Government Contractor Accounting: What DCAA Checks

Start by killing the phrase, because it does not exist as a certification. The Defense Contract Audit Agency does not approve software, does not issue certificates, and does not maintain a list of blessed vendors. What it does is examine a specific contractor’s specific system against criteria published on Standard Form 1408, the Preaward Survey of Prospective Contractor Accounting System, and against its own preaward accounting system adequacy checklist, and issue an opinion on whether that system is adequate for accumulating costs under a prospective contract. Any vendor telling you their product is DCAA-certified is describing a marketing claim, not a regulatory status.

The criteria on SF 1408 are worth reading in full because they are the whole test. The system has to be in accord with generally accepted accounting principles. It has to provide proper segregation of direct costs from indirect costs. It has to identify and accumulate direct costs by contract. It has to allocate indirect costs to cost objectives on a logical and consistent basis. It has to accumulate costs under general ledger control. It has to include a timekeeping system that identifies employees’ labor by intermediate and final cost objectives, and a labor distribution system that charges direct and indirect labor to the appropriate objectives. It has to allow interim determination of costs charged to a contract through routine posting to the books, at least monthly. It has to exclude costs that are unallowable under FAR Part 31 or other contract provisions. It has to identify costs by contract line item when the contract requires it. And it has to segregate preproduction costs from production costs where that distinction matters.

Ten criteria, all of them ordinary bookkeeping discipline, none of them requiring exotic software. A firm running a mid-market accounting package with a properly built chart of accounts, a real timekeeping application, and a written policy manual can satisfy every one of them.

Now the practical question: does a small firm need this? It depends entirely on contract type. If everything you hold is firm-fixed-price awarded through competitive procedures, nobody is going to examine your indirect rates, because the government is buying an outcome at a price and your cost structure is your problem. The moment you accept a cost-reimbursement contract, a time-and-materials contract, a cost-reimbursable line item inside an otherwise fixed-price award, or a Small Business Innovation Research Phase II with cost-type terms, the analysis flips. FAR 16.301-3 prohibits a contracting officer from awarding a cost-reimbursement contract unless the contractor’s accounting system is adequate for determining costs applicable to the contract. That is where the preaward survey comes from.

Who does what also matters. DCAA audits and recommends. The Defense Contract Management Agency, or the cognizant contracting officer at a civilian agency, makes the determination and approves or disapproves the business system. For Department of Defense work, the Defense Federal Acquisition Regulation Supplement adds a formal Accounting System Administration clause at DFARS 252.242-7006 with eighteen system criteria, and a determination that the system has a significant deficiency can trigger payment withholding, a real percentage of every invoice, held until the deficiency is corrected.

Here is a concrete sequence. A ten-person engineering firm in Brooklyn wins a $2.4 million cost-plus-fixed-fee task order. Before award, DCAA requests a preaward survey. The firm has been running cash-basis books in a starter accounting package, with time tracked in a shared spreadsheet and no charge number structure. The auditor finds three deficiencies: no segregation of unallowable costs, no daily employee time entry, and job cost maintained outside the general ledger with no reconciliation. Award gets delayed four months while the firm converts to accrual, builds a chart of accounts with separate unallowable accounts, deploys a timekeeping tool with daily entry and supervisor approval, and writes a policies and procedures manual. Direct cost of the fix: roughly $28,000 in software, implementation, and CPA time. Cost of the delay: four months of a $2.4 million task order sitting unstarted, plus the two senior engineers who took other jobs while waiting.

What the auditor actually asks for is predictable, and you can assemble it in advance. The request list runs to a trial balance and financial statements, a chart of accounts with the indirect pools and unallowable accounts visible, the written accounting policies and procedures, a sample of timesheets with the approval trail, the timekeeping policy signed by employees, a labor distribution report tying to payroll, a description of the indirect rate structure with pools and bases, and a walkthrough of how a single invoice gets built from the ledger. A firm that can hand over that package in a week is treated very differently from a firm that needs a month.

The common mistake: treating system adequacy as a document you produce for the audit rather than a way you keep books every day. Contractors build a polished policy manual, hand it to the auditor, and then fail the floor check because employees have never seen it. The auditor is going to talk to your staff. If the manual says time is entered daily and the engineer says she does hers on Friday mornings for the whole week, the manual is evidence against you. The second mistake is waiting for the award to start. Preaward surveys arrive with two weeks of notice, and you cannot retroactively create six months of daily timesheets.

