[Federal Register Volume 65, Number 128 (Monday, July 3, 2000)]
[Proposed Rules]
[Pages 41038-41041]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-16640]


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DEPARTMENT OF DEFENSE

48 CFR Parts 242 and 252

[DFARS Case 2000-D003]


Defense Federal Acquisition Regulation Supplement; Material 
Management and Accounting Systems

AGENCY: Department of Defense (DoD).

ACTION: Proposed rule with request for comments.

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SUMMARY: The Director of Defense Procurement is proposing to amend the 
Defense Federal Acquisition Regulation Supplement (DFARS) to revise the 
criteria for determining when review of a contractor's material 
management and accounting system (MMAS) is needed. The rule also 
replaces the current requirement for an MMAS ``demonstration'' with a 
requirement for the contractor to provide adequate evidence that it has 
conducted internal audits to ensure compliance with its MMAS policies, 
procedures, and operating instructions.

DATES: Comments on the proposed rule should be submitted in writing to 
the address shown below on or before September 1, 2000, to be 
considered in the formation of the final rule.

ADDRESSES: Interested parties should submit written comments on the 
proposed rule to: Defense Acquisition Regulations Council, Attn: Mr. 
Rick Layser, OUSD (AT&L) DP (DAR), IMD 3D139, 3062 Defense Pentagon, 
Washington, DC 20301-3062. Telefax (703) 602-0350.
    E-mail comments submitted via the Internet should be addressed to 
[email protected]
    Please cite DFARS Case 2000-D003 in all correspondence related to 
this proposed rule. E-mail correspondence should cite DFARS Case 2000-
D003 in the subject line.

FOR FURTHER INFORMATION CONTACT: Mr. Rick Layser, (703) 602-0293.

SUPPLEMENTARY INFORMATION:

A. Background

    This proposed rule makes the following changes to the DFARS:
    1. Revises the prescription for use of the clause at 252.242-7004, 
Material Management and Accounting System.
    a. The DFARS presently requires inclusion of the clause in fixed-
price contracts with progress payments or other Government financing, 
regardless of whether the financing provisions are based on cost. The 
proposed rule requires inclusion of the clause in only those fixed-
price contracts that contain progress payments based on cost or other 
financing provisions based on cost.
    b. The DFARS presently exempts small businesses, educational 
institutions, and nonprofit organizations from the major MMAS 
requirements of disclosure, demonstration, and maintenance, but still 
requires inclusion of the clause in contracts with these entities. The 
proposed rule eliminates the requirement for inclusion of the clause in 
contracts with small businesses, educational institutions, and 
nonprofit organizations.
    2. Revises the clause at 252.242-7004 to replace the requirement 
for an MMAS ``demonstration'' with a requirement for the contractor to 
have policies, procedures, and operating instructions that adequately 
describe its MMAS, and to provide adequate evidence that it has 
conducted internal audits to ensure compliance with its MMAS policies, 
procedures, and operating instructions.

[[Page 41039]]

The requirement for a demonstration has caused significant confusion, 
because the DFARS does not define the term or describe what constitutes 
an adequate demonstration. The proposed rule revises the MMAS 
requirements to be consistent with the documentation and testing 
requirements of other system reviews such as accounting and purchasing. 
The Government does not require demonstrations of these systems, but 
instead performs risk-based reviews that focus on contractor practices 
and the implementation of those practices, including testing the system 
when and where necessary. This revision does not eliminate the 
requirement for contractor compliance with the ten MMAS standards or 
alter the level of audit access to which the Government is entitled.
    3. Makes the dollar threshold for conducting an MMAS review 
consistent with the threshold for conducting a Contractor Insurance/
Pension Review at DFARS Subpart 242.73. The DFARS presently requires an 
MMAS review every 3 years for contractors that receive total annual DoD 
awards in excess of $70 million, unless the administrative contracting 
officer (ACO) specifies otherwise. The proposed rule eliminates the 
requirement for an MMAS review every 3 years; raises the minimum dollar 
threshold for MMAS review from $30 million to $40 million; requires the 
ACO to make a case-by-case determination of the need for an MMAS 
review; and revises the basis for the dollar threshold, replacing 
``prior year DoD contract and subcontract awards'' with the definition 
of ``qualifying sales'' from DFARS Subpart 242.73.
    4. Clarifies the responsibilities of the ACO and the MMAS team 
members.
    This rule was not subject to Office of Management and Budget review 
under executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

