`[Federal Register Volume 90, Number 11 (Friday, January 17, 2025)]
[Rules and Regulations]
[Pages 5725-5735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00721]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 202, 215, 234, 242, 244, 245, and 252

[Docket DARS-2024-0020]
RIN 0750-AL25


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

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

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SUMMARY: DoD is issuing a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to implement sections of the 
National Defense Authorization Acts 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.''

DATES: Effective January 17, 2025.

FOR FURTHER INFORMATION CONTACT: Mr. Jon Snyder, telephone 703-945-
5341.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published a proposed rule in the Federal Register at 89 FR 
53561 on June 27, 2024, to implement section 806 of the National 
Defense Authorization Act (NDAA) for Fiscal Year (FY) 2021 (Pub. L. 
116-383), 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.'' Three respondents 
submitted public comments in response to the proposed rule.

II. Discussion and Analysis

    DoD reviewed the public comments in the development of the final 
rule. A discussion of the comments and the changes made to the rule as 
a result of those comments is provided, as follows:

A. Summary of Significant Changes From the Proposed Rule

    There are no significant changes from the proposed rule.

B. Analysis of Public Comments

    Comment: A respondent recommended DoD add experience requirements 
for administrative contracting officers that issue decisions related to 
business system deficiencies. The respondent also recommended 
clarifying that, although the terminology has changed, a warranted 
official is required to make the determination of findings of the audit 
or review.
    Response: Federal Acquisition Regulation 1.603 establishes the 
requirements for the selection, appointment, and termination of 
appointment for contracting officers. Section 806 does not require 
administrative contracting officers that issue decisions related to 
business system deficiencies to have a certain amount of experience. 
DFARS 242.7502 specifies that the cognizant contracting officer, in 
consultation with the auditor or functional specialist, shall determine 
the acceptability of a contractor's accounting system and approve or 
disapprove the system and pursue correction of any deficiencies as 
required. As such, it is not necessary to make the recommended changes.
    Comment: A respondent recommended adding a matrix at DFARS 242.7000 
that aligns the types of Generally Accepted Accounting Systems internal 
control findings with the Defense Contract Management Agency (DCMA) 
corrective action request levels.
    Response: The creation of a reference matrix to pre-establish a 
particular level of a corrective action request would constrain the 
cognizant contracting officer's ability to administer and oversee 
contracts. Therefore, this recommendation is not implemented in the 
final rule.
    Comment: A respondent recommended that DoD discontinue the use of 
or replace earned value management with a ``cash on delivery'' payment 
system. A respondent recommended that DoD consider a small business 
exemption from the DFARS business system clauses because they are 
complex systems that most small businesses cannot afford to invest the 
human and financial capital into supporting. A respondent recommended 
that DoD implement an inflation adjustment for each business system for 
fiscal year 2025 to mitigate the impacts of inflation on small 
businesses.
    Response: These comments are outside the scope of this rule. 
Section 806 does not authorize DoD to discontinue the use of or replace 
earned value management, nor does it authorize DoD to establish a small 
business

[[Page 5726]]

exemption or an inflation adjustment. Inflation adjustments are made in 
accordance with 41 U.S.C. 1908.

C. Other Changes

    The clause at DFARS 252.245-7003, Contractor Property Management 
System Administration, is amended to update the paragraph references to 
align with the changes made to the clause. At DFARS 
242.7203(c)(2)(ii)(A) ``deficiency'' is changed to ``weakness or 
deficiency''. In addition, at DFARS 215.407-5-70(d)(1) and 244.305-
70(c)(1) ``weakness and deficiencies'' is changed to ``weakness or 
deficiencies''.

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

    This final rule amends the clauses at DFARS 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. However, this final 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.

IV. Expected Impact of the Rule

    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 final 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 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.

V. Executive Orders 12866 and 13563

    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.

VI. Congressional Review Act

    As required by the Congressional Review Act (5 U.S.C. 801-808) 
before an interim or final rule takes effect, DoD will submit a copy of 
the interim or final rule with the form, Submission of Federal Rules 
Under the Congressional Review Act, to the U.S. Senate, the U.S. House 
of Representatives, and the Comptroller General of the United States. A 
major rule under the Congressional Review Act cannot take effect until 
60 days after it is published in the Federal Register. The Office of 
Information and Regulatory Affairs has determined that this rule is not 
a major rule as defined by 5 U.S.C. 804.

VII. Regulatory Flexibility Act

    A final regulatory flexibility analysis has been prepared 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. 
and is summarized as follows:
    This rule is necessary 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 rule will help DoD maintain appropriate oversight over 
contractor business systems by enabling clear classification of 
deficiencies according to severity.
    There were no significant issues raised by the public in response 
to the initial regulatory flexibility analysis.
    The 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 fiscal years 2021, 2022, and 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 rule does not impose any new reporting, recordkeeping or other 
compliance requirements.
    There are no known alternatives that would accomplish the stated 
objectives of the applicable statute.

VIII. Paperwork Reduction Act

    This final rule does not contain any information collection 
requirements that require the approval of the Office of Management and 
Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35).

List of Subjects in 48 CFR Parts 202, 215, 234, 242, 244, 245, and 
252

    Government procurement.

Jennifer D. Johnson,
Editor/Publisher, Defense Acquisition Regulations System.

    Therefore, the Defense Acquisition Regulations System amends 48 CFR 
parts 202, 215, 234, 242, 244, 245, and 252 as follows:

0
1. The authority citation for 48 CFR 202, 215, 234, 242, 244, 245, and 
252 continues to read as follows:

    Authority:  41 U.S.C. 1303 and 48 CFR chapter 1.

[[Page 5727]]

PART 202--DEFINITIONS OF WORDS AND TERMS

0
2. Amend section 202.101 by adding in alphabetical order the definition 
of ``Material weakness'' to read as follows:


202.101   Definitions.

* * * * *
    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--
    (1) Probable; or
    (2) More than remote but less than likely (section 806 of Pub. L. 
116-283).
* * * * *

0
3. Amend section 215.407-5-70 by:
0
a. Revising paragraph (a);
0
b. In paragraph (c)(2)(ii) removing ``any deficiencies'' and adding 
``any weaknesses or deficiencies'' in its place;
0
c. Revising and republishing paragraph (d); and
0
d. In paragraph (e) removing ``significant deficiencies'' and adding 
``material weaknesses'' in its place.
    The revisions and republications read as follows:


215.407-5-70   Disclosure, maintenance, and review requirements.

