DFARS Business Systems
The six DFARS business systems, and what a disapproval costs.
DFARS defines six contractor business systems: accounting, estimating, purchasing, material management (MMAS), earned value (EVMS) and property. Each applies when its clause is in your contract. If one is disapproved, the contracting officer can withhold 5% of payments on CAS-covered contracts per system, up to 10% in total, until the weaknesses are fixed.
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How the rules fit together
The umbrella clause is DFARS 252.242-7005, Contractor Business Systems. It lists the six system clauses and gives the contracting officer a withholding remedy when a system has a material weakness. It applies only to covered contracts, meaning contracts subject to the Cost Accounting Standards.
The system clauses reach further. The accounting system clause lands in any cost-type or T&M contract, whatever your size. A small business can have its system disapproved with no withholding at all, and the disapproval still follows it to buying activities and into pricing reports on your proposals until it’s resolved.
Since January 17, 2025, DFARS says material weakness where it used to say significant deficiency. The contracting officer, usually a DCMA ACO, approves or disapproves the system. DCAA auditors and DCMA specialists review and report.
We’re led by a former DCAA Supervisory Auditor who supervised business system audits of major defense contractors, then ran these same systems from inside a venture-backed defense technology company.
At a Glance
The six systems, their clauses and their triggers
Codified DFARS clause numbers first. DoD’s FAR overhaul class deviations renumber several of them in new solicitations, so check which version your contract carries.
Umbrella: 252.242-7005, Contractor Business Systems
Deviation number 252.242-7998. Applies to CAS-covered contracts that include any of the six system clauses. Withholding of 5% per disapproved system, capped at 10% across systems.
Accounting system: 252.242-7006
Deviation 252.242-7999. DCAA audits; the ACO decides. Trigger: any cost-reimbursement, incentive, T&M or labor-hour contract, or progress payments based on cost or percentage of completion. No dollar threshold.
Estimating system: 252.215-7002
Same number under the deviation. DCAA audits. Applies to large businesses that received $50 million or more of DoD prime contracts and subcontracts requiring certified cost or pricing data in the prior fiscal year, or $10 million to $50 million when the contracting officer so determines.
Purchasing system: 252.244-7001
Deviation 252.244-7998. DCMA purchasing system analysts perform the CPSR. Codified FAR 44.302 looks at the need for a review when Government sales, excluding competitive fixed-price and commercial sales, are expected to top $25 million in the next 12 months. DoD’s Part 244 deviation uses $50 million.
Material management and accounting system (MMAS): 252.242-7004
Deviation 252.242-7997. DCAA typically audits; the ACO decides. Clause goes in non-commercial cost-type contracts, or fixed-price with cost-based progress payments, above the simplified acquisition threshold. Not applied to small businesses. Review after $40 million of qualifying sales in the prior year plus an ACO risk assessment.
Earned value management system: 252.234-7002
Deviation 252.234-7999. DCMA determines compliance when DoD is the cognizant agency. Codified DFARS requires EIA-748 compliance on cost or incentive contracts of $20 million and a formally determined compliant system at $50 million. The August 2026 deviation raises those to $50 million and $100 million.
Property management system: 252.245-7003
Same number under the deviation. DCMA property administrators review. Trigger: any contract with FAR 52.245-1, Government Property. No dollar threshold.
What Changed
The accounting system is the one that goes first
Of the six, the accounting system is reviewed earliest and feeds the others. Estimating pulls its rates from it, billing reconciles to it, and MMAS charges through it. Get it wrong and the findings do not stay in one system. DCAA compliant accounting system.
What a disapproval actually costs
Where the contract carries DFARS 252.242-7005, the contracting officer can withhold a percentage of your payments for each system found deficient, and the withholding runs until the deficiencies are corrected. The review tests how the system operates, not how it was designed. Post-award accounting system review.
What changed in 2025 and 2026
The FAR is mid-rewrite under the Revolutionary FAR Overhaul, and DoD operates under class deviations for most DFARS parts, including 215, 234, 242, 244 and 245. We check the current text on every engagement, because last year’s clause number may not match this year’s solicitation.
- Class Deviation 2026-O0050, effective March 16, 2026, rewrote DFARS Part 242 and issued deviation clauses for business systems, accounting and MMAS. The 5% and 10% limits carry over unchanged.
- Class Deviation 2026-O0011, Rev. 1 (August 5, 2026) raised the EVMS thresholds and exempted contracts primarily for software.
- Section 1826 of the FY2026 NDAA exempts nontraditional defense contractors from the business system requirements unless waived. DoD has written the exemption into its deviation text for estimating, EVMS, purchasing and property.
- The FY2026 NDAA raised the certified cost or pricing data threshold to $10 million for DoD contracts after June 30, 2026, and the CAS thresholds to $35 million and $100 million. Fewer awards will count toward the estimating trigger, and fewer contracts will be CAS-covered.
The Review
What the auditor actually looks at
Every system clause lists its criteria, and the review tests two things: whether your written policies meet them, and whether your people follow those policies. In our experience, most findings come from the second.
Expect a walkthrough, then transaction testing. For accounting: timekeeping and labor floor checks, billed cost traced to the ledger, unallowables screened out. For estimating: a basis of estimate traced to source data, and how you compare past estimates with actuals. For purchasing: the subcontract file, meaning competition or price analysis, flowdowns and approvals.
