Cost Accounting Standards (CAS): Coverage, Compliance, and Disclosure

Government contractors working under cost-type, time-and-materials, or incentive contracts already face a set of rules under FAR 31.2 that govern which costs are allowable and how the direct-versus-indirect split works. The Cost Accounting Standards (CAS) add a second, separate layer. Where FAR 31.2 answers the question “can this cost be charged to the government?”, CAS answers a different question: “is the contractor measuring, assigning, and allocating costs consistently, and does the methodology produce equitable results?” The two frameworks overlap (a contractor must satisfy both), but they are not the same thing, and confusing them is one of the most common mistakes contractors make when they first encounter CAS requirements. A cost can be allocated in a way that is perfectly consistent under CAS and still be unallowable under FAR 31.205. Conversely, a cost can be allowable under FAR but allocated using a methodology that violates CAS.

CAS consists of 19 individual standards, promulgated by the CAS Board (originally an independent body, now part of the Office of Federal Procurement Policy within the Office of Management and Budget). The standards are codified in 48 CFR Chapter 99, separate from the Federal Acquisition Regulation. Each standard addresses a specific cost accounting practice: how to allocate home office expenses to segments (CAS 403), how to account for the cost of compensated personal absence like vacation and sick leave (CAS 408), how to depreciate tangible capital assets (CAS 409), how to allocate general and administrative expenses (CAS 410), and so on. Not every contractor is subject to all 19 standards. Coverage depends on the dollar value of the contractor’s CAS-covered awards, and the system uses two tiers (full coverage and modified coverage) to scale the requirements to the size and complexity of the contractor’s government business.

What’s the difference between CAS and FAR 31.2?

FAR 31.2 is the allowability framework: it tells the contractor which costs can be charged to government contracts. CAS operates at a different level, prescribing how costs are measured, assigned to periods, and allocated to contracts. CAS requires consistency (e.g., travel classified as direct on one contract must be direct on all), but does not determine whether a cost is allowable.

A contractor can violate CAS without violating FAR 31.2, and vice versa. The two analyses run independently.

• Executive compensation allocated through G&A using a CAS-compliant methodology can still be unallowable if it exceeds the FAR 31.205-6(p) cap.
• Contractors below CAS thresholds still face FAR 31.2 if the contract includes the cost principles clause. CAS adds requirements only when awards reach the dollar thresholds described below.

What are the CAS coverage thresholds?

CAS uses a two-tier coverage system. Full coverage applies to contractors with $50 million or more in net CAS-covered awards during the preceding cost accounting period, requiring compliance with all 19 standards and filing a Disclosure Statement (CASB DS-1). Modified coverage applies to contractors with a single CAS-covered award of $7.5 million or more but below the full threshold, requiring compliance with four standards only: CAS 401, CAS 402, CAS 405, and CAS 406.

• Full coverage is measured at the contractor level (aggregate awards), not the contract level.
• Modified coverage is triggered by a single award of $7.5 million or more. No Disclosure Statement is required, though one may be filed voluntarily.

Exemptions. Several categories of contracts and contractors are exempt from CAS entirely, regardless of dollar value. Contracts and subcontracts below the $7.5 million threshold are exempt. Sealed-bid contracts are exempt. Firm-fixed-price or fixed-price-with-economic-price-adjustment contracts awarded on the basis of adequate price competition are exempt, because the government’s payment does not depend on the contractor’s actual costs. Contracts with small businesses (as defined by the Small Business Administration size standards) are exempt. Contracts for commercial items under FAR Part 12 are exempt. These exemptions can overlap: a firm-fixed-price contract with a small business for a commercial item is exempt on multiple grounds.

The thresholds are measured at the contractor level, not the contract level, for full coverage. If a contractor has $50 million in CAS-covered awards spread across twenty contracts, it is fully covered even though no single contract exceeds $50 million. For modified coverage, the trigger is a single award of $7.5 million or more.

What’s changing in October 2026?

The CAS Board published a final rule on September 1, 2026, implementing Section 1806 of the FY2026 National Defense Authorization Act. The new thresholds take effect October 1, 2026, and contractors who assumed their CAS status was settled under the current numbers need to re-check.

