In Part 1 of this series, we examined the Cost Accounting Standards Board’s (CASB or Board) 2026 rulemakings, including the rescission of CAS 407, 408, and 411, the substantial elimination of CAS 404 and 409, and the threshold reforms that raised full Cost Accounting Standards (CAS) coverage to $100 million. Taken together, these changes represent the most significant narrowing of the CAS framework since the 1970s; even still, the policy shift behind them is far from complete. The Department of War’s (DoW) September 14, 2026 memorandum, “Fostering One Strong Industrial Base,” commits the Department to moving from Government-unique accounting to Generally Accepted Accounting Principles (GAAP) “to the maximum extent the law permits” and starts a series of 30-, 60-, and 90-day clocks that will shape the next round of reform. Alongside those directives are the Board’s continuing CAS-to-GAAP conformance agenda, the Department’s business-system and audit reform initiatives, and an open question about how much of this can be accomplished without Congress, which rewrote the statutory CAS framework in the National Defense Authorization Act for Fiscal Year 2026 (NDAA) less than a year ago.

For contractors, the practical question is not whether CAS will continue to shrink, but what will take its place, and what the Government will expect contractors to demonstrate instead. The Department has made clear that it intends to retain, and seeks to expand, visibility into contractor cost and pricing information. The likely trade is Government-unique accounting rules for greater reliance on audited financial statements, internal-control attestations, and commercial frameworks such as Sarbanes-Oxley (SOX). That shift favors contractors whose GAAP-based systems, documentation, and governance can support that reliance, and it creates risk for those who read the rescissions as license to do less rather than to do things differently. In this Part 2, we look at where the reforms are headed, where the open legal and implementation questions lie, how the changes are likely to affect different segments of the industrial base, and the steps contractors can take now.

Where the Reforms Are Headed

The CASB Track: Cost Measurement Versus Cost Allocation

The standards the Board has rescinded primarily addressed cost measurement areas (e.g., capitalization, depreciation, material accounting, compensated absences, and standard costing) where GAAP provides extensive guidance on when costs are recognized and how they are measured. Cost allocation is different. GAAP governs how costs are measured and reported, but it generally does not address how costs are allocated among contracts, segments, programs, or customers, and allocation remains one of the Government’s central concerns in reimbursing contractors and negotiating equitable prices. The remaining standards governing indirect cost allocation, home office expense, pension and insurance costs, and general and administrative expense therefore continue to serve a purpose that financial accounting standards do not, and the Board expressly relied on the continued operation of the CAS consistency and allocation standards in concluding that the Government’s interests remain protected after the rescissions.

The Board’s treatment of CAS 407 shows how that distinction is being applied: the portions of the standard that duplicated GAAP were rescinded, while the production-unit and variance-allocation provisions were preserved and relocated to CAS 418. The same logic points to the likely next candidates. The Board’s March 2026 meeting notice identified CAS 407, 415, and 416 as the three remaining standards flagged in its 2019 roadmap as suitable for conformance. With CAS 407 complete, CAS 415 (deferred compensation) and CAS 416 (insurance costs) are the most probable subjects of the next conformance rulemaking, and contractors should expect the Board to retain whatever allocation provisions it concludes GAAP does not reach.

The DoW Track: Coverage, “Shadow CAS,” and the 30-, 60-, and 90-Day Clocks

The September 14 memorandum reaches past individual standards to the role of CAS in the procurement system itself. It directs the Department to submit proposals to the Board within 60 days that would make CAS exemption the default, confine remaining coverage to sole-source, cost-based development or incentive-fee procurements, apply CAS only to the relevant contracts and indirect-cost pools rather than to entire companies, and modernize Disclosure Statement requirements. Two provisions have more immediate effect. Within 30 days, Components are prohibited from imposing on exempt awards and other transactions the equivalent of CAS coverage, disclosure, business-system review, or practice-change governance—what the memorandum calls “shadow CAS.” And until the Board acts, no DoW solicitation that could bring a business unit newly under full CAS coverage may issue without written approval of the acquisition strategy by the Under Secretary of War for Acquisition and Sustainment, who must decide within 15 business days or elevate the request to the Deputy Secretary.

That relief arrives unevenly. For example, business units that already hold CAS-covered contracts remain covered until the Board changes the rules. The memorandum also reinforces the Department’s preference for fixed-price and commercially oriented approaches, reserving cost-based contracting for situations where adequate market pricing does not exist—a shift that, if sustained, would shrink the population of contracts for which CAS matters regardless of what the Board does.

