DoW Acquisition Reform Targets CAS, Pricing, Audits, and Business Systems

DoW is pursuing significant acquisition reforms that could reshape CAS applicability, pricing, audits, and contractor business system oversight. The planned changes emphasize greater use of GAAP, reduced administrative requirements, and streamlined acquisition practices, with implementation actions scheduled over the next 30 to 120 days and additional regulatory changes potentially required.

Highlights

• Acquisition Reform. A September 14, 2026, memorandum directs major changes to DoW contracting, pricing, and oversight.
• CAS Applicability. DoW want to limit CAS applicability and use GAAP as the accounting baseline.
• Pricing Changes. New guidance will emphasize fixed-price contracts and profit based on value, risk, and investment.
• Reduced Oversight. Planned reforms would simplify business system reviews and reduce duplicative audits.
• Implementation. Actions are due within 30 to 120 days, with additional legislative changes potentially required.

On September 14, 2026, Deputy Secretary of War, Stephen A. Feinberg issued another bombshell Memorandum for Senior Pentagon Leadership on Fostering One Strong Industrial Base. The introduction to this memo states:

“The Department of War (DoW) must buy faster, simpler, and more competitively to get speed and volume. Backed by strong Congressional support in the FY26 NDAA to strengthen the Defense Industrial Base, the Department continues to break down barriers to entry and expand our industrial base. To build on this momentum and keep all of industry engaged, we must completely transform and modernize our contract cost and pricing ruleset.”

What is DoW Planning?

Here is what is on the DoW wish list:

• Removal of the Cost Accounting Standards (CAS) unique government accounting requirements and replacement with Generally Accepted Accounting Principles (GAAP) throughout the supply chain.
• DoW wants to limit CAS to sole-source cost-based development and incentive-fee contracts.
• When and if cost and pricing data is necessary, request it in a GAAP format.
• As directed by Executive Order 14402 award only firm-fixed-price contracts, except for basic research and development of major systems (i.e., applied research?).
• Allow subcontractors greater access to DoW resources like Office of Strategic Capital loans, Industrial Base Analysis and Sustainment funds, and talented DoW business operators.
• Ensure sole-source subcontractors are not taking advantage of having the prime contractor between them and the Government.

Practical Challenges with Contract Specific CAS Applicability

The memorandum states DoW wants to “ensure CAS applies only to relevant contracts and not companies as a whole.” I am not sure the drafters of this memorandum understand how cost accounting works. Contractors with CAS covered contracts are required to maintain three sets of books, one supporting cost by contract based on CAS, one supporting the cost of goods sold (COGS) in their financial statements based on GAAP, and yet another supporting their tax returns based on federal and state income tax regulations. While bringing CAS and GAAP into conformance should make the total COGS and total of all contract costs equal, there are still going to be differences in the necessary accounting effort.

This statement would appear to imply that different accounting practices for each contract are an option. While it may be an option it is not any easier than the current requirements and would likely create more accounting effort for the contractor. At the end of the day, I believe the Government is always going to want to see cost in greater detail than presented in COGS for GAAP (i.e., cost at a contract/project level, which is not a standard commercial practice).

DoW Action Plan

Within 30 days, review implementation of requirements reform to accelerate adoption and improve processes. As I see it, the intent is to bring the warfighter and industry closer in the requirements process and get the pentagon out of playing intermediary.

The Under Secretary of War for Acquisition and Sustainment (USW(A&S)) will:

• Accelerate acquisition transformation by issuing Department-wide modular open systems approach (MOSA) policy and the Portfolio Acquisition Executive Operating Framework, including its addendum of recommended authorities for delegation.
• Issue a class deviation to increased CAS thresholds based on section 1806 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2026. Read more in our article, DoD Issues Class Deviation to Raise Full Cost Accounting Standards (CAS) Threshold to $100 million.
• Issue CAS and cost data guidance:
  • Prohibiting the inclusion of terms and conditions similar to “CAS coverage, disclosure, business system review, or practice-change governance” in exempt awards and other transaction agreements (OTAs); and
  • Limiting the request for any cost data to how the contractor maintains the data in its accounting system.
• Limit solicitation for new contracts to acquisition methods that provide an exception to the application of CAS (i.e., competition). Any solicitation requiring CAS will need to be approved by USW(A&S).
• Issue commercial determination guidance:
  • Requiring determinations be completed in 15 days;
  • Contracting officers must rely on prior Department determinations; and
  • “Cost data may [only] be requested if the contracting officer determines price, market, and sales data are insufficient to determine a fair and reasonable price.

The 15 days is the only news here. Fifteen days is going to be a challenge when the Defense Contract Management Agency (DCMA) Commercial Item Group (CIG) is engaged.

• Issue a policy to expand the use of OTAs in 45 days and then within 120 days reissue the Other Transactions Guide with updates to support expanded utilization.
• Issue modernized profit policy guidance, within 90 days:
  • The policy will support the negotiation of profit reflecting “value delivered, risk carried, and private capital invested – not merely cost incurred;”
  • “Commercial benchmarks will inform negotiation objectives but will not constitute caps;” and
  • “The policy will reward efficiency, speed, and performance; weigh the financial health of fragile supply-chain chokepoints; and address sustained loss positions prospectively through fair pricing of future work.