    The proposed rule is not expected 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, et seq., because the 
DFARS already exempts small business concerns from the major MMAS 
requirements. Therefore, DoD has not performed an initial regulatory 
flexibility analysis. DoD invites comments from small businesses and 
other interested parties. DoD also will consider comments from small 
entities concerning the affected DFARS subparts in accordance with 5 
U.S.C. 610. Such comments should be submitted separately and should 
cite DFARS Case 2000-D003.

C. Paperwork Reduction Act

    The proposed rule will eliminate the requirement for contractors to 
demonstrate their material management and accounting systems, and will 
reduce the number of contractors that must disclose their systems to 
the Government. Therefore, this rule will reduce the paperwork burden 
hours approved under Office of Management and Budget Control Number 
0704-0250.

List of Subjects in 48 CFR Parts 242 and 252

    Government procurement.

Michele P. Peterson,
Executive Editor,

Defense Acquisition Regulations Council.

    Therefore, DoD proposes to amend 48 CFR Parts 242 and 252 as 
follows:
    1. The authority citation for 48 CFR Parts 242 and 252 continues to 
read as follows:

    Authority: 41 U.S.C. 421 and 48 CFR Chapter 1.
    2. Subpart 242.72 is revised to read as follows;

Subpart 242.72--Contractor Material Management and Accounting 
System

Sec.
242.7200  Scope of subpart.
242.7201  Definitions.
242.7202  Policy.
242.7203  Review procedures.
242.7204  Contract clause.

242.7200  Scope of subpart.

    (a) This subpart provides policies, procedures, and standards for 
use in the evaluation of a contractor's material management and 
accounting system (MMAS).
    (b) The policies, procedures, and standards in this subpart--
    (1) Apply only when the contractor has contracts exceeding the 
simplified acquisition threshold that are not for the acquisition of 
commercial items and are either--
    (i) Cost-reimbursement contracts; or
    (ii) Fixed-price contracts with progress payments based on cost or 
other financing provisions based on cost; and
    (2) Do not apply to small businesses, educational institutions, or 
nonprofit organizations.


242.7201  Definitions.

    Material management and accounting system and valid time-phased 
requirements are defined in the clause at 252.242-7004, Material 
Management and Accounting System.


242.7202  Policy.

    DoD policy is for its contractors to have an MMAS that conforms to 
the standards in paragraph (e) of the clause at 252.242-7004, so that 
the system--
    (a) Reasonably forecasts material requirements;
    (b) Ensures the costs of purchased and fabricated material charged 
or allocated to a contract are based on valid time-phased requirements; 
and
    (c) Maintains a consistent, equitable, and unbiased logic for 
costing of material transactions.


242.7203  Review procedures.

    (a) Criteria for conducting reviews. Conduct an MMAS review when--
    (1) A contractor has $40 million of qualifying sales to the 
Government during the contractor's preceding fiscal year; and
    (2) The administrative contracting officer (ACO), with advice from 
the auditor, determines an MMAS review is needed based on a risk 
assessment of the contractor's past experience and current 
vulnerability.
    (b) Qualifying sales. Qualifying sales are sales for which cost or 
pricing data were required under 10 U.S.C. 2306a, as implemented in FAR 
15.403, or that are contracts priced on other than a firm-fixed-price 
or fixed-price with economic price adjustment basis. Sales include 
prime contracts, subcontracts, and modifications to such contracts and 
subcontracts.
    (c) System evaluation. Cognizant contract administration and audit 
activities must jointly establish and manage programs for evaluating 
the MMAS systems of contractors and must annually establish a schedule 
of contractors to be reviewed. In addition, they must--
    (1) Conduct reviews as a team effort.
    (i) The ACO--
    (A) Appoints a team leader; and
    (B) Ensures that the team includes appropriate functional 
specialists (e.g., industrial specialist, engineer, property 
administrator, auditor).
    (ii) The team leader--
    (A) Advises the ACO and the contractor of findings during the 
review and at the exit conference.
    (B) Makes every effort to resolve differences regarding questions 
of fact during the review.
    (iii) The contractor auditor--
    (A) Participates as a member of the MMAS team or serves as the team 
leader (see paragraph (c)(1)(i) of this section); and
    (B) Issues an audit report for incorporation into the MMAS report 
based on an analysis of the contractor's books, accounting records, and 
other related data.

