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 is the difference between CAS and FAR 31.2?

FAR Part 31 and CAS occupy adjacent but distinct territory. FAR 31.2 is the allowability framework. It tells the contractor which costs can be charged to government contracts (allowable versus unallowable), sets reasonableness and allocability standards, and lists specific cost categories that are expressly unallowable (entertainment, lobbying, alcoholic beverages, bad debts, fines, and several dozen others under FAR 31.205). When DCAA questions a cost on allowability grounds, the auditor is working from FAR 31.2.

CAS operates at a different level. It does not tell the contractor which costs are allowed. Instead, it prescribes how costs are measured, how they are assigned to cost accounting periods, and how they are allocated to cost objectives (contracts). CAS requires consistency: if a contractor treats travel as a direct cost on one contract, it must treat travel as a direct cost on every contract (CAS 402). If a contractor uses a particular method to allocate G&A expenses, it must use that method consistently across periods and contracts (CAS 410, CAS 401). If a contractor has a home office that provides services to operating segments, the cost of that home office must be allocated to segments using a method that reflects the beneficial or causal relationship (CAS 403).

A contractor can violate CAS without violating FAR 31.2, and the reverse is also true. Suppose a contractor properly allocates executive compensation to contracts through the G&A pool using a consistent, CAS-compliant methodology. The allocation methodology is fine under CAS. But if the executive’s total compensation exceeds the FAR 31.205-6(p) cap (the statutory ceiling on contractor executive compensation, currently tied to the benchmark compensation amount published annually), the excess is unallowable under FAR regardless of how correctly it was allocated. The CAS and FAR analyses run independently.

For contractors below the CAS thresholds, FAR 31.2 still applies if the contract includes the FAR cost principles clause. CAS adds its requirements only when the contractor’s awards reach the dollar thresholds described below.

What are the CAS coverage thresholds?

CAS uses a two-tier coverage system based on dollar thresholds, with several categorical exemptions. The thresholds are set by statute and regulation, and the specific numbers matter because crossing a threshold changes what the contractor must do.

Full CAS coverage applies to a contractor that received $50 million or more in net CAS-covered awards during its preceding cost accounting period (typically the fiscal year). A contractor under full coverage must comply with all 19 CAS standards and must file a Disclosure Statement (CASB DS-1) with the cognizant federal auditor, which is usually DCAA. Full coverage is the most demanding tier, because the contractor’s entire cost accounting system must satisfy each applicable standard, and any change in cost accounting practice triggers the formal change process described below.

Modified CAS coverage applies to a contractor that receives a single CAS-covered contract or subcontract of $7.5 million or more but does not meet the $50 million full-coverage threshold. Under modified coverage, the contractor must comply with four standards: CAS 401 (consistency in estimating, accumulating, and reporting costs), CAS 402 (consistency in allocating costs for the same purpose), CAS 405 (accounting for unallowable costs), and CAS 406 (cost accounting period). A contractor under modified coverage is not required to file a Disclosure Statement, though it may choose to file one 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 do the most important CAS standards require?

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

CAS 401, Consistency in Estimating, Accumulating, and Reporting Costs. This is the foundational consistency standard. It requires that the practices used to estimate costs for proposals must be consistent with the practices used to accumulate and report costs during contract performance. If a contractor estimates labor at burdened rates using a particular overhead rate methodology, it must accumulate and report actual labor costs using the same overhead rate methodology. The purpose is to prevent a contractor from using one set of practices to win the contract (by estimating low) and a different set to bill (by accumulating high). CAS 401 also requires that the contractor’s practices for accumulating and reporting costs 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.

What is the Disclosure Statement?

The Disclosure Statement (CASB DS-1) is a document that describes, in detail, the contractor’s cost accounting practices. It is required for all contractors under full CAS coverage and is optional for contractors under modified coverage. The form is published by the CAS Board, and it requires the contractor to describe its practices for each of the 19 CAS standards: how it classifies costs as direct or indirect, what allocation bases it uses for each indirect pool, how it accounts for unallowable costs, how it computes depreciation, how it accounts for compensated absences, and so on.

