The Cost Accounting Standards (CAS) are 19 federal standards that establish consistent requirements for measuring, assigning, and allocating costs on certain government contracts and subcontracts. They address areas such as indirect costs, depreciation, pensions, home office expenses, and the accounting for unallowable costs.
CAS focuses on how contractors account for and allocate costs to cost objectives, including government contracts. It is related to, but distinct from, the Federal Acquisition Regulation (FAR). The FAR generally establishes the cost principles used to determine whether costs are reasonable, allocable, and allowable, while applicable CAS establishes requirements for how certain costs are measured, assigned, and allocated.
Beginning October 1, 2026, negotiated contracts and subcontracts valued at $35 million or less will generally be exempt from CAS, unless another rule or requirement applies. Small businesses remain exempt regardless of contract value. For non-exempt awards above $35 million, CAS coverage may apply, with full CAS coverage and disclosure statement requirements generally moving from $50 million to $100 million. The new CAS threshold does not change the $2.5 million threshold for certified cost or pricing data, which remains a separate requirement. Contractors should also consider other longstanding CAS exemptions, including sealed bids, certain commercial acquisitions, and prices set by law or regulation.
CAS 401–406 cover consistency in estimating and reporting costs, allocation of costs incurred for the same purpose, home-office expense allocation, capitalization of tangible assets, unallowable costs, and cost accounting periods. CAS 407–411 address standard costs, compensated personal absence, depreciation, business-unit general and administrative expense allocation, and material acquisition costs.
CAS 412–417 address pension costs, pension adjustments, facilities capital cost of money, deferred compensation, insurance costs, and construction capital cost of money. CAS 418 governs the allocation of direct and indirect costs, while CAS 420 governs independent research and development (IR&D) and bid and proposal (B&P) costs. CAS 419 is reserved, leaving 19 active standards numbered 401 through 420.
For contracts containing FAR 52.216-7, a contractor generally must submit its final indirect cost rate proposal within six months after its fiscal year ends. The incurred cost submission supports final indirect rates and includes schedules tying claimed costs to accounting records.
DCAA evaluates whether the submission is adequate and may audit it based on applicable requirements and risk. During a DCAA audit, auditors may reconcile costs to general ledger and job-cost records, test direct and indirect costs, review allocation bases, and question costs that are unsupported, unallowable, or improperly assigned.
CAS non-compliance can result in adjustments to contract prices or cost allowances when the government paid increased costs because of the non-compliance. The government can also recover interest from the time of overpayment until the adjustment is made. Contractors may need to prepare a cost-impact proposal covering affected contracts.
Preparation starts with documented policies, consistent allocation methods, clean reconciliations, trained employees, and controlled accounting changes. Legal Fees and Transaction Costs should also be reviewed separately for proper allowability and allocation. Strong CAS compliance is much easier to demonstrate when documentation already exists before an auditor asks for it.
What happens when a contractor becomes newly subject to CAS?
A newly covered contractor should determine whether full or modified coverage applies, identify affected contracts, document its existing accounting practices, and update procedures where necessary. Business Carve-Outs or reorganizations can change which business unit is tested, so CAS coverage should be reassessed.
How do Cost Accounting Standards differ from GAAP?
GAAP governs external financial reporting to investors, lenders, and other users. CAS governs how certain government contractors measure, assign, and allocate contract costs. A company can follow GAAP and still fail CAS because the objectives and required accounting practices are different.
Can a contractor change its cost accounting practices post-award?
Yes, but not casually. Required changes must be made, while voluntary changes may require advance notice, disclosure updates, and a cost-impact analysis. If a change increases government costs, contract adjustments may be required. Contractors should coordinate significant changes before implementation.
What triggers a DCAA accounting system review?
A contracting officer may request a pre-award or post-award accounting system review when contracts require reliable cost accumulation, such as cost-reimbursement work or progress payments. DCAA may also conduct follow-up or risk-based reviews after award when accounting-system concerns arise.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Lindsey Sykes, partner in Bennett Thrasher’s Financial Reporting & Assurance practice, or call us at 770.396.2200.
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