• Full coverage and the Disclosure Statement requirement rise from $50 million to $100 million. The CAS Board’s own estimate is that this relieves more than 200 contractors of full CAS coverage.
• The basic CAS applicability threshold rises from $2.5 million to $35 million, replacing the old $7.5 million trigger-contract mechanism outright. Negotiated contracts and subcontracts of $35 million or less are exempt from CAS under the new rule.
• CAS 407 (use of standard costs for direct material and direct labor) is substantially rescinded, on the reasoning that most of its requirements duplicate GAAP. Its surviving provisions fold into CAS 418, leaving 18 substantive standards from October 1 forward. Contractors who already use standard costing do not need to change existing practices on their own initiative; any voluntary change to a standard costing method after the rescission is treated as a unilateral change at the contractor’s expense, the same as any other disclosed practice change.
• Indefinite-delivery contracts receive specific treatment: a multiple-award IDC is evaluated order by order using each task or delivery order’s ceiling value, while a single-award IDC is evaluated once, at contract award, using the full contract ceiling. That asymmetry means a single-award vehicle can trigger CAS exposure earlier than a multiple-award one, even for a contractor whose individual task orders are modest.

The categorical exemptions (small businesses, sealed bid, firm-fixed-price with adequate competition, commercial items, foreign governments) remain unchanged. The October 2026 rule extends these exemptions to apply to a portion of a contract, which matters for a hybrid award that mixes commercial and non-commercial line items.

Contractors currently CAS-covered because of a contract between $7.5 million and $35 million should confirm whether that coverage lapses for new awards signed on or after October 1, 2026. Existing coverage on contracts already awarded does not automatically disappear; the analysis applies going forward. The safest approach is to run the CAS applicability analysis on every open and upcoming proposal against both the current and the incoming thresholds, rather than assuming the change is someone else’s problem because it sounds like deregulation.

What do the most important CAS standards require?

Of the 19 standards, a handful drive the bulk of the compliance work and most audit findings. The following are the ones contractors encounter most frequently.

• CAS 401, Consistency in Estimating, Accumulating, and Reporting Costs. Requires that practices used to estimate costs for proposals match those used to accumulate and report costs during performance. A contractor cannot estimate labor using one overhead methodology to win the bid and then bill using a different one. Practices must also be consistent across cost accounting periods.

• CAS 402, Consistency in Allocating Costs Incurred for the Same Purpose. CAS 402 is the “direct in one place, indirect in another” prohibition. If a contractor treats a type of cost as direct on one contract, it must treat that same type of cost as direct on all contracts (and conversely, if indirect, then indirect on all). The classic violation is treating travel as a direct cost on Contract A (charging the airfare and hotel directly to the contract) while treating travel as an indirect cost on Contract B (sweeping travel into an overhead pool and allocating it through the rate). That inconsistency violates CAS 402. The standard allows for legitimate differences in classification if the circumstances are genuinely different (a contract that requires no travel might have no direct travel charges, which is fine because there is no travel to classify), but a contractor cannot classify the same type of expense differently across contracts for convenience or to manipulate billing amounts.

• CAS 403, Allocation of Home Office Expenses to Segments. For contractors with a home office (corporate headquarters) and multiple operating segments (divisions, subsidiaries, or profit centers), CAS 403 governs how home office costs are allocated to the segments. The standard requires that home office costs be grouped into logical, homogeneous expense pools and allocated to segments using allocation bases that reflect the beneficial or causal relationship between the cost and the segment. Residual expenses (those that cannot be allocated on a beneficial/causal basis) are allocated using a three-factor formula based on payroll dollars, operating revenue, and net book value of tangible capital assets.

• CAS 405, Accounting for Unallowable Costs. CAS 405 requires the contractor to identify unallowable costs and exclude them from billings to the government. This overlaps with FAR 31.205, which lists the specific categories of unallowable costs, but CAS 405 adds a process requirement: the contractor must have a system that identifies unallowable costs, classifies them as such, and prevents them from being included in proposals, billings, or claims. Simply ignoring unallowable costs is not enough. The contractor must affirmatively identify them and account for them. If a cost that is expressly unallowable (say, a country club membership) ends up in an indirect cost pool that feeds contract billings, the contractor has violated both FAR 31.205 and CAS 405.

