close
Request Consultation

As the defense contracting landscape continues to evolve, one recent legislative change is expected to have a significant impact on procurement teams across the industry. The FY2026 National Defense Authorization Act (NDAA) introduced statutory exemptions for qualifying Nontraditional Defense Contractors (NDCs), creating new opportunities for commercial suppliers while shifting additional responsibilities onto prime contractors.

For Contracts and Procurement departments, this means preparing for an increasing number of suppliers asserting NDC status during the procurement process. While these exemptions can streamline negotiations and reduce administrative burden, they also require organizations to implement consistent, compliant procedures for evaluating and documenting supplier assertions.

Companies that establish repeatable processes now will be better positioned to accelerate procurement while reducing downstream compliance risk.

The FY2026 NDAA may simplify compliance for qualifying Nontraditional Defense Contractors (NDCs), but it places new responsibilities squarely on prime contractors. As more suppliers begin asserting NDC status, Contracts and Procurement departments will become the first line of defense for ensuring those assertions are reviewed consistently, documented properly, and administered in compliance with evolving regulations.

What Is a Nontraditional Defense Contractor?

A Nontraditional Defense Contractor is generally defined as an entity that has not performed under a fully CAS-covered Department of Defense contract for at least one year before the solicitation.

This definition includes many organizations that primarily serve commercial markets, including:

Historically, many of these companies avoided defense contracts because of the significant compliance requirements associated with traditional government contracts. Congress designed the NDC exemptions to encourage greater commercial participation in the defense industrial base by lowering those barriers.

For qualifying Department of Defense contracts, the FY2026 NDAA provides statutory exemptions from certain requirements related to:

Although these statutory changes are effective, regulatory implementation within the DFARS remains ongoing, making proper internal administration especially important.

Why Procurement Teams Should Expect More NDC Assertions

The new statutory exemptions create meaningful incentives for suppliers to identify themselves as Nontraditional Defense Contractors.

From a supplier's perspective, qualifying as an NDC can significantly reduce the amount of documentation and administrative effort required during negotiations. Less cost information may be required, compliance obligations are reduced, and contract administration becomes more efficient.

As awareness of these benefits grows throughout the defense industry, procurement professionals should expect suppliers to begin proactively asserting NDC status during subcontract negotiations.

This creates new challenges for prime contractors.

Instead of simply accepting or rejecting supplier assertions, procurement personnel must determine whether:

Without standardized procedures, organizations may find different buyers handling identical situations differently, increasing compliance risk and creating inconsistencies across programs.

The Opportunity for Prime Contractors

While the influx of NDC assertions introduces additional responsibilities, it also presents meaningful opportunities to improve procurement efficiency.

Organizations that establish a structured review process can realize several important benefits.

Accelerated Procurement Cycles

Reducing unnecessary cost analysis allows buyers to move negotiations forward more quickly, helping organizations meet aggressive acquisition schedules without sacrificing compliance.

Reduced Administrative Burden

When suppliers legitimately qualify for statutory exemptions, procurement professionals spend less time requesting, reviewing, and documenting detailed cost information.

This allows Contracts and Procurement teams to focus on higher-value acquisition activities rather than unnecessary administrative work.

Greater Supplier Participation

Commercial companies that once viewed defense contracting as overly burdensome may now be more willing to pursue government work.

This broader supplier base can increase competition, encourage innovation, and improve access to emerging technologies that benefit Department of Defense programs.

Improved Procurement Efficiency

Organizations with clearly defined review procedures can process supplier assertions consistently, reducing delays while maintaining confidence that procurement decisions are fully documented.

The Compliance Risks of an Informal Process

Although the exemptions simplify portions of the procurement process, they do not eliminate the need for sound internal controls.

One of the greatest risks organizations faces is inconsistent administration.

For example, one buyer may require extensive documentation before accepting an assertion, while another may approve similar assertions with minimal review. Over time, these inconsistencies can create unnecessary exposure during internal audits, customer reviews, or government oversight.

Potential compliance risks include:

The objective is not simply to approve supplier assertions faster—it is to establish a repeatable process that produces consistent, well-supported decisions every time.

Building a Sustainable NDC Review Process

As more suppliers begin asserting NDC status, organizations should develop standardized procedures that guide procurement personnel through each review.

An effective process often includes several key components.

Standardized Supplier Certifications

Develop a consistent questionnaire or certification form that suppliers complete when asserting Nontraditional Defense Contractor status.

This creates consistency across procurement activities while documenting the supplier's representation.

Defined Documentation Requirements

Determine exactly what supporting documentation procurement personnel should request before accepting an assertion.

Establishing clear requirements prevents unnecessary variation between buyers.

Internal Review and Approval Workflows

Identify who is responsible for evaluating assertions, approving exemptions, and escalating complex situations to Contracts, Legal, or Compliance personnel when appropriate.