[[Page 41040]]

    (2) Tailor reviews to take full advantage of the day-to-day work 
done by both organizations.
    (3) Prepare the MMAS report.
    (d) Disposition of evaluation team findings. The team leader must 
document the evaluation team findings and recommendations in the MMAS 
report to the ACO. If there are any significant MMAS deficiencies, the 
report must provide an estimate of the adverse impact on the Government 
resulting from those deficiencies.
    (1) Initial notification to the contractor. The ACO must provide a 
copy of the report to the contractor immediately upon receipt from the 
team leader.
    (i) The ACO must notify the contractor in a timely manner if there 
are no deficiencies.
    (ii) If there are any deficiencies, the ACO must request the 
contractor to provide a written response within 30 days (or such other 
date as may be mutually agreed to by the ACO and the contractor) from 
the date of initial notification.
    (iii) If the contractor agrees with the report, the contractor has 
60 days (or such other date as may be mutually agreed to by the ACO and 
the contractor) to correct any identified deficiencies or submit a 
corrective action plan showing milestones and actions to eliminate the 
deficiencies.
    (iv) If the contractor disagrees with the report, the contractor 
must provide rationale in the written response.
    (2) Evaluation of the contractor's response. The ACO, in 
consultation with the auditor, evaluates the contractor's response and 
determines whether--
    (i) The MMAS contains any deficiencies and, if so, any corrective 
action is needed;
    (ii) The deficiencies are significant enough to result in the 
reduction of progress payments or disallowance of costs on vouchers; 
and
    (iii) Proposed corrective actions (if the contractor submitted 
them) are adequate to correct the deficiencies.
    (3) Notification of ACO determination.
    (i) The ACO must notify the contractor in writing (copy to auditor 
and functional specialists) of--
    (A) Any deficiencies and the necessary corrective action;
    (B) Acceptability of the contractor's corrective action plan (if 
one was submitted) or the need for a corrective action plan; and
    (C) Any decision to reduce progress payments or disallow costs on 
vouchers.
    (ii) The Government does not approve or disapprove the contractor's 
MMAS. ACO notifications should avoid any such implications.
    (iii) From the time the ACO determines that there are any 
significant MMAS deficiencies until the time the deficiencies are 
corrected, all field pricing reports for that contractor must contain a 
recommendation relating to proposed adjustments necessary to protect 
the Government's interests.
    (iv) The ACO should consider the effect of any significant MMAS 
deficiencies in reviews of the contractor's estimating system (see 
215.407-5).
    (4) Reductions or disallowances.
    (i) When the ACO determines the MMAS deficiencies have a material 
impact on Government contract costs, the ACO must reduce progress 
payments by an appropriate percentage based on affected costs (in 
accordance with FAR 32.503-6) and/or disallow costs on vouchers (in 
accordance with FAR 42.803). The reductions or disallowances must 
remain in effect until the ACO determines that--
    (A) The deficiencies are corrected; or
    (B) The amount of the impact is immaterial.
    (ii) The maximum payment adjustment is the adverse material impact 
to the Government as specified in the MMAS report. The ACO should use 
the maximum adjustment when the contractor did not submit a corrective 
action plan with its response, or when the plan is unacceptable. In 
other cases, the ACO should consider the quality of the contractor's 
corrective action plan in determining the appropriate percentage.
    (iii) As the contractor implements its accepted corrective action 
plan, the ACO should reinstate a portion of withheld amounts 
commensurate with the contractor's progress in making corrections. 
However, the ACO must not fully reinstate withheld amounts until the 
contractor corrects the deficiencies, or until the impact of the 
deficiencies become immaterial.
    (5) Monitoring contractor's corrective action. The ACO and the 
auditor must monitor the contractor's progress in correcting 
deficiencies. When the ACO determines the deficiencies have been 
corrected, the ACO must notify the contractor in writing. If the 
contractor fails to make adequate progress, the ACO must take further 
action. The ACO may--
    (i) Elevate the issue to higher level management;
    (ii) Further reduce progress payments and/or disallow costs on 
vouchers;
    (iii) Notify the contractor of the inadequacy of the contractor's 
cost estimating system and/or cost accounting system; and
    (iv) Issue cautions to contracting activities regarding the award 
of future contracts.


