When Financial Planning Ignores CAS Standards

Summary of Keypoints

• Not being formally CAS-covered does not eliminate CAS-related risk, because early financial planning choices can create cost structures that later become expensive to unwind and can still trigger DCAA scrutiny during proposals, pre-award surveys, and accounting system reviews.
• CAS coverage is described as kicking in through CAS-covered awards thresholds, with full coverage generally tied to $50M in net CAS-covered awards in the prior fiscal year and modified coverage applying when a contractor receives a CAS-covered contract below that threshold.

1. Routine financial planning choices can create “CAS-style” red flags, especially:
2. Using inconsistent cost accounting periods (CAS 406 concepts), which disrupt budgeting, rate calculations, and audit defensibility.
3. Changing allocation bases or using different methods for proposals vs. billing vs. internal planning (CAS 410 concepts), creating inconsistency auditors and evaluators will question.

• Treating similar costs as direct on some contracts and indirect on others (CAS 418 concepts), which undermines rate forecasting and proposal consistency.
• Failing to identify and segregate unallowable costs (FAR 31.205 + CAS 405 concepts), leading to inflated rates and potential repayments after audit adjustments.
• Misaligned cost structures can harm growth before CAS coverage, because DCAA system audits and adequacy reviews look for consistent application of practices; inconsistent pools, bases, periods, and unallowable handling can result in deficiencies, delayed awards, restricted contract types, and cost volume questions or rejection.
• The recommended prevention approach is to embed CAS principles into planning from day one, by documenting cost accounting practices, designing the chart of accounts to support consistent treatment and unallowable segregation, using the same methodologies for planning and actual accounting, and adding regular internal review points to catch inconsistencies before they become audit or proposal problems.

“We’re not CAS-covered yet, so we don’t need to worry about it.”

This is often heard from contractors who are growing fast and building their financial systems on assumptions that will later cost them.

Technically, that is correct. If you have not crossed the CAS coverage thresholds, then you are not legally required to comply with Cost Accounting Standards. However, the financial planning decisions made right now are creating cost structures that will either support or sabotage you when you do become CAS-covered.

Future compliance is a big part of it, but misaligned cost structures create problems long before CAS coverage kicks in. They put you on DCAA’s radar during pre-award surveys and raise questions during proposal evaluations. This misalignment creates inconsistencies that auditors notice even on non-CAS contracts.

Most contractors don’t intentionally ignore CAS principles. They just don’t understand how deeply CAS affects financial planning decisions that seem routine. Understand what this means and what to do about it before it becomes a problem.

Understanding When CAS Actually Applies

Before learning what happens when you ignore CAS, you need to understand when it applies. According to the Cost Accounting Standards Board, CAS coverage is triggered when you receive a single CAS-covered contract or when your net CAS-covered awards in the preceding cost accounting period exceeded specific dollar thresholds.

For most contractors, full CAS coverage kicks in at $50 million in net CAS-covered awards in the prior fiscal year. Modified CAS coverage applies to contractors who receive a single CAS-covered contract but haven’t hit the full coverage threshold.

Even before you’re formally CAS-covered, DCAA expects your cost accounting practices to follow logical, consistent principles. Those principles are essentially the same ones spelled out in CAS. The government wants to see that you are treating similar costs consistently, allocating costs to the appropriate cost objectives, and that your practices are documented and followed.

When your financial planning ignores these principles, you create red flags that show up during audits, proposal evaluations, and accounting system reviews.

The Financial Planning Decisions That Create Problems

Most CAS problems stem from financial planning decisions made without understanding their downstream implications. These decisions seem innocuous when you make them, but they create cost structure misalignments that DCAA will question.

Inconsistent Cost Period Definitions

CAS 406 requires contractors to use consistent cost accounting periods. That sounds simple until you realize what it means in practice. Your fiscal year for financial reporting needs to align with your cost accounting period for indirect rate calculations and your period for accumulating costs by contract.

I’ve worked with contractors who closed their books on a calendar year for tax purposes but calculated indirect rates based on a different 12-month period because “that’s when their biggest contracts started.” Or they’d use one period for overhead rates and a different period for G&A rates.

Innconsistencies, like taxes and indirect rate calculations on different time periods, doesn’t just violate CAS. It makes your financial planning impossible to execute cleanly. You cannot develop meaningful budgets when your cost periods don’t align. Performance cannot be tracked against a plan when you are measuring different time periods for different cost categories. Explaining your rate structures to DCAA doesn’t work when the periods don’t match.

What to do instead: Establish one fiscal year that serves as your cost accounting period for all purposes. Use it consistently for financial reporting, indirect rate calculations, contract cost accumulation, and budget development. Document this in your accounting policies and stick to it.