Clear accountability improves consistency across the organization.

Procurement Team Training

Buyers, subcontract administrators, contracts managers, and pricing analysts should understand:

Training helps ensure every procurement professional applies to the same standards.

Documentation and Record Retention

Organizations should maintain procurement files that clearly demonstrate how each assertion was evaluated and approved.

Proper documentation supports future audits while reducing questions about procurement decisions months or even years later.

Preparing Before Supplier Assertions Become Routine

Many procurement organizations have not yet updated their policies or procedures to address the expected increase in NDC assertions.

Waiting until suppliers begin regularly requesting exemptions places unnecessary pressure on acquisition teams already managing tight schedules and evolving regulatory requirements.

Instead, organizations should begin preparing now by:

These proactive steps help ensure procurement teams are ready before supplier assertions become commonplace.

RKI Helps Government Contractors Prepare for What's Next

The growing use of Nontraditional Defense Contractor assertions represents one of the latest examples of how government contracting requirements continue to evolve.

While these statutory exemptions can significantly reduce procurement burdens, they also require organizations to implement repeatable, compliant processes that withstand future scrutiny.

RKI Accounting works with government contractors to strengthen procurement processes, improve compliance programs, and develop sustainable internal controls that reduce administrative burden without increasing risk. Whether your organization is preparing for an influx of NDC assertions or reviewing broader procurement policies, our experienced consultants can help you establish procedures that support both compliance and operational efficiency.

Contact RKI Accounting today to learn how your Contracts and Procurement teams can confidently navigate evolving defense contracting requirements while mitigating downstream compliance risk.

Frequently Asked Questions

What is a Nontraditional Defense Contractor?

A Nontraditional Defense Contractor is an organization that has not performed under a fully CAS-covered Department of Defense contract for at least one year before the solicitation.

Why are more suppliers expected to assert NDC status?

The FY2026 NDAA introduced statutory exemptions that reduce compliance requirements for qualifying contractors, making NDC status more attractive to commercial suppliers.

Do NDC exemptions eliminate all procurement requirements?

No. While qualifying contractors may receive statutory exemptions from Truthful Cost or Pricing Data, FAR Part 31 Cost Principles, and DFARS Business Systems requirements for applicable DoD contracts, prime contractors should still maintain documented review procedures and consistent procurement practices.

How should prime contractors prepare for NDC assertions?

Organizations should establish standardized review procedures, define documentation requirements, train procurement personnel, implement approval workflows, and maintain complete procurement records to ensure supplier assertions are handled consistently and compliantly.

Cost Accounting Standards (CAS) 403 governs how home office expenses are allocated to business segments performing government contracts. The purpose of CAS 403 is to establish criteria for allocating home office expenses to the segments of an organization based on a beneficial or causal relationship. The standard requires contractors to allocate home office costs in a manner that reflects the benefit received by each segment, helping ensure consistency, compliance, and equitable cost distribution across the organization.

Key Definitions for CAS 403

To understand CAS 403, it is fundamental to know how CAS defines a home office, an intermediate home office, and a segment.

A home office is an office responsible for directing or managing two or more segments of an organization. For example, a corporate headquarters. A home office usually performs management, administrative, and other back-office functions the benefit one or more segments.

An organization can also have intermediate home offices for each group within the organization that report to one common home office. For example, a company may have an ultimate parent organization that directs strategy of the business with core executive functions and similar.  And intermediate home offices may be back office support organizations that sit beneath the ultimate parent but still perform functions on behalf of multiple segments.

In order to properly comply with CAS 403, a complete cost accounting illustration is necessary to understand the big picture of who supports who and where they sit within the organizational and operating structure of the business.  Just getting this part right at the on-set is a significant advantage to complying with CAS 403, but also to understanding the best way to optimize cost allocations within your business.

A segment is “one of two or more divisions, product departments, plants, or other subdivisions of an organization reporting directly to a home office, usually identified with responsibility for profit and/or producing a product or service.”

CAS 403 focuses on how home office expenses must be allocated to segments, and/or intermediate home offices, as applicable.

Allocation Pool and Base Requirements for CAS 403

CAS 403 requires that home office expenses are allocated on the basis of beneficial or causal relationships.  The allocation methodology is hierarchial in nature, with direct allocations of home/intermediate home office costs

CAS 403 guide

being required to the maximum extent practicable. The concept of ‘direct allocation’ is not to be confused with the concept of ‘direct costs’.  Directly allocated simply means a cost is being assigned directly to the benefiting segment.

For example, if a home office is performing legal work on behalf of an individual segment, however it has responsibility for four (4) segments, the time spent on the matter can be directly identified, and hence directly allocated to the benefitting segment.  When direct allocation is not practical, home office expenses must be grouped into homogeneous expense pools and allocated subsequently.

