FAR & CAS Compliance Is the Backbone of Your Financial Strategy

Most contractors treat FAR21 and CAS like terms and conditions nobody reads. They know these regulations exist in the background, and they assume their accountant handles it.

Then the audit notice arrives, or a contracting officer questions their indirect rates. Maybe they discover that the costs they have been billing for months are unallowable under FAR Part 31, and now they are facing a six-figure payback.

That’s when FAR and CAS compliance suddenly become very real, very fast.

Every contractor scaling beyond their first few contracts must understand that compliance with the Federal Acquisition Regulation and Cost Accounting Standards is not a legal requirement you check off and forget. It’s the foundation of every financial decision you make in government contracting.

If your business strategy does not account for FAR and CAS from the beginning, you are building on sand.

What FAR and CAS Actually Control (Spoiler: Everything)

The Federal Acquisition Regulation governs how the federal government buys goods and services. It establishes the rules for allowable costs, contract types, proposal requirements, and audit standards. According to FAR Part 31, every cost you charge to a government contract must be reasonable, allocable, and allowable.

That’s not accounting jargon. That’s the framework that determines whether you get paid.

Cost Accounting Standards take it further. CAS establishes specific requirements for measuring, assigning, and allocating costs to government contracts. Once you cross certain contract thresholds, you become CAS-covered, which means your cost accounting practices must meet these heightened standards consistently.

Per the Cost Accounting Standards Board guidance, CAS exists to achieve uniformity and consistency in measuring, assigning, and allocating costs to contracts. The government wants to ensure that contractors do not shift costs between contracts or time periods to inflate what they pay.

FAR and CAS control how you structure your accounting system, how you develop indirect rates, what costs you can recover, how you price proposals, when and how you bill, and what documentation you need to defend your costs during audits.

If you think that sounds like everything, you are right. That’s the point.

Why Contractors Treat Compliance Like an Afterthought

I have worked with enough contractors to recognize the pattern. You win your first few contracts, and compliance seems straightforward. You are tracking costs, submitting invoices, and getting paid. Everything feels fine.

Then your contract portfolio grows. You add cost-plus work and cross the threshold for CAS coverage without realizing it. Your indirect rate structure that worked fine at $2 million in revenue starts creating problems at $10 million.

The systems you built to get started are not adequate for where you are headed. However, by the time you realize that, you have got contracts in performance, proposals in the pipeline, and an audit on the horizon.

This keeps happening because:

Compliance feels reactive. Most contractors do not think about FAR and CAS compliance until someone asks them to prove their costs are compliant. It’s too late to fix structural issues without significant disruption by then.

The language is intimidating. FAR and CAS are written in regulatory language that does not translate easily to everyday business operations. Contractors assume their accountant understands it, but general accounting or advisory services often do not have government contracting expertise.

There’s no obvious immediate payoff. Investing in compliant accounting systems costs money now for benefits that only become obvious when you avoid problems later. That’s a tough sell when cash is tight and you are focused on winning the next contract.

Nobody explains how compliance enables strategy. Contractors see FAR and CAS as restrictions on what they cannot do, not as the framework for what they should do to maximize profitability and competitiveness.

In reality, the contractors who treat compliance as strategy from day one are the ones who scale successfully. The ones who treat it as paperwork are the ones who hit walls they could have avoided.

How FAR and CAS Compliance Shape Every Financial Decision You Make

Once you understand that FAR and CAS are not just audit requirements but the rules of the game, you start seeing how they influence everything.

Your Chart of Accounts Becomes Your Contract Foundation

Your chart of accounts is the structure that determines how costs flow from your general ledger to your contracts, how you calculate indirect rates, and how you support proposal pricing.

According to DCAA guidance, your accounting system must be able to segregate direct costs by contract, accumulate costs in logical indirect pools, and maintain documentation that supports cost transfers and allocations.

If your chart of accounts does not align with FAR Part 31 cost categories, you are creating compliance problems before you even submit a proposal. You will struggle to separate allowable from unallowable costs, your indirect rate calculations will not hold up under scrutiny, and you will have difficulty demonstrating that costs are properly allocable.

Setting up your accounting system with FAR and CAS principles from the beginning means every transaction is captured in a way that supports both compliance and strategic decision-making.

Your Indirect Rate Structure Determines Competitiveness

Your indirect rates are how you recover overhead, G&A, fringe, and other costs that are not directly chargeable to contracts. These rates are built from cost pools and allocation bases that must comply with CAS requirements for consistency and allocation.

If you are CAS-covered, your allocation methods cannot change arbitrarily. Per CAS 410, you must use the same cost accounting period for all contracts, and changes to your established practices require disclosure and sometimes approval.