• CAS 406, Cost Accounting Period. CAS 406 requires the contractor to use its fiscal year as its cost accounting period. This sounds trivial, but it matters because it prevents a contractor from selecting different accounting periods for different contracts or different cost pools to produce favorable billing results. The cost accounting period must be applied consistently, and indirect rates must be computed on the same annual basis.

• CAS 408, Accounting for Compensated Personal Absence. CAS 408 addresses how the contractor accounts for the cost of paid leave (vacation, sick time, holidays, and other compensated absences). The standard requires that the cost be assigned to the period in which the entitlement is earned (the accrual period), not the period in which the leave is taken. If an employee earns vacation ratably over the year, the cost of that vacation is an expense of each month in proportion to the entitlement earned that month, even if the employee takes all the vacation in August. CAS 408 prevents a contractor from front-loading or back-loading leave costs to shift expenses between cost accounting periods.

• CAS 409, Depreciation of Tangible Capital Assets. CAS 409 requires the contractor to use consistent depreciation methods and service lives for tangible capital assets. It prohibits the contractor from using one depreciation method for government contract costing and a different method for commercial purposes without appropriate adjustments. The estimated service life of an asset must be based on the contractor’s expected period of use, not arbitrary IRS tax lives (which tend to be shorter and would accelerate depreciation charges to government contracts). Gains and losses on the disposition of assets must be handled as adjustments to depreciation in the period of disposition.

• CAS 410, Allocation of Business Unit G&A Expenses. CAS 410 governs how a business unit allocates its general and administrative expenses to final cost objectives (contracts). The G&A pool must include all management, financial, and other expenses incurred for the general management and administration of the business unit as a whole. The allocation base must represent the total activity of the business unit. The two common bases are total cost input (all costs incurred by the business unit, including direct and indirect costs applied before G&A) and value-added cost input (total cost input minus material and subcontractor costs that pass through the business unit without being significantly transformed). The contractor must select a base that does not produce distorted results, and once selected, it must use that base consistently.

• CAS 418, Allocation of Direct and Indirect Costs. CAS 418 requires that direct costs be allocated directly to contracts, that the indirect cost pools be homogeneous (each pool contains costs that are similar in their relationship to the cost objectives), and that the allocation base for each pool reflect a beneficial or causal relationship between the pool costs and the contracts receiving the allocation. This standard works in concert with CAS 401, 402, and 410 to ensure that the overall cost allocation structure produces equitable results. Effective October 1, 2026, CAS 418 also absorbs the surviving requirements of CAS 407 (standard costs for direct material and direct labor), which is being substantially rescinded.

What’s the Disclosure Statement?

The Disclosure Statement (CASB DS-1) describes the contractor’s cost accounting practices in detail. It is required under full CAS coverage and optional under modified coverage. The contractor files it with the cognizant federal auditor (usually DCAA) and must update it whenever a cost accounting practice changes. It is a living document, not a one-time filing.

The Disclosure Statement serves two purposes:

• It gives the government an auditing baseline: the auditor compares actual practices to the disclosed ones.
• It binds the contractor: following a practice that differs from the disclosure is noncompliance even if the actual practice is reasonable. If the Disclosure Statement says G&A is allocated on total cost input and the contractor uses a different base, that is a finding.

The obligation is to do what you said you would do, and to follow the formal change process before implementing anything different.

What happens when a contractor doesn’t comply with CAS?

CAS noncompliance occurs in two forms: failing to follow the practices described in the Disclosure Statement, or failing to comply with a CAS standard regardless of what the Disclosure Statement says. When DCAA identifies noncompliance, the auditor calculates the cost impact on government contracts.

The adjustment is one-directional in the government’s favor: if the noncompliance overcharged the government, the contractor refunds the difference plus interest; if it undercharged the government, the government keeps the savings.

• The cost impact is computed contract by contract, period by period, and can reach back to the beginning of the noncompliance.
• A contractor using an inconsistent allocation practice for three years before discovery faces a cost impact covering all three years.
• This asymmetry makes CAS noncompliance financially risky, and proactive correction is far less expensive than a DCAA finding.

How does a contractor change its cost accounting practices?

