The short answer is yes, the contractor is required to collect cost by CLIN/SLIN for that contract if it contains DFARS clause 252.242-7006.  No additional language is required.  The DFARS language is very clear.

One clarification is in order.  In your question background, you state "I have a Contractor that states they do not have to collect cost at the Contract Line Item for ALL contracts ..." (my emphasis).  That part of their statement may very well be true if that contractor has smaller FFP contracts or orders that don't require progress payments.  Those contracts would not contain the DFARS clause so that requirement would not apply to those contracts.  However, if the contract does contain the clause at DFARS 252.242-7006 and the contractor signs the contract, the contractor is required to comply.  No additional language in the contract is required to make that clause enforceable.

Additionally, if the contract is a Cost Accounting Standards (CAS) covered contract, the Government could withhold payments (see DFARS 252.242-7006(b) and DFARS 242.7000.  CAS covered contracts are very large dollar contracts usually performed by larger Defense contractors.

Before taking any significant action on this matter, it is always best to talk to your legal advisor.

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