Friday, January 22, 2010

Business System Requirements - Purchasing

Over the past few days, we've been discussing the proposed DFARS (DoD FAR Supplement) regulations that will allow the Government to withhold funds from contracts with contractors that have inadequate business systems. We discussed the six systems addressed by the regulations, the procedures from audit finding to initial determination to final determination, and the amount of the withholds (10 to 100 percent). It is readily apparent that if this reguation is implemented in any form resembling the proposal, contractors are going to be heavily incentivized to pay more attention to their business systems. Implementation will come at a cost. One commentator quipped that this is Sarbanes-Oxly for defense contractors, meaning that everyone spends lots of money to set up internal control systems and spends more money to test for compliance while unable to show any tangible benefits.

Regardless of how the final regulation fleshes out, the sections that list specific requirements for each of the six business systems will most likely remain intact. These specific requirements are not exactly new however. They've been brought in from other sources. For example, the requirements for a purchasing system are essentially those that DCMA (Defense Contract Management Agency) tests for when conducting  a CPSR (Contractor Purchasing System Reviews). Beginning today and continuing until we cover the six business systems, we will list the specific requirements that the Government will expect systems to include. We begin with the 17 requirements for an adequate purchasing system.

Purchasing systems must:

  1. Have an adequate system description including policies, procedures, and operating instructions that comply with the FAR and DFARS.
  2. Ensure that all applicable purchase orders and subcontracts contain all flow down clauses, including terms and conditions and any other clauses needed to carry out the requirements of the prime contract.
  3. Maintain an organization plan that establishes clear lines of authority and responsibility.
  4. Purchase orders are based on authorized requisitions and include complete history files.
  5. Establish and maintain adequate documentation to provide a complete and accurate history of purchase transactions to support vendors selected and prices paid.
  6. Apply a consistent make or buy policy that is in the best interest of the Government.
  7. Use competitive sourcing to the maximum extent practicable and ensure debarred or suspended contractors are properly excluded from contract award.
  8. Evaluate price, quality, delivery, technical capabilities, and financial capabilities of competing vendors.
  9. Require management level justification and cost/price analysis as applicable for any sole or single source award.
  10. Perform appropriate cost or price analysis and technical evaluation for each subcontractor and supplier proposal or quote.
  11. Document negotiations in accordance with FAR 15.406-3.
  12. Seek, take, and document appropriate purchase discounts, including cash discounts, trade discounts, quantity discounts, rebates, freight allowances, and company-wide volume discounts.
  13. Ensure proper type of contract selection and prohibit issuance of cost-plus-a-percentage-of-cost subcontracts.
  14. Maintain subcontract surveillance to ensure timely delivery of an acceptable product and procedures to notify the Government of potential subcontract problems that may impact delivery, quantity, or price.
  15. Document and justify reasons for subcontract changes that affect cost or price.
  16. Notify the Government of the award of an auditable subcontract and perform adequate audits of those subcontracts.
  17. Enforce adequate policies on conflict of interest, gifts, and gratuities, including the requirements of the Anti-Kickback Act.




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