Authored by Levi C. Webb
A major change to federal contracting rules will dramatically reduce the number of companies required to comply with the government’s Cost Accounting Standards beginning October 1, potentially making it easier for midsize and nontraditional companies to compete for federal work.
At the same time, the Pentagon is moving in almost the opposite direction on some larger defense contracts, demanding greater visibility into what contractors and their suppliers actually spend. Together, the changes illustrate an important tension developing in federal acquisition policy: Washington is removing some longstanding accounting requirements while the Department of Defense separately seeks more detailed cost information from its suppliers.
For companies that do not regularly work with the federal government, Cost Accounting Standards, or CAS, can be difficult to appreciate. CAS is a specialized set of federal rules governing how certain contractors measure, allocate and report costs associated with government contracts. The requirements are designed to make costs consistent and transparent, but complying with them can require sophisticated accounting systems, documented accounting practices and additional government oversight.
That can become a significant barrier for a successful commercial technology company considering its first large government contract. A company may already maintain financial records that comply with normal commercial accounting standards, but federal contracting can impose an additional accounting regime simply because a contract crosses a particular dollar threshold.
Beginning October 1, that threshold becomes dramatically higher.
On September 1, the Office of Management and Budget’s Cost Accounting Standards Board published a final rule increasing the basic CAS applicability threshold from $2.5 million to $35 million. The rule also eliminates the existing $7.5 million “trigger contract” concept. Contracts and subcontracts that do not exceed $35 million will generally be exempt from CAS unless another provision applies. oai_citation:0‡Justia
The threshold for full CAS coverage and the associated Disclosure Statement requirement is also doubling, from $50 million to $100 million. That distinction matters because contractors under full CAS coverage face substantially greater accounting and disclosure obligations than companies operating below that level.
OMB estimates the change will reduce the number of businesses subject to full CAS coverage and Disclosure Statement requirements by nearly 30 percent. Its analysis of federal contracting data from fiscal years 2020 through 2024 identified 773 entities subject to those requirements. Applying the new $100 million threshold reduced that estimate to 564 entities. Yet the dollar value covered barely changes, falling from approximately $1.22 trillion to $1.21 trillion. oai_citation:1‡Justia
In other words, the government believes it can eliminate a substantial compliance burden for hundreds of companies while continuing to subject more than 99 percent of the contract dollars previously captured by the system to full CAS requirements.
That is particularly significant for midsize businesses and companies entering the federal marketplace from the commercial sector. Small businesses already benefit from important CAS exemptions. The difficult transition can occur when a company grows beyond small-business status and suddenly encounters an accounting and compliance environment designed largely around traditional government contractors.
OMB explicitly describes the new rule as deregulatory and says the higher thresholds are intended to reduce barriers for nontraditional contractors, new entrants and midsize companies. The Board argues that allowing companies to pursue substantially larger contracts before encountering CAS requirements should encourage additional private investment and competition in the federal marketplace. oai_citation:2‡Justia
The implications extend across the federal government, including the Department of Defense and Army organizations buying information technology, cybersecurity, communications, engineering and other professional services. A commercial technology company considering a $10 million, $20 million or $30 million federal opportunity will soon face a very different CAS calculation than it would have under the previous rules.
OMB simultaneously finalized another significant simplification.
The Cost Accounting Standards Board is rescinding CAS 407, the standard governing the use of standard costs for direct materials and direct labor. The Board determined that Generally Accepted Accounting Principles, commonly known as GAAP, have evolved sufficiently that most of CAS 407 now substantially overlaps accounting practices already required in the commercial financial system. oai_citation:3‡GovInfo
Rather than maintaining a separate federal accounting standard where commercial accounting rules already provide substantially equivalent protections, the government will rely largely on GAAP and remaining CAS requirements. The change also becomes effective October 1.
That sounds technical, but the underlying policy is relatively straightforward: where the commercial accounting system already accomplishes what the government needs, contractors should not have to maintain an additional government-specific requirement simply for the sake of having one.
The two CAS rules therefore move federal procurement toward a lighter compliance model. Fewer contracts will encounter CAS in the first place, fewer companies will face full CAS coverage, and one longstanding accounting standard is largely disappearing in favor of established commercial accounting practices.
For the Pentagon, however, another policy is moving toward greater scrutiny.
An August 18 memorandum on supplier cost and pricing transparency directs Defense acquisition personnel to seek significantly greater visibility into contractor costs on products and services valued at $10 million or more. The policy reaches beyond prime contractors into the supply chain and calls for actual cost information even in situations where traditional certified cost or pricing data requirements may not otherwise apply. Commercial-off-the-shelf items are treated differently under the policy.
That distinction is important. Certified cost or pricing data is a formal acquisition requirement with specific statutory and regulatory rules. Actual cost information requested to evaluate whether a price is reasonable is not necessarily the same thing. A contractor can therefore avoid one formal accounting requirement while still being asked to provide the government with substantial information supporting its price.
For traditional defense contractors with mature government accounting systems, those requests may be manageable. For commercial technology companies and other businesses the Pentagon has been trying to attract into the defense marketplace, extensive cost disclosure can be considerably more disruptive. Commercial businesses frequently price products according to markets, competition, intellectual property, demand and business strategy rather than simply adding an acceptable profit margin to their underlying costs.
That creates the emerging contradiction.
Government-wide acquisition policy is attempting to make federal contracting resemble commercial business practices more closely. The CAS Board is raising thresholds, relying more heavily on GAAP and explicitly trying to reduce barriers for companies that do not traditionally sell to the government.
The Pentagon, meanwhile, wants greater insight into the economics behind the prices it pays, particularly on large acquisitions and within complex supply chains.
Those objectives are not necessarily incompatible. The government can reduce prescriptive accounting requirements while simultaneously becoming more sophisticated about evaluating prices. But the balance matters. If cost-transparency requirements become sufficiently intrusive, they could recreate some of the barriers that the CAS reforms are specifically intended to remove.
For Army organizations and other Defense customers purchasing enterprise IT, cybersecurity, software, communications and professional services, the practical result may therefore be mixed. More midsize and commercial companies could become capable of competing for substantial federal contracts without immediately building a full government-specific CAS compliance structure. Once those opportunities become large enough, however, Defense contracting officers may increasingly ask those same companies to explain the actual costs underlying their prices.
Beginning October 1, the federal government will have substantially fewer contractors formally caught in the CAS system. Whether that translates into a genuinely easier path for commercial companies into the defense marketplace will depend partly on how aggressively the Pentagon implements its separate push for supplier cost transparency.
The direction of federal acquisition policy is therefore not simply deregulation or increased oversight. Right now, it is both.
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Reporting and writing by Levi C. Webb. AI tools were used selectively to assist with research and editorial support.
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