The written policies matter more than most owners expect. An adequate system has documented procedures covering timekeeping, labor distribution, the treatment of unallowable costs, the indirect rate structure and allocation bases, billing, and the annual incurred cost submission. Auditors ask for those documents first, then test whether practice matches. A three-page memo that describes what you actually do beats a forty-page template downloaded from a consultant that describes what somebody else does.

Looking ahead, the sensible sequencing for a government contractor moving from fixed-price into cost-type work is to build the system while you are still small, when the conversion costs $25,000 instead of $250,000 and you have four employees to retrain rather than forty. Get the accrual books, the charge number structure, the timekeeping discipline, and the unallowable accounts in place before you bid the first cost-type job. Our guide to cash versus accrual accounting covers the conversion itself. This is general information rather than advice about your contracts; have a licensed CPA review your specific system and clauses before you certify anything to a contracting officer.

An indirect rate is a fraction. The numerator is a pool of costs that benefit more than one contract. The denominator is a base of activity that measures how much each contract benefited. Divide, get a percentage, apply it. Everything difficult about indirect rates is a disagreement about what belongs in the numerator or how to measure the denominator.

The standard three-tier structure for a services contractor works like this. Fringe collects the cost of employing people beyond their base wage: the employer share of FICA, federal and state unemployment, health and dental premiums, disability and life insurance, the retirement plan match, workers compensation, and paid time off. The base is total labor dollars, every hour anybody works, direct and indirect. Overhead collects the cost of producing contract work that cannot be traced to one contract: non-billable project management, engineering supervision, project-specific software and tools, production facility rent, and technical training. The base is direct labor plus the fringe that rides on direct labor. General and administrative collects the cost of running a company: executive compensation, accounting and legal, corporate insurance, corporate rent, allowable business development, and bid and proposal effort. The base is total cost input, meaning every other direct and indirect dollar the business incurred.

Run the arithmetic on a real-sized firm. Direct labor for the year is $2,000,000. Indirect labor is $500,000, so total labor is $2,500,000. The fringe pool is $750,000, producing a fringe rate of 30 percent. Fringe applied to direct labor is $600,000, so the overhead base is $2,600,000. The overhead pool is $780,000, producing a 30 percent overhead rate. Direct materials, subcontracts, travel, and other direct costs total $900,000. The G&A pool is $700,000. Total cost input is direct labor plus applied fringe plus applied overhead plus the other direct costs, build the base per your disclosed practice, and in this simplified version call it $4,280,000. G&A comes out near 16.4 percent.

Now price an hour. A senior analyst earns $60.00 an hour. Add 30 percent fringe: $78.00. Add 30 percent overhead: $101.40. Add 16.4 percent G&A: $118.03. Add an 8 percent fee: $127.47. That multiplier from $60.00 to $127.47 is the wrap rate, roughly 2.12, and it is the number that decides whether you win competitive work. A firm with a 2.6 wrap loses to a firm with a 1.9 wrap on price every time, which is why indirect structure is a strategy question and not just a compliance question.

The base choice for G&A deserves specific attention. Total cost input spreads G&A over everything, including materials and subcontracts. If you win a job that passes through $5,000,000 of hardware, total cost input loads roughly $820,000 of G&A onto that hardware, which you may not be able to price competitively, and which arguably does not reflect the administrative effort of buying one thing once. A value-added base excludes materials and subcontracts, which raises the rate applied to labor but keeps the pass-through clean. Cost Accounting Standard 410, at 48 CFR 9904.410, governs the choice for CAS-covered contractors and requires the base to represent the total activity of the business unit. Non-CAS contractors work under FAR 31.203, which asks only for a base that is a reasonable measure of benefit, applied consistently.

Some contractors add a fourth pool, a material handling or subcontract administration rate, precisely so they can use total cost input for G&A without overloading pass-throughs. Others split overhead between on-site and off-site work, because a contractor working in a client’s facility does not consume its own rent. Both are legitimate. Both require consistent application, and both make your incurred cost submission longer. A related device is the service center: a pool for something like a machine shop or a test lab that is charged out on a measured unit, hours or square feet, rather than spread as overhead. Service centers are clean when the measure is real and indefensible when it is a guess.

Rates run on a two-step cycle. During the year you bill using provisional billing rates established under FAR 42.704. After year end you submit actuals and negotiate final indirect cost rates under FAR 42.705. The difference is settled in cash. Bill all year at a 32 percent overhead rate on $2,000,000 of direct labor, settle at 27 percent, and you have overbilled by roughly $100,000 plus the G&A that rode on it. That money goes back. FAR 42.704 lets either party request a revision when it becomes apparent the provisional rates are materially off, and a contractor who watches its rates monthly and adjusts in July avoids a January refund it cannot fund.

