Key Takeaways
- The CAS Board’s two final rules, effective October 1, raise the basic CAS applicability threshold from $2.5 million to $35 million, double the full CAS coverage and Disclosure Statement thresholds from $50 million to $100 million, and rescind CAS 407 in favor of GAAP and remaining CAS requirements, potentially reducing the number of CAS-covered business segments by approximately 60% while maintaining over 90% of covered contract dollars.
- The DoW is simultaneously pressing for greater cost and pricing transparency through its August 18 and September 14 memoranda, directing the acquisition workforce to obtain actual cost information for negotiations valued at $10 million or more, including at the supplier level, regardless of whether certified cost or pricing data is otherwise required.
- Federal and defense contractors should assess eligibility for the transition from full to modified CAS coverage, evaluate the impact of the new IDC applicability rules and business-unit-level Disclosure Statement thresholds, and prepare for heightened scrutiny of pricing information in sole-source and non-competitive procurements, while monitoring forthcoming DoW guidance on automated access to contractor financial systems and further CAS reform proposals.
Federal contractors are heading into October with significantly different cost accounting rules, while defense contractors are also facing renewed pressure to provide the government with greater visibility into their costs and pricing.
On September 1, the Cost Accounting Standards (CAS) Board issued two final rules, both effective October 1, that substantially reduce the reach of CAS. Most notably, the Board increased the basic CAS applicability threshold from $2.5 million to $35 million and doubled the thresholds for full CAS coverage and Disclosure Statements from $50 million to $100 million. In a separate rule, the Board eliminated CAS 407, which governs the use of standard costs for direct material and direct labor, after concluding that Generally Accepted Accounting Principles (GAAP) and other CAS requirements adequately address most of the same issues.
At nearly the same time, however, the Department of War (DoW) has been pressing for greater contractor cost and pricing transparency. An August 18 memorandum directed acquisition officials to seek actual cost information for negotiations involving products and services valued at $10 million or more, including information at the supplier level, regardless of whether certified cost or pricing data is otherwise required. DoW followed that direction on September 14 with a broader acquisition reform memorandum that seeks to reduce government-unique accounting requirements while continuing to demand access to cost information when market data is insufficient.
Taken together, the developments suggest that contractors may face fewer formal CAS requirements but should not necessarily expect less government interest in the underlying cost information used to support contract prices.
How Do the New CAS Thresholds Affect Contract and Subcontract Coverage?
The first September 1 final rule makes several major changes to the CAS coverage framework.
Most significantly, negotiated contracts and subcontracts valued at $35 million or less will generally be exempt from CAS, up from the current $2.5 million threshold. The rule also eliminates the separate $7.5 million “trigger contract” concept that could subject later awards to CAS once a contractor performs a sufficiently large CAS-covered contract. According to the Board, raising the basic applicability threshold to $35 million could reduce the number of CAS-covered business segments by approximately 60%, while maintaining more than 90% of the dollars currently subject to CAS.
For contracts that remain CAS-covered, the rule doubles the thresholds for full CAS coverage and Disclosure Statement requirements from $50 million to $100 million. Full CAS coverage generally will apply when a business unit receives a single CAS-covered award of at least $100 million or received at least $100 million in net CAS-covered awards during the preceding cost accounting period. The Board estimates that the new threshold would reduce the number of entities subject to full CAS coverage and Disclosure Statement requirements by nearly 30%, while leaving more than 99% of the contract dollars previously subject to those requirements within the full-coverage regime.
The final rule also provides transition relief for contractors already subject to full CAS coverage under the former $50 million threshold. An eligible business unit may transition affected contracts or subcontracts to modified CAS coverage at the beginning of its next full cost accounting period beginning on or after October 1, provided the business unit has no unresolved CAS noncompliance and would not qualify for full coverage under the new $100 million threshold. Contractors meeting those conditions may also use their modified-coverage status for new solicitations and awards beginning October 1. Importantly, the Board explained that any resulting changes to the contractor’s cost accounting practices would be treated as unilateral changes and remain subject to applicable contract price-adjustment requirements.
The rule makes several other notable changes. For instance, Disclosure Statement applicability will now be assessed at the individual business-unit or segment level rather than through an initial company-wide aggregation. The Board also raised the amount that an agency head may waive from CAS without Board approval from $15 million to $100 million. And, for indefinite-delivery contracts, the rule clarifies that CAS applicability generally will be determined at the individual task- or delivery-order level for multiple-award indefinite delivery contracts (IDC), while single-award IDCs generally will be evaluated at the time of IDC award using the contract’s ceiling value.
Why Did the CAS Board Rescind CAS 407, and What Replaces It?
The Board’s second September 1 final rule continues its broader effort to conform CAS to GAAP by rescinding CAS 407, which addresses standard costs for direct material and direct labor.
The Board concluded that GAAP, together with existing CAS requirements, now provides substantially equivalent protections for most of the matters addressed by CAS 407. Limited requirements concerning standard costs and related variances at the production-unit level that are not addressed by GAAP will be retained and moved to CAS 418. Contractors will also remain subject to CAS 401 and applicable CAS contract clauses requiring consistency in disclosed or established cost accounting practices.