Homogenous Expense Pools Prescribed by CAS 403

The following are the types of homogenous expense pools prescribed by CAS 403 that can be used:

  1. Centralized service functions
  2. Staff management of certain specific activities of segments
  3. Line management of particular segments or groups of segments
  4. Central payments or accruals
  5. Independent research and development (IR&D) costs and bid and proposal costs (B&P)
  6. Residual expenses

These are referred to as “functional allocations”.  The number of functional allocations an organization has usually depends on the variety and significance of service and management functions performed by the home office. But to avoid having too many groupings, as long as the pooled expenses can be allocated using the same allocation base (e.g., employee headcount), they can be included in the same home office expense pool.

CAS 403 Examples

CAS 403 provides illustrated examples of typical home office allocation pools and bases. For items one through five above, following are some additional examples.

Home Office Expense or FunctionIllustrative Allocation Bases
Human ResourcesEmployee headcount, labor hours, payroll, number of hires
Information TechnologyEmployee headcount, computer equipment nodes
Centralized warehousingSquare footage, value of material, volume
Finance and accountingOperating revenue
SecurityEmployee headcount, square footage

 

Lastly, if the home office costs cannot be allocated either directly or functionally then CAS provides for the remainder of costs to be treated as “residual expenses”.  Residual expenses are typically those that are not identifiable with specific activities of segments and cannot be more equitably allocated based on a functional allocation.

While it may be compliant to allocate residual expenses in different ways, the most common approach is the Three Factor Formula which is calculated by taking the arithmetical average of the following three percentages for the same period:

  1. Percentage of segment payroll dollars to total payroll dollars of all segments
  2. Percentage of segment operating revenue to total operating revenue of all segments
  3. Percentage of average NBV of the sum of segment tangible capital assets plus inventories to the total average NBV of such assets of all segments

Note that at certain size thresholds contractors are required to use the 3 Factor Formula.  Other contractors sometimes use sales as a simple residual allocation method when not required by CAS to use 3 Factor Formula.  Others still may find that a 2 Factor formula is most equitable given the nature of their business.  For example, it is not uncommon for some businesses to have highly variable fixed assets across their segments which may be distortive to the allocation method.

Congress has approved legislation that would increase CAS applicability and Full CAS Coverage thresholds. As of June 2026, these changes have been enacted but remain pending implementation through rulemaking. Contractors should continue following current CAS requirements until the new regulations take effect. (Effective 6/30/26)

Best Practice Strategies

CAS 403 Challenges

The most common CAS 403 challenges we find working with contractors include:

While CAS 403 is a U.S. Government contract requirement, it’s allocation methodologies are highly leverageable by companies that understand them.  CAS 403 has its own dedicated audit program (DCAA > Customers > Guidance > Directory of Audit Programs)  that DCAA uses when auditing and findings within CAS 403 are some of the most common CAS audit findings.  While they can be a challenge, they can also be a way to ensure alignment between home office parents and their segments.  We have found the contractors with the most success with CAS 403 are those that have strong communication and alignment with their parent organizations.

Frequently Asked Questions

What is CAS 403?

CAS 403 establishes rules for allocating home office expenses to business segments based on beneficial or causal relationships.

Does CAS 403 require the Three Factor Formula?

Not always. The Three Factor Formula is generally used for residual expenses when direct or functional allocation methods are not appropriate.

What is a home office under CAS 403?

A home office is an organization responsible for directing or managing two or more segments.

What is an intermediate home office?

An intermediate home office performs management or support functions for multiple segments while reporting to a higher-level home office.

What are residual expenses under CAS 403?

Residual expenses are home office costs that cannot be directly or functionally allocated and must be distributed using an appropriate residual allocation methodology.

Lastly, Home Office allocations require a Home Office Disclosure Statement.  For more information on preparing compliant Disclosure Statements, please visit:  DS Done -- CAS DS-1 Form completion application (rkiaccounting.com)

Defining CAS Coverage and What is a CAS Covered Contract

In its simplest sense, a CAS covered contract is any U.S. Government contract that does not meet an exemption from the Cost Accounting Standards (CAS) and includes the CAS clause (FAR 52-230-2 Cost Accounting Standards). While that sounds simple, what is not is navigating whether a contract meets CAS exemptions, and if it does not, knowing which CAS coverage is applicable to the contract; modified CAS or full CAS.

CAS applicability is one of the most common challenges faced by a growing U.S. Government contractor. Once a contractor begins performing CAS-covered contracts, its compliance profile changes significantly, bringing increased cost accounting requirements, disclosure obligations, and audit interest from the Defense Contract Audit Agency (DCAA).