Fringe deserves one New York-specific note. The pool has to carry the employer costs that a New York employer actually bears, the state unemployment insurance rate, the metropolitan commuter transportation mobility tax where it applies, paid family leave premiums, and disability coverage. Those are real dollars, they belong in fringe, and a contractor using a national rule-of-thumb fringe percentage borrowed from a Virginia competitor will underprice its own labor. The New York State tax rules determine the amounts; FAR determines only whether they are allowable, and payroll-related employer taxes generally are under FAR 31.205-41.

The common mistake: pulling unallowable costs out of the pool but forgetting to leave them in the base. Under FAR 31.201-6 and CAS 405, unallowable costs are removed from the indirect pool, but if the activity that generated them received a benefit from the allocation, those dollars stay in the allocation base. Unallowable bid and proposal labor still consumed fringe. Unallowable entertainment still consumed general administration. Contractors who strip the cost from both sides overstate the rate applied to government work, which is exactly the finding an auditor is looking for. The second mistake is treating an owner’s salary as entirely direct when the owner spends half of every week selling, that half belongs in G&A, and mischarging it is the fastest way to fail a labor audit.

Going forward, compute your rates monthly against a budget, not annually against a memory. Set provisional rates you can defend, watch the variance every month, and request a revision when the gap exceeds a few points. Keep the pool definitions written down so that a new controller allocates the same way you did. Our client accounting services team builds and monitors these structures for federal contractors. This page is general information and not advice about your rate structure; have a licensed CPA review the pools, the bases, and the disclosed practices for your specific contracts.

Unallowable does not mean illegal, and it does not mean you cannot spend the money. It means the federal government will not reimburse it and will not let it sit in a pool that gets charged to a contract. A firm can buy season tickets, throw a holiday party, borrow money, and hire a lobbyist. It just has to pay for all of that with its own margin.

The gate is FAR 31.201-2, which lists five conditions a cost must satisfy: reasonableness, allocability, compliance with Cost Accounting Standards or otherwise with generally accepted accounting principles, the terms of the contract, and any limitations in FAR Subpart 31.205. Fail any one and the cost is out.

Reasonableness is defined in FAR 31.201-3 as a cost that does not exceed what would be incurred by a prudent person in the conduct of competitive business. The section adds a detail contractors should read twice: no presumption of reasonableness attaches to a cost simply because the contractor incurred it, and once the contracting officer challenges a specific cost, the burden of proof rests on the contractor. Allocability comes from FAR 31.201-4. A cost is allocable if it is incurred specifically for the contract, benefits both the contract and other work in a proportion that can be measured, or is necessary to overall operations even though a direct relationship cannot be shown.

Then FAR 31.205 works through the named categories. The reliable offenders, in the order auditors find them: entertainment of any kind under 31.205-14, including tickets, club memberships, and social events. Alcoholic beverages under 31.205-51, full stop, including the wine at an otherwise allowable business meal. Interest on borrowings and the cost of raising capital under 31.205-20, which catches the interest on nearly every contractor’s line of credit. Bad debts and the cost of collection under 31.205-3. Contributions and donations under 31.205-8, including the charity golf outing. Fines, penalties, and mischarging costs under 31.205-15. Lobbying and political activity under 31.205-22, along with the travel to do it. Most advertising and public relations under 31.205-1, with narrow carve-outs for recruitment advertising and notices the contract requires. Organization costs under 31.205-27, meaning the legal and banking fees for a merger, a reorganization, or an equity raise. Losses on other contracts under 31.205-23. Federal income taxes under 31.205-41.

Compensation under 31.205-6 is allowable but capped. A statutory ceiling on allowable compensation applies to every employee, adjusted annually and published by the Office of Federal Procurement Policy, and the amount above the ceiling comes out of the pool. Bonuses and incentive compensation are allowable only if paid under an agreement entered into before the services were rendered or under an established plan followed consistently. A discretionary year-end bonus decided in December for work done in March is a familiar disallowance. Travel under 31.205-46 is allowable only up to the per diem rates in the Federal Travel Regulation for domestic travel: book a $600 hotel room in a city with a $258 lodging rate and $342 is unallowable, not the whole night.

