On January 17, 2025, DoD released a final rule to implement Section 806 of the NDAA for FY 2021 to define the term “material weakness” for purposes of Defense Federal Acquisition Regulation Supplement (DFARS) contractor business system evaluations and replace the term “significant deficiency.” The final rule defines material weakness 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.”

According to the final rule, the definition of material weakness provides greater clarity to DoD and industry and creates consistency with generally accepted auditing standards. Most notable among various changes to DFARS language to replace significant deficiency with material weakness is that payment withholds are now linked/driven by material weaknesses rather than significant deficiencies.

The January 17 final rule can be found here.