Compliance with CAS can be complex and confusing to many Contractors, so it is crucial for Contractors to understand CAS applicability and determine whether they have any CAS Covered Contracts. It is also crucial, based on the type of CAS Coverage, to understand CAS implications in their organization. Many contractors lack the formal procedures and internal controls to effectively track their US Government Contract awards against CAS Coverage. This can result in major compliance challenges downstream that are expensive to untangle.

Table Of Contents:

CAS Exemptions & Applicability

Cost Accounting Standards (CAS) apply to certain negotiated government contracts unless a specific exemption applies. Recent legislative changes have increased CAS applicability thresholds, making it more important than ever for contractors to evaluate each award individually.

A contract may be exempt from CAS if:

If none of these exemptions apply, the contract may be subject to CAS coverage. Contractors should carefully evaluate each award against the applicable CAS thresholds and regulations in effect on the contract award date.

As contractors grow and pursue larger federal opportunities, they often accumulate multiple CAS-covered contracts. Losing track of which contracts are subject to CAS and the level of coverage applicable to each contract, can create significant compliance challenges.

The U.S. Government has rights under CAS-covered contracts that do not exist under exempt contracts, including the ability to seek contract price adjustments when a contractor fails to comply with applicable Cost Accounting Standards.

Because CAS applies at the contract level, every award should be evaluated independently. Maintaining a CAS tracking process is critical to ensuring compliance, understanding disclosure requirements, and avoiding costly downstream issues.

Important: Recent legislative and regulatory changes are increasing CAS applicability thresholds from $7.5M to $35M for modified CAS and from $50M to $100M for full CAS coverage, effective 6/30/26.  Because these requirements continue to evolve, contractors should evaluate each award based on the regulations and thresholds in effect on the contract award date.

CAS Covered Contracts – Modified vs. Full CAS Coverage

CAS Covered Contracts

When a contract is determined to be CAS-covered, the next step is determining whether it is subject to Modified CAS Coverage or Full CAS Coverage.

Modified CAS Coverage requires compliance with four Cost Accounting Standards:

Modified CAS Coverage generally applies to contractors that do not meet the thresholds for Full CAS Coverage.

Full CAS Coverage requires compliance with all 19 Cost Accounting Standards and carries additional disclosure and compliance requirements. Full CAS Coverage is generally triggered when a contractor exceeds the applicable CAS thresholds established by statute and regulation. Because these thresholds may change over time, contractors should evaluate coverage requirements based on the regulations and thresholds in effect on the contract award date.

A key requirement under Full CAS Coverage is the submission of a CASB Disclosure Statement (Form CASB DS-1). This document details a contractor's cost accounting practices and serves as the basis for demonstrating ongoing compliance with Cost Accounting Standards. In certain circumstances, contractors subject to Modified CAS Coverage may also be required to submit a Disclosure Statement.

Maintaining consistency between disclosed accounting practices and actual business operations is critical. Failure to comply with applicable CAS requirements can result in audit findings, cost impacts, and contract price adjustments by the U.S. Government.

CAS Exemptions Flowchart

A CAS coverage flowchart that illustrates applicability, coverage, exemptions, and CAS disclosure statement requirements can be found here.

A common misconception held by many contractors is that a contractor is either CAS-covered or not CAS-covered. While a simple way to think of it, it is important to recognize that CAS applies at a contract level, not at a contractor level. Every U.S. Government contract should be evaluated on its date of award to determine if and how CAS applies.

How Long Does CAS Coverage Last?

The CAS applicability on the date of the contract award is the applicability for the life of the contract. Hence, some contractors can have a combination of exempt, modified CAS, and full CAS covered contracts.

The CAS status of a contract or subcontract remains the same throughout its life. For example, if a contractor holds a contract subject to Modified CAS Coverage, and then receives a contract subject to Full CAS Coverage, the initial contract does not become subject to Full CAS, and remains subject to Modified CAS.

CAS Compliance Requirements

Cost Accounting Standards (CAS) compliance is essential for government contractors performing CAS-covered contracts. CAS was established to promote consistency, uniformity, and transparency in how contractors estimate, accumulate, allocate, and report costs to the U.S. Government. Below are several key CAS compliance requirements contractors should understand:

  1. CAS Coverage Determination

Contractors should evaluate each contract individually to determine whether it is exempt from CAS or subject to Modified or Full CAS Coverage. CAS applicability is determined at the contract level and is based on the regulations and thresholds in effect on the contract award date.

  1. Cost Accounting Practices

Contractors must establish and consistently follow documented cost accounting practices for estimating, accumulating, allocating, and reporting costs. Changes to these practices may require disclosure to the U.S. Government and could result in contract price adjustments.

  1. Disclosure Statement Requirements

Contractors subject to Full CAS Coverage are generally required to submit a CASB Disclosure Statement (Form CASB DS-1), which documents their cost accounting practices. In certain circumstances, contractors under Modified CAS Coverage may also be required to submit a Disclosure Statement. Contractors must ensure their actual practices remain consistent with their disclosed practices.