The concept that costs contractors the most money is directly associated costs. FAR 31.201-6 says that when an unallowable cost is incurred, its directly associated costs are also unallowable. A directly associated cost being one that would not have been incurred if the unallowable cost had not been incurred. The airfare and hotel for a trip to lobby Congress are unallowable because the lobbying is. The salary of the employee for the hours spent on the lobbying is unallowable. The catering at an unallowable entertainment event is unallowable. Cost Accounting Standard 405 imposes a parallel requirement for CAS-covered contractors and adds that the accounting practices must be able to demonstrate the exclusion. Auditors trace these chains carefully, and contractors almost never do.

Work the numbers on what a finding costs. A contractor’s overhead pool is $1,000,000 against a base of $2,600,000, giving a 38.5 percent rate. Audit removes $80,000, a $22,000 holiday event with directly associated travel, $31,000 of line of credit interest, $9,000 of charitable contributions, and $18,000 of business development labor that turned out to be lobbying. The pool drops to $920,000, the rate drops to 35.4 percent, and the contractor has overbilled roughly $62,000 of overhead across its cost-reimbursement portfolio, plus the G&A applied on top. Now add FAR 42.709. For costs that are expressly unallowable, meaning a cost that a specific provision names as unallowable. The contracting officer may assess a penalty equal to the disallowed amount plus interest. If the same cost was determined unallowable in a prior year and the contractor included it anyway, the penalty doubles. A $62,000 recovery can become a six-figure event, and waiver is available only in narrow circumstances that include having a policy and training in place.

The common mistake: handling unallowables at year end instead of at entry. A contractor who books everything to general accounts and then hands the CPA a list in June has no defensible record and will miss the directly associated costs entirely. The fix is structural: build separate general ledger accounts for each recurring unallowable category, entertainment, interest, contributions, lobbying, penalties, excess compensation, excess travel, and route the transactions there when they post. The accounts still show up in your financial statements. They just never touch a pool. The second mistake is assuming a cost is allowable because it was reasonable and business-related. Reasonableness is one of five tests, and 31.205 overrides it. A perfectly sensible client dinner with wine is still partly unallowable.

Documentation carries the day at the margins. Business meals, conference attendance, professional memberships, and training are all allowable in the right circumstances and unallowable in the wrong ones, and the difference is usually a note in the file describing purpose and attendees. Auditors do not disallow costs they can understand. They disallow costs they cannot. The Selected Area of Cost Guidebook DCAA publishes on the FAR 31.205 cost principles is public, and reading the relevant sections before an audit tells you exactly which questions are coming.

Looking ahead, put an unallowable cost policy in writing, train the people who code invoices, and review the unallowable accounts quarterly rather than annually. A government contractor with a documented policy, segregated accounts, and evidence of training has a real argument for waiver of the FAR 42.709 penalty even when something slips through. Our bookkeeping team sets up these account structures for federal contractors. This page is general information rather than advice about your costs; a licensed CPA should review your specific pool composition before you certify a proposal.

The incurred cost submission is the annual reckoning on cost-reimbursement work. During the year you bill using estimated indirect rates. After the year closes you tell the government what those rates actually were, contract by contract, and the two sides settle up. The formal name in the clause is a final indirect cost rate proposal.

The obligation comes from FAR 52.216-7, the Allowable Cost and Payment clause, which appears in essentially every cost-reimbursement contract and in the cost-reimbursable portions of hybrid awards. The clause requires the contractor to submit an adequate final indirect cost rate proposal, together with supporting data, within six months after the end of its fiscal year. A calendar-year contractor is due June 30. A contractor with a September 30 year end is due March 31. Extensions are possible but have to be requested from and granted by the contracting officer in writing, and a request filed on June 29 is not a plan.

What you submit is a package of linked schedules. DCAA publishes a model workbook, the Incurred Cost Electronically model, and while contractors are not required to use it, submitting in a format the auditor does not recognize invites an adequacy question you do not need. The schedules do the following work. Schedule A summarizes the overhead pool and computes the claimed overhead rate. Schedule B does the same for G&A. Schedule C handles fringe. Schedule D presents all claimed rates together. Schedule E details the allocation bases. Schedule H is the heart of it, listing direct costs by contract with indirect burden applied at claimed rates. Schedule I is the cumulative allowable cost worksheet, comparing cumulative billings on each contract to cumulative allowable cost, which tells everyone whether the contractor owes money or is owed money. Schedule J lists subcontracts. Schedule K reconciles claimed labor to the payroll tax returns. Schedule L reconciles total claimed cost to the general ledger and the income tax return. The remaining schedules cover unallowable cost accounts, executive compensation for the top five, and contract closing information.