The Disclosure Statement is filed with the cognizant federal auditor, which is usually the DCAA office assigned to the contractor. DCAA reviews the Disclosure Statement to determine whether the disclosed practices are CAS-compliant and whether they are consistent with what the auditor observes during audits. The Disclosure Statement must be updated whenever the contractor changes a cost accounting practice. It is not a one-time filing; it is a living document that must reflect the contractor’s current practices at all times.

The Disclosure Statement serves two purposes. First, it gives the government a baseline for auditing. If the Disclosure Statement says the contractor allocates G&A on a total cost input base, the auditor can verify that the contractor is in fact using total cost input and not some other base. Second, it binds the contractor to its disclosed practices. If the contractor follows a practice that differs from what the Disclosure Statement describes, the contractor is in noncompliance even if the actual practice is a reasonable one. The obligation is to do what you said you would do, and if you want to do something different, to follow the formal change process before implementing the new practice.

What happens when a contractor does not comply with CAS?

CAS noncompliance occurs in two main forms. The first is a failure to follow the practices described in the Disclosure Statement. The contractor says it will allocate G&A on total cost input, but actually allocates on value-added cost input. The second is a failure to comply with the requirements of a CAS standard itself, regardless of what the Disclosure Statement says. If CAS 402 prohibits treating the same type of cost as direct on one contract and indirect on another, a contractor that does so is noncompliant even if the Disclosure Statement is silent on the issue.

When DCAA identifies a CAS noncompliance, the auditor calculates the cost impact: how much did the noncompliance change the costs allocated to government contracts? If the noncompliance increased costs to the government (the government was charged more than it should have been under the correct practice), the contractor owes the government a refund of the difference, plus interest. If the noncompliance decreased costs to the government (the government was undercharged), the government keeps the benefit. The adjustment is one-directional in the government’s favor: if a noncompliance helps the government, the government keeps the savings, but if it hurts the government, the contractor pays the difference. This asymmetry is built into the CAS regulations and is one of the features that makes CAS noncompliance financially risky for contractors.

The cost impact calculation can be substantial. It is computed contract by contract, period by period, and it can reach back to the beginning of the noncompliance. If a contractor has been using an inconsistent allocation practice for three years before it is caught, the cost impact covers all three years.

How does a contractor change its cost accounting practices?

Changing a cost accounting practice under CAS is not as simple as deciding to do something differently. The regulations distinguish between voluntary changes and required changes, and both follow a defined process.

Required changes are those compelled by a new or amended CAS standard, by a change in law, or by a contracting officer determination that the current practice is noncompliant. When a change is required, the contractor must implement it, compute the cost impact, and submit the impact analysis to the contracting officer and DCAA. If the required change increases costs to the government, the government absorbs the increase. If it decreases costs to the government, the government receives a downward adjustment.

Voluntary changes are those initiated by the contractor for business reasons. A contractor might decide that switching its G&A allocation base from total cost input to value-added cost input better reflects its cost structure, particularly if it has a large volume of material and subcontractor pass-through costs that distort the G&A rate under total cost input. Before implementing a voluntary change, the contractor must give advance notice to the contracting officer and DCAA (generally 60 days before the start of the cost accounting period in which the change will take effect). The contractor must prepare a cost impact analysis showing how the change affects costs allocated to each government contract. If the voluntary change increases costs to the government, the contractor bears the increase (the government does not pay more because the contractor chose to change its practices). If the voluntary change decreases costs, the government gets the benefit through a downward adjustment.

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) that every contractor with cost-type contracts must file is where CAS compliance gets tested in practice. The ICS reports the contractor’s actual indirect rates for the fiscal year, broken out by pool and allocation base, along with the direct costs charged to each contract. DCAA audits the ICS to verify that the costs are allowable under FAR 31.2, that the indirect rates are correctly computed, and that the allocation methodology is consistent with the contractor’s disclosed practices (for CAS-covered contractors) or with its established practices (for non-CAS-covered contractors).