This is a significant change but does appear to line up with the Under Secretary’s prior memorandum. Read more our article, Department of War (DoW) is After Your Data and Profit. I am also not sure how this is going to fit with FAR 15.404-4(a)(3) which provides that: “Negotiation of extremely low profits, use of historical averages, or automatic application of predetermined percentages to total estimated costs do not provide proper motivation for optimum contract performance.” Also, it has been the understanding of most contracting officers that they could not increase profit in follow-on contracts to cover prior contract losses.

• Within 90 days, eliminate any recurring review, checklist, data demand, or approval that is not required by the Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS).
• Have Defense Contract Management Agency (DCMA) and Defense Contract Audit Agency (DCAA) overhaul the guidance on forward pricing rate agreements (FPRAs). The memorandum states: “FPRAs will be used only where they accelerate recurring, high-volume negotiations and enable a more efficient process for the Department and for industry.” I thought that was the current guidance.
• Issue guidance implementing the August 18, 2026 memorandum. For more information on this read our article, Department of War (DoW) is After Your Data and Profit.

The Under Secretary of War Comptroller (USW(C)) will:

• Submit a proposal to the CAS Board including that:
  • DoW contracts and subcontracts are exempt from CAS except for cost-based development contracts awarded without adequate price competition;
  • DoW CAS coverage is limited to specific contracts and has no flowdown requirement;
  • GAAP is now the baseline for DoW contract cost accounting; and
  • Disclosure requirements be reevaluated.

• Within 60 days, issue guidance that:
  • A contractor's audited GAAP financial statements and internal-control attestations will be considered before performing any additional audits;
  • Ensure that no contracting officer will request an audit of a cost or system that has already been audited or reopen closed years absent indicators of fraud or material misstatement; and
  • “Every audit will identify the risk, its materiality to a government decision, the records needed, and why existing evidence is insufficient.”

These have aways been the rules. DCAA just does not like to play by the rules.

• Within 30 days, recommend a replacement for the DCAA director on the CAS Board.

The USW(A&S) and USW(C) will:

• Within 90 days, consolidate the requirements related to contractor business systems:
  • The Estimating, Accounting, and Material Management and Accounting system requirements will be consolidated into one contract clause, and the requirements will be tied to GAAP.
  • Limit Earned Value Management System (EVMS) to major development programs where there is cost risk and long duration production. Replace the system review with integrated baseline reviews using contractor system data.
  • Rely on commercial practices for customer provided tooling and eliminate Government property reviews.
  • Establish a requirement that contractor corrective action plans be completed in 90 days.
  • Direct contracting officers to issue no cost modifications to implement these changes to existing contracts.

• Within 60 days, simplify business system reviews:
  • Publish clear, specific, and publicly available commercial-aligned criteria for contractor business systems and issue a class deviation to implement.
  • Issue DFARS changes to accept a registered independent public accounting firm’s certification against the new criteria in place of Department reviews.
  • Issue guidance that Department reviews must be approved by the Component Acquisition Executive.
  • For contractors with contracts for multiple Components, DCMA will establish which Component will take cognizance of the business systems.

• Within 30 days, issue a statement that, for fixed-price contracts and other transactions, a contractor “that becomes more efficient against a fairly negotiated price keeps the savings for that contract, and the Department captures efficiencies only prospectively, in the next negotiation, at a fair margin.” This has always been the case. Again, I question the depth of the drafters understanding of the current acquisition requirements. This is how things have worked for the last several decades.

The Military Departments will implement the Portfolio Acquisition Authority set forth in the Acquisition Transformation Strategy.

The Defense Innovation Unit will apparently continue doing what it does, which is “Converting Capitalism Into Combat Power.” This group works with commercial companies to address current warfighter needs and problems.

The Director of Administration and Management for the DoW will, within 90 days, realign the contract oversight function within DoW, including Military Departments, DCMA, and DCAA. While this is still a proposed section (811) in the NDAA for FY 2027, DoW is moving out smartly on it. Could we see all price analysis support moved to DCMA or back to the Military Departments? What about implementing a single audit concept like in 2 CFR 200 Subpart F-Audit Requirements and DCAA limited to working with the very large contractors, or (shall I say it) gone completely.

The USW (A&S) and USW (C) will measure the results and submit a proposal to Congress for legislative changes, if necessary. This is really overwhelming. All I can say is buckle-up and hold-on the GOVCON roller coaster is about to get crazy.

Preparing for Changes to Contractor Accounting and Oversight

As DoW moves forward with changes to CAS applicability, pricing, audits, and contractor business systems, government contractors will need to understand how new requirements affect their accounting, estimating, and pricing processes. Redstone GCI works with contractors to evaluate CAS applicability, assess accounting and estimating systems, develop compliant proposal cost volumes, and align internal processes with evolving government requirements. As new guidance is issued, our consultants can also provide system assessments and training to help accounting, contracts, pricing, and leadership teams understand the changes and prepare for implementation.

Frequently Asked Questions (FAQs)

• What is the memorandum's purpose? To simplify contracting, reduce administrative burdens, and accelerate defense acquisitions.
• Is CAS being eliminated? No. DoW want to limit CAS to certain cost-based development contracts.
• Will GAAP replace CAS? DoW want to use GAAP as the accounting baseline.
• How will audits change? DoW plans to reduce duplicative audits and increase reliance on existing financial statements and independent certifications by certified public accounts.
• When will changes take effect? Actions are due within 30 to 120 days, but some reforms require additional approval or rulemaking.