Changing a cost accounting practice under CAS requires a defined process. The regulations distinguish between required changes (compelled by a new standard, a change in law, or a contracting officer determination of noncompliance) and voluntary changes (initiated by the contractor for business reasons). Both require a cost impact analysis.

• Required changes: the government absorbs any cost increase; it receives a downward adjustment if costs decrease.
• Voluntary changes: the contractor bears any cost increase (the government does not pay more because the contractor chose to change). Decreases benefit the government. Advance notice (generally 60 days before the new period) must go to the contracting officer and DCAA.
• The asymmetry creates a strong incentive to analyze cost impact thoroughly before proposing a voluntary change.

The asymmetry in the adjustment rules creates a strong incentive to analyze the cost impact thoroughly before proposing a voluntary change. A contractor that changes its allocation base and discovers after the fact that the change increased costs to the government by $120,000 will owe that amount back to the government. The change might still be the right business decision, but the contractor needs to know the cost impact before committing.

Hypothetical: a contractor crossing the modified CAS threshold

Hypothetical example. All numbers are round and illustrative.

Consider a small defense technology company that has been performing government work under contracts below $7.5 million each. None of its contracts triggered CAS coverage, and the company has operated under FAR 31.2 cost principles and DCAA accounting system requirements without needing to address CAS compliance. The company wins a new cost-plus-fixed-fee contract valued at $10 million. That single award exceeds the $7.5 million modified CAS coverage threshold.

The company is now subject to modified CAS coverage and must comply with four standards: CAS 401 (consistency between estimating and accumulating), CAS 402 (consistency in allocating costs for the same purpose), CAS 405 (accounting for unallowable costs), and CAS 406 (cost accounting period).

The company reviews its current practices against each standard and finds that CAS 401, 405, and 406 present no issues. Its cost estimating practices align with its accumulation practices, its unallowable costs are properly identified and excluded, and it uses its fiscal year consistently as its cost accounting period. But the CAS 402 review reveals a problem. On two of its existing contracts, the company charges travel as a direct cost, with airfare, hotel, and per diem posted directly to those contracts’ job cost accounts. On a third contract (an older, smaller award), travel for the contract was swept into the overhead pool and allocated through the indirect rate, because the project manager at the time did not bother to set up direct travel coding for what seemed like a minor contract. The overhead pool absorbed the travel, and the overhead rate distributed a portion of it to all contracts, including the two where travel was also charged directly.

This is a CAS 402 violation. The same type of cost (travel) is treated as direct on some contracts and indirect on another. The fix requires the company to choose one consistent treatment (most likely direct, since that is the predominant practice) and reclassify the travel on the third contract from indirect to direct. The reclassification reduces the overhead pool, which changes the overhead rate, which changes the indirect costs allocated to every contract for that period. The company must run the revised rate calculation, determine the cost impact on each government contract, and report the adjustment.

The cost impact might be modest on a contractor of this size, but the finding is significant because it establishes that the company’s practices were inconsistent. Fixing the issue before the first audit of the new $10 million contract is far better than having DCAA discover it during an incurred cost audit, where the finding would appear in the audit report and potentially delay contract closeout.

Hypothetical: changing a G&A allocation base under full CAS coverage

Hypothetical example. All numbers are round and illustrative.

A mid-size defense contractor operating under full CAS coverage decides to change its G&A allocation base from total cost input to value-added cost input. The company’s Disclosure Statement currently describes its G&A practice as allocating the G&A pool over total cost input, which includes all direct costs (labor, materials, subcontractors, travel, other direct costs) plus all applied indirect costs (fringe, overhead). The company has grown its subcontracting volume significantly, and subcontractor costs now represent about 40% of total cost input. Because subcontractor invoices are large pass-through amounts that require minimal G&A support (the company is not managing the subcontractor’s workforce, IT, or facilities), the total-cost-input base over-allocates G&A to contracts with heavy subcontract content and under-allocates it to labor-intensive contracts.

The company prepares a cost impact analysis. Under the current total-cost-input base, the G&A pool of $6 million is spread over $40 million in total cost input, yielding a 15% G&A rate. Under the proposed value-added base (which excludes $16 million in subcontractor costs), the same $6 million G&A pool is spread over $24 million, yielding a 25% rate. The higher rate applies to a smaller base, so the total G&A allocated is the same ($6 million), but the distribution shifts. Contracts with heavy subcontract content receive less G&A; labor-intensive contracts receive more.