Shifting Cost Allocation Methodologies

CAS 410 addresses the consistency of cost allocation. The government wants to see that you’re using the same allocation methods period after period, unless you have a valid reason to change and you’ve disclosed that change.

Contractors run into trouble when they change allocation bases without thinking through the CAS implications. Maybe you’ve been allocating overhead based on direct labor dollars, but you decide to switch to direct labor hours because your labor mix is changing. That sounds reasonable, but it’s a change in cost accounting practice that requires disclosure if you are CAS-covered or that will create questions if you become CAS-covered later.

Worse, contractors will use different allocation methods for different purposes. They allocate overhead in one way for proposals, another for actual contract billing, and yet another for internal financial planning. This creates a mess that’s nearly impossible to defend during an audit.

What to do instead: Select allocation methodologies that make sense for your business and use them consistently. Document why you chose each base and what cost objective it serves. If you need to change methodologies, do it deliberately with full documentation of the reason for the change. Build your financial planning around these consistent allocation methods, so your budgets and forecasts align with how you actually account for costs.

Pooling Costs Inconsistently

CAS 418 governs the allocation of direct and indirect costs. One of its key requirements is that costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect costs.

Contractors struggle with this all the time. A project manager’s time is charged directly to one contract because the customer specifically requested that person. Then they will charge a different project manager with similar responsibilities to overhead on another contract because the customer didn’t specifically request them. This inconsistency violates CAS principles and creates financial planning nightmares.

Your budgets become meaningless when you are inconsistently classifying costs. Indirect rate forecasts are wrong because you don’t know which costs will end up in pools and which will be direct-charged. Proposal pricing is inconsistent because you are treating similar costs differently based on customer preference rather than the nature of the cost.

What to do instead: Develop clear criteria for what gets treated as direct versus indirect and apply those criteria consistently. Document these criteria in your cost accounting practices. Train your project managers and accounting team to apply the criteria uniformly. Build your financial plans around this consistent treatment so you can actually project indirect rates and direct costs with confidence.

Ignoring Unallowable Cost Requirements

FAR Part 31 lists unallowable costs that cannot be charged to government contracts. However, CAS 405 goes further and requires that you identify unallowable costs and exclude them from indirect rate calculations.

Contractors who don’t plan for this end up with overinflated indirect rates that include unallowable costs. Then, during an audit, DCAA identifies the unallowable costs, your rates get adjusted downward, and you owe money back to the government.

This is a compliance problem and a financial planning failure. If you have been budgeting and forecasting based on indirect rates that include unallowable costs, your entire financial plan is built on rates that won’t hold up under scrutiny.

What to do instead: Review FAR 31.205 and identify which of your costs are unallowable. Set up your chart of accounts to segregate these costs or create adjustment schedules that identify and exclude them from indirect pools before you calculate rates. Build your financial forecasts using rates that reflect only allowable costs so your projections are realistic and defensible.

How Misaligned Cost Structures Put You on DCAA’s Radar

It is easy to assume that if you are not CAS-covered, DCAA won’t care about these issues. That is incorrect. DCAA reviews cost accounting practices, even for non-CAS-covered contractors, and misaligned cost structures raise red flags that trigger deeper scrutiny.

During Accounting System Audits

When you compete for cost-reimbursement contracts, DCAA may conduct an accounting system review to determine whether your system is adequate for government contracting. According to DCAA guidance, one of the key criteria they evaluate is whether your system produces costs that are “consistently applied.”

If your cost allocation methods are all over the place, if you are treating similar costs differently, or if your cost periods don’t align, DCAA will note these as deficiencies. Even if you’re not technically violating CAS because you aren’t covered, you are demonstrating that your accounting practices aren’t rigorous enough to support government contracts.

That deficiency can delay contract awards, limit your ability to bid on certain contract types, or require you to implement corrective action plans before you can bill costs.

During Pre-Award Surveys

Before awarding a contract, the government may conduct a pre-award survey to assess whether you have adequate financial management systems. Part of that assessment includes reviewing your cost accounting practices.

Evaluators are looking for evidence that you understand how to properly account for government contract costs. If your financial planning reflects inconsistent cost treatment, undefined allocation methodologies, or failure to segregate unallowable costs, you are signaling that your company does not have the financial management sophistication needed for complex government work.

Contractors lose awards not because their technical approach was weak but because their financial systems and practices raised concerns about their ability to properly manage contract costs.

During Proposal Evaluations

When you submit a cost proposal, you are providing indirect rates and supporting calculations. Evaluators compare your proposed rates to your historical actuals, and they look for consistency in the calculation of those rates.

