Last reviewed on May 12, 2026.
What "business systems" means in DFARS
DFARS 242.7000 et seq. defines six contractor business systems that DoD reviews for adequacy. The systems together cover the core financial and operational functions a defense contractor uses to estimate, perform, account for, and report on government work. The framework applies primarily to contracts that include the contractor business systems clause and is most consequential for contractors holding cost-reimbursement, incentive, or other negotiated work with DCAA audit exposure.
The six systems:
- Accounting system (DFARS 252.242-7006)
- Estimating system (DFARS 252.215-7002)
- Purchasing system (DFARS 252.244-7001)
- Material Management and Accounting System (MMAS) (DFARS 252.242-7004)
- Earned Value Management System (EVMS) (DFARS 252.234-7002)
- Government property management system (DFARS 252.245-7003)
Civilian agencies do not have a directly parallel framework, but several of the underlying disciplines (particularly accounting and estimating) apply to negotiated contracts across the government through other mechanisms.
Accounting system
The accounting system is the most universal of the six. Any contractor holding cost-reimbursement, time-and-materials, or other negotiated work needs an adequate accounting system. The system must:
- Segregate direct costs from indirect costs and unallowable costs
- Identify direct costs by contract or final cost objective
- Accumulate indirect costs in logical pools and allocate using consistent bases
- Maintain a labor distribution that ties timekeeping to the cost ledger
- Reconcile billed costs to the general ledger
- Produce interim determinations of costs incurred on each contract
For the detailed control framework, see DCAA compliance and accounting systems. The pre-award accounting system review uses SF Form 1408. Post-award adequacy is evaluated through full accounting system audits.
Estimating system
An estimating system is the documented process a contractor uses to develop cost estimates for proposals. Adequacy requires that the system:
- Produce verifiable, supportable, and documented estimates
- Use appropriate methods (analogy, parametric, engineering build-up) based on the data available
- Identify the sources of pricing data and the bases for assumptions
- Apply consistent treatment to similar cost elements across proposals
- Include internal review and management approval before submission
- Track estimating accuracy by comparing estimated to actual costs
An estimating system audit looks at whether the documented procedures are followed in practice. Common findings include reliance on outdated rate data, undocumented assumptions, and inconsistent treatment between proposals.
Purchasing system
A purchasing system is the contractor's process for buying goods and services from subcontractors and vendors. The contractor purchasing system review (CPSR) evaluates whether the system:
- Produces price-reasonable purchases through competition or documented sole-source analysis
- Includes adequate cost or price analysis on significant purchases
- Flows down required clauses to subcontractors at the appropriate tiers
- Documents make-or-buy decisions where applicable
- Tracks small business subcontracting goals (see subcontracting plans)
- Maintains a vendor qualification and performance process
- Handles consent requests when subcontract awards exceed delegated thresholds
An approved purchasing system increases the contractor's procurement authority — fewer subcontracts require government consent before award. An unapproved system means most significant subcontracts go through individual consent reviews, which slows performance.
Material Management and Accounting System (MMAS)
MMAS adequacy applies to contractors that produce material-intensive deliverables. The standard covers planning, controlling, and accounting for material throughout the procurement-to-delivery cycle. Adequacy requires:
- Material requirements planning that links demand to procurement actions
- Bills of material that accurately reflect actual material content
- Inventory accounting that tracks material by contract
- Cost transfer procedures that prevent improper movement of costs between contracts
- Internal audits of MMAS performance
MMAS reviews are most common for prime contractors producing manufactured goods. Many professional services firms are not subject to MMAS.
Earned Value Management System (EVMS)
EVMS adequacy applies to contracts that require integrated cost and schedule reporting using the earned value methodology — typically major development or production contracts over specific dollar thresholds. The EIA-748 standard defines 32 guidelines covering:
- Organization of the work breakdown structure and responsibility assignment
- Integrated cost and schedule planning with a baseline
- Accounting and analysis at the work-package level
- Revisions and data maintenance with disciplined change control
Smaller contractors and professional services firms rarely face EVMS requirements. When a contract triggers EVMS, the implementation effort is substantial.
Government property management system
When the government furnishes property to a contractor or the contractor acquires property for which the government holds title, the property management system must:
- Record receipt and accountability for each item
- Maintain location and condition records
- Track utilization and maintenance
- Properly dispose of property at contract end (or as authorized)
- Report loss, damage, or destruction
- Support physical inventories at required intervals
Property management findings often surface at contract closeout, when disposition decisions force a reconciliation of records.
What happens when a system is found inadequate
If DoD finds significant deficiencies in a business system, the contractor receives an "Initial Determination" listing the deficiencies. The contractor has 30 days to respond with corrective action plans. The contracting officer then issues a "Final Determination."
If the final determination finds the system inadequate, the contracting officer may:
- Withhold payments. Up to 5% of billings on cost-reimbursement, T&M, and similar contracts may be withheld until corrective action is complete. Multiple inadequate systems can compound the withhold up to 10%.
- Disapprove the system. Affects competitiveness on future awards and increases administrative burden on existing contracts.
- Require corrective action milestones. The contractor and government agree on a schedule for remediation.
Payment withholding is the most consequential consequence of inadequacy findings. A 5% withhold across a portfolio of cost-type contracts compounds into significant cash flow pressure quickly.
Common mistakes
- Assuming small business size exempts you. Business system requirements attach by contract clause, not by company size. A small business holding a CPFF contract may face the same accounting system review as a large prime.
- Documenting systems on paper but not in practice. Reviewers compare written policy to actual execution. Discrepancies are findings.
- Estimating system without traceability. Proposals built from "experienced judgment" without documented data sources fail estimating system reviews.
- Purchasing system without flow-down discipline. Missing required clause flow-downs in subcontracts is a routine CPSR finding.
- Treating government property as company property. Property accountability does not lapse with use — it must be tracked from receipt to final disposition.
- Letting deficiencies compound. Two simultaneous inadequate systems trigger higher withholds and stronger contracting officer scrutiny on future awards.