Department of War’s (DoW) October 1, 2026, memorandum provides guidance on cost data requests, reporting, and profit expectations. Questions remain about how the direction will affect pricing negotiations, accounting requirements, and profit sharing. Government contractors should assess these expectations alongside existing contract terms and applicable regulations.
Highlights
- Cost Data Requests. DoW’s October 1, 2026, memorandum reinforces requests for actual cost data when needed to determine a fair and reasonable price, using information in the form contractors maintain.
- Reporting Enforcement. Contractors subject to Cost and Software Data Reporting requirements face demand letters and potential payment withholding if reporting deficiencies are not resolved within 30 days.
- Automated Data Sharing. The memorandum describes voluntary automated cost data submissions, while questions remain about system access and how participation will work in practice.
- Profit Expectations. DoW emphasizes efficiency, performance, and investment in profit negotiations and encourages tiered profit sharing for certain programs, including similar terms for key suppliers.
- Implementation Questions. The guidance leaves unresolved questions about accounting requirements, existing contract rights, profit sharing, and how contractor losses would be addressed.
On October 1, 2026, the Undersecretary of War for Acquisition and Sustainment (A&S) issued a memorandum, Implementation of Supplier Cost and Pricing Transparency. This memorandum implements the direction in prior memorandums from Deputy Secretary of War Stephen A. Feinberg Supplier Cost and Pricing Transparency, dated August 18, 2026, and Fostering One Strong Industrial Base, dated September 14, 2026. The new memorandum provides “policy and procedures to secure cost visibility across [Department of War (DoW)] … acquisition portfolio.” The introduction of the implementing memorandum ends by stating:
“While the Department seeks to reward genuine efficiencies from industry, we must reject opaque cost increases and unrealistic starting prices in negotiations.”
We are not really sure how to take this statement. We do not believe any government contractor is simply allowing costs to increase without understanding what is driving that increase.
Bottom Line Up Front
The memorandum repeats much of what was in the prior two memorandums with little to no specifics as to how the expectations will be implemented. We will have to wait for the future proposed rules to come out of the formal rulemaking process. These proposed rules should make for some great reading, and we are sure there will be few surprises.
Cost Information When Needed
This is the title of the first section of the memorandum. Some of the statements in this section are confusing and potentially terrifying – terror coming from the DoW, well they did pick the right month for it. The first two paragraphs simply instruct contracting officers to request actual cost data when it is necessary to determine a fair and reasonable price. Contracting officers are told to follow the existing requirements in 10 U.S.C. § 3705 and Federal Acquisition Regulation (FAR) 15.402 and 15.403. (Note: There is a proposed rule out in the Federal Register that may result in small changes to these sections of the FAR - 2026-19162). Contracting officers are also told to limit their requests to data in the form maintained by the contractor. This is nothing new and, in our opinion, good advice.
Cost Data Requests and Contractual Rights
Here is where things start to go a little off the rails. The memorandum states:
“A request for such information does not, by itself, necessitate the use of a cost-reimbursement contract, Cost Accounting Standards (CAS) coverage, or a right of access to records not otherwise provided by contract.”
We are not sure about the point that is being made here. We hold this truth to be self-evident – the need for cost data to negotiate a fair and reasonable price should not trigger the need to change the contract type or apply CAS or even expand the department’s right to other data.
Certified Cost or Pricing Data and DCAA Audit Concerns
Now for some terror. The memorandum goes on to state:
“For acquisitions subject to the Truth in Negotiations Act, if a contractor refuses to provide statutorily required certified cost or pricing data, COs must immediately coordinate with the Defense Contract Audit Agency to initiate a Truth in Negotiations Audit.”