    (a) Definitions. As used in this section--
    Acceptable estimating system means an estimating system that 
complies with the system criteria in paragraph (d) of 252.215-7002, 
Cost Estimating System Requirements, and provides for a system that--
    (i) Is maintained, reliable, and consistently applied;
    (ii) Produces verifiable, supportable, documented, and timely cost 
estimates that are an acceptable basis for negotiation of fair and 
reasonable prices;
    (iii) Is consistent with and integrated with the contractor's 
related management systems; and
    (iv) Is subject to applicable financial control systems.
    Contractor means a business unit as defined in FAR 2.101.
    Estimating system means the contractor's policies, procedures, and 
practices for budgeting and planning controls and for generating 
estimates of costs and other data included in proposals submitted to 
customers in the expectation of receiving contract awards. Estimating 
system includes the contractor's--
    (i) Organizational structure;
    (ii) Established lines of authority, duties, and responsibilities;
    (iii) Internal controls and managerial reviews;
    (iv) Flow of work, coordination, and communication; and
    (v) Budgeting, planning, estimating methods, techniques, 
accumulation of historical costs, and other analyses used to generate 
cost estimates.
* * * * *
    (d) Disposition of findings--(1) Reporting of findings. The auditor 
shall document findings and recommendations in a report to the 
contracting officer. If the auditor identifies any material weaknesses, 
the report shall describe the underlying deficiencies in sufficient 
detail to allow the contracting officer to understand the weaknesses or 
deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
all findings and recommendations and, if there are no material 
weaknesses, shall promptly notify the contractor, in writing, that the 
contractor's estimating system is acceptable and approved; or
    (ii) If the contracting officer finds that there are one or more 
material weaknesses due to the contractor's failure to meet one or more 
of the estimating system criteria in the clause at 252.215-7002, the 
contracting officer shall--
    (A) Promptly make an initial written determination on any material 
weaknesses and notify the contractor, in writing, providing a 
description of each material weakness in sufficient detail to allow the 
contractor to understand the deficiency (see PGI 215.407-5-70(d)(2));
    (B) Request the contractor to respond in writing to the initial 
determination within 30 days; and
    (C) Promptly evaluate the contractor's responses to the initial 
determination, in consultation with the auditor or functional 
specialist, and make a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor in writing that--
    (A) The contractor's estimating system is acceptable and approved, 
and no material weaknesses remain; or
    (B) Material weaknesses remain. The notice shall identify any 
remaining material weaknesses and indicate the adequacy of any proposed 
or completed corrective action. The contracting officer shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the weaknesses;
    (2) Disapprove the system in accordance with the clause at 252.215-
7002; and
    (3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of material weaknesses in PGI 
215.407-5-70(d)(3).
* * * * *

PART 234--MAJOR SYSTEM ACQUISITION


234.001   [Redesignated as 234.001-70]

0
4. Redesignate section 234.001 as section 234.001-70.

0
5. Revise newly redesignated section 234.001-70 to read as follows:


234.001-70   Definitions.

    As used in this part--
    Acceptable earned value management system means an earned value 
management system that generally complies with system criteria in 
paragraph (b) of 252.234-7002, Earned Value Management System.
    Earned value management system means an earned value management 
system that complies with the earned value management system guidelines 
in the ANSI/EIA-748.
    Production of major defense acquisition program means the 
production and deployment of a major system that is intended to achieve 
an operational capability that satisfies mission needs, or an activity 
otherwise defined as Milestone C under Department of Defense 
Instruction 5000.02 or related authorities.

0
6. Amend section 234.201--
0
a. In paragraph (5)(ii) by removing ``any deficiencies'' and adding 
``any weaknesses or deficiencies'' in its place;
0
b. By revising and republishing paragraph (7); and
0
c. In paragraph (8) by removing ``significant deficiencies'' and adding 
``material weaknesses'' in its place.
    The revision and republication reads as follows:


234.201   Policy.

    (7) Disposition of findings--(i) Reporting of findings. The 
functional specialist or auditor shall document findings and 
recommendations in a report to the contracting officer. If the 
functional specialist or auditor identifies any material weakness in 
the contractor's earned value management system, the report shall 
describe the

[[Page 5728]]

weaknesses or deficiencies in sufficient detail to allow the 
contracting officer to understand the weaknesses or deficiencies.
    (ii) Initial determination. (A) The contracting officer shall 
review all findings and recommendations and, if there are no material 
weaknesses, shall promptly notify the contractor, in writing, that the 
contractor's earned value management system is acceptable and approved; 
or
    (B) If the contracting officer finds that there are one or more 
material weaknesses due to the contractor's failure to meet one or more 
of the earned value management system criteria in the clause at 
252.234-7002, the contracting officer shall--
    (1) Promptly make an initial written determination of any material 
weaknesses and notify the contractor, in writing, providing a 
description of each material weakness in sufficient detail to allow the 
contractor to understand the weaknesses (see PGI 234.201(7)(ii));
    (2) Request the contractor to respond, in writing, to the initial 
determination within 30 days; and
    (3) Evaluate the contractor's response to the initial 
determination, in consultation with the auditor or functional 
specialist, and make a final determination.
    (iii) Final determination. (A) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (1) The contractor's earned value management system is acceptable 
and approved, and no material weaknesses remain; or
    (2) Material weaknesses remain. The notice shall identify any 
remaining material weaknesses and indicate the adequacy of any proposed 
or completed corrective action. The contracting officer shall--
    (i) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the deficiencies or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the weaknesses;
    (ii) Disapprove the system in accordance with the clause at 
252.234-7002 when initial validation is not successfully completed 
within the timeframe approved by the contracting officer, or the 
contracting officer determines that the existing earned value 
management system contains one or more material weaknesses in high-risk 
guidelines in ANSI/EIA-748 standards (guidelines 1, 3, 6, 7, 8, 9, 10, 
12, 16, 21, 23, 26, 27, 28, 30, or 32). When the contracting officer 
determines that the existing earned value management system contains 
one or more material weaknesses in one or more of the remaining 16 
guidelines in ANSI/EIA-748 standards, the contracting officer shall use 
discretion to disapprove the system based on input received from 
functional specialists and the auditor; and
    (iii) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (B) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of material weaknesses at PGI 
234.201(7)(iii).
* * * * *

PART 242--CONTRACT ADMINISTRATION AND AUDIT SERVICES


242.302   [Amended]

0
7. Amend section 242.302 in paragraph (a)(7) by removing 
``deficiencies'' and adding ``weaknesses or deficiencies'' in its 
place.

