Our Take: The Cost Accounting Standards are Changing, Not Going Away

OUR TAKE – CAS

For years, many organizations have viewed the Cost Accounting Standards (CAS) as a burdensome  barrier to entry for doing business with the Government. Over the last six months, the current Administration, Congress, and the CAS Board (CASB) have taken meaningful action to reduce the burden. As a result, CAS has had more change than industry has seen in decades. That change has come in the form of continued and increased harmonization with Generally Accepted Accounting Principles, increases to coverage thresholds, modifications to CAS exemptions (non-traditional contractor status and elimination of the TINA threshold), and at least in DOW’s case, a desire to make the applicability of CAS an “exception”, not the “rule”.  In navigating these changes, existing contractors and new market entries should evaluate their CAS covered contracts and potential awards against the evolving regulatory environment, understand their options, and capitalize on changes.

Our take: Changes and uncertainty with CAS create opportunity

CAS harmonization with GAAP, the 2026 National Defense Authorization Act, DOW’s Class Deviation (DFARS Class Deviation 2026-O0006, Revision 1, CASB’s Final Rule 91 FR 56056, and DOW’s “Fostering One Strong Industrial Base” memo are significantly impacting the CAS landscape.  As a result, coverage thresholds are increased, there are fewer Standards to comply with (although the ones remaining have historically created the most issues), especially for new market entrants and existing contractors graduating from small business exemptions, and additional efforts appear to be underway to further reduce the “burden” of CAS.

Here are the top four CAS mistakes organizations should avoid until the future of the Standards is settled:

1. Mistake #1: Assuming CAS is going away
   • CAS relief is effectively underway, but the Standards aren’t going away; yet.  The DOW is certainly trying to limit the issuance of new CAS contracts and is even attempting to exempt contracts from CAS via Class Deviation.  However, CAS is a matter of public law, as is compliance with the standards when applicable. Congress must act in order to eliminate CAS entirely.  At the same time, questioned costs by DCAA related to CAS noncompliances seems to be significantly increasing, so ignore current compliance at your own peril.
2. Mistake #2: Assuming CAS is different from GAAP
   • FAR requires contractors to comply with GAAP.  That is nothing new.  Only when a CAS Standard that requires the measurement,  assignment, or allocation of costs is more stringent, does CAS “trump” GAAP.  That being said, compliant CAS practices are compliant with GAAP (keep in mind, some GAAP practices may not comply with GAAP).  In short, CAS requires a more detailed accounting for cost than GAAP does for financial reporting purposes.  While these requirements may be new to an organization or different from their financial reporting practices, the standards do allow for equitable allocation and deeper insight to contract cost performance.
3. Mistake #3: Assuming CAS harmonization with GAAP equates to automatic adoption of GAAP practices
   • As a result of CASB’s harmonization activities CAS 408 – Accounting for Compensated Personal Absence and CAS 411 – Acquisition Cost of Materials have been eliminated in their entirety.  CAS 404 – Capitalization of Tangible Assets, CAS 409 – Depreciation of Tangible Capital Assets, and CAS 407 – Use of Standard Costs for Direct Material & Direct Labor are mostly rescinded, with key provisions now being included elsewhere.  As a result, many of the more robust requirements of CAS no longer apply.
   • The rescinding of these Standards allows contractors to align with GAAP, but outside of the exemption for CAS 408, if that alignment requires a contractor to change how they measure, assign, or allocate costs (the 3 tenets of CAS), they will have to process those changes as a unilateral cost accounting practice change, requiring disclosure statement revisions, prospective notification, and cost impact analysis.
4. Mistake #4: Failing to consider the adoption of GAAP practices now or making other changes to cost accounting practices
   • The rescinding of standards opens the door for contractors to adopt less restrictive cost accounting practices consistent with those used for GAAP and financial reporting purposes.  As discussed, the rules surrounding unilateral practices changes should continue to be followed.  However, now is a great time to consider making changes in practice.
     1. The 2026 NDAA calls for multiple impacts, effective on the same date, to now be aggregated.  While CASB has not published a final rule implementing this change, once it does, it will no longer be acceptable for contracting officers to accept changes in cost accounting practices which “benefit” the Government while also demanding price adjustments for changes with increased costs “in the aggregate”.
     2. Similarly, prospective changes will no longer require consideration of CAS covered, fixed-price contracts, making impact analyses easier to complete and potentially less costly to contractors.
     3. Thresholds have changed and contracts which have historically been “fully covered” may revert to “modified” coverage upon the start of a contractor’s next fiscal year after 10/1/2026.  Contractors not currently performing on a $100M contract will now be able to revert all CAS covered contracts they hold to modified coverage, which limits CAS compliance under those contracts to CAS 401, 402, 405 & 406.

What should government contractors do?

CAS has changed more in the last year than it has over the last number of decades.  CAS thresholds have updated, applicability to contracts has changed, standards are being harmonized with GAAP, and the process for calculating impacts have all changed with an effort to expand the contractor industrial base and make doing business with the Government more attractive.  Contractors should act now to take advantage of this new, friendlier environment rather than waiting for the dust to settle.  Contractors need to evaluate how these changes impact their contract portfolios, understand how applicability to their current CAS covered contracts may change, and consider potential changes in cost accounting practices and their related impacts now.