  1. Consistent Cost Allocation

CAS requires contractors to consistently allocate costs between direct and indirect cost pools. Costs incurred for the same purpose under similar circumstances must be treated consistently throughout the organization to prevent inequitable cost charging.

  1. Recordkeeping and Audit Readiness

Contractors must maintain sufficient documentation to support their accounting practices, indirect rate structures, cost allocations, and contract billings. These records should be readily available to support government audits and compliance reviews.

  1. Understanding CAS Exemptions

Not all government contracts are subject to CAS. Certain contracts may qualify for exemptions based on factors such as contractor size, contract type, competition, or the nature of the goods or services being provided. Properly identifying exemptions is an important part of maintaining compliance.

Failure to comply with CAS requirements can result in audit findings, contract price adjustments, increased government scrutiny, and other compliance challenges. Maintaining strong accounting systems, documented procedures, and consistent cost accounting practices is essential to successfully managing CAS-covered contracts.

Making Cost Accounting Practice Changes Under CAS

Once a contractor begins performing CAS-covered contracts, it must monitor its cost accounting practices for changes that require disclosure to the U.S. Government pursuant to FAR 52.230-3 Disclosure and Consistency of Cost Accounting Practices. Contractors that fail to realize this significant requirement, applicable under both modified and full CAS covered contracts, may make a change that results in increased cost to the U.S. Government for which it will not pay.

Generally, the U.S. Government will not pay increased costs due to changes in a contractor’s cost accounting practices. One of the easiest, and expensive, ways to get in trouble with CAS covered contracts is to make changes to cost accounting practices that seem benign but change the way the U.S. Government participates in cost. Examples of common changes in cost accounting practice that are natural for a contractor but impact cost allocation include:

NOTE:  Recent changes in legislation now exempt firm fixed price contracts from cost impacts resulting from changes in cost accounting practice.

Impact on CAS Covered Contracts

All changes to cost accounting practice are likely to result in some cost impact to CAS covered contracts. Changes to cost accounting practice require disclosure prior to adopting them. In most instances the U.S. Government will require a contractor to submit a cost impact proposal, either through a Detailed Cost Impact (DCI) or General Dollar Magnitude (GDM).

Not realizing this requirement can result in significant cost impacts to the U.S. Government whereby a contractor may have to pay large sums of money back to the U.S. Government for years of undisclosed changes in cost accounting practice. This is a massive difference from commercial and non-CAS covered contracts. In its simplest sense, once a contractor is CAS covered, it must carefully evaluate, disclose, and coordinate changes to its cost accounting practices before implementation.

Monitor Your Contracts and Protect Your Organization!

If you are a contractor, it is important to evaluate every award for CAS applicability and maintain a CAS tracker so that you know the CAS applicability at the contract level. And it is something every executive team, not just accounting and contracts, needs to be familiar with. Changes in organizations bring changes to cost accounting; and those changes need to be considered prior to making the change. If the entire organization is not aware of these risks, it can easily result in changes that cost the contractor money.

Need Help Navigating CAS Compliance? We're Here to Support You.

Winning and managing CAS-covered contracts can bring major opportunities—but also complex requirements. Whether you're preparing for a new award, updating your cost accounting practices, or responding to an audit, our team understands what it takes to stay on track with CAS compliance.

At RKI, we work with government contractors of all sizes to evaluate readiness, strengthen internal systems, and support disclosure requirements. If you're unsure where to start or need a second set of eyes, we’re here to help you move forward with clarity and confidence.

Don’t let CAS compliance slow you down. Let’s make compliance a strength, not a stressor. Contact us today to get started and ensure your compliance needs are met with precision and expertise.

Frequently Asked Questions

What is a CAS covered contract?

A CAS covered contract is a U.S. Government contract that is subject to the Cost Accounting Standards (CAS) and does not qualify for a CAS exemption. CAS-covered contracts require contractors to follow specific cost accounting rules and maintain consistency in how costs are estimated, accumulated, allocated, and reported.

What is Modified CAS Coverage?

Modified CAS Coverage requires compliance with four Cost Accounting Standards: CAS 401, CAS 402, CAS 405, and CAS 406. It is generally applicable to contractors that do not meet the requirements for Full CAS Coverage but are performing CAS-covered contracts.

What is Full CAS Coverage?

Full CAS Coverage requires compliance with all 19 Cost Accounting Standards and carries additional disclosure and compliance obligations. Contractors subject to Full CAS Coverage are typically required to submit a CASB Disclosure Statement outlining their cost accounting practices.

Does CAS apply to small businesses?

No. Contracts awarded to qualifying small businesses are generally exempt from Cost Accounting Standards. However, contractors should evaluate each award individually to determine whether an exemption applies.

