DFARS ESTIMATING SYSTEM

Are your contracts subject to DFARS 252.215-7002?  Does your organization have Cost Accounting Standards Covered (CAS) contracts with the Federal Government?  Does the organization routinely submit proposals to Federal Agencies which require Certified Cost and/or Pricing Data?

If so, your organization may need an a DCAA approved estimating system as part of the overall contract requirements. We work with clients to review, develop, and remediate estimating system policies, procedures, practices and controls to ensure compliance with regulatory requirements and alignment with Defense Contract Audit Agency (DCAA) Estimating System Audit Guidance.

DCAA Estimating System Requirements

In broad terms, FAR 15.407-5 – Special Cost or Pricing Areas (Estimating Systems) requires Government Auditor surveillance of contractor estimating systems or methods, as “acceptable proposal preparation benefits both the Government and the contractor by increasing the accuracy and reliability of individual proposals, reduces the scope of reviews to be performed on individual proposals, and expedites the negotiations process.

If your organization has CAS covered Department of Defense (DoD) contracts, DFARS 252.215-7002 – Cost Estimating System Requirements, clearly defines when a contractor is required to maintain a DCAA Approved Estimating System.  However, contractors are reminded that many agencies outside DoD reference the 17 Estimating System Criteria contained within DFARS 252.215-7002.

DFARS 215.407-5-70 establishes DoD’s policy that all contractors have an acceptable estimating system.  However, “Large Contractors”, as defined by the Small Business Administration (SBA), are required to disclose and maintain their estimating systems, and support DCAA Reviews of the Estimating System if:

    • Contractors awarded DoD Prime and Subcontracts, which required certified cost or pricing data, totaling $50 million or more in the previous fiscal year; or
    • Contractors awarded DoD Prime and Subcontracts, which required certified cost or pricing data, $10 million or more and written notice of Estimating System Requirements from their Contracting Officer.

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DCAA Approved Estimating System

Why is having an approved estimating system important for my organization and my government customer(s)?

An adequate estimating system determination is important for multiple reasons:

 Save time and money

An adequate estimating system provides assurances to the Government that the contractor can consistently produce accurate and reliable cost estimates; thus, reducing the need to audit individual proposals separately.

  Add proposal evaluation points

Estimating system approvals can equate to valuable proposal evaluation points, which can be a deciding factor in award determinations.

  Be a key differentiator or competitive advantage

An approved estimating system can be a key differentiator/competitive advantage. Contracting officers can rely on the contractor’s estimates, and may be more inclined to award funding.

  Reduce audit scrutiny

It helps to reduce audit scrutiny of other business systems and prevents financial penalties being applied to the contractor. It is not uncommon for DCAA to question the adequacy of a contractor’s accounting or purchasing system subsequent to an inadequate determination of the estimating system.  As the business systems are intended to compliment one another, may of the audit objectives are found in each individual audit program.  Failure of any one system can result in a 5% payment withhold per system, until the deficiency is remediated.  Multiple system failures resulting from the review of only the estimating system can create significant cashflow concerns for contractors.

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For DoD contractors, DCAA is responsible for reviewing the contractor’s estimating system. Final determination of the adequacy of a contractor’s estimating system is the responsibility of the contractor’s DCMA Administrative Contracting Officer (DACO) or Cognizant Contracting Officer.  For those contractors with agencies other than DoD, your contracting officer may request agency assigned auditors, a contracted third-party audit firm, or that DCAA perform the estimating system review.

Estimating system audits are not automatic actions undertaken by DCAA, and require a Contracting Officer’s request for audit. FAR 15.407 requires audit surveillance of a contractor’s estimating system and DFARS 215.407-5-70 requires all DoD contractors to have an adequate estimating system.  However, factors such as contract type, contract value, the required submission of certified cost or pricing data and contract type contribute to a contracting officer’s decision in requesting a review of a contractor’s estimating system.  Lastly, large DoD contractors meeting the applicability requirements of DFARS 252.215-7002 should generally expect an audit by DCAA within a year of applicability, and then once every three years thereafter.

Contractors should expect all proposals in excess of $2 million and which require the submission certified cost or pricing data, submitted in the six month period preceding DCAA’s audit notification, to be subject to review.

Contractors are certainly welcome to inform their Contracting Officers that they are prepared for and welcome DCAA’s review of the estimating system. However, the Contracting Officer and/or DCAA is not obligated to fulfill such requests.  Additionally, contractors are cautioned against such requests; especially if they have not had the estimating system independently evaluated.  Business system audits are costly and time-consuming endeavors for both contractors and the Government; and an inadequate determination has business and financial consequences, including withholding of contractor payments and the triggering of other business system audits and/or inadequate determinations.

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