Legal Update
Mar 5, 2025
Six Essential Tips for Complying with FAR Cost Accounting Standards (CAS)
In honor of the release of the 6th Edition of the Government Contracts Compliance Handbook, we are sharing six essential tips for complying with the Cost Accounting Standards (CAS). CAS compliance is critical for government contractors who enter into contracts subject to these complex requirements. Failure to comply can lead to severe consequences, including cost disallowances, contract price adjustments, penalties under the False Claims Act, and potential suspension or debarment from future government contracts. These six tips will help contractors navigate CAS regulations effectively while mitigating compliance risks.
1. Determine if CAS Applies to Your Contracts
The first step in CAS compliance is determining whether your contracts fall under full CAS coverage, modified CAS coverage, or exemptions. CAS applies to most negotiated contracts over $2 million unless an exemption applies, such as:
- Sealed bid contracts
- Contracts below the Truthful Cost or Pricing Data statute (formerly TINA) threshold ($2 million)
- Contracts with small businesses
- Commercial item contracts
- Firm-fixed-price contracts awarded based on adequate price competition without the submission of certified cost or pricing data
If your company receives a single CAS-covered contract of $50 million or more, you will be subject to full CAS coverage, meaning you must comply with all 19 CAS standards. If your CAS-covered contracts are below $50 million, you may qualify for modified CAS coverage, requiring compliance with only four standards:
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- CAS 401 – Consistency in estimating, accumulating, and reporting costs
- CAS 402 – Consistency in allocating costs for the same purpose
- CAS 405 – Accounting for unallowable costs
- CAS 406 – Use of a consistent cost accounting period
Understanding your CAS obligations is critical to structuring your accounting systems properly from the outset.
2. Submit and Maintain an Accurate CAS Disclosure Statement
Government contractors subject to full CAS coverage must submit a CAS Disclosure Statement (Form CASB DS-1), which provides a detailed explanation of the contractor’s cost accounting practices. This document must be:
- Accurate and complete – Any errors, omissions, or misrepresentations can lead to penalties under the False Statements Act (18 U.S.C. § 1001).
- Consistently followed – The government expects contractors to apply their disclosed cost accounting practices uniformly across all contracts.
- Updated when changes occur – Contractors must amend their Disclosure Statements whenever they change their cost accounting practices.
Failure to properly disclose cost accounting practices can result in disputes, contract price adjustments, and liability under fraud statutes.
3. Ensure Cost Accounting Practices Are Consistent and Compliant
CAS requires contractors to maintain consistency in their cost accounting practices to ensure fairness in cost allocation. Common CAS standards that focus on consistency include:
- CAS 401 (Estimating, Accumulating, and Reporting Costs) – Requires contractors to use the same cost accounting practices for estimating contract prices and accumulating actual costs.
- CAS 402 (Consistency in Allocating Costs) – Prohibits contractors from charging a cost as direct on one contract while treating similar costs as indirect on another.
- CAS 405 (Accounting for Unallowable Costs) – Requires that expressly unallowable costs (e.g., lobbying, fines, entertainment) be segregated from allowable costs and not included in government billings.
Contractors should establish internal reviews and audits to ensure their cost accounting practices remain consistent and CAS-compliant.
4. Develop Internal Controls and Employee Training Programs
Given the complexity of CAS, contractors must implement strong internal controls and ensure that key personnel—such as finance, accounting, and contract managers—are well-trained in compliance obligations. Best practices include:
- Creating a formal CAS compliance program – This includes written policies and procedures that clearly define how cost accounting standards will be followed.
- Providing CAS-specific training – Employees involved in cost reporting, proposal preparation, and accounting should receive regular training on CAS requirements and government expectations.
- Conducting internal CAS audits – Periodic audits help identify discrepancies before they become compliance issues during a Defense Contract Audit Agency (DCAA) review.
Well-documented internal controls and training programs can demonstrate good-faith efforts to comply with CAS, which may mitigate penalties in the event of a government audit.
5. Manage Changes to Cost Accounting Practices Carefully
Contractors must notify the government of any changes to their cost accounting practices and analyze the impact of such changes on government contracts. Key considerations include:
- CAS 406 (Consistency in Cost Accounting Periods) – Contractors must ensure that changes in cost allocation methodologies do not unfairly shift costs to the government.
- Notification and cost impact analysis – Contractors must notify the Cognizant Federal Agency Official (CFAO) of changes and submit a cost impact proposal detailing any increase or decrease in government costs.
- Equitable Adjustments – If a change results in increased costs to the government, an equitable adjustment may be required to ensure compliance.
Failing to properly disclose and manage accounting changes can result in cost disallowances, disputes, and liability under the False Claims Act.
6. Be Prepared for Government Audits and Investigations
Government auditors, particularly the DCAA, closely scrutinize CAS compliance. To prepare for audits:
- Maintain detailed records – Ensure all financial and cost accounting documentation is readily available for review.
- Regularly test compliance – Conduct mock audits or hire external consultants to assess compliance gaps.
- Respond promptly to audit findings – If a government auditor identifies potential CAS violations, contractors should work proactively with the CFAO to resolve issues before they escalate.
The consequences of noncompliance can be severe, including contract price reductions, penalties, and even suspension or debarment from future government contracts.
Complying with the CAS is essential for government contractors to avoid penalties, maintain eligibility for federal contracts, and ensure financial integrity. By following these six essential tips, contractors can strengthen their compliance programs, minimize risks, and maintain positive relationships with government agencies.
These insights, drawn from the 6th Edition of the Government Contracts Compliance Handbook, reflect our firm’s commitment to helping contractors navigate the complex regulatory landscape of government contracting. For tailored legal guidance on CAS compliance, cost audits, or contract disputes, our elite government contracts practice group is ready to assist.