How long does CAS Coverage last?

CAS applicability is determined on the date of contract award and remains in effect for the life of the contract. A contract that is exempt, modified CAS-covered, or full CAS-covered at award generally retains that status throughout its performance period.

What is a CASB Disclosure Statement?

A CASB Disclosure Statement (Form CASB DS-1) is a document that outlines a contractor's cost accounting practices. It provides transparency to the U.S. Government and serves as the basis for evaluating compliance with Cost Accounting Standards. Contractors subject to Full CAS Coverage are generally required to submit and maintain a Disclosure Statement.

What happens if a contractor violates CAS?

Failure to comply with Cost Accounting Standards can result in audit findings, contract price adjustments, increased government scrutiny, and potential repayment of costs to the U.S. Government. Maintaining documented accounting practices and monitoring cost accounting changes are essential to reducing compliance risk.

Can a contractor have both CAS-covered and CAS-exempt contracts?

Yes. CAS applies at the contract level, not the contractor level. A contractor may simultaneously hold CAS-exempt contracts, contracts subject to Modified CAS Coverage, and contracts subject to Full CAS Coverage. Each contract should be evaluated independently based on the rules applicable at the time of award.

A CASB Disclosure Statement (CASB DS-1) is a required disclosure document used by certain government contractors to describe their cost accounting practices under the Cost Accounting Standards (CAS). It helps the Government evaluate whether a contractor's accounting methods are CAS-compliant, consistent, and properly disclosed.

What Is Included in a CASB Disclosure Statement?

A CASB Disclosure Statement consists of eight primary sections that document how a contractor estimates, accumulates, allocates, and reports costs.

Each part has numerous sections called items which vary in applicability to the contractor, depending on the contractor’s cost accounting practices. While each item is generally constituted by selection boxes and multiple-choice questions, certain responses require the contractor to detail information in longer narrative form, on “continuation sheets”.

When is a CASB Disclosure Statement Required?

The requirement to submit a CASB Disclosure Statement depends on the CAS covered contracts a contractor maintains. In a nutshell, CAS is applicable to individual contracts and the applicability of CAS is triggered based on dollar thresholds. Whether or not CAS is applicable to a given contract is determined by the contract type, the size of the business receiving the contract, and the amount awarded. A CASB Disclosure Statement is required if Full-CAS coverage applies to a contractor.

Contractors subject to Full CAS Coverage are generally required to submit a CASB Disclosure Statement. Full CAS Coverage typically applies when a contractor receives a CAS-covered award of $50 million ($100M, effective 6/30/26) or more, or when the contractor receives $50 million ($100M, effective 6/30/26) or more in net CAS-covered awards during its preceding cost accounting period.

CASB DS-1 should not be submitted prior to Full-CAS coverage applicability. The solicitation usually provides clarification on when exactly the Disclosure is required. Typically, if the requirement is in the solicitation, and it is the Contractor’s first Disclosure, then submission is due at the time of the proposal.

If a CAS-covered contract under $50 million ($100M, effective 6/30/26) is awarded, and the Contractor received net CAS-covered awards in the prior accounting period totaling more than $50 million ($100M, effective 6/30/26), then the Contractor is required to file a Disclosure Statement prior to the contract award. However, if the award is within the first 90 days of the preceding accounting period, then the contractor is not required to file until the end of the 90 days. If a contractor anticipates future Full-CAS coverage, it is prudent to have the Disclosure Statement prepared and ready (i.e., not submitted to the Government).

CASB Disclosure Statement Adequacy and Compliance

When a CASB Disclosure Statement is required, it must be submitted to the Contracting Officer (CO) and the Cognizant Federal Agency Official (CFAO). All Disclosure Statements will be reviewed and audited based on two major factors (1) adequacy, and (2) compliance.CAS Disclosure statement

CASB Disclosure Statement Adequacy

The adequacy of a CASB Disclosure Statement is determined by how the DS-1 is formatted and filled out based on the applicability of the 19 Cost Accounting Standards to the contractor. For example, if a contractor accumulates Home Office expenses and allocates such expenses to various business segments, but it does not complete Part VIII of the Disclosure Statement, the Disclosure Statement would be deemed inadequate.

Ensuring adequacy on a CASB Disclosure Statement is not easy, and it can be a grueling process to pass adequacy with DCAA. DCAA’s adequacy checklist evaluates the DS-1 for completeness and proper formatting, oftentimes resulting in many rounds of back and forth before a Disclosure Statement is accepted for audit.  This erodes auditor confidence and burns costly time on behalf of the Government and the contractor.

Our experience suggests that at least 50% of inadequacies can be avoided simply by filling the DS-1 out with all the required information in proper format.  As a result, we designed a proprietary software – CASB DS-Done – to facilitate an adequate Disclosure Statement.  The software is built with control integrity to hit on all the required fields and continuation sheets with user-friendly prompts avoiding the countless hours of formatting and inadequacy rejections.  [Learn more about DS-Done].