The Statutory Ceiling

Several of the memorandum’s proposals would require rulemaking, and some may test the limits of the Board’s authority. The CAS statute generally applies the standards to all contracts above the monetary thresholds, with exemptions and waivers reserved to the Board and to agency heads in defined circumstances, and Congress revised those thresholds through the NDAA for FY 2026 less than a year ago. A proposal to make exemption the default and to confine coverage to a narrow category of procurements could be read as inconsistent with that framework. How the Board and the Department reconcile the memorandum’s objectives with the statute and whether the Department seeks further legislative change in the NDAA for FY 2027  will likely be the central legal question of the next phase.

The Trade-Off: Flexibility Versus Certainty

One of CAS’s traditional strengths has been uniformity: contractors measured and allocated costs under common rules, and disputes turned on the interpretation of those rules. GAAP often permits multiple acceptable treatments and relies more heavily on management judgment. Contractors will have greater flexibility in the areas the Board has vacated, but less certainty about how a particular judgment will be viewed in the procurement context, and contracting officers and auditors may respond by placing greater weight on the disclosure, consistency, and allocation requirements that remain.

Two points follow. First, the consistency obligations of CAS 401 and 402 and the Disclosure Statement do not disappear. The flexibility GAAP allows is bounded by what the contractor has disclosed and consistently applied, and a change in a GAAP-based practice may still be a change in cost accounting practice with cost-impact consequences. Second, the Department’s parallel emphasis on supplier cost and pricing transparency, set out in its August 18, 2026 memorandum, means that less Government-unique accounting will not translate into less Government interest in cost information. How those two objectives are reconciled—GAAP as the baseline, with continued access to cost data where cost-based pricing demands it—is the implementation question that will determine whether the reforms reduce burden in practice.

Beyond the Standards: Business Systems, Audits, + SOX

The Department’s July 31, 2026, request for industry input and its September memorandum make clear that reform is not confined to the standards themselves. Three areas are in play.

  1. Reliance on SOX Control Environments. Public companies subject to SOX Section 404 maintain internal control structures that undergo management assessment and independent auditor testing each year, and much Government oversight evaluates the same controls and processes. The memorandum directs greater consideration of audited financial statements and internal-control attestations in lieu of duplicative Government reviews, which raises the question whether contractors with effective SOX-compliant controls and unqualified audit opinions should face the same recurring review as those without them.
  2. DFARS Business Systems. Business-system oversight has grown into a prescriptive structure governing accounting, estimating, material management, purchasing, earned value management, and property systems, and commercial companies routinely identify it as a barrier to entry. The memorandum directs consolidation of business-system oversight, reliance on independent public accounting firm certifications and existing financial controls, and a prohibition on recreating retired oversight regimes through local policy. Congress moved first for one population: Section 1826 of the NDAA for FY 2026 exempts qualifying nontraditional defense contractors from certified cost or pricing data requirements, FAR Part 31 cost principles, and the DFARS business-system rules.
  3. Audit Practice. Incurred-cost and post-award audits often require schedules and reconciliations that duplicate information already in audited financial statements and ERP systems. The memorandum directs reliance on audited GAAP financial statements and internal-control attestations before additional audit work is performed, ties audits to identified risk and materiality, and states that completed audits generally should not be reopened absent indicators of fraud or material misstatement. DCAA has begun to implement the changes. On August 20, 2026, it issued MRD 26-CCLD-004(R), an audit alert on the CAS threshold increases, and MRD 26-CCLD-005(R), audit guidance on the conformance of CAS 404, 408, 409, and 411 to GAAP, and it has discontinued planned compliance audits of the rescinded standards. Contractor practices will continue to be evaluated, but increasingly against GAAP, the remaining standards, and the consistency requirements rather than against standards that have been eliminated.

What the Reforms Mean for Different Contractors

The reforms are broadly deregulatory, but their effect will vary with where a contractor sits in the industrial base.