First, it appears the drafter of the memorandum missed the name change from Truth in Negotiations Act (TINA) to the Truthful Cost or Pricing Data Act. Second, you cannot perform a Truth in Negotiations Audit on a contract that has not been awarded, so we are assuming that this means that if you push back on providing cost data the department is going to require DCAA to audit all of your already awarded contracts based on the defective pricing clauses (FAR 52.215-10, 52.215-11, 52.215-12, and 52.215-13) in them. This certainly does sound like the DoW is carrying a big stick. The only problem is that DCAA cannot get the audits they currently have done. Maybe this is not all that terrifying. But even if DCAA just starts opening a bunch of audits it will eat up your resources.
Cost Data Requests for Contract Modifications
Then the memorandum stirs in some confusion related to other than certified cost or pricing data. The memorandum refers to FAR 52.215-21, Requirements for Certified Cost or Pricing Data and Data Other Than Certified Cost or Pricing Data-Modifications, related to “obtaining … data … necessary … to determine a fair and reasonable price,” “[f]or example, actual cost data may be required to rationalize other than nominal year-over-year prices increases.” While we hope not, is the DoW looking to potentially reprice current contracts?
CAS and GAAP Expectations for Actual Cost Data
The memorandum then ends this section by stating:
“Contractors that are required to adhere to CAS may continue to provide actual cost data, when needed, from a CAS compliant system, and contractors that are not required to adhere to CAS will provide such data through a Generally Accepted Accounting Principles system.” (Emphasis Added)
First, there is no “may” about it, if you have CAS covered contracts your accounting system “must” comply with the CAS requirements. Additionally, the key requirement with CAS and Government cost accounting under FAR part 31 is that you must have a project-based accounting system (i.e., an accounting system that accumulates cost by contract). Generally Accepted Accounting Principles (GAAP) accounting systems are focused on reporting the cost of goods sold at the company or reporting unit level, not at the contract level. We do not believe this statement will change much when it comes to the actual cost data contracting officers and auditors are looking for. They are still going to want actual cost data by contract.
The key point that the memorandum never does get around to making is that actual cost data when it comes to pricing is the actual cost data you incurred on prior contracts, not the contract that is being negotiated, unless you are performing under a letter contract.
Data Sources
While not providing much in the way of specifics, this memorandum again addresses the following:
Cost and Software Data Reporting (CSDR)
If your DoW contracts have the Defense FAR Supplement (DFARS) clause DFARS 252.234-7004, Cost and Software Data Reporting System, in them and you are not current on your required reporting you will be getting a demand letter from the contracting officer and a payment withhold if you do not come into compliance within 30 days.
Automated Data Integration (ERP and API Access)
To reduce the administrative burden on contractors, the department is looking to establish a process whereby contractor will automatedly push their actual cost data to the department. The memorandum states:
“Contractor participation will be strictly voluntary and there will be no penalties for contractors who do not opt in and will not be used as a condition of award, an evaluation factor, or a consideration in any responsibility determination.”
Sounds good. However, we would not bet any of our money on opting out being penalty free. Also, remember that the department has no contractual right to cost data on fixed price contracts, until the department is in the process of negotiating the next contract or DFARS 252.234-7004, Cost and Software Data Reporting System, is in the contract.
Profit
The memorandum provides that contracting officers should tailor profit objectives to “reward efficiency, speed, and performance” but not establish caps on profit. It goes on to state:
“Specifically, hardware and weapon systems expectations should align with commercial manufacturing risk-to-reward ratios, dynamically adjusting for the contractor’s self-funded facilitization, non-recurring engineering investments, and execution risk – not merely costs incurred.”
Here are a few things to consider.
Research and Development (R&D)
The department, as well as the rest of the Government, has been on a “pay as you go” plan when it comes to independent research and development for over half a century. FAR 31.205-18, Independent research and development and bid and proposal costs, and CAS 420, Accounting for independent research and development costs and bid and proposal costs, require current contracts to pay for the investment in research and development to support future contracts. Even GAAP, for the most part, requires research and development costs to be expensed in the period incurred. However, in the development of commercial pricing all businesses consider the recovery of this prior period cost/expense (i.e., investment) in the price it plans to charge its customers.