That consistency requirement is not just red tape. It forces you to develop rate structures that are logical, defensible, and predictable. When your rates are built on compliant foundations, they become strategic tools for pricing proposals competitively while ensuring cost recovery.

I have seen contractors whose indirect rates were all over the place because they did not understand allocation requirements. They’d use one methodology for one contract type and a different approach for another. When DCAA showed up, they could not explain the inconsistency, and their rates were questioned across their entire contract portfolio.

Your Pricing Strategy Depends on Allowable Cost Rules

Not all business costs are allowable under government contracts. FAR 31.205 lists dozens of cost categories with specific allowability limitations. Entertainment costs, certain advertising expenses, some legal fees, penalties, and fines are generally unallowable.

You are overcharging the government if your indirect cost pools include unallowable costs and you do not identify and exclude them before calculating rates. That creates audit risk and competitive disadvantage.

The contractors who understand allowable cost rules build their business operations to minimize unallowable costs from the start. They structure executive compensation within allowable limits, they segregate IR&D spending appropriately, and they know which costs can be recovered and which cannot.

That knowledge shapes everything from facility decisions to how they structure business development activities. Compliance becomes a strategic advantage.

Your Contract Performance Depends on Compliant Billing

When you bill a cost-reimbursement contract, you certify that the costs are allowable, allocable, and reasonable. If DCAA audits those costs and finds problems, you may have to return money you have already spent.

The Defense Contract Audit Agency uses specific checklists and adequacy criteria to evaluate contractor billing. Your labor costs are questioned if your timekeeping system does not meet DCAA standards. If you cannot support indirect rate calculations, your burden is questioned. If your cost transfers are not properly documented, everything is questioned.

Building systems that support compliant billing from day one means you can bill with confidence, minimize the risk of cost disallowance, and avoid the cash flow nightmares that come from having to repay questioned costs.

The Cost of Getting It Wrong

I have watched contractors lose contracts, face significant financial penalties, and damage their reputation because they did not take FAR and CAS compliance seriously until it was too late.

One client had their billing suspended because DCAA found their accounting system inadequate. They could not bill any costs until they implemented corrective actions, which took months. The cash flow impact nearly put them out of business.

Another contractor discovered during an incurred cost audit that they’d been billing costs that were unallowable under FAR Part 31. The government demanded repayment of more than $300,000 in questioned costs, plus they had to resubmit multiple years of incurred cost submissions with corrected rates.

A third company lost a major recompete because its forward pricing rates could not be supported with adequate cost data. The contracting officer did not trust their numbers, and they lost to a competitor with more transparent, better-documented rate structures.

These are not edge cases. This happens when contractors treat compliance as an afterthought instead of a strategic imperative.

Building Compliance Into Your Financial Strategy

The contractors who succeed in government contracting long-term are the ones who build FAR and CAS compliance into their financial DNA from the beginning.

Start with the right accounting system. Not QuickBooks set up by your cousin, who does bookkeeping. A government contract accounting system designed to meet DCAA adequacy standards, segregate costs properly, and generate the reports you need for proposals and audits.

Develop indirect rate structures that comply with CAS. Even if you are not CAS-covered yet, following CAS principles for consistency and allocation creates rate structures that scale as you grow. You will not have to rebuild everything when you cross the coverage threshold.

Implement timekeeping and cost tracking systems that meet DCAA standards. Your labor costs are usually your largest cost category. If your timekeeping does not hold up under audit, your entire cost structure is at risk.

Understand allowable cost rules and structure operations accordingly. Know what you can recover and what you cannot. Make business decisions with that knowledge rather than discovering allowability issues during an audit.

Maintain documentation proactively. The contractor who can produce supporting documentation quickly during an audit or proposal evaluation is the contractor who wins. Documentation is not something you create when asked. It’s something you maintain as part of normal operations.

Work with a Government Contracts Accountant who understands FAR and CAS. General accountants can handle taxes and financial statements, but government contract compliance requires specialized expertise. The investment in the right advisor often pays for itself by avoiding problems and optimizing your approach.

FAR and CAS Are the Foundation of GovCon 

FAR and CAS are the frameworks within which successful government contractors operate. The regulations seem restrictive if you are trying to force a commercial business model into a government contracting environment without adaptation.

Something interesting happens when you build compliance into your financial strategy from the beginning. The restrictions become guardrails that keep you focused on sustainable, profitable growth. The documentation requirements become the proof points that support competitive proposals. The cost accounting rules become the foundation for rates that win contracts and protect margins.

You stop seeing compliance as a burden and start seeing it as a competitive advantage.

Ready to build FAR and CAS compliance into your financial strategy before it becomes a crisis? Let’s talk about what that foundation looks like for your business.