DoW’s ‘Fostering One Strong Industrial Base’ Memorandum Moves Contractors From CAS to GAAP

On September 14, 2026, Deputy Secretary of War Steve Feinberg signed a memorandum titled  “Fostering One Strong Industrial Base” (the Memorandum), which directs the Department of War (DoW) to move from government-unique Cost Accounting Standards (CAS) to Generally Accepted Accounting Principles (GAAP) as its accounting baseline, confine CAS coverage to a narrow set of sole-source, cost-based work, and restructure how DoW audits and reviews contractor business systems.

Building on Executive Order 14402 and an August 18, 2026 memorandum regarding supplier transparency considerations, the reforms described in the Memorandum aim to lower barriers to entry and align procurement with commercial practices. With major actions due within 30 to 90 days, contractors should promptly assess the effects on accounting, pricing, systems, and compliance. For prime contractors, subcontractors and new entrants alike, the Memorandum signals a significant change in how DoW will price, audit, and oversee defense work, although many of its directives depend on further agency guidance, class deviations, rulemaking, and CAS Board action.

Key Takeaways

• CAS-to-GAAP Transition. GAAP will become DoW’s accounting baseline, with limited, specific exceptions where CAS will continue to apply.
• Fixed-Price as Default. Fixed-price contracts become standard; cost-based contracts are to be reserved for research and major-system development where no reliable market price exists.
• Business Systems, Audits, and Transparency. Business-system reviews will be consolidated around commercial-aligned criteria, independent CPA certification may replace government review, and audits will be risk-based without rereview of previously audited costs. Supplier requests will follow a price-first approach, use information already maintained, and prohibit automated system access absent contractual authorization.
• Timeline and Next Steps. Most implementing actions are due within 30, 60, or 90 days, with the most significant CAS-related changes requiring action by the CAS Board. Contractors should expect fewer government-unique accounting and business-system requirements alongside continued requests for cost data where market pricing is unavailable.

Background

The Memorandum is the latest step in a series of acquisition reforms. To that end, Executive Order 14402, “Promoting Efficiency, Accountability, and Performance in Federal Contracting,” signed April 30, 2026, directs agencies to use fixed-price contracts, tie profit to performance-based metrics, to the maximum extent consistent with law, and provide written justification for non-fixed-price contract types. Then, on August 18, 2026, the Deputy Secretary issued a memorandum titled “Supplier Cost and Pricing Transparency,” which established new DoW expectations for obtaining cost and pricing information from industry, including at the supplier level. And, most recently, the Memorandum seeks to tie these threads together. It describes the DoW’s goal as to rely on cost data drawn from a company’s existing records rather than invasive oversight if no market exists, while letting the market set price where competition, comparable sales, or reliable price history are available. The Memorandum also states that requesting cost or pricing information does not alone create a cost-reimbursement contract or mandate CAS coverage, and it does not alter the thresholds or exceptions for certified cost or pricing data. The CAS Board has already moved in a similar direction, rescinding several standards it found duplicative of GAAP in a July 8, 2026 final rule and raising CAS thresholds in a final rule that became effective on October 1, 2026.

Key Provisions of the Memorandum

The Memorandum includes a number of consequential provisions:

• The DoW will shift accounting from CAS towards GAAP and propose, within 60 days, changes to the CAS Board that would make CAS exemption the Department’s default process and attach any remaining CAS coverage requirements to specific contracts, not companies.
• The DoW will require commercial product and service determinations to  be completed within 15 business days, with prior determinations standing unless reversed in writing.
• The DoW will expand Other Transaction (OT) cost policy through interim guidance within 45 days and reissue full OT Guide within 120 days, to include terms related to milestone-based payments and streamlined eligibility procedures. Within 90 days, the Department also intends to begin DFARS rulemaking so negotiated profit reflects value, risk, and invested capital rather than cost alone.
• The DoW will consolidate business-system requirements into commercial-based criteria, with independent public accounting firm certification accepted in place of government review. Audits will be risk-based, consider GAAP financial statements first, and seek to avoid re-reviewing previously audited costs or reopening closed years absent indicia of fraud or material misstatement.
• The DoW will shift supplier transparency to a price-first approach and request cost supplier information only as needed in the contractor’s existing format and prohibit automated system access without contractual authorization.
• Finally, the DoW intends to pursue advance market commitments, including aggregated allied demand, to support demand certainty and industrial-base growth.

Implementation Timeline

The memorandum requires rapid implementation, to include the following key deadlines:

• 30 days (approximately October 14, 2026): procedures implementing the August 18 supplier-transparency memorandum, the prohibition on shadow CAS, an efficiency-assurance enforcement statement for fixed-price contracts and other transactions, and a consortium policy for other transactions.
• 45 days (approximately October 29, 2026): commerciality determination guidance and interim other transaction policy.
• 60 days (approximately November 13, 2026): CAS Board proposals, a CAS waiver policy with standing justification templates, risk-based audit direction, and business-system criteria with an accompanying class deviation.
• 90 days (approximately December 13, 2026): business-system consolidation, initiation of the profit-policy rulemaking, annotation of sub-FAR and sub-DFARS requirements with their authority, options for realigning DCAA and DCMA roles, and revision of inconsistent subordinate guidance.
• 120 and 180 days: reissuance of the full OT Guide and additional advance market commitments led by the Defense Innovation Unit.

Practical Implications for Government Contractors

While the Memorandum generally reduces compliance burden, it does not reduce DoW’s interest in seeking accurate cost information. Contractors should expect contracting officers to request cost data in the form already kept in corporate books whenever price, market, and sales data are insufficient.  These actions are consistent with the August 18 memorandum, which confirmed similar efforts at the supplier level.

In addition, DoW’s shift to fixed-price contracting under Executive Order 14402 and the Memorandum also shifts cost and performance risk to the contractor, placing a premium on reliable estimating. The efficiency assurance offers some comfort, since a contractor that is efficient in the performance of a negotiated fixed price is permitted to keep the savings on that contract.  That said, contractors should be advised that the Memorandum expressly preserves remedies for fraud, defective pricing, and CAS price adjustments, each of which remains actionable under controlling statutory law. Contractors may want to consider the following steps:

• Inventory CAS-covered and potentially covered contracts and business units and assess eligibility for the higher thresholds, available exemptions, and the forthcoming waiver policy.
• Evaluate whether GAAP-based records, audited financial statements, and internal-control attestations can support pricing and future business-system certifications.
• Review existing contracts for business-system, earned value management, and property clauses that may be removed through bilateral no-cost modifications and decide whether to request those modifications.
• Prepare for supplier-level cost and pricing requests, including how data will be produced, protected, and limited to the pricing action for which it was requested.
• Strengthen estimating and risk-pricing capabilities ahead of increased fixed-price awards.
• Review subcontracts and teaming agreements to ensure that flowdowns reflect the narrowed requirements and government-provided benefits pass through the supply chain.
• Monitor the implementing guidance, class deviations, CAS Board activity, and the DFARS profit-policy rulemaking and consider engaging with DoW while such guidance is being developed.

Because most of the Memorandum’s directives require further agency action, and the core CAS reforms depend on the CAS Board, the practical effect will turn on the implementing documents DoW issues over the coming months. McGuireWoods will continue to monitor these developments. For questions about the Memorandum or its effect on your contracts, accounting systems, or compliance programs, please contact the authors or another member of the McGuireWoods Government Contracts team.