The company runs the analysis contract by contract. On the government contracts in aggregate, the net effect is an increase in allocated costs of $120,000, because the labor-intensive government contracts absorb more G&A than they did before, and the reduction on subcontract-heavy contracts (some of which are commercial, not government) does not fully offset the increase. Because this is a voluntary change, the contractor bears the $120,000 increase. The government will not reimburse the additional amount.

The company must amend its Disclosure Statement to reflect the new practice, submit the amendment to DCAA, provide the cost impact analysis to the contracting officer and DCAA, and give advance notice at least 60 days before the new cost accounting period begins. DCAA will review the amended Disclosure Statement for compliance with CAS 410, evaluate the reasonableness of the cost impact calculation, and may negotiate the impact amount if it disagrees with the contractor’s methodology.

The company decides to proceed because the value-added base produces a more equitable allocation (it better reflects the causal/beneficial relationship between G&A costs and the contracts generating them), and the $120,000 one-time adjustment is acceptable given the improved rate structure going forward.

How does CAS interact with the incurred cost submission?

The annual incurred cost submission (ICS) is where CAS compliance gets tested in practice. DCAA audits the ICS to verify that costs are allowable under FAR 31.2, indirect rates are correctly computed, and allocation methodology matches the Disclosure Statement (for CAS-covered contractors).

• If the Disclosure Statement says overhead is allocated on direct labor dollars but the ICS uses direct labor hours, the auditor has a CAS 401 finding.
• If travel is charged directly on some contracts and indirectly on others, the auditor has a CAS 402 finding.
• Contractors approaching a CAS threshold should get the ICS right before crossing it, since correcting noncompliant data after the fact is far more expensive.

Contractors that are approaching a CAS threshold should pay close attention to the ICS filing, because the data in the ICS reflects the practices that DCAA will scrutinize once CAS coverage applies. Getting the ICS right before crossing the threshold is much easier than correcting CAS-noncompliant data after the fact.

How does CAS compliance relate to accounting?

A DCAA-adequate accounting system is a prerequisite for CAS compliance but not sufficient on its own. For non-CAS contractors, the DFARS 252.242-7006 standard is the bar. For CAS-covered contractors, the system must also implement practices that comply with each applicable standard and match the Disclosure Statement.

A contractor crossing a CAS threshold should review its system configuration, indirect rate structure, and allocation practices against the applicable standards before coverage takes effect.

• Discovering noncompliance during a DCAA audit is expensive: cost impact adjustment, audit findings on the record, and potential reputational consequences.
• Discovering and fixing noncompliance proactively, before the first CAS-covered contract is billed, avoids both.

How does CAS compare to nonprofit cost allocation?

Contractors subject to CAS and nonprofits subject to 2 CFR Part 200 (the Uniform Guidance) face a similar challenge: both must allocate costs to federally funded agreements using consistent, documented methodologies based on a beneficial or causal relationship. The Uniform Guidance parallels several CAS principles, but the frameworks differ in formality.

• CAS has 19 detailed standards and a formal Disclosure Statement. The Uniform Guidance addresses cost allocation at a higher level of generality, requiring a cost allocation plan or indirect cost rate proposal.
• CAS noncompliance triggers a contract-by-contract cost impact calculation. Uniform Guidance noncompliance results in questioned costs in a Single Audit with a different resolution process.
• A contractor that also performs grant-funded work may need to comply with both frameworks simultaneously.

What should a contractor do next?

The starting point depends on where the contractor stands relative to the CAS thresholds.

• Below $7.5 million in any single CAS-covered award: exempt. Focus on maintaining a DCAA-adequate accounting system and compliant indirect rate structure.
• Approaching the $7.5 million modified threshold: review current practices against CAS 401, 402, 405, and 406 now, while corrections are still proactive.
• At or above the $50 million full-coverage threshold: ensure the Disclosure Statement is current, actual practices match it, and any planned changes follow the formal change process.

In every case, the relationship between CAS, FAR 31.2, and the accounting system is cumulative: each layer adds requirements, none replaces the others.

Related guides:

• Cost Accounting Standards (CAS): When They Apply, Which Ones Matter, and How to Comply

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.