What Are the Penalties of CASB Disclosure Statement Inadequacies or Noncompliance?

Inadequate formatting of CASB DS-1 greatly hampers the progress of a contractor’s Government Contracts program from an operational, accounting, and billing standpoint. To ensure all contract estimates, procurements, and billings are conducted properly under CAS rules, regulations, and standards, and FAR part 31, the accounting practices of Full-CAS covered contracts or companies/business segments are audited via initial Disclosure Statement audit.

Such audits will only be initiated once the CFAO has deemed the CASB DS-1 to be adequate. Delays in Disclosure Statement adequacy translate to delays in Disclosure Statement audits, and delays in Disclosure Statement audits degrade both contractor and Government confidence in the contractor’s cost accounting reliance.  It can also result in delayed contract award, in addition to unnecessary resource consumption on both parties to resolve inadequacies that can be avoided with upfront diligence.

Penalties for Noncompliance

Depending on the nature of the non-compliance there can be a variety of penalties for noncompliance. In its simplest sense, the U.S. Government will be entitled to repayment of any material non-compliance if it resulted in increased cost to the Government. If the CFAO determines that noncompliance is material, the contractor is required to submit a description of any accounting practice change needed to bring the practices into compliance, which the auditor will review for adequacy and compliance. If the proposed change is both adequate and compliant, the contractor must submit a cost impact detailing the effect the non-compliance had on all affected CAS covered awards.

The CFAO will evaluate the cost impact and if the result was increased cost to the Government, the CFAO will administer contract and/or billing adjustments, plus applicable fines and interest to repay the amounts due as a result of the noncompliance. Noncompliant cost impacts take time to develop, negotiate, and are a significant burden and expense to both the contractor and the Government to administer. It can require going back years into your historical contract and accounting records to obtain the necessary information to perform a cost impact analysis.

Adding to the risk of CAS non-compliances is the risk of perceived, or actual, False Claim Act (FCA) allegations from the customer.  In many instances, the U.S. Government customer may assert that the contractor was aware, or should have been aware, of the non-compliance and, as such, the Government is entitled to False Claim damages up to treble damages.  In short, CAS non-compliances only come in 2 varieties:  bad and worse.

“CAS noncompliance” is among the short list of bad words you never want associated with your organization; right along with false claims and defective pricing – words that often get attached to CAS noncompliance if the Government feels the noncompliance was purposeful.  Be diligent upfront and ensure you can demonstrate compliance with CAS.

Need Help with a CAS Disclosure Statement?

Preparing a CAS Disclosure Statement requires more than simply completing Form DS-1. Your disclosed accounting practices must align with your estimating, accumulating, and reporting processes across CAS-covered contracts.

RKI helps government contractors:

Contact RKI today to discuss your CAS Disclosure Statement requirements.

Frequently Asked Questions

What is a CASB Disclosure Statement?

A CASB Disclosure Statement (DS-1) is a formal document used by government contractors to disclose their cost accounting practices when subject to Full CAS Coverage.

Who must file a CASB Disclosure Statement?

Contractors subject to Full CAS Coverage generally must submit a CASB Disclosure Statement to the Government.

What happens if my Disclosure Statement is inadequate?

The Government may reject the submission, delaying audits, contract awards, and compliance approvals until deficiencies are corrected.

Does DCAA approve CASB Disclosure Statements?

DCAA typically audits Disclosure Statements for adequacy and compliance, while the Cognizant Federal Agency Official (CFAO) ultimately determines adequacy and resolves findings.

How often must a CASB Disclosure Statement be updated?

Contractors must revise and disclose significant changes to accounting practices when those changes affect disclosed practices.

What is the difference between Modified CAS Coverage and Full CAS Coverage?

Modified CAS Coverage generally applies to certain CAS-covered contracts that do not meet the requirements for Full CAS Coverage. Full CAS Coverage requires contractors to comply with all applicable Cost Accounting Standards and typically requires submission of a CASB Disclosure Statement.

Cost Accounting Standards (CAS) 401 and 402 are all about a U.S. Government contractor’s consistency in its cost accounting practices. While CAS 401 dictates the requirements for contractors to “bid, book, and bill” consistently, CAS 402 focuses on how a contractor ensures that contracts are not inequitably charged for similar costs incurred in like circumstances.

Cost Accounting Standards 401 – Consistency in Estimating, Accumulating and Reporting Costs.

The purpose of CAS 401 as stated: “is to ensure that each contractor’s practices used in estimating costs for a proposal are consistent with cost accounting practices used by [the contractor] in accumulating and reporting costs.”