A deficiency becomes a material weakness when there’s a reasonable possibility, meaning probable or more than remote, that a material misstatement of the system’s information won’t be prevented or caught in time. That’s an auditing-standards test, which is why a pattern of exceptions matters far more than one isolated error.
Report
DCAA or the DCMA specialist reports findings to the contracting officer, describing each weakness.
Initial determination
The contracting officer notifies you in writing of each material weakness.
Your 30-day response
You respond in writing within 30 days, with your rationale if you disagree. Facts get corrected here, before positions harden.
Final determination
If weaknesses remain, the system is disapproved. On contracts carrying 252.242-7005, the determination includes a notice to withhold 5%.
45 days to correct or plan
You fix the weaknesses or submit an acceptable corrective action plan with milestones. Once the plan is accepted and being implemented, withholding drops to 2%.
Verification and release
You notify the contracting officer when fixed, the auditor verifies, and withheld amounts are released. If there’s no decision within 90 days of your notice, withholding must be cut by at least 50% in the meantime.
How We Help
How we help, system by system
We build systems that pass and get disapproved systems approved again. Already holding a determination? We draft the 30-day response and corrective action plan with you, alongside your counsel if the matter turns legal.
Accounting system
Design and document a system that meets the 18 criteria in 252.242-7006. See our DCAA-compliant accounting system page.
Estimating system
Written estimating procedures, basis of estimate standards, and the estimate-to-actual comparisons the clause requires.
Purchasing system
CPSR readiness, subcontract file standards, price analysis and flowdown checks. See our contractor purchasing system review page.
MMAS
Requirements logic, transfer procedures, inventory accuracy and commingled inventory controls. More below.
EVMS, the accounting side
We don’t certify EVMS. We make the cost side work: cost collection aligned to the WBS and indirect rates that flow correctly into EVM actuals. We are not a CMMC assessor either.
Property system
Property records, physical inventory reconciliation, and written procedures that match what FAR 52.245-1 expects.
MMAS
MMAS: where hardware companies get surprised
MMAS is the business system software-first companies meet last. It starts to matter once you build hardware on cost-type or cost-based progress payment contracts and material flows through shared inventory. The clause sets ten standards. These get tested hardest:
- Valid time-phased requirements. Material charged to a contract must be needed by its production plan. The goals are 98% bill of material accuracy and 95% master production schedule accuracy.
- MRP and transfer logic. Transfers between contracts must be costed consistently within the same billing period; loan/pay-back needs ACO-approved procedures.
- Inventory accuracy. Periodic reconciliation of recorded quantities to physical counts by part number, with 95% as the goal. Below any of these goals, you must show there’s no material harm to the government and that meeting the goal would cost more than it’s worth.
- Commingled inventory. When stock serves fixed-price, cost-type and commercial work, controls must keep costs on the right contract. Government-furnished material can’t be commingled at all.
- Change discipline. Significant MMAS changes go to the ACO at least 30 days before implementation.
Questions
Frequently asked
Do all six business systems apply to every defense contractor?
No. Each system applies only when its clause is in your contract, and payment withholding under DFARS 252.242-7005 applies only to CAS-covered contracts. A small business on cost-type work usually deals with accounting, and sometimes purchasing and property. Estimating, MMAS and EVMS are mostly large-contractor territory.
How much can the government withhold if a system is disapproved?
5% of progress payments, performance-based payments and interim cost vouchers for each disapproved system, capped at 5% per system and 10% across multiple systems. It drops to 2% once your corrective action plan is accepted and being implemented. Completed and accepted fixed-price line items are exempt.
What is the difference between a significant deficiency and a material weakness?
Since January 17, 2025, DFARS uses material weakness instead of significant deficiency. A material weakness means a reasonable possibility that a material misstatement of the system’s information won’t be prevented, or detected and corrected, on time. The test is tied to materiality.
How long do we have to respond to an initial determination?
30 days, in writing. If you disagree, the response has to state your rationale. After a final determination that finds material weaknesses, you have 45 days to correct them or submit an acceptable corrective action plan with milestones.
We are a nontraditional defense contractor. Do these rules apply to us?
Section 1826 of the FY2026 NDAA exempts nontraditional defense contractors from the business system requirements unless the head of the contracting activity waives the exemption in writing. Status depends on not having performed a fully CAS-covered DoD contract in the prior year, so it can change. We confirm it against the clauses in each contract.
Can you certify our EVMS or our cybersecurity compliance?
No. EVMS compliance is determined by DCMA when DoD is the cognizant agency, and it’s a specialty discipline. We support the accounting side that feeds it. We are not a CMMC assessor and don’t offer cybersecurity certification.
More
Related services
Contractor purchasing system reviews
CPSR preparation, subcontract files, and purchasing system findings.
DCAA-compliant accounting systems
A system that meets DFARS 252.242-7006 and survives review.
Post-award & business system reviews
System reviews, material weaknesses, withholding and corrective action.
CAS Disclosure Statements
Form CASB DS-1 preparation, cost impact analysis, and disclosed practice compliance.
Nontraditional defense contractors
What Section 1826 of the FY2026 NDAA exempts, how status is asserted and lost, and what still gets reviewed.
Subcontract cost & price analysis
Independent analysis of supplier proposals under FAR 15.404-1, documented to FAR 15.408 Table 15-2 for your purchasing file.
Facing a business system review?
Tell us which system clauses are in your contracts and where you stand. If an initial determination just arrived, the 30-day clock is running.