0
8. Revise and republish section 242.7000 to read as follows:


242.7000   Contractor business system deficiencies.

    (a) Definitions. As used in this subpart--
    Acceptable contractor business systems means contractor business 
systems that comply with the terms and conditions of the applicable 
business system clauses listed in the definition of ``contractor 
business systems'' in this section.
    Contractor business systems means--
    (i) Accounting system, if the contract includes the clause at 
252.242-7006, Accounting System Administration;
    (ii) Earned value management system, if the contract includes the 
clause at 252.234-7002, Earned Value Management System;
    (iii) Estimating system, if the contract includes the clause at 
252.215-7002, Cost Estimating System Requirements;
    (iv) Material management and accounting system, if the contract 
includes the clause at 252.242-7004, Material Management and Accounting 
System;
    (v) Property management system, if the contract includes the clause 
at 252.245-7003, Contractor Property Management System Administration; 
and
    (vi) Purchasing system, if the contract includes the clause at 
252.244-7001, Contractor Purchasing System Administration.
    Covered contract means a contract that is subject to the Cost 
Accounting Standards under 41 U.S.C. chapter 15, as implemented in 
regulations found at 48 CFR 9903.201-1 (10 U.S.C. 3841 note prec., as 
amended by section 816 of Pub. L. 112-81).
    (b) Determination to withhold payments. If the contracting officer 
makes a final determination to disapprove a contractor's business 
system in accordance with the clause at 252.242-7005, Contractor 
Business Systems, the contracting officer shall--
    (1) In accordance with agency procedures, identify one or more 
covered contracts containing the clause at 252.242-7005 from which 
payments will be withheld. When identifying the covered contracts from 
which to withhold payments, the contracting officer shall ensure that 
the total amount of payment withholding under 252.242-7005 does not 
exceed 10 percent of progress payments, performance-based payments, and 
interim payments under cost-reimbursement, labor-hour, and time-and-
materials contracts billed under each of the identified covered 
contracts. Similarly, the contracting officer shall ensure that the 
total amount of payment withholding under the clause at 252.242-7005 
for each business system does not exceed 5 percent of progress 
payments, performance-based payments, and interim payments under cost-
reimbursement, labor-hour, and time-and-materials contracts billed 
under each of the identified covered contracts. The contracting officer 
has the sole discretion to identify the covered contracts from which to 
withhold payments.
    (2) Promptly notify the contractor, in writing, of the contracting 
officer's determination to implement payment withholding in accordance 
with the clause at 252.242-7005. The notice of payment withholding 
shall be included in the contracting officer's written final 
determination for the contractor business system and shall inform the 
contractor that--
    (i) Payments shall be withheld from the contract or contracts 
identified in the written determination in accordance with the clause 
at 252.242-7005, until the contracting officer determines that there 
are no remaining material weaknesses; and
    (ii) The contracting officer reserves the right to take other 
actions within the terms and conditions of the contract.
    (3) Provide a copy of the determination to all contracting officers 
administering the selected contracts from which payments will be 
withheld. The contracting officer shall also provide a copy of the 
determination to the auditor; payment office; affected contracting 
officers at the buying

[[Page 5729]]

activities; and cognizant contracting officers in contract 
administration activities.
    (c) Monitoring contractor's corrective action. The contracting 
officer, in consultation with the auditor or functional specialist, 
shall monitor the contractor's progress in correcting the weaknesses. 
The contracting officer shall notify the contractor of any decision to 
decrease or increase the amount of payment withholding in accordance 
with the clause at 252.242-7005.
    (d) Correction of material weaknesses. (1) If the contractor 
notifies the contracting officer that the contractor has corrected the 
material weaknesses, the contracting officer shall request the auditor 
or functional specialist to review the correction to verify that the 
weaknesses have been corrected. If, after receipt of verification, the 
contracting officer determines that the contractor has corrected all 
material weaknesses as directed by the contracting officer's final 
determination, the contracting officer shall discontinue the 
withholding of payments, release any payments previously withheld, and 
approve the system, unless other material weaknesses remain.
    (2) Prior to the receipt of verification, the contracting officer 
may discontinue withholding payments pending receipt of verification, 
and release any payments previously withheld, if the contractor submits 
evidence that the material weaknesses have been corrected, and the 
contracting officer, in consultation with the auditor or functional 
specialist, determines that there is a reasonable expectation that the 
corrective actions have been implemented and are expected to correct 
the material weaknesses.
    (3) Within 90 days of receipt of the contractor notification that 
the contractor has corrected the material weaknesses, the contracting 
officer shall--
    (i) Make a determination that--
    (A) The contractor has corrected all material weaknesses as 
directed by the contracting officer's final determination in accordance 
with paragraph (d)(1) of this section;
    (B) There is a reasonable expectation that the corrective actions 
have been implemented in accordance with paragraph (d)(2) of this 
section; or
    (C) The contractor has not corrected all material weaknesses as 
directed by the contracting officer's final determination in accordance 
with paragraph (d)(1) of this section, or there is not a reasonable 
expectation that the corrective actions have been implemented in 
accordance with paragraph (d)(2) of this section; or
    (ii) Reduce withholding directly related to the material weaknesses 
covered under the corrective action plan by at least 50 percent of the 
amount being withheld from progress payments and performance-based 
payments, and direct the contractor, in writing, to reduce the 
percentage withheld on interim cost vouchers by at least 50 percent, 
until the contracting officer makes a determination in accordance with 
paragraph (d)(3)(i) of this section.
    (4) If, at any time, the contracting officer determines that the 
contractor has failed to correct the material weaknesses identified in 
the contractor's notification, the contracting officer will continue, 
reinstate, or increase withholding from progress payments and 
performance-based payments, and direct the contractor, in writing, to 
continue, reinstate, or increase the percentage withheld on interim 
cost vouchers to the percentage initially withheld, until the 
contracting officer determines that the contractor has corrected all 
material weaknesses as directed by the contracting officer's final 
determination.
    (e) Sample formats. For sample formats for written notifications of 
contracting officer determinations to initiate payment withholding, 
reduce payment withholding, and discontinue payment withholding in 
accordance with the clause at 252.242-7005, see PGI 242.7000.