Adequacy is a threshold question, not a quality judgment. DCAA runs a published incurred cost submission adequacy checklist, and a submission missing a required schedule, missing the certificate of final indirect costs, or missing reconciliation to the books is returned as inadequate, which means, legally, that no proposal was submitted. The consequences follow from FAR 42.703-2 and FAR 42.705: the contracting officer can unilaterally establish final indirect cost rates, and unilateral rates are set conservatively. A contractor who was going to recover a 31 percent overhead rate may find the contracting officer decrementing it to 26 percent on the theory that unverified costs are not allowable costs.

Here is a settlement in numbers. A firm bills three cost-plus-fixed-fee contracts during the year using provisional rates of 28 percent fringe, 32 percent overhead, and 15 percent G&A. Direct labor across the three is $1,800,000, and total billings including fee are $4,600,000. Year-end actuals come in at 29 percent fringe, 27 percent overhead, and 16 percent G&A, headcount grew, so labor spread the overhead pool further. Schedule I shows cumulative allowable cost of $4,455,000 against cumulative billings of $4,600,000. The firm owes $145,000. It is October when the audit concludes, the money was spent in the prior year, and the tax on it was paid. This is the single most common cash crisis in a growing government contractor, and it is entirely predictable from monthly rate monitoring.

After the audit, final rates are negotiated and recorded in a rate agreement under FAR 42.705. The rates then apply to every contract of that fiscal year, final invoices go out, and contracts close. Closeout has its own timelines, and unclosed contracts from six years ago are a common finding in due diligence when a contractor is sold. The Contract Disputes Act carries a six-year limitations period for claims by either party, running from accrual, so an unresolved year is a live exposure for a long time.

The common mistake: filing late, or filing something incomplete to stop the clock. Late submissions are tracked, and a contractor with a pattern of them loses the benefit of the doubt on everything else. The second mistake is preparing the submission from scratch in June from a year-old general ledger. If your unallowable accounts, job cost detail, and labor distribution are maintained monthly, the incurred cost submission is an afternoon of assembling schedules. If they are not, it is six weeks of forensic reconstruction and the reconciliation to the tax return never quite works. The third is forgetting subcontractor rates: a prime cannot close out a contract until the subcontractors’ rates are settled, so a prime that never asked its subs for their submissions will be holding open contracts for years.

Two smaller points that save real money. First, an incurred cost submission is a claim about your costs, so the numbers have to tie to something filed elsewhere. Auditors reconcile claimed labor to the quarterly Form 941 filings and reconcile total claimed cost to the corporate return. Differences are fine; unexplained differences are not. Second, if actual rates came in higher than provisional, you are owed money, contractors routinely leave that on the table because nobody runs Schedule I in the direction that favors them.

There is also a sampling reality worth knowing. Not every submission gets a full audit. Low-dollar years may be closed on a memorandum basis without an audit at all, and larger ones are sampled. That is not a reason to be casual, because the years selected for audit are frequently the ones where something in the data looked unusual, a rate that jumped, a new pool, a large related-party transaction, a spike in consultant cost. Consistency across years buys you a quieter file.

Going forward, calendar the due date the day the fiscal year ends, close the books within sixty days, and prepare the submission in the following month while the year is fresh. Monitor provisional rates monthly so the settlement is a rounding difference instead of a payable. Our corporate return work ties the submission to the filed return so the reconciliation schedule is not an argument. This page is general information and not advice about your submission; have a licensed CPA review your schedules and your certificate before you sign it.

Cost Accounting Standards are a second layer of rules that sit on top of FAR Part 31 for contractors above certain dollar thresholds. FAR Part 31 tells you whether a cost is allowable. CAS tells you how you must measure, assign, and allocate it, and, critically, requires you to keep doing it the same way. The standards live at 48 CFR Chapter 99, and FAR Part 30 handles how contracting officers administer them.

There are nineteen standards, numbered from 401 to 420 with one number unassigned. They cover consistency in estimating and reporting, allocation of costs incurred for the same purpose, allocation of home office expenses, capitalization of tangible assets, accounting for unallowable costs, the cost accounting period, depreciation, compensated personal absence, direct and indirect labor cost accounting, G&A allocation, material cost, composition and measurement of pension cost, deferred compensation, insurance cost, and the cost of money.

