252.242-7998 Contractor Business Systems

This clause was introduced by the Revolutionary FAR Overhaul (EO 14275) and does not appear in the codified eCFR. It applies to contracts using the RFO model.

RFO Prescription

Insert the clause at 252.242-7998, Contractor Business Systems, in solicitations and
contracts (other than in contracts with educational institutions, Federally Funded
Research and Development Centers (FFRDCs), or University Associated Research
Centers (UARCs) operated by educational institutions) when—

(a) The resulting contract will be a covered contract as defined in 242.7000(a); and

(b) The solicitation or contract includes any of the following clauses:

(1) 252.215-7002, Cost Estimating System Requirements.

(2) 252.234-7999, Earned Value Management System.

(3) 252.242-7997, Material Management and Accounting System.

(4) 252.242-7999, Accounting System Administration.

(5) 252.244-7998, Contractor Purchasing System Administration.

(6) 252.245-7003, Contractor Property Management System
Administration.

Current Text (RFO)

CONTRACTOR BUSINESS SYSTEMS (DEVIATION 2026-O0050) (MAR 2026)

(a) This clause only applies to covered contracts that are subject to the Cost
Accounting Standards under 41 U.S.C. chapter 15, as implemented in regulations found
at 48 CFR 9903.201-1 (see the FAR Appendix).

(b) Definitions. As used in this clause—

"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 clause.

"Contractor business systems" means—

(1) Accounting system, if this contract includes the clause at 252.242-7999,
Accounting System Administration;

(2) Earned value management system, if this contract includes the clause at
252.234-7999, Earned Value Management System);

(3) Estimating system, if this contract includes the clause at 252.215-7002, Cost
Estimating System Requirements;

(4) Material management and accounting system, if this contract includes the
clause at 252.242-7997, Material Management and Accounting System;

(5) Property management system, if this contract includes the clause at
252.245-7003, Contractor Property Management System Administration; and

(6) Purchasing system, if this contract includes the clause at 252.244-7998,
Contractor Purchasing System Administration.

"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).

(c) General. The Contractor shall establish and maintain acceptable business
systems in accordance with the terms and conditions of this contract.

(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) Withholding payments.

(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) Payment withhold percentage limits.

(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.

(ii) If this contract contains pre-existing withholds, and the application of
any subsequent payment withholds will cause withholding under this clause to exceed
the payment withhold percentage limits in paragraph (e)(3)(i) of this clause, the
Contracting Officer will reduce the payment withhold percentage in the final
determination to an amount that will not exceed the payment withhold percentage
limits.

(4) For the purpose of this clause, payment means any of the following
payments authorized under this contract:

(i) Interim payments under—

(A) Cost-reimbursement contracts;

(B) Incentive type contracts;

(C) Time-and-materials contracts;

(D) Labor-hour contracts.

(ii) Progress payments.

(iii) Performance-based payments.

(5) Payment withholding shall not apply to payments on fixed-price line items
where performance is complete and the items were accepted by the Government.

(6) The withholding of any amount or subsequent payment to the Contractor
shall not be construed as a waiver of any rights or remedies the Government has under
this contract.

(7) Notwithstanding the provisions of any clause in this contract providing for
interim, partial, or other payment withholding on any basis, the Contracting Officer
may withhold payment in accordance with the provisions of this clause.

(8) The payment withholding authorized in this clause is not subject to the
interest-penalty provisions of the Prompt Payment Act.

(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-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, release any payments
previously withheld directly related to the material weaknesses identified in the
Contractor notification, 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.

(End of clause)