0
9. Revise section 242.7201 to read as follows:


242.7201   Definitions.

    As used in this subpart--
    Acceptable material management and accounting system means a 
material management and accounting system that generally complies with 
the system criteria in paragraph (d) of the clause at 252.242-7004, 
Material Management and Accounting System.
    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.
    Valid time-phased requirements means material that is--
    (1) Needed to fulfill the production plan, including reasonable 
quantities for scrap, shrinkage, yield, etc.; and
    (2) Charged or billed to contracts or other cost objectives in a 
manner consistent with the need to fulfill the production plan.


242.7202   [Amended]

0
10. Amend section 242.7202 in paragraph (b)(2) by removing ``any 
deficiencies'' and adding ``any weaknesses or deficiencies'' in its 
place.

0
11. Amend section 242.7203 by--
0
a. Revising and republishing paragraph (c); and
0
b. Revising paragraph (d).
    The revisions and republication read as follows:


242.7203   Review procedures.

* * * * *
    (c) Disposition of findings--(1) Reporting of findings. The auditor 
or functional specialist shall document findings and recommendations in 
a report to the contracting officer. If the auditor or functional 
specialist identifies any material weakness, the report shall describe 
the weaknesses or deficiencies in sufficient detail to allow the 
contracting officer to understand the weaknesses or deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
findings and recommendations and, if there are no material weaknesses, 
shall promptly notify the contractor, in writing, that the contractor's 
MMAS is acceptable and approved; or
    (ii) If the contracting officer finds that there are one or more 
material weaknesses due to the contractor's failure to meet one or more 
of the MMAS system criteria in the clause at 252.242-7004, the 
contracting officer shall--
    (A) Promptly make an initial written determination on any material 
weaknesses and notify the contractor, in writing, providing a 
description of each material weakness in sufficient detail to allow the 
contractor to understand the weakness or deficiency;
    (B) Request the contractor to respond, in writing, to the initial 
determination within 30 days; and
    (C) Promptly evaluate the contractor's response to the initial 
determination in consultation with the auditor or functional 
specialist, and make a final determination (see PGI 242.7203(c)(2)).
    (3) Final determination. (i) The ACO shall make a final 
determination and notify the contractor that--
    (A) The contractor's MMAS is acceptable and approved, and no 
deficiencies remain; or
    (B) Material weaknesses remain. The notice shall identify any 
remaining material weaknesses and indicate the adequacy of any proposed 
or completed

[[Page 5730]]

corrective action. The contracting officer shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the weaknesses or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the weaknesses;
    (2) Disapprove the system in accordance with the clause at 252.242-
7004; and
    (3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of material weaknesses in PGI 
242.7203(c)(3).
    (d) System approval. The contracting officer shall promptly approve 
a previously disapproved MMAS and notify the contractor when the 
contracting officer determines that there are no remaining material 
weaknesses.
* * * * *

0
12. Revise section 242.7501 to read as follows:


242.7501   Definitions.

    As used in this subpart--
    Acceptable accounting system means a system that complies with the 
system criteria in paragraph (c) of the clause at 252.242-7006, 
Accounting System Administration, to provide reasonable assurance 
that--
    (1) Applicable laws and regulations are complied with;
    (2) The accounting system and cost data are reliable;
    (3) Risk of misallocations and mischarges are minimized; and
    (4) Contract allocations and charges are consistent with billing 
procedures.
    Accounting system means the contractor's system or systems for 
accounting methods, procedures, and controls established to gather, 
record, classify, analyze, summarize, interpret, and present accurate 
and timely financial data for reporting in compliance with applicable 
laws, regulations, and management decisions, and may include subsystems 
for specific areas such as indirect and other direct costs, 
compensation, billing, labor, and general information technology.

0
13. Amend section 242.7502--
0
a. In paragraph (b)(2) by removing ``any deficiencies'' and adding 
``any weaknesses or deficiencies'' in its place;
0
b. By revising and republishing paragraph (d);
0
c. By revising paragraph (e);
0
d. In the paragraph (g) heading and paragraphs (g)(1) and (g)(2)(i) by 
removing ``accounting system'';
0
e. In paragraph (g)(2)(iii) by removing ``accounting system's''; and
0
f. In paragraph (g)(3) introductory text by removing ``an accounting 
system deficiency'' and adding ``a deficiency'' in its place.
    The revisions and republication read as follows:


242.7502   Policy.

* * * * *
    (d) Disposition of findings--(1) Reporting of findings. The auditor 
shall document findings and recommendations in a report to the 
contracting officer. If the auditor identifies any material weakness, 
the report shall describe the weaknesses or deficiencies in sufficient 
detail to allow the contracting officer to understand the weaknesses or 
deficiencies. Follow the procedures at PGI 242.7502 for reporting of 
deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
findings and recommendations and, if there are no material weaknesses, 
shall promptly notify the contractor, in writing, that the contractor's 
accounting system is acceptable and approved; or
    (ii) If the contracting officer finds that there are one or more 
material weaknesses due to the contractor's failure to meet one or more 
of the accounting system criteria in the clause at 252.242-7006, the 
contracting officer shall--
    (A) Promptly make an initial written determination on any material 
weaknesses and notify the contractor, in writing, providing a 
description of each material weakness in sufficient detail to allow the 
contractor to understand the weakness (see PGI 242.7502(d)(2));
    (B) Request the contractor to respond, in writing, to the initial 
determination within 30 days; and
    (C) Promptly evaluate the contractor's response to the initial 
determination, in consultation with the auditor or functional 
specialist, and make a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (A) The contractor's accounting system is acceptable and approved, 
and no material weaknesses remain; or
    (B) Material weaknesses remain. The notice shall identify any 
remaining material weaknesses and indicate the adequacy of any proposed 
or completed corrective action. The contracting officer shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the weaknesses or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the weaknesses;
    (2) Make a determination to disapprove the system in accordance 
with the clause at 252.242-7006; and
    (3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of material weaknesses in PGI 
242.7502(d)(3).
    (e) System approval. The contracting officer shall promptly approve 
a previously disapproved accounting system and notify the contractor 
when the contracting officer determines that there are no remaining 
material weaknesses.
* * * * *

PART 244--SUBCONTRACTING POLICIES AND PROCEDURES

0
14. Revise section 244.101 to read as follows:


244.101   Definitions.

    Acceptable purchasing system means a purchasing system that 
complies with the system criteria in paragraph (c) of the clause at 
252.244-7001.
    Purchasing system means the contractor's system or systems for 
purchasing and subcontracting, including make-or-buy decisions, the 
selection of vendors, analysis of quoted prices, negotiation of prices 
with vendors, placing and administering of orders, and expediting 
delivery of materials.

