,” Callahan said. “Our desired outcome is for the contractors to have systems that are approved so we can rely upon the information that’s produced to help us manage our programs more effectively.” Guidance on the CBS Rule may be found at

The CBS Rule applies to contracts that are subject to Cost Accounting Standards (CAS) covered awards DFARS defines Contractor business systems as (1) Accounting system, if this contract includes the clause at , Accounting System Administration; (2) Earned value management system, if this contract includes the clause at , Earned Value Management System; (3) Estimating system, if this contract includes the clause at , Cost Estimating System Requirements;

(4) Material management and accounting system, if this contract includes the clause at , Material Management and Accounting System; (5) Property management system, if this contract includes the clause at , Contractor Property Management System Administration; and (6) Purchasing system, if this contract includes the clause at , Contractor Purchasing System Administration.

“Property management system” means the Contractor’s system or systems for managing and controlling Government property. “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. “Acceptable property management system” means a property system that complies with the system criteria in paragraph (c) of this clause.

(c) System criteria. The Contractor’s property management system shall be in accordance with paragraph (f) of the contract clause at Federal Acquisition Regulation Contractor Plans and Systems (FAR (f)) –Acquisition of Property –Receipt of Government Property –Records of Government property –Physical Inventory –Subcontractor control –Reports –Relief of stewardship responsibility –Utilizing Government property –Maintenance –Property Closeout

The Government Property Administrator/Functional Specialist (GPA) performs Property Management System Analysis (PMSA) The GPA prepares business systems reports and summarizes findings using the Business System Analysis Summary (BSAS) document and forwards both to the Contracting Officer (CO) for review CO to discuss findings with GPA to determine if deficiencies are significant

If there are no significant deficiencies, the CO shall issue a final determination, notifying the Contractor in writing that the system is acceptable and approved For non-significant findings (Level I or II CAR), the GPA shall pursue corrective action, as appropriate If significant deficiencies are identified, the CO issues an initial written determination letter Contractor has 30 days to respond either taking exception or agreeing with findings (they may submit a corrective action plan at this time)

CO will evaluate Contractor response and consult with GPA Prior to submitting a final determination letter disapproving a system, the CO shall obtain a higher- level review from the Contractor Business Systems Review Panel. CO Issues Final Determination approving system or disapproving system, requiring correction, and initiating withholding against contract payments (5% per system, not to exceed 10% total on any contract)

(e) If the Contractor receives the Contracting Officer’s final determination of significant deficiencies, the Contractor shall, 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. (f) Withholding payments. If the Contracting Officer makes a final determination to disapprove the Contractor’s property management system, and the contract includes the clause at , Contractor Business Systems, the Contracting Officer will withhold payments in accordance with that clause.

Corrective Action Requests (DCMA-INST-1201) There are four CAR levels (I, II, III, and IV). Level I and II CARs may be issued by functional specialists... For Level III and IV CARs, the cognizant Contracting Officer (CO) is responsible for issuance of the CAR, acceptance of contractor corrective action plans, and CAR closure. [NOTE: When the acronym “CO” is used, it refers to the appropriate Corporate Administrative Contracting Officer (CACO), Divisional Administrative Contracting Officer (DACO) or Administrative Contracting Officer (ACO).] The ACO shall work closely with the functional specialists throughout the corrective action process.

Level I. Level I is issued for noncompliances that are minor in nature, are promptly corrected by the contractor, and present no need for root cause determination or further preventive action. Level I CARs shall be issued to the contractor management level responsible for correcting the cited noncompliance. While the contractor must correct the noncompliance, further actions are not required regarding the specific noncompliance.

Level II. Level II is issued for noncompliances that are not promptly correctable and warrant root cause analysis and preventive action, or need action by the contractor to determine if other product/services are affected. Level II CARs shall be directed to the contractor management level responsible for initiating corrective actions. A written response from the contractor is required.

Level III. Level III is issued to the contractor’s management responsible for the company or business segment to call attention to a serious noncompliance, a significant deficiency pursuant to Reference (e), a failure to respond to a lower level CAR, or to remedy recurring noncompliance. A written response from the contractor is required. A Level III CAR, may result in initiation of available contractual remedies, such as reductions of payments, cost disallowances, revocation of government assumption of risk of loss, or business management systems disapprovals, etc.

Level IV. Level IV is issued to the contractor’s segment or corporate management and when the contractual noncompliance(s) is of a serious nature or when a Level III CAR has been ineffective. A written response from the contractor is required. A Level IV CAR will result in a mandatory review of available contractual remedies, such as cost disallowance, reduction or suspension of payments, revocation of government assumption of risk of loss, business system disapproval, or suspension of product acceptance activities (see paragraph below). Any contractual remedies will be implemented IAW applicable FAR/DFARS policies and procedures