In its simplest sense the federal government wants to ensure that a contractor can prove that the costs it estimates can, in some meaningful way, be tied to the actual costs they incur. Without this consistency, there is risk a contractor may estimate costs one way without any capability to evidence that their estimated costs were reasonable. An example of CAS 401 follows:

Example: A contractor estimates engineering labor hours for five (5) separate engineering labor categories. However, the contractor does not separately track engineering labor hours for its employees in any of its books and records. In such a scenario, a contractor cannot demonstrate the actual number of hours incurred for the labor categories that they estimated. The key question a contrator should ask themselves is “can I reproduce this cost estimate with actuals once the contract begins?”. Of significance in answering this question is the CAS definition for “accumulating costs”, as follows:

CAS 401“Accumulating costs means the collecting of cost data in an organized manner, such as through a system of accounts.” (48 CFR 9905.501-30)

Cost Accounting Standards 401 Practice:

Please note that the definition provides for collecting cost data in an “organized manner”. That does not mean that you can’t have supplemental records that corroborate your cost estimates. Extending our example above for cost accounting standard 401, it’s possible the contractor does not differentiate its engineering labor in its General Ledger (G/L). However, it may well have work orders or project accounting records that provides such visibility.

There are even instances where a contractor may maintain the records outside its accounting software. Hence, the CASB DS-1 section 1.5.0 “Identification of Differences Between Contract Cost Accounting and Financial Accounting Records.” The federal government requirements understand that financial accounting and federal cost accounting are not one and the same.

The key is that they be equitable and reconcilable with the ability to reproduce actuals consistent with how you estimated. Best practice is certainly to have your financial accounting and federal cost accounting match one-to-one, but that’s not always practical. Understanding CAS 401 is key to how you establish your cost accounting and cost estimating practices. 

Cost Accounting Standards 402 – Consistency in Allocating Costs Incurred for the Same Purpose

The purpose of CAS 402 as stated: “is to require that each type of cost is allocated once and on only one basis to any contract or other cost objective.” Certain types of costs, such as project management, equipment, project accounting personnel, etc., are prone to inconsistent cost accounting practices where a federal contract may be charged twice for the same, or similar cost, without any additional benefit received.

They key words in Cost accounting standards 402 are that “All costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives.” This can be tricky given the innumerable circumstances in which a cost may be incurred (e.g., on-site, remote, etc.). An example follows:

Example: A contractor has a procurement department that supports all purchasing efforts, direct and indirect of the business. The department’s costs are included entirely in G&A. However, it has a new contract award that it bids procurement personnel as direct labor for.

This example is a classic CAS 402 example. The obvious conclusion is that this is a CAS 402 non-compliance because a federal contract would be incurring cost directly for the direct labor of the new procurement individual, as well as the G&A (which includes procurement personnel) resulting in double charging (bad words in government contracting!). Are there examples by which this may be compliant? Beauty is in the eye of the beholder.

Some contractors may be able to demonstrate that the nature of the procurement is different. Perhaps its local procurement overseas whereby they’re purchasing small dollar items for contract-specific needs. This may not in and of itself make it ‘unlike’, but it might. There are many variables to properly defining each cost as direct or indirect.

The question we most often ask a way of translating this is “Is the contract benefitting from both the direct activity and the indirect activity?” This might not answer the question completely, but it’s a start. CAS 402 is one of the most common, if not the most common CAS non-compliance during CAS audits.

Benefits of Cost Accounting Standard 401 and Cost Accounting Standard 402 Compliance

Complying with CAS 401 and CAS 402 have benefits to contractors that can significantly impact their bottom lines. CAS compliance can lead to:

Looking For CAS Compliance?

If you're seeking expertise in CAS compliance, look no further. At RKI Accounting, we specialize in helping businesses navigate the complexities of the Cost Accounting Standards (CAS). Our team of seasoned professionals is dedicated to ensuring that your company adheres to all CAS requirements, minimizing the risk of non-compliance and potential financial penalties. Contact us today to learn more about our CAS compliance services and how we can help your business thrive.

Cost Accounting Standards (CAS), promulgated by Part 30 of the Federal Acquisition Regulation (https://www.acquisition.gov/far/part-30#FAR_30_101), maintains specific requirements for a US Government Contractor when they apply to a US Federal Government Contract.

A CAS Covered Contract is one that meets specific qualifications that trigger CAS Coverage. The qualifications, exceptions, and other conditions that determine CAS Applicability, Coverage Type, and Disclosure Requirements can be confusing. Our blog post: What Are CAS Covered Contracts?  lists these qualifications and additional detail on the matter. To provide added clarity for the visual learner, we’ve put it all into one clean illustration:

Download the CAS Flowchart Here: CAS Applicability Flowchart.

 

Copyright @ 2025 RKI Accounting. All rights reserved. | 828 Marketing and Web Design
CALL NOW linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram Skip to content