0
15. Amend section 244.305-70--
0
a. In the introductory text by removing ``subsection'' and adding 
``section'' in its place;
0
b. By revising and republishing paragraph (c);
0
c. By revising paragraph (d); and
0
d. In the paragraph (f) heading and paragraphs (f)(1) and (f)(2)(i) by 
removing ``purchasing system'';
0
e. In paragraph (f)(2)(iii) by removing ``purchasing system's''; and
0
f. In paragraph (f)(3) introductory text by removing ``purchasing 
system''.
    The revisions and republications read as follows:


244.305-70   Policy.

* * * * *
    (c) Disposition of findings--(1) Reporting of findings. The 
purchasing system analyst or auditor shall document findings and 
recommendations in a report to the contracting officer. If the auditor 
or purchasing system analyst identifies any

[[Page 5731]]

material weaknesses, the report shall describe the underlying 
deficiencies in sufficient detail to allow the contracting officer to 
understand the weaknesses or deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
all findings and recommendations and, if there are no material 
weaknesses, shall promptly notify the contractor that the contractor's 
purchasing system is acceptable and approved; or
    (ii) If the contracting officer finds that there are one or more 
material weaknesses due to the contractor's failure to meet one or more 
of the purchasing system criteria in the clause at 252.244-7001, the 
contracting officer shall--
    (A) Promptly make an initial written determination on any material 
weaknesses and notify the contractor, in writing, providing a 
description of each material weakness in sufficient detail to allow the 
contractor to understand the weakness (see PGI 244.305-70(c)(2));
    (B) Request the contractor to respond, in writing, to the initial 
determination within 30 days; and
    (C) Evaluate the contractor's response to the initial determination 
in consultation with the auditor or purchasing system analyst and make 
a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (A) The contractor's purchasing system is acceptable and approved, 
and no material weaknesses remain; or
    (B) Material weaknesses remain. The notice shall identify any 
remaining material weaknesses and indicate the adequacy of any proposed 
or completed corrective action. The contracting officer shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the weaknesses or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the weaknesses;
    (2) Disapprove the system in accordance with the clause at 252.244-
7001; and
    (3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of material weaknesses in PGI 
244.305-70(c)(3).
    (d) System approval. The contracting officer shall promptly approve 
a previously disapproved purchasing system and notify the contractor 
when the contracting officer determines that there are no remaining 
material weaknesses.
* * * * *

PART 245--GOVERNMENT PROPERTY

0
16. Amend section 245.105--
0
a. By revising paragraph (a);
0
b. In paragraph (b)(2) by removing ``any deficiencies'' and adding 
``any weaknesses or deficiencies'' in its place;
0
c. By revising and republishing paragraph (d); and
0
d. In paragraph (e) by removing ``significant deficiencies'' and adding 
``material weaknesses'' in its place.
    The revisions and republication read as follows:


245.105   Contractors' property management system compliance.

    (a) Definitions. As used in this subpart--
    Acceptable property management system means a property system that 
complies with the system criteria in paragraph (c) of the clause at 
252.245-7003, Contractor Property Management Administration.
    Property management system means the contractor's system or systems 
for managing and controlling Government property.
* * * * *
    (d) Disposition of findings--(1) Reporting of findings. The 
property administrator shall document findings and recommendations in a 
report to the contracting officer. If the property administrator 
identifies any material weaknesses, the report shall describe the 
underlying deficiencies in sufficient detail to allow the contracting 
officer to understand the weaknesses or deficiencies.
    (2) Initial determination. (i) The contracting officer shall review 
findings and recommendations and, if there are no material weaknesses, 
shall promptly notify the contractor, in writing, that the contractor's 
property management system is acceptable and approved; or
    (ii) If the contracting officer finds that there are one or more 
material weaknesses due to the contractor's failure to meet one or more 
of the property management system criteria in the clause at 252.245-
7003, the contracting officer shall--
    (A) Promptly make an initial written determination on any material 
weaknesses and notify the contractor, in writing, providing a 
description of each material weakness in sufficient detail to allow the 
contractor to understand the weakness (see PGI 245.105(d)(2));
    (B) Request the contractor to respond, in writing, to the initial 
determination within 30 days and;
    (C) Evaluate the contractor's response to the initial 
determination, in consultation with the property administrator, and 
make a final determination.
    (3) Final determination. (i) The contracting officer shall make a 
final determination and notify the contractor, in writing, that--
    (A) The contractor's property management system is acceptable and 
approved, and no material weaknesses remain; or
    (B) Material weaknesses remain. The notice shall identify any 
remaining material weaknesses and indicate the adequacy of any proposed 
or completed corrective action. The contracting officer shall--
    (1) Request that the contractor, within 45 days of receipt of the 
final determination, either correct the weaknesses or submit an 
acceptable corrective action plan showing milestones and actions to 
eliminate the weaknesses;
    (2) Disapprove the system in accordance with the clause at 252.245-
7003; and
    (3) Withhold payments in accordance with the clause at 252.242-
7005, Contractor Business Systems, if the clause is included in the 
contract.
    (ii) Follow the procedures relating to monitoring a contractor's 
corrective action and the correction of material weaknesses in PGI 
245.105(d)(3).
* * * * *

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
17. Amend section 252.215-7002--
0
a. By revising the section heading and clause date;
0
b. In paragraph (a) by--
0
i. Adding in alphabetical order the definition of ``Material 
weakness''; and
0
ii. Removing the definition of ``Significant deficiency'';
0
c. By revising and republishing paragraph (e); and
0
d. By revising paragraph (f).
    The addition, revisions, and republication read as follows:


252.215-7002   Cost Estimating System Requirements.

