DFARS 252.242-7004: MMAS Criteria, Audits, and 5% Withholding

DFARS 252.242-7004 is the Defense FAR Supplement clause that sets ten criteria your Material Management and Accounting System (MMAS) must satisfy on qualifying Department of Defense contracts. Miss those criteria and the Administrative Contracting Officer (ACO) can disapprove the system, which triggers a mandatory 5 percent withholding on progress payments, performance-based payments, and interim cost vouchers under the companion clause at DFARS 252.242-7005.¹

When the Clause Applies to Your Contract

Two conditions put the clause into a solicitation or contract. The contract has to exceed the simplified acquisition threshold ($350,000 as of the 2025 inflation adjustment), and it cannot be for commercial products or services. It also has to be either a cost-reimbursement contract or a fixed-price contract where progress payments are based on incurred costs.²

Having the clause in the contract is not the same as being audited under it. A formal MMAS review is triggered only when both of these are true: your qualifying sales to the government hit $40 million or more in the preceding fiscal year, and the ACO decides a review is warranted based on a risk assessment.² Qualifying sales are contracts where certified cost or pricing data were required, or contracts priced on something other than firm-fixed-price or fixed-price with economic price adjustment. Prime contracts, subcontracts, and modifications all count toward the $40 million.³

The Ten System Criteria

Paragraph (d) of the clause lists ten criteria. Each is a potential material weakness finding if your system falls short. They sort into a handful of practical areas.

System Description and Written Procedures

The first criterion requires an adequate system description with written policies, procedures, and operating instructions that comply with both the FAR and DFARS.⁴ Auditors compare what you have written against what the system actually does. Gaps between the two, including outdated procedures, produce findings on their own.

Time-Phased Requirements and Accuracy Targets

Under the second criterion, material costs charged to a contract must be based on valid time-phased requirements: material genuinely needed to fulfill the production plan and charged consistently with that plan.⁴ Practical realities like minimum order quantities and economic order quantities are accounted for as long as the system handles the allocation correctly.

The clause sets two accuracy benchmarks tied to those requirements: 98 percent for the Bill of Material (BOM) and 95 percent for the Master Production Schedule (MPS).⁴ These are framed as desirable goals rather than hard pass/fail lines. If your accuracy is lower, you can still avoid a finding by showing that the shortfall is not causing material harm to the government and that reaching the target would cost more than the impact justifies.

A separate accuracy standard sits in the fifth criterion. Your system must reconcile recorded inventory quantities to physical counts by part number on a periodic basis, with 95 percent accuracy as the target.⁵ The clause does not prescribe how often physical counts happen. Auditors want to see that your cycle count or physical inventory program produces reliable reconciliation data.

Controls, Overrides, and Audit Trails

The third criterion requires a mechanism to identify, report, and resolve system control weaknesses and manual overrides. Operational exceptions such as excess inventory or residual material must be flagged as soon as they are known.⁴ If users can override standard processes without generating an alert or logging the override, that is a control gap.

The fourth criterion requires audit trails and records, manual or electronic, sufficient for auditors to evaluate system logic and verify through transaction testing that the system works as intended.⁴ Every material transaction needs a traceable path from requisition through receipt, storage, issuance, and final cost allocation.

Transfers and Costing Logic

The sixth criterion requires detailed descriptions of the circumstances that trigger manual or system-generated transfers of parts between contracts or cost objectives. The seventh requires consistent, equitable, and unbiased costing logic for all material transactions, and it requires written policies covering the transfer methodology and the loan/pay-back technique.⁴

Loan/pay-back applies when a part transfers between contracts but the transfer cannot happen within the same billing period. The system loans the material to the receiving contract and pays back the originating contract in a later period. Your written policies must describe when and how the technique is used, and your costing method, whether standard cost, actual cost, or an inventory method under 48 CFR 9904.411-50(b), must stay consistent across contract types and accounting periods.⁴