The rescission therefore should not be viewed as permission for contractors to freely change existing standard-costing practices. The Board specifically stated that it does not expect rescission of CAS 407 itself to require changes to currently compliant practices and that future changes involving standard costing of direct material or labor or the treatment of variances would be treated as unilateral accounting-practice changes.
What Does the DoW August 18 Memorandum Require for Supplier Cost Transparency?
While the Board is reducing formal accounting requirements, DoW has been moving to increase its visibility into contractor pricing.
On August 18, Deputy Secretary of War Stephen Feinberg issued a memorandum titled Supplier Cost and Pricing Transparency, directing the acquisition workforce to pursue “full transparency” throughout the supply chain for negotiations involving products and services valued at $10 million or more. The direction applies regardless of whether cost or pricing data must be certified and calls for contracting officers to have access to actual cost information at both the prime-contractor and supplier levels, except for commercial off-the-shelf items.
The memorandum also directs DoW to explore an automated solution using Application Programming Interfaces to obtain information directly from contractors’ enterprise resource planning or other financial systems. It separately directs enforcement of existing Cost and Software Data Reporting requirements, including submission of delinquent prime and subcontractor reports, and calls for increased use of actual-cost information when evaluating non-commercial, sole-source acquisitions.
The August memorandum itself does not amend procurement statutes, rewrite the FAR or DFARS, or create an immediate contractual right to unrestricted access to contractor financial systems. DoW instead directed acquisition leadership to update applicable issuances and regulations to implement the policy. Accordingly, significant questions remain concerning the mechanics and legal limits of any future automated access, including the treatment of proprietary information, subcontractor data, cybersecurity controls, and existing statutory exceptions to certified cost or pricing data requirements.
How Does DoW’s September 14 Memorandum Reconcile CAS Reform with Cost Transparency?
On September 14, DoW provided additional context in a new memorandum titled Fostering One Strong Industrial Base. The DoW expressly stated that the memorandum carries forward the August 18 supplier-transparency initiative while also seeking to reduce government-unique accounting, audit, and compliance requirements. DoW explained that requesting cost information does not create CAS coverage or a cost-reimbursement contract and does not alter existing thresholds or exceptions for certified cost or pricing data.
Under the new approach, DoW will rely on market information, including competition, comparable sales, and reliable price history, where a functioning market exists. Where reliable market information is unavailable, particularly for major sole-source development and procurement, DoW intends to rely on cost information already maintained in contractors’ records. The DoW also directed that price information be obtained first and cost information requested only to the extent needed to establish a fair price. Contractors will not be required to establish new accounting systems or special data formats, and the implementing procedures must prohibit automated access to contractor systems absent express contractual authorization and applicable security protections.
The September 14 directive also outlines additional CAS reforms. DoW plans to propose that the Board make exemption from CAS the default, generally limit remaining CAS coverage to large cost-based development contracts awarded without adequate price competition, and attach CAS coverage to the covered contract and relevant indirect-cost pools rather than to an entity or segment as a whole. The DoW also directed agencies to begin using the higher CAS thresholds immediately and to obtain senior-level approval before taking acquisition actions that would newly subject a business unit to full CAS coverage. In addition, DoW directed its components not to impose CAS-like requirements on otherwise exempt awards, such as equivalent disclosure obligations, business-system reviews, or accounting-practice controls under another label.
The memorandum also calls for greater reliance on audited GAAP financial statements and independent audits and directs DoW to modernize its profit policy so that negotiated margins reflect value delivered, risk carried, and private capital invested rather than simply costs incurred.
What Should Federal and Defense Contractors Do Now to Prepare?
The government is moving away from imposing specialized accounting requirements simply because a company enters the federal marketplace, but it is not abandoning cost scrutiny where competition or reliable market information is unavailable.
The October 1 CAS changes may provide substantial relief, particularly for mid-sized contractors and business units with CAS-covered awards between $35 million and $100 million. Contractors currently operating under full CAS coverage should assess whether they qualify for the new transition to modified coverage, including whether any unresolved CAS noncompliance could prevent that transition. Contractors should also evaluate the effect of the new IDC rules and determine whether existing Disclosure Statement obligations will continue under the business-unit-level $100 million threshold.
Defense contractors should simultaneously prepare for greater attention to the information supporting their prices. Companies involved in significant sole-source or otherwise non-market-based negotiations should review how actual-cost information is maintained, what information is available from suppliers and subcontractors, and how proprietary cost information is protected. Contractors should also monitor forthcoming DoW guidance implementing both the August 18 and September 14 directives, particularly any rules addressing automated access to financial information, Central Securities Depositories Regulation (CSDR) enforcement, profit analysis, and the DoW’s proposed further narrowing of CAS coverage.
The emerging model appears to be less government-unique accounting, but continued cost transparency when market forces cannot establish a reliable price. How DoW implements that distinction will determine whether these reforms ultimately reduce contractors’ compliance burdens or simply shift them from formal CAS requirements to more targeted pricing and data requests.
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