* * * * *

Cost Estimating System Requirements (Jan 2025)

    (a) * * *
    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

[[Page 5732]]

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--
    (1) Probable; or
    (2) More than remote but less than likely (section 806 of Pub. L. 
116-283).
* * * * *
    (e) Material weaknesses. (1) The Contracting Officer will provide 
an initial determination to the Contractor, in writing, of any material 
weaknesses. The initial determination will describe the underlying 
deficiency in sufficient detail to allow the Contractor to understand 
the weakness or deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
material weaknesses in the Contractor's estimating system. If the 
Contractor disagrees with the initial determination, the Contractor 
shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's response 
and notify the Contractor, in writing, of the Contracting Officer's 
final determination concerning--
    (i) Remaining material weaknesses;
    (ii) The adequacy of any proposed or completed corrective action; 
and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more material weaknesses remain.
    (f) If the Contractor receives the Contracting Officer's final 
determination of material weaknesses, the Contractor shall, within 45 
days of receipt of the final determination, either correct the material 
weaknesses or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the material weaknesses.
* * * * *

0
18. Amend section 252.234-7002--
0
a. By revising the clause date;
0
b. In paragraph (a) by--
0
i. Adding in alphabetical order the definition of ``Material 
weakness''; and
0
ii. Removing the definition of ``Significant deficiency'';
0
c. By revising and republishing paragraph (i); and
0
d. By adding a heading to paragraph (k).
    The additions, revisions, and republication read as follows:


252.234-7002   Earned Value Management System

* * * * *

Earned Value Management System (Jan 2025)

    (a) * * *
    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--
    (1) Probable; or
    (2) More than remote but less than likely (section 806 of Pub. L. 
116-283).
* * * * *
    (i) Material weaknesses. (1) The Contracting Officer will provide 
an initial determination to the Contractor, in writing, of any material 
weaknesses. The initial determination will describe the underlying 
deficiency in sufficient detail to allow the Contractor to understand 
the weakness or deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
material weaknesses in the Contractor's EVMS. If the Contractor 
disagrees with the initial determination, the Contractor shall state, 
in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's response 
and notify the Contractor, in writing, of the Contracting Officer's 
final determination concerning--
    (i) Remaining material weaknesses;
    (ii) The adequacy of any proposed or completed corrective action;
    (iii) System noncompliance, when the Contractor's existing EVMS 
fails to comply with the earned value management system guidelines in 
the ANSI/EIA-748; and
    (iv) System disapproval, if initial EVMS validation is not 
successfully completed within the timeframe approved by the Contracting 
Officer, or if the Contracting Officer determines that the Contractor's 
earned value management system contains one or more material weaknesses 
in high-risk guidelines in ANSI/EIA-748 standards (guidelines 1, 3, 6, 
7, 8, 9, 10, 12, 16, 21, 23, 26, 27, 28, 30, or 32). When the 
Contracting Officer determines that the existing earned value 
management system contains one or more material weaknesses in one or 
more of the remaining 16 guidelines in ANSI/EIA-748 standards, the 
Contracting Officer will use discretion to disapprove the system based 
on input received from functional specialists and the auditor.
    (4) If the Contractor receives the Contracting Officer's final 
determination of material weaknesses, the Contractor shall, within 45 
days of receipt of the final determination, either correct the material 
weaknesses or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the material weaknesses.
* * * * *
    (k) Subcontracts. * * *
* * * * *

0
19. Amend section 252.242-7004--
0
a. Revising the clause date and paragraph (a);
0
b. Revising and republishing paragraph (e); and
0
c. Revising paragraph (f).
    The revisions and republication read as follows:


252.242-7004   Material Management and Accounting System.

* * * * *

Material Management and Accounting System (Jan 2025)

    (a) Definitions. As used in this clause--
    Acceptable material management and accounting system means a 
material management and accounting system that generally complies with 
the system criteria in paragraph (d) of this clause.
    Contractor means a business unit as defined in Federal Acquisition 
Regulation (FAR) 2.101.
    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.
    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--
    (1) Probable; or
    (2) More than remote but less than likely (section 806 of Pub. L. 
116-283).
    Valid time-phased requirements means material that is--
    (1) Needed to fulfill the production plan, including reasonable 
quantities for scrap, shrinkage, yield, etc.; and
    (2) Charged or billed to contracts or other cost objectives in a 
manner

[[Page 5733]]

consistent with the need to fulfill the production plan.
* * * * *
    (e) Material weaknesses. (1) The Contracting Officer will provide 
an initial determination to the Contractor, in writing, of any material 
weaknesses. The initial determination will describe the underlying 
deficiencies in sufficient detail to allow the Contractor to understand 
the weaknesses or deficiencies.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
material weaknesses in the Contractor's MMAS. If the Contractor 
disagrees with the initial determination, the Contractor shall state, 
in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's response 
and notify the Contractor, in writing, of the Contracting Officer's 
final determination concerning--
    (i) Remaining material weaknesses;
    (ii) The adequacy of any proposed or completed corrective action; 
and
    (iii) System disapproval if the Contracting Officer determines that 
one or more material weaknesses remain.
    (f) If the Contractor receives the Contracting Officer's final 
determination of material weaknesses, the Contractor shall, within 45 
days of receipt of the final determination, either correct the material 
weaknesses or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the material weaknesses.
* * * * *

0
20. Amend section 252.242-7005--
0
a. By revising the section heading and clause date;
0
b. In paragraph (b) by--
0
i. Adding in alphabetical order the definition of ``Material 
weakness''; and
0
ii. Removing the definition of ``Significant deficiency''; and
0
c. By revising paragraphs (d), (e)(1) and (2), (e)(3)(i), and (f).
    The addition and revisions read as follows:


252.242-7005  Contractor Business Systems.