  • Large CAS-Covered Contractors. Most major defense contractors already maintain practices consistent with both CAS and GAAP, so the rescissions require little change to day-to-day accounting. The benefits are reduced documentation, fewer CAS-specific interpretive disputes, and lower cost of maintaining parallel compliance frameworks—and, if the Department follows through on SOX reliance, meaningful relief from duplicative review. Full CAS coverage, Disclosure Statements, business-system reviews, and audit activity will nonetheless remain substantial obligations for this group.
  • Mid-Sized Contractors. This segment likely benefits most. Many have built CAS capability without the large compliance departments and resources typically available to major defense contractors, and the new thresholds will enable some contractors to transition contracts from full to modified coverage. The September 1 implementation rule provides transition procedures and streamlined Disclosure Statement requirements for that move: new solicitations may use modified-coverage status beginning October 1, 2026, while existing contracts transition at the start of the next full cost accounting period on or after that date—January 1, 2027 for calendar-year contractors. Resources freed from compliance can be redirected to growth and contract performance.
  • Small Businesses + Emerging Contractors. Small businesses are generally exempt from CAS, so the rescissions provide little direct benefit. The larger effect is on the transition out of small-business status: higher thresholds, streamlined requirements, and reliance on commercial practice reduce the compliance cliff that has historically discouraged successful small businesses from pursuing larger procurements.
  • Commercial + Nontraditional Contractors. The Board stated that the reforms are intended to reduce barriers to entry for nontraditional and commercial firms, and Section 1826 of the NDAA goes further for qualifying nontraditional defense contractors. For companies that have stayed out of defense work because of Government-unique accounting and business-system requirements, the combination of CAS exemption, relief from certified cost or pricing data, and business-system relief is the most significant change in the defense market in decades.
  • Public Versus Private Companies. The Department’s emphasis on SOX-aligned controls will initially favor public companies, whose governance and control environments are already subject to external scrutiny. Larger private companies often maintain comparable structures, however, and the likely dividing line will be whether a contractor can demonstrate reliable systems, effective controls, and transparent reporting—not whether it is listed.

What Contractors Should Do Now

The outcome of the next round of rulemaking is uncertain, but several steps make sense regardless of how it is resolved:

  • Confirm Coverage Status. Determine which existing contracts, anticipated contract awards, and business units are affected by the new $35 million and $100 million thresholds, confirm there is no unresolved CAS noncompliance that would block a move to modified coverage, and calendar any applicable transition dates for existing contracts.
  • Update the Disclosure Statement. Remove references to rescinded standards, take advantage of the streamlined requirements, and confirm that the practices now governed by GAAP are described accurately.
  • Document the GAAP Policies That Replace CAS 404, 407, 408, 409, and 411, and evaluate whether any resulting change in practice is a change in cost accounting practice requiring a cost-impact analysis. The Board exempted directly associated changes from the price-adjustment process under the CAS 408 rule; the treatment of other changes should be confirmed before they are made.
  • Treat Consistency as the Surviving Constraint. CAS 401 and 402 and the disclosed practices remain the standard against which GAAP-based judgments will be tested.
  • Re-Align Proposal + Pricing Procedures. CAS coverage and certified cost or pricing data thresholds have diverged ($35 million and $100 million versus $10 million), and a growing range of procurements will be subject to one regime but not the other.
  • Inventory SOX + Internal-Control Documentation.Identify materials that could support a request for Government reliance in lieu of a business-system review.
  • Watch Solicitations for Shadow CAS. CAS-equivalent terms imposed on exempt awards or other transactions are now contrary to Department policy, and the memorandum provides a basis to push back.
  • Engage in the Rulemaking. The Board’s and the Department’s next proposals will shape coverage for a decade, and the comment windows are the opportunity to address the issues above.

What to Watch

  • Mid-November 2026. The Department’s 60-day deliverables under the September 14 memorandum, including its coverage proposals to the CAS Board, are due.
  • Mid-December 2026. The remaining 90-day deliverables under the memorandum’s appendix are due.
  • January 1, 2027. Existing contracts transition to modified coverage for calendar-year contractors.
  • CASB Rulemaking. Watch for rulemaking on CAS 415 and 416, and for any proposal responding to the Department’s coverage recommendations.
  • DFARS Rulemaking. Watch for rulemaking implementing Section 1826 and any business-system consolidation.
  • The NDAA for FY 2027. Any statutory change needed to support exemption-as-default would appear here.

The Road Ahead: Preparing for the Next Phase of CAS Reform

The next phase of reform will test the central premise of the 2026 rulemakings: that GAAP should govern cost measurement, a narrower CAS should police allocation and consistency, and oversight should target material risk rather than procedural conformity. Whether that framework emerges in full depends on the Board, the Department, and Congress, and on how the Government’s continued interest in cost information is reconciled with its stated preference for commercial practice. For contractors, the direction is clear enough to act on now. Reach out to Fluet’s Government Contracts team at Fluet for help assessing coverage, Disclosure Statement, or business-system readiness as the next round of reforms takes shape.