The Office of Federal Procurement Policy (OFPP), within the Office of Management and Budget (OMB), has issued a final rule that fundamentally restructures the Cost Accounting Standards (CAS) applicable to U.S. federal contractors. The rule is scheduled for Federal Register publication on July 8, 2026 and becomes effective 30 days after publication — placing the effective date in early August 2026.

The rule's core objective is to align CAS more closely with Generally Accepted Accounting Principles (GAAP), reducing the divergence between the two frameworks that has long imposed compliance burdens on contractors who must maintain separate CAS-compliant and GAAP-compliant accounting systems. The reform is the most significant restructuring of the CAS framework in decades.

CAS 408 — Rescinded in Full

CAS 408 (Accounting for Costs of Compensated Personal Absence) is rescinded entirely. CAS 408 governed the measurement and allocation of costs associated with compensated personal absence — vacation, sick leave, holiday pay, and similar benefits. Under CAS 408, contractors were required to assign these costs to cost accounting periods based on when the entitlement was earned, which often diverged from GAAP accrual treatment. The rescission eliminates this divergence; contractors will now follow GAAP for compensated absence costs.

CAS 411 — Rescinded in Full

CAS 411 (Accounting for Acquisition Costs of Material) is rescinded entirely. CAS 411 governed the measurement and allocation of material acquisition costs, including purchasing, receiving, inspection, and storage costs. The rescission aligns material cost accounting with GAAP, eliminating the separate CAS 411 compliance track.

CAS 404 — Mostly Rescinded

CAS 404 (Capitalization of Tangible Assets) is mostly rescinded, with only certain retained provisions transferred into the remaining CAS framework. CAS 404 governed the capitalization of tangible assets — the threshold and criteria for treating expenditures as capital assets versus period expenses. The retained provisions address specific areas where the OFPP determined that GAAP alone was insufficient for government contract cost accounting purposes.

CAS 409 — Mostly Rescinded

CAS 409 (Depreciation of Tangible Capital Assets) is mostly rescinded, with certain retained provisions transferred into the remaining CAS framework. CAS 409 governed the depreciation of tangible capital assets for cost accounting purposes. The retained provisions address areas where CAS-specific depreciation requirements remain necessary for government contract purposes.

The CAS applies to negotiated federal contracts and subcontracts above specified dollar thresholds. The rule affects:

• Federal prime contractors with CAS-covered contracts (generally contracts above $2 million, with full CAS coverage for contracts above $50 million)
• Federal subcontractors with CAS-covered subcontracts
• Defense contractors and suppliers — the Department of Defense is the largest CAS-covered contracting agency
• Government-facing construction companies with CAS-covered construction contracts
• Engineering and professional services firms with cost-reimbursement government contracts
• Acquisition targets in M&A transactions where the target has significant U.S. government contract revenue

Cost Accounting Manuals and Disclosure Statements

CAS-covered contractors are required to maintain a Cost Accounting Practice Disclosure Statement (Form CASB DS-1 or DS-2) that describes their cost accounting practices. The rescission of CAS 408, CAS 411, and most of CAS 404 and CAS 409 will require contractors to update their Disclosure Statements to reflect the new framework. Disclosure Statement amendments must be submitted to the cognizant Federal agency official (CFAO) and may require government review and approval before implementation.

ERP and Accounting System Updates

Many federal contractors maintain separate accounting system configurations or manual adjustments to comply with CAS requirements that diverge from GAAP. The rescission of CAS 408 and CAS 411 — and the partial rescission of CAS 404 and CAS 409 — will require contractors to review their ERP configurations, cost allocation methodologies, and accounting system documentation to determine what changes are needed to reflect the new framework.

Transition Treatment

The rule's transition provisions govern how contractors move from the old CAS framework to the new one. Transition treatment — including the treatment of costs that were capitalized, depreciated, or accrued under the old CAS rules but will be treated differently under the new framework — requires careful analysis. Contractors should not assume that the transition is simply a matter of switching to GAAP; the retained provisions and transition rules may create specific compliance obligations.

Retained Provisions

The rule does not eliminate all CAS requirements for the affected standards — it transfers "certain retained provisions" into the remaining CAS framework. Contractors must identify which retained provisions apply to their specific cost accounting practices and ensure continued compliance with those provisions even after the rescission of the parent standards.

Contract Modifications

For existing CAS-covered contracts, the change in cost accounting practices resulting from the rule may trigger contract modification requirements under the CAS clause (FAR 52.230-2 or 52.230-3). Contractors should review their existing contracts and consult with their CFAO about the appropriate treatment of the accounting practice change.

For M&A transactions involving federal contractors, the CAS reform has specific diligence implications:

Updated Diligence Checklists

Standard M&A diligence checklists for government contractors include a review of CAS compliance — Disclosure Statements, cost accounting practices, open CAS audits, and potential CAS noncompliance exposure. These checklists should be updated to reflect the new framework: the rescinded standards are no longer compliance risks, but the retained provisions and transition treatment create new areas of focus.

Disclosure Statement Review

Buyers acquiring CAS-covered contractors should confirm that the target's Disclosure Statement has been (or will be) updated to reflect the new framework, and that the target has properly analyzed the transition treatment for affected cost categories.

Open CAS Audits

CAS audits by the Defense Contract Audit Agency (DCAA) or other government auditors that were initiated under the old framework — covering periods before the effective date of the new rule — will continue to apply the old CAS standards to those periods. Buyers should identify any open CAS audits and assess the potential exposure under the old rules.

Earn-Out and Working Capital Adjustments

In transactions with earn-out provisions or working capital adjustments tied to government contract profitability, the change in cost accounting practices may affect the calculation of earn-out metrics or working capital targets. Transaction documents should address how the CAS reform affects these calculations.

Turkish defense and aerospace suppliers. Turkish companies that supply components, materials, or services to U.S. defense prime contractors under subcontracts that flow down CAS requirements should assess whether the rule affects their subcontract compliance obligations. CAS flow-down provisions in subcontracts typically require subcontractors to comply with the same CAS standards as the prime contractor; the rescission of CAS 408 and CAS 411 should reduce compliance burdens for affected subcontractors.

M&A involving U.S. government contractors. Turkish investors or companies evaluating acquisitions of U.S. federal contractors should update their diligence frameworks to reflect the new CAS structure. The transition period — from the effective date through the completion of Disclosure Statement updates and accounting system changes — creates a specific diligence window where compliance status may be in flux.

Engineering and professional services. Turkish engineering firms with U.S. government contract exposure — through joint ventures, teaming arrangements, or direct contracts — should review their cost accounting practices in light of the rule.

ULF New York advises Turkish companies and investors on U.S. government contracts law, federal procurement compliance, and M&A transactions involving government contractors.