Defense Federal Acquisition Regulation Supplement: Definition of Material Weakness (DFARS Case 2021-D006)

DEPARTMENT OF DEFENSE <SUBAGY>Defense Acquisition Regulations System</SUBAGY> <CFR>48 CFR Parts 202, 215, 234, 242, 244, 245, and 252</CFR> <DEPDOC>[Docket DARS-2024-0020]</DEPDOC> <RIN>RIN 0750-AL25</RIN> <SUBJECT>Defense Federal Acquisition Regulation Supplement: Definition of Material Weakness (DFARS Case 2021-D006)</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Defense Acquisition Regulations System, Department of Defense (DoD). <HD SOURCE="HED">ACTION:</HD> Proposed rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> DoD is proposing to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to implement a section of the National Defense Authorization Act for Fiscal Year 2021 that defines the term “material weakness” for Government evaluation of contractor business systems. The term “material weakness” replaces the term “significant deficiency.” </SUM> <DATES> <HD SOURCE="HED">DATES:</HD> Comments on the proposed rule should be submitted in writing to the address shown below on or before August 26, 2024, to be considered in the formation of a final rule. </DATES> <HD SOURCE="HED">ADDRESSES:</HD> Submit comments identified by DFARS Case 2021-D006, using either of the following methods: ○ <E T="03">Federal eRulemaking Portal: https://www.regulations.gov.</E> Search for DFARS Case 2021-D006. Select “Comment” and follow the instructions to submit a comment. Please include “DFARS Case 2021-D006” on any attached documents. ○ <E T="03">Email: osd.dfars@mail.mil.</E> Include DFARS Case 2021-D006 in the subject line of the message. Comments received generally will be posted without change to <E T="03">https://www.regulations.gov,</E> including any personal information provided. To confirm receipt of your comment(s), please check <E T="03">https://www.regulations.gov,</E> approximately two to three days after submission to verify posting. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Mr. Jon Snyder, telephone 703-945-5341. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Background</HD> DoD is proposing to amend the DFARS to implement section 806 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2021 (Pub. L. 116-283), which amends section 893 of the NDAA for FY 2011 (Pub. L. 111-383). Section 893 of the NDAA for FY 2011 requires a program for the improvement of contractor business systems and provides for DoD approval or disapproval of contractor business systems. Section 806 of the NDAA for FY 2021 defines the term “material weakness”, which replaces the term “significant deficiency.” <HD SOURCE="HD1">II. Discussion and Analysis</HD> This proposed rule replaces the term “significant deficiency” with “material weakness” in each of the following DFARS contract clauses: 252.215-7002, Cost Estimating System Requirements; 252.234-7002, Earned Value Management System; 252.242-7004, Material Management and Accounting System; 252.242-7005, Contractor Business Systems; 252.242-7006, Accounting System Administration; 252.244-7001, Contractor Purchasing System Administration-Basic and Alternate I; and 252.245-7003, Contractor Property Management System Administration. The term “material weakness” means a deficiency or combination of deficiencies in the internal control over information in contractor business systems, such that there is a reasonable possibility that a material misstatement of such information will not be prevented, or detected and corrected, on a timely basis. A reasonable possibility exists when the likelihood of an event occurring is probable or more than remote but less than likely. This definition of “material weakness” aligns with generally accepted auditing standards. This proposed rule will therefore assist DoD to maintain appropriate oversight over contractor business systems by enabling clear classification of deficiencies according to their severity, consistent with generally accepted auditing standards. To conform with this definitional change, this proposed rule also replaces the term “significant deficiency” with the term “material weakness” each place it appears in DFARS parts 215, 234, 242, 244, and 245. Further, this proposed rule adds the word “underlying” to describe “deficiencies” in certain parts of the affected DFARS text to emphasize that material weaknesses are comprised of one or more deficiencies. Additionally, this proposed rule adds the full text of definitions in DFARS parts 215, 234, 242, 244, and 245 in place of references to definitions located in DFARS clauses. These definitions are substantially unchanged. This change is intended to assist contracting officers by minimizing cross-references. The definition of “material weakness” is added at DFARS 202.101, since the term applies to multiple DFARS parts in the proposed rule. <HD SOURCE="HD1">III. Applicability to Contracts at or Below the Simplified Acquisition Threshold (SAT), for Commercial Products (Including Commercially Available Off-the-Shelf (COTS) Items), and for Commercial Services</HD> This proposed rule amends the clauses at DFARS 252.215-7002, 252.234-7002, 252.242-7004, 252.242-7005, 252.242-7006, 252.244-7001—Basic and Alternate I, and 252.245-7003. However, this proposed rule does not impose any new requirements on contracts at or below the SAT, for commercial products, including COTS items, or for commercial services. Applicability of the clauses to acquisitions at or below the SAT, to acquisitions of commercial products, including COTS items, and to acquisitions of commercial services remains unchanged. <HD SOURCE="HD1">IV. Expected Impact of the Rule</HD> Presently, the DFARS includes a definition of “significant deficiency” in the context of DoD evaluation of contractor business systems. “Significant deficiency” is defined as “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.” This proposed rule replaces the term “significant deficiency” in the DFARS with the term “material weakness,” defined as a deficiency or combination of deficiencies in the internal control over information in contractor business systems, such that there is a reasonable possibility that a material misstatement of such information will not be prevented, or detected and corrected, on a timely basis. A reasonable possibility exists when the likelihood of an event occurring is probable or more than remote but less than likely. This definition of “material weakness” provides more detail and clarity both to DoD and to industry in the context of evaluating contractor business systems compared to the definition of “significant deficiency.” This definition of “material weakness” also aligns with generally accepted auditing standards. Therefore, this proposed rule will both create consistency with generally accepted auditing standards and minimize confusion about the seriousness of deficiencies, which will aid both DoD and industry. <HD SOURCE="HD1">V. Executive Orders 12866 and 13563</HD> Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is not a significant regulatory action and, therefore, was not subject to review under section 6(b) of E.O. 12866, Regulatory Planning and Review, as amended. <HD SOURCE="HD1">VI. Regulatory Flexibility Act</HD> DoD does not expect this proposed rule, when finalized, to have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, <E T="03">et seq.,</E> because this proposed rule does not require contractors to alter their existing business practices. However, an initial regulatory flexibility analysis has been performed and is summarized as follows: DoD is proposing to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to implement section 806 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2021 (Pub. L. 116-283). Section 806 amends section 893 of the NDAA for FY 2011 (Pub. L. 111-383), which requires a program for the improvement of contractor business systems and provides for DoD approval or disapproval of contractor business systems. Section 806 of the NDAA for FY 2021 replaces the term “significant deficiency” with “material weakness” and defines the term “material weakness.” The objective of the rule is to introduce the term “material weakness” for Government evaluation of contractor business systems, replacing the term “significant deficiency.” The definition of “material weakness” aligns with generally accepted auditing standards. This proposed rule will help DoD maintain appropriate oversight over contractor business systems by enabling clear classification of deficiencies according to severity. The legal basis for the rule is section 806 of the NDAA for FY 2021. The proposed rule may impact small entities that are awarded DoD contracts. Based on data from the Federal Procurement Data System and the Electronic Data Access for FY 2021 through FY 2023, DoD estimates that an average of 5,134 unique small entities are awarded an average of 22,263 contract actions annually that include one or more relevant clauses. This proposed rule does not impose any new reporting, recordkeeping or other compliance requirements. This proposed rule does not duplicate, overlap, or conflict with any other Federal rules. There are no known alt ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 75k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━