Contrary to popular belief, business systems are not specific software packages. Instead, they are a confluence of policies, procedures, and reestablished practices.

Business systems are the foundation of any sustainable and profitable company. In the federal contracting realm, they are as follows: accounting, estimating, material management, purchasing, earned value management, and property. These systems flow into the financial statements. So, if you do not have efficient or properly functioning internal controls in place within these systems, you may be in for a real eye-opener if you receive a notification of an impending business-system audit.

Many U.S. government contractors are expected to comply with contractual requirements for maintaining adequate business systems. Business-systems rules and requirements are not limited to those who primarily serve the Department of Defense. The criteria typically used to determine the adequacy of business systems can be found throughout Federal Acquisition Regulation (FAR), Defense Federal Acquisition Regulation Supplement (DFARS), and other agency supplements. Industry and federal contracting officers consider the criteria within these regulations as suitable standards to use in determining the acceptability of any government contractor’s internal controls. How well-versed are you in these requirements?

Business systems matter

For those working on Department of Defense contracts, a non-compliant business system may hurt your wallet. DFARS 252.242-7005 (e) indicates that if a contracting officer determines that any of a contractor’s required business systems has significant deficiencies, they will withhold five percent on progress payments until the deficiencies have been corrected. While the fixes may be simple to implement, the follow-on audit to verify the corrections may take months or longer. To avoid these withholdings and maintain a competitive advantage, contractors must understand which business systems would currently or soon be subject to an audit.