* * * * *

Contractor Business Systems (Jan 2025)

* * * * *
    (b) * * *
    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--
    (1) Probable; or
    (2) More than remote but less than likely (section 806 of Pub. L. 
116-283).
* * * * *
    (d) Material weaknesses. (1) The Contractor shall respond, in 
writing, within 30 days to an initial determination that there are one 
or more material weaknesses in one or more of the Contractor's business 
systems.
    (2) The Contracting Officer will evaluate the Contractor's response 
and notify the Contractor, in writing, of the final determination as to 
whether the Contractor's business system contains material weaknesses. 
If the Contracting Officer determines that the Contractor's business 
system contains material weaknesses, the final determination will 
include a notice to withhold payments.
    (e) * * *
    (1) If the Contracting Officer issues the final determination with 
a notice to withhold payments for material weaknesses in a contractor 
business system required under this contract, the Contracting Officer 
will withhold 5 percent of amounts due from progress payments and 
performance-based payments, and direct the Contractor, in writing, to 
withhold 5 percent from its billings on interim cost vouchers on cost-
reimbursement, labor-hour, and time-and-materials contracts until the 
Contracting Officer has determined that the Contractor has corrected 
all material weaknesses as directed by the Contracting Officer's final 
determination. The Contractor shall, within 45 days of receipt of the 
notice, either correct the weaknesses or submit an acceptable 
corrective action plan showing milestones and actions to eliminate the 
weaknesses.
    (2) If the Contractor submits an acceptable corrective action plan 
within 45 days of receipt of a notice of the Contracting Officer's 
intent to withhold payments, and the Contracting Officer, in 
consultation with the auditor or functional specialist, determines that 
the Contractor is effectively implementing such plan, the Contracting 
Officer will reduce withholding directly related to the material 
weaknesses covered under the corrective action plan, to 2 percent from 
progress payments and performance-based payments, and direct the 
Contractor, in writing, to reduce the percentage withheld on interim 
cost vouchers to 2 percent until the Contracting Officer determines the 
Contractor has corrected all material weaknesses as directed by the 
Contracting Officer's final determination. However, if at any time, the 
Contracting Officer determines that the Contractor has failed to follow 
the accepted corrective action plan, the Contracting Officer will 
increase withholding from progress payments and performance-based 
payments, and direct the Contractor, in writing, to increase the 
percentage withheld on interim cost vouchers to the percentage 
initially withheld, until the Contracting Officer determines that the 
Contractor has corrected all material weaknesses as directed by the 
Contracting Officer's final determination.
    (3) * * *
    (i) The total percentage of payments withheld on amounts due under 
each progress payment, performance-based payment, or interim cost 
voucher on this contract shall not exceed--
    (A) Five percent for one or more material weaknesses in any single 
contractor business system; and
    (B) Ten percent for material weaknesses in multiple contractor 
business systems.
* * * * *
    (f) Correction of weaknesses. (1) The Contractor shall notify the 
Contracting Officer, in writing, when the Contractor has corrected the 
business system's weaknesses.
    (2) Once the Contractor has notified the Contracting Officer that 
all weaknesses have been corrected, the Contracting Officer will take 
one of the following actions:
    (i) If the Contracting Officer determines that the Contractor has 
corrected all material weaknesses as directed by the Contracting 
Officer's final determination, the Contracting Officer will, as 
appropriate, discontinue the withholding of progress payments and 
performance-based payments, and direct the Contractor, in writing, to 
discontinue the payment withholding from billings on interim cost 
vouchers under this contract associated with the Contracting Officer's 
final determination, and authorize the Contractor to bill for any 
monies previously withheld that are not also being withheld due to 
other material weaknesses. Any payment withholding under this contract 
due to other material weaknesses will remain in effect until the 
Contracting Officer determines that those material weaknesses are 
corrected.
    (ii) If the Contracting Officer determines that the Contractor 
still has material weaknesses, the Contracting Officer will continue 
the withholding of progress payments and performance-

[[Page 5734]]

based payments, and the Contractor shall continue withholding amounts 
from its billings on interim cost vouchers in accordance with paragraph 
(e) of this clause, and not bill for any monies previously withheld.
    (iii) If the Contracting Officer determines, based on the evidence 
submitted by the Contractor, that there is a reasonable expectation 
that the corrective actions have been implemented and are expected to 
correct the material weaknesses, the Contracting Officer will 
discontinue withholding payments, and release any payments previously 
withheld directly related to the material weaknesses identified in the 
Contractor notification, and direct the Contractor, in writing, to 
discontinue the payment withholding from billings on interim cost 
vouchers associated with the Contracting Officer's final determination, 
and authorize the Contractor to bill for any monies previously 
withheld.
    (iv) If, within 90 days of receipt of the Contractor notification 
that the Contractor has corrected the material weaknesses, the 
Contracting Officer has not made a determination in accordance with 
paragraph (f)(2)(i), (ii), or (iii) of this clause, the Contracting 
Officer will reduce withholding directly related to the material 
weaknesses identified in the Contractor notification by at least 50 
percent of the amount being withheld from progress payments and 
performance-based payments, and direct the Contractor, in writing, to 
reduce the payment withholding from billings on interim cost vouchers 
directly related to the material weaknesses identified in the 
Contractor notification by a specified percentage that is at least 50 
percent, but not authorize the Contractor to bill for any monies 
previously withheld until the Contracting Officer makes a determination 
in accordance with paragraph (f)(2)(i), (ii), or (iii) of this clause.
    (v) At any time after the Contracting Officer reduces or 
discontinues the withholding of progress payments and performance-based 
payments, or directs the Contractor to reduce or discontinue the 
payment withholding from billings on interim cost vouchers under this 
contract, if the Contracting Officer determines that the Contractor has 
failed to correct the material weaknesses identified in the 
Contractor's notification, the Contracting Officer will reinstate or 
increase withholding from progress payments and performance-based 
payments, and direct the Contractor, in writing, to reinstate or 
increase the percentage withheld on interim cost vouchers to the 
percentage initially withheld, until the Contracting Officer determines 
that the Contractor has corrected all material weaknesses as directed 
by the Contracting Officer's final determination.
* * * * *

0
21. Amend section 252.242-7006--
0
a. Revising the section heading, clause date, and paragraph (a);
0
b. Revising and republishing paragraph (d); and
0
c. Revising paragraph (e).
    The revisions and republication read as follows:


252.242-7006  Accounting System Administration.

