Cost Accounting Standards (CAS)

Cost Accounting Standards (CAS) are 19 accounting standards issued by the Cost Accounting Standards Board (CASB) that establish uniformity and consistency requirements for how contractors measure, assign, and allocate costs to government contracts, reducing the government's risk that contractors manipulate cost allocation to maximize reimbursement on cost-type contracts.

What is the Cost Accounting Standards (CAS) Program?

The CASB was established by the Truth in Negotiations Act of 1970 (subsequently reauthorized by Congress) in response to congressional concerns that defense contractors were using inconsistent cost accounting practices to shift costs between contracts and time periods to maximize government reimbursement. The 19 CAS standards (CAS 401 through 420) address specific aspects of cost accounting: indirect cost pools (CAS 418), depreciation (CAS 409), compensation for personal services (CAS 408, 412, 413), IR&D and B&P (CAS 420), and others.

CAS is distinct from FAR Part 31 cost principles, though the two interact closely. FAR Part 31 defines which costs are allowable on government contracts. CAS defines how costs must be consistently measured and allocated once they have been classified as allowable. A cost can be allowable under FAR Part 31 but still be misallocated in a way that violates CAS.

CAS coverage comes in two levels. Full CAS coverage (CAS 401-420) applies to companies receiving a single CAS-covered contract of $50M or more in a year. Modified CAS coverage applies to companies with contracts over $2M (the CAS trigger threshold) but below the full coverage threshold, they must comply only with CAS 401 (Consistency in Estimating, Accumulating, and Reporting Costs) and CAS 402 (Consistency in Allocating Costs). Below $2M, contracts are CAS-exempt.

When a CAS-covered contractor makes a voluntary or required change to its cost accounting practices, it must disclose the change to the DCAA and contracting officer and calculate the cost impact (how the change increases or decreases the government's contract costs). The government has the right to an equitable adjustment, potentially in its favor, when a change in accounting practice reduces the cost the government would otherwise have paid.

Why CAS Matters for Government Contractors

CAS compliance is one of the most administratively demanding aspects of large government contracting. Violations, such as using different cost pools for government versus commercial work, or treating compensation costs inconsistently between estimating and accumulating, result in cost disallowances, penalty assessments, and audit findings that can persist across multiple years. Small businesses approaching the CAS threshold for the first time should invest in accounting system upgrades and CAS compliance reviews before accepting large cost-type contracts.

Example

A mid-tier defense contractor growing toward full CAS coverage wins a $55M CPFF contract, triggering full CAS coverage for the first time. The firm's accounting team, working with its DCAA auditor, reviews all 19 standards to ensure their cost accounting system is compliant, discovering they have been treating certain IT infrastructure costs inconsistently between direct and indirect pools in a way that violates CAS 418 (Allocation of Indirect Costs). They implement a corrective cost accounting change, disclose it to the contracting officer, and calculate a cost impact adjustment of $127,000 in the government's favor for the current year.

Frequently Asked Questions

Which of the 19 CAS standards are most frequently audited?

DCAA most commonly focuses on CAS 401 and 402 (consistency), CAS 408 (compensation for personal services, vacation/holiday/sick costs), CAS 409 (depreciation of tangible capital assets), CAS 410 (allocation of business unit G&A), CAS 412 and 413 (pension costs and measurement period), CAS 416 (insurance costs), and CAS 418 (allocation of indirect costs). These standards address the cost categories most susceptible to inconsistent treatment between commercial and government work.

Does CAS apply to commercial item contracts?

No. Contracts for commercial items (certified under FAR Part 12) are exempt from CAS regardless of dollar value. Commercial item contracting is premised on market-based pricing rather than cost-based pricing, making CAS cost consistency requirements inapplicable. This is one reason the commercial item exemption is valuable to contractors who sell the same product or service to both commercial and government customers, it avoids CAS compliance requirements on government sales.

What is a Disclosure Statement and when is it required?

The Disclosure Statement (SF 1408 for educational institutions, DS-1 for all other contractors) is a formal document in which a CAS-covered contractor describes its cost accounting practices in sufficient detail for the DCAA to verify CAS compliance. Full CAS coverage triggers a mandatory Disclosure Statement requirement. The statement covers cost pools, allocation bases, depreciation methods, compensation practices, and other cost accounting elements. Once submitted, the contractor must follow the practices described and submit an amendment when practices change.

Can a contractor lose CAS coverage if its revenue drops?

Once a contractor is subject to full or modified CAS coverage on a specific contract, that contract remains CAS-covered for its duration regardless of subsequent revenue changes. However, future contracts awarded after revenue drops below the CAS threshold would not be CAS-covered. The practical effect is that a contractor straddling the CAS threshold may simultaneously have CAS-covered and CAS-exempt contracts in its portfolio, requiring careful cost accounting segregation between covered and uncovered contracts.