If your allocation methods have changed, your cost periods don’t align, or your rate buildup includes costs that appear unallowable, evaluators will question your proposal. Those questions delay evaluation, trigger requests for additional information, and can result in your proposal being found inadequate.

Even worse, if evaluators can’t determine whether your costs are properly allocated and consistently treated, they may conclude that your proposed costs aren’t realistic. That’s grounds for rejecting your entire cost volume.

The Forward-Looking Problem: Crossing Into CAS Coverage

All of these issues become dramatically worse when it crosses into CAS coverage. If you have been ignoring CAS principles in your financial planning, you are looking at a complete overhaul of your cost accounting practices at exactly the wrong time.

You’ll need to submit a CAS Disclosure Statement describing your cost accounting practices. If your practices are inconsistent or poorly documented, you won’t be able to adequately complete the disclosure.

Additionally, it is necessary to reconcile your disclosed practices with how you have actually been accounting for costs. If there are discrepancies, you need to implement changes to align your actual practices with your disclosure. Those changes may require adjustments to existing contracts if they affect already-negotiated indirect rates.

You will be subject to CAS compliance audits where DCAA will scrutinize whether your practices match your disclosure and whether you’re following CAS requirements. Any noncompliance can result in cost disallowances, contract adjustments, and penalties.

All of this is exponentially harder if your financial planning has been built on practices that ignore CAS principles. This implementation of  new requirements is unwinding years of inconsistent decisions and rebuilding your entire cost structure.

Building CAS Principles Into Financial Planning From Day One

The smart approach is to build CAS principles into your financial planning, whether you are CAS-covered or not. These are logical practices lead to better financial management and more defensible cost structures.

Establish Clear, Documented Cost Accounting Practices

Write down how you account for costs. Define your fiscal year and cost accounting period. Document your allocation bases and why you selected them. Specify your criteria for treating direct versus indirect costs. Describe how you identify and handle unallowable costs.

This documentation serves multiple purposes. It forces you to deliberately think through your practices. It provides guidance to your accounting team so they can apply practices consistently. This gives you a foundation for financial planning because you know how costs will flow through your system.

Design Your Chart of Accounts to Support Consistent Treatment

Your chart of accounts should make it easy to treat similar costs consistently. Group costs logically so that expenses incurred for the same purpose naturally land in the same accounts. Segregate cost pools clearly so you can allocate them using appropriate bases. Flag unallowable costs or create separate accounts for them so they’re easy to identify and exclude.

When your chart of accounts supports consistent treatment, your financial planning becomes more accurate because you can project costs based on clear categories that map to how you will actually charge or allocate those costs.

Use the Same Methodologies for Planning and Accounting

One of the biggest mistakes contractors make is using one set of assumptions for financial planning and a different set for actual accounting. They will budget overhead at 40% based on rough estimates, but then allocate actual overhead using a different calculation methodology.

This disconnect means your financial plans are out of step with reality. When actuals come in differently than planned, you cannot tell whether it’s because performance varied or because your planning methodology did not match your accounting methodology.

Use the same allocation bases, cost pools, and period definitions for both planning and accounting. Your budgets should be built using the exact same structure you will use to accumulate actual costs. This alignment makes variance analysis meaningful and helps you catch problems early.

Build in Review Points Before You’re Required To

Don’t wait for DCAA to tell you there is a problem. Build regular review points into your financial planning process to assess whether your practices remain consistent, logical, and aligned with CAS principles.

Quarterly, review whether you’re treating similar costs consistently across contracts. Annually, evaluate whether your allocation methods still make sense given changes in your business. When planning significant operational changes, assess the cost accounting implications before implementing them.

These proactive reviews let you catch and fix issues before they become audit findings or proposal deficiencies.

The Bottom Line

Ignoring CAS standards in your financial planning puts future compliance at risk. Build cost structures that are defensible, consistent, and aligned with how government contracts actually work.

The contractors who succeed long-term in government contracting are those who embed CAS principles into their financial DNA from the beginning. They are not scrambling to retrofit compliance when they cross coverage thresholds or explaining inconsistent cost treatment during audits. They are not rebuilding proposals because their rate structures don’t hold up under scrutiny.

These contractors have built financial planning processes that naturally produce CAS-compliant results because those processes are grounded in logical, consistent principles.

If you are building your financial plans without considering CAS, you are building on a foundation that will eventually need to be replaced. Better to build it right from the beginning.

Ready to align your financial planning with CAS principles before it becomes a crisis? Let’s talk about what that foundation looks like for your business.