Common Inventory and Commingled Material

The eighth criterion covers allocations from common inventory accounts shared across multiple contracts. Reallocations and any credits must be processed at least as often as your routine billing cycle, inventory held for non-contract requirements cannot be allocated to government contracts, and the allocation algorithms must use valid, current data.⁵

The ninth criterion addresses physically commingled inventories, where material for fixed-price, cost-reimbursement, and commercial work sits in the same storage area. Controls must prevent commingling from compromising any of the other criteria. Government-furnished material gets stricter treatment: it cannot be physically commingled with other material, and it cannot be used on commercial work.⁵

Internal Reviews

The tenth criterion requires periodic internal reviews to confirm compliance with your own established policies and procedures.⁵ Frequency is not prescribed, but the ACO can request the results at any time. A contractor who cannot produce evidence of regular self-assessments is signaling that nobody has been checking whether the system still works as documented.

How the Audit Works and Who Decides

MMAS compliance is audited by the Defense Contract Audit Agency (DCAA), with overall surveillance and the final determination handled by the Defense Contract Management Agency (DCMA) through the ACO.⁶ There is no fixed audit cycle. DCAA audits each business system on a cyclical basis driven by a documented risk assessment.

An audit typically opens with notification and an entrance conference, then a system demonstration walking auditors through how each of the ten criteria is met. Fieldwork centers on transaction testing: samples of material transactions traced through the system to verify that documented procedures match actual practice. Auditors specifically test BOM and MPS accuracy, verify consistent costing logic, confirm the audit trail, and check that inventory records reconcile to physical counts.⁷ DCAA then issues a report to the ACO with findings and recommendations. The ACO, not the auditor, decides whether the system is acceptable.³

What Disapproval Costs You

Initial Determination and the 30-Day Response

If the ACO identifies material weaknesses, you get a written initial determination describing each weakness in enough detail to know what needs to be fixed.³ You have 30 days to respond in writing. Disagreements need supporting evidence, not just objections.⁴

Final Determination and the 45-Day Corrective Action Window

The ACO evaluates your response and issues a final determination. If material weaknesses remain, the final determination identifies them, assesses any corrective action already proposed or completed, and formally disapproves the system. From that point, you have 45 days to either correct the weaknesses outright or submit a corrective action plan with milestones and specific actions to eliminate them.³ The ACO will monitor progress against those milestones. Vague commitments will not carry the plan.

The 5 Percent Payment Withholding

Disapproval triggers mandatory withholding under DFARS 252.242-7005. The Contracting Officer will withhold 5 percent from progress payments and performance-based payments, and direct you to withhold 5 percent from interim cost vouchers on cost-reimbursement, labor-hour, and time-and-materials contracts.¹ The clause says “will withhold,” not “may.”

MMAS is one of six business systems covered by 252.242-7005. If you have material weaknesses in more than one system, total withholding across all of them caps at 10 percent.¹ Withholding continues until the ACO determines that all material weaknesses in the final determination have been corrected. The 5 percent applies across every qualifying payment, not only the contract that prompted the audit.

Consistency with Your CAS Disclosure Statement

If you are subject to Cost Accounting Standards, your MMAS costing methodology has to match your CAS Disclosure Statement. The clause requires consistency in costing across all contract and customer types and from one accounting period to the next.⁴ A Disclosure Statement that says standard costing while the MMAS uses actual cost on certain contracts can produce findings in both the MMAS audit and a separate CAS compliance review. Treat MMAS policies as an extension of your disclosed practices, not a parallel document.

1
Acquisition.GOV. DFARS 252.242-7005 – Contractor Business Systems
2
Defense Acquisition Regulations System. DFARS 242.72 – Contractor Material Management and Accounting System
3
Acquisition.GOV. DFARS 242.7203 – Review Procedures
4
Acquisition.GOV. DFARS 252.242-7004 – Material Management and Accounting System
5
eCFR. 48 CFR 252.242-7004 – Material Management and Accounting System
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Defense Contract Audit Agency. DCAA Contract Audit Manual Chapter 5
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Defense Contract Audit Agency. Audit Program – Material Management and Accounting System (MMAS)