For a CAS-covered contractor, the ICS audit is the primary mechanism for detecting CAS noncompliance. The auditor compares the practices used in the ICS to those described in the Disclosure Statement. If the contractor’s Disclosure Statement says it uses direct labor dollars as the overhead allocation base, but the ICS computes overhead using direct labor hours, the auditor has a CAS 401 finding. If the ICS shows travel charged directly on some contracts and indirectly on others, the auditor has a CAS 402 finding. The findings go into the audit report, the contracting officer issues a determination, and the cost impact analysis and adjustment process begins.

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.

What is the relationship between CAS compliance and the accounting system?

A DCAA-adequate accounting system is a prerequisite for CAS compliance, but it is not sufficient on its own. The DFARS 252.242-7006 criteria require the system to accumulate costs by contract, segregate direct from indirect, exclude unallowable costs, and be consistent with CAS if the contractor is CAS-covered. CAS then adds specific requirements about how that accumulation, segregation, and allocation must work.

For a non-CAS-covered contractor, having an adequate accounting system under DFARS 252.242-7006 is the standard. For a CAS-covered contractor, the standard is higher: the system must not only be adequate in its mechanics but must also implement cost accounting practices that comply with each applicable CAS standard and match the practices described in the Disclosure Statement.

The practical implication is that a contractor crossing a CAS threshold should review its accounting system configuration, its indirect rate structure, and its cost allocation practices against the applicable CAS standards before the coverage takes effect. Discovering a noncompliance during a DCAA audit is expensive (the cost impact adjustment, the audit findings on the record, the potential reputational consequences). Discovering and fixing a noncompliance proactively, before the first CAS-covered contract is billed, costs time and accounting effort but avoids the adjustment and the audit finding.

How does CAS compare to the cost allocation requirements for nonprofits?

Contractors subject to CAS and nonprofits subject to 2 CFR Part 200 (the Uniform Guidance) face a similar structural challenge: both must allocate costs to federally funded agreements using a methodology that is consistent, documented, and based on a beneficial or causal relationship. The Uniform Guidance’s cost allocation requirements (2 CFR 200.405 through 200.411) parallel several CAS principles, particularly the requirements for consistency in treatment (direct versus indirect), identification of unallowable costs, and the use of allocation bases that reflect the benefit received by each cost objective.

The major differences are in the formality and specificity of the requirements. CAS has 19 detailed standards, each with its own definitions, rules, and compliance triggers. The Uniform Guidance addresses cost allocation in a handful of sections at a higher level of generality. CAS has a formal Disclosure Statement; the Uniform Guidance requires a cost allocation plan or an indirect cost rate proposal, but the format and level of detail are less prescribed. CAS noncompliance triggers a contract-by-contract cost impact calculation; Uniform Guidance noncompliance typically results in questioned costs in a Single Audit, which follow a different resolution process through the cognizant federal agency. A contractor that also performs grant-funded work may need to comply with both frameworks simultaneously, which requires careful alignment of cost allocation methodologies.

What should a contractor do next?

The starting point depends on where the contractor is relative to the CAS thresholds. A contractor below $7.5 million in any single CAS-covered award is exempt and should focus on maintaining a DCAA-adequate accounting system and compliant indirect rate structure. A contractor approaching the $7.5 million modified coverage threshold should review its current practices against CAS 401, 402, 405, and 406 now, while corrections are still proactive rather than reactive. A contractor at or above the $50 million full-coverage threshold needs to ensure it has a complete, current Disclosure Statement on file, that its actual practices match the Disclosure Statement, and that any planned changes in cost accounting practices follow the formal change process with advance notice and cost impact analysis.

In every case, the relationship between CAS, FAR 31.2, and the accounting system is cumulative: each layer adds requirements, none replaces the others. Getting the accounting system adequate under DFARS 252.242-7006 is step one. Getting FAR 31.2 allowability right is step two. Getting CAS methodology right is step three. The contractors that run into trouble are typically the ones that treated step three as an afterthought, discovered the noncompliance during a DCAA incurred cost audit, and then faced a cost impact adjustment that could have been avoided with a proactive review.

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