The applicability rules in 48 CFR 9903.201-1 are all dollar thresholds and exemptions. CAS reaches negotiated contracts and subcontracts above the truthful cost or pricing data threshold, currently $2 million. Then a long list of exemptions pulls most work back out. Sealed bid contracts are exempt. Contracts with small businesses are exempt, whatever the dollar value. Firm-fixed-price contracts and subcontracts for commercial products and commercial services are exempt. Contracts with foreign governments are exempt. Contracts where the price is set by law or regulation are exempt. And the exemption most emerging contractors rely on: contracts and subcontracts of less than $7.5 million, provided that at the time of award the business unit is not currently performing any CAS-covered contract or subcontract of $7.5 million or greater.

That $7.5 million trigger works like a ratchet. Take one CAS-covered award at or above $7.5 million and the exemption for smaller awards disappears while you are performing it, so the next $3 million cost-type contract comes in CAS-covered too. Contractors approaching the threshold should model the compliance cost before they bid, because the answer sometimes changes the bid. Note also that losing small business status has the same effect from a different direction, a firm that outgrows its size standard loses the small business exemption on new awards, and the CAS analysis begins.

Coverage comes in two grades. Modified coverage, under 48 CFR 9903.201-2, applies to a CAS-covered contract of less than $50 million awarded to a business unit that received less than $50 million in net CAS-covered awards in its immediately preceding cost accounting period. Modified coverage requires four standards: CAS 401, consistency in estimating, accumulating, and reporting costs; CAS 402, consistency in allocating costs incurred for the same purpose; CAS 405, accounting for unallowable costs; and CAS 406, cost accounting period. Full coverage applies when a business unit receives a single CAS-covered award of $50 million or more, or received $50 million or more in net CAS-covered awards during its preceding cost accounting period. Full coverage means all nineteen standards.

Full coverage also brings the Disclosure Statement. Form CASB DS-1 is a written description of the contractor’s cost accounting practices, how it classifies direct and indirect costs, what goes in each pool, what base each pool is allocated over, how it depreciates, how it accounts for compensated absences. Once filed and found adequate, the disclosed practices bind you. This is the real weight of CAS. Not the standards themselves, which mostly codify sensible accounting, but the requirement that you keep doing what you said you do.

Changing a disclosed practice triggers a cost impact analysis under FAR Subpart 30.6. The contractor computes the effect of the change on every affected CAS-covered contract, and if the change increases the cost to the government in the aggregate, the government is entitled to an adjustment. Consider a contractor that decides to move G&A from a total cost input base to a value-added base because it has started winning hardware-heavy work. The change is defensible and may well produce better cost measurement. It is also a change in cost accounting practice. Suppose the portfolio holds twelve CAS-covered contracts, and the recomputation shows that eight of them cost the government $310,000 more under the new base while four cost $195,000 less. Aggregate increased cost is $115,000, and the contracting officer is entitled to recover it. A required change, one mandated by a new standard, is treated differently from a unilateral one, and unilateral changes get the least favorable treatment.

CAS 405 deserves a note because it applies at both coverage levels and overlaps FAR 31.201-6. It requires that unallowable costs be identified and excluded from any billing, claim, or proposal, that directly associated costs be identified when the unallowable cost is included in an allocation base, and that the contractor’s accounting practices be able to demonstrate the exclusion. That last clause is what turns unallowable cost handling from a spreadsheet exercise into a chart of accounts design question.

The common mistake: drifting away from disclosed practices without noticing. A new controller reclassifies a category of labor from overhead to G&A because it makes more sense to them. Nobody files anything. Three years later an auditor compares practice to the Disclosure Statement and finds a noncompliance covering three years of contracts, with a cost impact computed across the entire portfolio. The second mistake is the opposite failure. A contractor who knows it is CAS-covered, is afraid to change anything, and keeps an obviously wrong allocation base for a decade because changing it feels risky. Changes are permitted. They just have to be disclosed, analyzed, and settled.

One more practical point for a growing government contractor: CAS applicability attaches at the business unit level, not the enterprise level. A contractor with distinct segments can, with real substance behind it, keep CAS-covered work in one unit and commercial work in another. Doing that for appearances rather than for operational reasons is a bad idea, and home office expense allocation under CAS 403 exists precisely to keep companies from parking corporate cost in an uncovered segment.

Going forward, track your net CAS-covered awards by cost accounting period the way you track revenue, so the $7.5 million and $50 million lines never arrive as a surprise. If you are approaching full coverage, start the Disclosure Statement early. It takes months and it forces you to write down practices most companies have never articulated. Our tax strategy guides cover the planning side of entity and segment structure. This page is general information and not compliance advice for your contracts; a licensed CPA and government contracts counsel should review your CAS status and any practice change before you make it.