Cost Accounting Standards (CAS): What Federal Contractors Must Know

Cost Accounting Standards (CAS) are a set of 19 standards that govern how defense and federal contractors measure, assign, and allocate costs on covered contracts. CAS requirements go beyond the cost principles in FAR Part 31 — they impose specific rules on how you account for costs, not just whether a cost is allowable.

Most small businesses never trigger CAS requirements. But as your federal contract portfolio grows — particularly if you win a large cost-reimbursable DoD contract — CAS compliance can become mandatory. Understanding when CAS applies, what it requires, and what happens if you violate it prevents costly surprises.

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What Is CAS?

CAS was established by Public Law 91-379 (1970) and is codified at 48 C.F.R. Chapter 99 (FAR Appendix). The Cost Accounting Standards Board (CASB), an independent board within the Office of Federal Procurement Policy, issues and maintains the standards.

CAS is separate from but related to FAR Part 31 (cost principles):

• FAR Part 31 defines what costs are allowable
• CAS defines how costs must be measured, accumulated, and allocated

A contractor can comply with FAR Part 31 (only allowable costs billed) while being out of compliance with CAS (using impermissible allocation methods).

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The 19 CAS Standards

The CAS standards address specific accounting practices:

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CAS Coverage Thresholds

Not every federal contract triggers CAS. Coverage depends on the size of your federal business and the value of individual contracts.

Exemptions from CAS (No CAS Required)

The following are exempt from CAS:

• Contracts below $2 million
• Firm-fixed-price contracts awarded competitively (with some exceptions)
• Contracts for commercial items (under FAR Part 12)
• Sealed bid contracts
• Contracts with educational institutions (different rules apply)
• Foreign military sales contracts
• Contracts where the prime's CAS-covered contract volume is below $50 million in the prior accounting year (the "small business" threshold)

Modified CAS Coverage

A contractor is subject to Modified Coverage when:

• A single CAS-covered contract exceeds $2 million but the contractor's prior-year CAS-covered awards are below $50 million

Modified coverage requires compliance with only 4 of the 19 CAS standards: CAS 401, 402, 405, and 406.

Full CAS Coverage

A contractor is subject to Full Coverage when:

• A single CAS-covered contract exceeds $2 million AND
• Prior-year CAS-covered net awards exceed $50 million

Full coverage requires compliance with all 19 CAS standards.

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The CAS Disclosure Statement (DS-1)

When a contractor first receives a CAS-covered contract exceeding $50 million (or their CAS-covered volume crosses $50 million), they must submit a Disclosure Statement (DS-1) to the cognizant federal agency official.

The DS-1 documents:

• Your accounting policies and practices for each CAS standard
• How you identify and allocate direct vs. indirect costs
• Your cost accounting period
• Your depreciation methods
• Your pension accounting approach

Important: Once submitted, you are locked into the accounting practices described in your DS-1. If you change a cost accounting practice, you must:

1. Notify the government in advance
2. Receive approval for the change
3. Adjust for the cost impact of the change (either the government pays for the increase or you absorb it)

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CAS and DCAA

The Defense Contract Audit Agency (DCAA) is the primary auditor of CAS compliance for DoD contracts. DCAA:

• Reviews your DS-1 for adequacy
• Audits whether your actual cost accounting practices match your disclosed practices
• Reviews the cost impact of accounting practice changes
• Issues findings when CAS violations are identified

CAS violations can result in:

• Disallowance of costs that were not allocated in accordance with your disclosed practices
• Demand for repayment of costs that were overbilled
• Forward pricing adjustments for future contracts
• In egregious cases, referral for False Claims Act investigation

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CAS Compliance in Practice

Consistency is the core principle. CAS 401 and 402 require that your cost accounting practices be consistent: consistent with how you estimated costs at proposal time, and consistent across similar cost categories regardless of whether the contract is government or commercial.

Common CAS violations:

• Treating the same type of cost as direct on some contracts and indirect on others
• Changing cost allocation methods mid-contract without disclosure
• Allocating costs that benefit commercial work to government contracts (or vice versa)
• Failing to segregate unallowable costs (CAS 405 violation)
• Inconsistent depreciation across business units

CAS and subcontractors: CAS is a flow-down obligation. If you are a prime contractor with CAS-covered contracts and you award subcontracts exceeding $2 million, those subcontractors must also comply with CAS. Your subcontracts should include the CAS clauses at FAR 52.230-2 (full coverage) or FAR 52.230-3 (modified coverage).

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Avoiding CAS Compliance Problems

Set Up Consistent Cost Pools Before You Need Them

The time to establish your cost accounting structure is before you receive your first large cost-reimbursable contract — not after DCAA shows up. Work with a CAS-experienced accountant or cost consultant to:

• Define your direct cost pools (direct labor, direct materials, ODCs)
• Define your indirect cost pools (fringe, overhead, G&A)
• Establish your allocation bases (labor hours, labor dollars, total cost input)

Document Your Practices

Your internal accounting manual or written cost accounting policies are your primary evidence of consistent practice. If you claim overhead is allocated on direct labor dollars, document that practice and follow it consistently.

Track Unallowable Costs Separately

CAS 405 requires that you identify and segregate unallowable costs (entertainment, fines, interest, lobbying) from allowable costs. Unallowable costs that get mixed into your pools and then allocated to government contracts are a CAS violation — and potentially a False Claims Act issue.

Engage DCAA Before Problems Arise

Contractors who engage proactively with their DCAA auditor — submitting adequate incurred cost proposals, responding timely to audit requests, and disclosing accounting practice changes — have far fewer adversarial audit experiences than those who are reactive.

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Key Takeaways

• CAS applies when a single CAS-covered contract exceeds $2 million AND you are not exempt — commercial items, sealed bids, and most FFP competitive awards are exempt.
• Modified coverage (4 of 19 standards) applies when you have a $2M+ CAS contract but under $50M in prior-year CAS volume; full coverage (all 19 standards) applies above $50M.
• The DS-1 Disclosure Statement locks in your accounting practices — changes require advance government notification and cost impact analysis.
• DCAA audits CAS compliance for DoD contracts; violations result in cost disallowances, repayment demands, and potential FCA exposure.
• Consistency is the foundational CAS principle — same types of costs must be treated the same way across commercial and government work.
• Prepare your cost accounting structure early — establish consistent cost pools, document your practices, and segregate unallowable costs before your first large cost-reimbursable contract.

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