242.7204  Contract clause.

    Use the clause at 252.242-7004, Material Management and Accounting 
System, in all solicitations and contracts exceeding the simplified 
acquisition threshold that are not for the acquisition of commercial 
items and--
    (a) Are not awarded to small businesses, educational institutions, 
or nonprofit organizations; and
    (b) Are either--
    (1) Cost-reimbursement contracts; or
    (2) Fixed-price contracts with progress payments based on cost or 
other financing provisions based on cost.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

    3. Section 252.242-7004 is revised to read as follows:


252.242-7004  Material Management and Accounting System.

    As prescribed in 242.7204, use the following clause.

Material Management and Accounting System (XXX 2000)

    (a) Definitions. As used in this clause--
    (1) ``Material management and accounting system (MMAS)'' means 
the Contractor's system or systems for planning, controlling, and 
accounting for the acquisition, use, issuing, and disposition of 
material. Material management and accounting systems may be manual 
or automated. They may be stand-alone systems or they may be 
integrated with planning, engineering, estimating, purchasing, 
inventory, accounting, or other systems.
    (2) ``Valid time-phased requirements'' means material that is--
    (i) Needed to fulfill the production plan, including reasonable 
quantities for scrap, shrinkage, yield, etc.; and
    (ii) Charged/billed to contracts or other cost objectives in a 
manner consistent with the need to fulfill the production plan.
    (3) ``Contractor'' means a business unit as defined in section 
31.001 of the Federal Acquisition Regulation (FAR).
    (b) General. The Contractor shall--
    (1) Maintain an MMAS that--
    (i) Reasonably forecasts material requirements;
    (ii) Ensures that costs of purchased and fabricated material 
charged or allocated to a contract are based on valid time-phased 
requirements; and
    (iii) Maintains a consistent, equitable, and unbiased logic for 
costing of material transactions; and
    (2) Assess its MMAS and take reasonable action to comply with 
the MMAS standards in paragraph (e) of this clause.
    (c) Disclosure and maintenance requirements. The Contractor 
shall--

[[Page 41041]]