Facilitization (Capital Asset Investment)
The quote above refers to self-funded facilitization. This is not new. Contractors have always raised their own capital to purchase capital assets and recovered that investment through depreciation costs assigned to each accounting period in which the asset is used (i.e., over the useful life of the asset). If the department is implying that contractors have been funding these investments by directly charging the purchases to contracts that is simply not true. Additionally, FAR 15.404-9(d)(1)(iv) already instructs contracting officers to consider “the contribution of contractor investments to efficient and economical contract performance” through capital investments.
Tiered Profit Sharing and Supplier Flowdowns
The memorandum goes on to state the following:
“For sole-source or long-term production programs, COs are strongly encouraged to use a “Tiered Profit-Sharing” mechanism. This approach involves negotiating a realistic base profit margin, then sharing profits from realized efficiencies over time. The Department’s share of these excess profits should be realized through non-cash value, such as prospective price reductions or additional deliverables. When this profit-sharing mechanism is used with prime contractors, COs must also require prime contractors to flow down similar terms to key suppliers. For advisory assistance on this matter, contact [the] … [A&S] office and request a discussion with the Deal Team under DPCAP’s Price, Cost, and Finance directorate.”
The DoW has the information on the DoW A&S Pricing website about the Deal Team. This appears to be similar to the old “Should Cost” reviews of contractors’ indirect costs. The DoW wants to set exceptions as to production improvements, efficiencies, and effectiveness they want to see made by the contractor. As we recall, the old Should Cost reviews came up with a lot of pie in the sky recommendations that due to program delays from the department side ended up dying before they could get out of the gate.
Questions About Profit Sharing and Contract Risk
We are also concerned with the department’s idea of sharing in these “excess profits” by prospective price reductions or additional deliverables. First, the current pricing process considers both production improvements and issues in the prior contract costs when pricing the next contract. Second, seeing as there is risk for both parties fixed price contracts with cost incentives may be a better approach. Also, we are not sure how the DoW accounting system would deal with deliveries beyond what was agreed to.
There is also an expectation that similar profit-sharing agreements be established between the prime and its key subcontractors. Other than the real estate market, the sharing of profit between buyers and sellers is not a standard commercial practice. Additionally, the impact of this on cost accounting could be more effort than expected.
And the biggest question of all, what about sharing in losses. Often there are reduced profits and even losses on contract nearing the end of a program. Vendor turnover and the cost to qualify new vendors is significant. Plus, the joys of dealing with the department reducing orders as it has found a new shiny object it wants.
Evaluating Cost Data Requests and Pricing Expectations
Government contractors should evaluate DoW cost data requests and profit expectations alongside applicable contract terms and accounting requirements. Redstone GCI helps contractors assess certified and other than certified cost or pricing data requirements, review contract clauses, develop proposal cost volumes, and prepare for pricing negotiations. Our team also assesses accounting and estimating systems, updates related policies, and provides training on applicable FAR, DFARS, and CAS requirements. As additional guidance and final rules are issued, we can help contractors determine whether system or process changes are needed and support their implementation.
Frequently Asked Questions (FAQs)
- What does the DoW memorandum address?
It provides guidance on contractor cost data requests, reporting requirements, and profit negotiations. - What is actual cost data?
It shows costs a contractor has already incurred, generally on prior contracts. The government may request this information to help determine whether a proposed price is fair and reasonable. - Does a cost data request change my contract requirements?
Not by itself. The memorandum states that a request alone does not change the contract type, create Cost Accounting Standards requirements, or expand the government’s access to records. - Is automated cost data sharing mandatory?
The memorandum states that participation would be voluntary, with no penalties for declining. How the process would work in practice remains unclear. - What is tiered profit sharing?
It involves negotiating a base profit margin and then sharing benefits from efficiencies achieved over time. The government’s share could take the form of future price reductions or additional deliverables. - What questions remain unanswered?
The article identifies concerns about accounting expectations, supplier profit sharing, and how contractor losses would be addressed. Further implementation details are still needed.