What Are Cost Accounting Standards & Who Must Comply?

Cost Accounting Standards (CAS) are rules for measuring, assigning, and allocating costs to contracts with the U.S. government. These standards ensure uniformity and consistency in cost accounting practices among federal contractors. CAS protects taxpayer interests by promoting fair and reasonable pricing in government procurement. The Cost Accounting Standards Board (CASB) was created to address concerns about inconsistent cost accounting practices that could lead to inflated contract costs. By standardizing cost accounting, CAS prevents misrepresentations and ensures the government pays only for appropriately incurred costs.

Entities Subject to Cost Accounting Standards

Cost Accounting Standards primarily apply to negotiated federal contracts, rather than those awarded through sealed bids. Contracts become subject to CAS if they exceed $2 million, unless an exemption applies.

A contract award of $7.5 million or more establishes CAS coverage for a contractor. Once a business unit has a CAS-covered contract of $7.5 million or more, all subsequent non-exempt negotiated contracts exceeding the TINA threshold (currently $2 million) become subject to CAS. CAS applicability extends to the specific business unit performing the government contract, not the entire corporate entity.

CAS coverage has different levels. Full CAS coverage applies to a single CAS-covered contract award of $50 million or more, or if total CAS-covered awards in the preceding cost accounting period reached at least $50 million. Modified CAS coverage applies to contracts of $7.5 million or more but less than $50 million, provided total CAS-covered awards in the preceding period were also less than $50 million.

Several contract types are exempt from CAS, including:
Sealed-bid contracts
Contracts with small businesses
Contracts where prices are set by law or regulation
Contracts for commercial items
Contracts with foreign concerns (though they may still need to comply with specific standards like CAS 401 and 402)

Fundamental Cost Accounting Principles

The Cost Accounting Standards are rooted in fundamental principles designed to promote fairness and consistency in government contracting. A core principle is consistency, which requires contractors to consistently apply their accounting practices for estimating, accumulating, and reporting costs. This means that once a method is chosen for a particular cost, it should be applied uniformly across all contracts and accounting periods to prevent contractors from shifting costs between contracts or accounting periods to their advantage.

Another principle is allocability, ensuring costs charged to a government contract are directly related to it. A cost is allocable if incurred specifically for the contract, benefits both the contract and other work, or is necessary for the overall business operation. Costs are categorized as either direct (traced to a single contract) or indirect (benefiting multiple contracts and allocated using a reasonable method). Allowability, governed by the Federal Acquisition Regulation (FAR), works with CAS to determine if a cost can be reimbursed by the government.

The 19 Cost Accounting Standards, codified in 48 CFR Chapter 99, guide various cost accounting treatments. They ensure uniformity in areas like consistency in estimating, accumulating, and reporting costs, and proper allocation of indirect costs. Other standards govern accounting for unallowable costs, depreciation, and inventory costing. Each standard details how contractors must account for specific costs or apply certain accounting methods, preventing arbitrary or inconsistent practices.

Compliance and Verification Framework

Ensuring compliance with Cost Accounting Standards involves a structured framework with several key participants. The Cost Accounting Standards Board (CASB) is responsible for promulgating and interpreting the CAS. This board establishes the rules that contractors must follow for government contracts subject to CAS. The CASB maintains the standards’ integrity and effectiveness, adapting them to evolving procurement practices.

The Defense Contract Audit Agency (DCAA) verifies contractor compliance with CAS. DCAA auditors review contractor accounting systems and practices to ensure adherence to standards and disclosed practices. Audits involve examining financial records, accounting policies, and cost allocations to confirm costs are measured, assigned, and allocated appropriately per CAS requirements. The DCAA also assesses whether contractors are consistently following their stated accounting practices.

A key component of CAS compliance is the Disclosure Statement (DS). This document describes a contractor’s cost accounting practices. Contractors generally submit a Disclosure Statement before a CAS-covered contract award of $50 million or more, or if total CAS-covered awards in a cost accounting period reach $50 million or more. The Disclosure Statement acts as a blueprint of the contractor’s accounting system, used by the DCAA to verify compliance.

Maintaining an adequate, well-documented accounting system is paramount for CAS compliance, as it must accurately reflect practices described in the Disclosure Statement and allow for proper cost tracking and allocation. Non-compliance can lead to contract price adjustments, requiring repayment of overcharged amounts to the government.