    (1) Have policies, procedures, and operating instructions that 
adequately describe its MMAS;
    (2) Provide to the Administrative Contracting Officer (ACO) 
adequate evidence that it has conducted internal audits to ensure 
compliance with established MMAS policies, procedures, and operating 
instructions; and
    (3) Disclose significant changes in its MMAS to the ACO within 
30 days of implementation.
    (d) Deficiencies.
    (1) If the Contractor receives a report from the ACO that 
identifies any deficiencies in its MMAS, the Contractor shall 
respond as follows:
    (i) If the Contractor agrees with the report findings and 
recommendations, the Contractor shall--
    (A) Within 30 days, state its agreement in writing; and
    (B) Within 60 days, correct the deficiencies or submit a 
corrective action plan showing milestones and actions to eliminate 
the deficiencies.
    (ii) If the Contractor disagrees with the report findings and 
recommendations, the Contractor shall, within 30 days, state its 
rationale for each area of disagreement.
    (2) The ACO will evaluate the Contractor's response and will 
notify the Contractor in writing of the--
    (i) Determination concerning any remaining deficiencies;
    (ii) Adequacy of any proposed or completed corrective action 
plan; and
    (iii) Need for any new or revised corrective action plan.
    (3) When the ACO determines the MMAS deficiencies have a 
material impact on Government contract costs, the ACO must reduce 
progress payments by an appropriate percentage based on affected 
costs (in accordance with FAR 32.503-6) and/or disallow costs on 
vouchers (in accordance with FAR 42.803) until the ACO determines 
that--
    (i) The deficiencies are corrected; or
    (ii) The amount of the impact is immaterial.
    (e) MMAS standards. The MMAS shall have adequate internal 
controls to ensure system and data integrity, and shall--
    (1) Have an adequate system description including policies, 
procedures, and operating instructions that comply with the FAR and 
Defense FAR Supplement;
    (2) Ensure that costs of purchased and fabricated material 
charged or allocated to a contract are based on valid time-phased 
requirements as impacted by minimum/economic order quantity 
restrictions.
    (i) A 98 percent bill of material accuracy and a 95 percent 
master production schedule accuracy are desirable as a goal in order 
to ensure that requirements are both valid and appropriately time-
phased.
    (ii) If systems have accuracy levels below these, the Contractor 
shall provide adequate evidence that--
    (A) There is no material harm to the Government due to lower 
accuracy levels; and
    (B) The cost to meet the accuracy goals is excessive in relation 
to the impact on the Government;
    (3) Provide a mechanism to identify, report, and resolve system 
control weaknesses and manual override. Systems should identify 
operational exceptions such as excess/residual inventory as soon as 
known;
    (4) Provide audit trails and maintain records (manual and those 
in machine readable form) necessary to evaluate system logic and to 
verify through transaction testing that the system is operating as 
desired;
    (5) Establish and maintain adequate levels of record accuracy, 
and include reconciliation of recorded inventory quantities to 
physical inventory by part number on a periodic basis. A 95 percent 
accuracy level is desirable. If systems have an accuracy level below 
95 percent, the Contractor shall provide adequate evidence that--
    (i) Three is no material harm to the Government due to lower 
accuracy levels; and
    (ii) The cost to meet the accuracy goal is excessive in relation 
to the impact on the Government;
    (6) Provide detailed descriptions of circumstances that will 
result in manual or system generated transfers of parts;
    (7) Maintain a consistent, equitable, and unbiased logic for 
costing of material transactions as follows:
    (i) The Contractor shall maintain and disclose written policies 
describing the transfer methodology and the loan/pay-back technique.
    (ii) The costing methodology may be standard or actual cost, or 
any of the inventory costing methods in 48 CFR 9904.411-50(b). The 
Contractor shall maintain consistency across all contract and 
customer types, and from accounting period to accounting period for 
initial charging and transfer charging.
    (iii) The system should transfer parts and associated costs 
within the same billing period. In the few instances where this may 
not be appropriate, the Contractor may accomplish the material 
transaction using a loan/pay-back technique. The ``loan/pay-back 
technique'' means that the physical part is moved temporarily from 
the contract, but the cost of the part remains on the contract. The 
procedures for the loan/pay-back technique must be approved by the 
ACO. When the technique is used, the Contractor shall have controls 
to ensure--
    (A) Parts are paid back expeditiously;
    (B) Procedures and controls are in place to correct any 
overbilling that might occur;
    (C) Monthly, at a minimum, identification of the borrowing 
contract and the date the part was borrowed; and
    (D) The cost of the replacement part is charged to the borrowing 
contract;
    (8) Where allocations from common inventory accounts are used, 
have controls (in addition to those in paragraphs (e)(2) and (7) of 
this clause) to ensure that--
    (i) Reallocations and any credit due are processed no less 
frequently than the routine billing cycle;
    (ii) Inventories retained for requirements that are not under 
contract are not allocated to contracts; and
    (iii) Algorithms are maintained based on valid and current data;
    (9) Notwithstanding FAR 45.505-3(f)(1)(ii), have adequate 
controls to ensure that physically commingled inventories that may 
include material for which costs are charged or allocated to fixed-
price, cost-reimbursement, and commercial contracts do not 
compromise requirements of any of the standards in paragraphs (e)(1) 
through (8) of this clause. Government-furnished material shall not 
be--
    (i) Physically commingled with other material; or
    (ii) Used on commercial work; and
    (10) Be subjected to periodic internal audits to ensure 
compliance with established policies and procedures.
(End of clause)

[FR Doc. 00-16640 Filed 6-30-00; 8:45 am]
BILLING CODE 5000-04-M