* * * * *

Accounting System Administration (Jan 2025)

    (a) Definitions. As used in this clause--
    Acceptable accounting system means a system that complies with the 
system criteria in paragraph (c) of this clause to provide reasonable 
assurance that--
    (1) Applicable laws and regulations are complied with;
    (2) The accounting system and cost data are reliable;
    (3) Risk of misallocations and mischarges are minimized; and
    (4) Contract allocations and charges are consistent with billing 
procedures.
    Accounting system means the Contractor's system or systems for 
accounting methods, procedures, and controls established to gather, 
record, classify, analyze, summarize, interpret, and present accurate 
and timely financial data for reporting in compliance with applicable 
laws, regulations, and management decisions, and may include subsystems 
for specific areas such as indirect and other direct costs, 
compensation, billing, labor, and general information technology.
    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--
    (1) Probable; or
    (2) More than remote but less than likely (section 806 of Pub. L. 
116-283).
* * * * *
    (d) Material weaknesses. (1) The Contracting Officer will provide 
an initial determination to the Contractor, in writing, of any material 
weaknesses. The initial determination will describe the underlying 
deficiency in sufficient detail to allow the Contractor to understand 
the weakness or deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
material weaknesses in the Contractor's accounting system. If the 
Contractor disagrees with the initial determination, the Contractor 
shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's response 
and notify the Contractor, in writing, of the Contracting Officer's 
final determination concerning--
    (i) Remaining material weaknesses;
    (ii) The adequacy of any proposed or completed corrective action; 
and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more material weaknesses remain.
    (e) If the Contractor receives the Contracting Officer's final 
determination of material weaknesses, the Contractor shall, within 45 
days of receipt of the final determination, either correct the material 
weaknesses or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the material weaknesses.
* * * * *

0
22. Amend section 252.244-7001--
0
a. By revising the section heading and clause date;
0
b. In paragraph (a) by--
0
i. Adding in alphabetical order the definition of ``Material 
weakness''; and
0
ii. Removing the definition of ``Significant deficiency'';
0
c. By revising and republishing paragraph (d);
0
d. By revising paragraph (e); and
0
e. In Alternate I--
0
i. By revising the clause date;
0
ii. In paragraph (a) by--
0
A. Adding in alphabetical order the definition of ``Material 
weakness''; and
0
B. Removing the definition of ``Significant deficiency'';
0
iii. By revising and republishing paragraph (d); and
0
iv. By revising paragraph (e).
    The additions, revisions, and republications read as follows:


252.244-7001  Contractor Purchasing System Administration.

* * * * *

Contractor Purchasing System Administration--Basic (Jan 2025)

    (a) * * *
    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

[[Page 5735]]

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--
    (1) Probable; or
    (2) More than remote but less than likely (section 806 of Pub. L. 
116-283).
* * * * *
    (d) Material weaknesses. (1) The Contracting Officer will provide 
notification of initial determination to the Contractor, in writing, of 
any material weaknesses. The initial determination will describe the 
underlying deficiency in sufficient detail to allow the Contractor to 
understand the weakness or deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
material weaknesses in the Contractor's purchasing system. If the 
Contractor disagrees with the initial determination, the Contractor 
shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's response 
and notify the Contractor, in writing, of the Contracting Officer's 
final determination concerning--
    (i) Remaining material weaknesses;
    (ii) The adequacy of any proposed or completed corrective action; 
and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more material weaknesses remain.
    (e) If the Contractor receives the Contracting Officer's final 
determination of material weaknesses, the Contractor shall, within 45 
days of receipt of the final determination, either correct the material 
weaknesses or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the weaknesses.
* * * * *
    Alternate I. * * *

Contractor Purchasing System Administration--Alternate I (Jan 2025)

    (a) * * *
    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--
    (1) Probable; or
    (2) More than remote but less than likely (section 806 of Pub. L. 
116-283).
* * * * *
    (d) Material weaknesses. (1) The Contracting Officer will provide 
notification of initial determination to the Contractor, in writing, of 
any material weaknesses. The initial determination will describe the 
underlying deficiency in sufficient detail to allow the Contractor to 
understand the weaknesses or deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
material weaknesses in the Contractor's purchasing system. If the 
Contractor disagrees with the initial determination, the Contractor 
shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's response 
and notify the Contractor, in writing, of the Contracting Officer's 
final determination concerning--
    (i) Remaining material weaknesses;
    (ii) The adequacy of any proposed or completed corrective action; 
and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more material weaknesses remain.
    (e) If the Contractor receives the Contracting Officer's final 
determination of material weaknesses, the Contractor shall, within 45 
days of receipt of the final determination, either correct the material 
weaknesses or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the weaknesses.
* * * * *

0
23. Amend section 252.245-7003--
0
a. By revising the clause date;
0
b. In paragraph (a) by--
0
i. Adding in alphabetical order the definition of ``Material 
weakness''; and
0
ii. Removing the definition of ``Significant deficiency'';
0
c. In paragraph (c), by removing ``paragraph (f)'' and adding 
``paragraphs (b) and (f)'' in its place;
0
d. By revising and republishing paragraph (d); and
0
e. By revising paragraph (e).
    The addition, revisions, and republication read as follows:


252.245-7003  Contractor Property Management System Administration.

* * * * *

Contractor Property Management System Administration (Jan 2025)

    (a) * * *
    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--
    (1) Probable; or
    (2) More than remote but less than likely (section 806 of Pub. L. 
116-283).
* * * * *
    (d) Material weaknesses. (1) The Contracting Officer will provide 
an initial determination to the Contractor, in writing, of any material 
weaknesses. The initial determination will describe the underlying 
deficiency in sufficient detail to allow the Contractor to understand 
the weaknesses or deficiency.
    (2) The Contractor shall respond within 30 days to a written 
initial determination from the Contracting Officer that identifies 
material weaknesses in the Contractor's property management system. If 
the Contractor disagrees with the initial determination, the Contractor 
shall state, in writing, its rationale for disagreeing.
    (3) The Contracting Officer will evaluate the Contractor's response 
and notify the Contractor, in writing, of the Contracting Officer's 
final determination concerning--
    (i) Remaining material weaknesses;
    (ii) The adequacy of any proposed or completed corrective action; 
and
    (iii) System disapproval, if the Contracting Officer determines 
that one or more material weaknesses remain.
    (e) If the Contractor receives the Contracting Officer's final 
determination of material weaknesses, the Contractor shall, within 45 
days of receipt of the final determination, either correct the material 
weaknesses or submit an acceptable corrective action plan showing 
milestones and actions to eliminate the material weaknesses.
* * * * *
[FR Doc. 2025-00721 Filed 1-16-25; 8:45 am]
BILLING CODE 6001-FR-P`