“We will accept GAAP-based accounting across all contracts to the maximum extent the law permits,” Deputy Secretary of Defense Stephen Feinberg wrote in a memo released Tuesday, signaling a move away from the government’s long-standing Cost Accounting Standards toward commercial accounting practices.
Deputy Secretary Stephen Feinberg’s memorandum and its aim
The memo, titled “Fostering One Strong Industrial Base,” frames the change as part of an effort to “completely transform and modernize our contract cost and pricing ruleset.” Feinberg told industry the Department will “open its buying to market forces,” and — when asked — expects that “industry shares the cost and pricing information it already keeps.” He also defended a prior August 18 order as “essential to ensure companies at every tier are treated fairly.”
Cost Accounting Standards (CAS) versus Generally Accepted Accounting Principles (GAAP)
The central technical shift Feinberg proposes is moving away from CAS and toward GAAP wherever “the law permits.” CAS has been the government’s default for many defense contracts and is designed to enable audit and oversight of government-specific cost allocations, particularly on sole-source development work. The memo acknowledges legal limits: by statute, the department must continue to apply CAS to sole-source development programs until the government-wide CAS Board changes the standards to permit GAAP.
Practically, DoD officials plan to use existing authorities to limit CAS applicability for commercial and new entrants, applying CAS on a program-by-program basis and restricting it on a company-by-company basis where possible. How that transition will be implemented is a recurring question among analysts quoted in the memo’s coverage.
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Get a security leadWho is affected today: the 7 percent and the $300–$400 billion
Analysts note a bifurcated reality: only about 7 percent of firms that do business with the Pentagon are CAS-compliant, but those firms accounted for roughly $300–$400 billion in obligations last year because they perform the large, traditional programs — carriers, submarines, fighter jets and similar work. That imbalance is a core reason leadership wants to streamline the rules; shifting applicability from companies to programs could change which firms face CAS obligations and how they organize internally.
Industry and investor reaction: cautious welcome, persistent concerns
Initial industry responses are mixed but largely cautious. The Aerospace Industries Association, through Eric Fanning, said “many of the reforms outlined in this memorandum, including streamlining business systems requirements and continuing the shift from Cost Accounting Standards toward Generally Accepted Accounting Principles, reflect priorities AIA has long supported and helped advance.” At the same time, Fanning warned that “continued demands for extensive cost and pricing data, could undermine the Department’s broader objective of attracting more companies, capital, and innovation into the defense industrial base.”
From the investment side, Roman Schweizer of TD Cowen wrote that where August’s memo focused on pricing transparency, the new memo “seems less about imposing new oversight & more about removing barriers that discourage companies from doing business” with DoD — but he cautioned that “there could still be some potential negatives” in implementation and that “Congress and industry will want input into how the changes are enacted.”
Analysts: a correction after apparent overreach
Several analysts described the new memo as a corrective to an August missive that alarmed commercial and non‑traditional firms. Jerry McGinn of the Center for the Industrial Base at CSIS said the August guidance “was received very poorly, and I think no one really understood what they meant,” and characterized the new memo as tying the effort back to industrial base strategy and articulating a process. Bill Greenwalt of the American Enterprise Institute argued the first memo applied “traditional compliance oversight to everyone including commercial and non‑traditional companies” and “would have had serious ramifications” for disruptive firms. He concluded, “It looks like they may have realized they overreached with the first memo.”
Alek Jovovic of CSIS highlighted the unanswered operational questions: “What are the business implications of transitioning from CAS compliant companies to CAS compliant programs? What impact does that have on companies?”
What this means for major defense firms, non-traditional firms, and the CAS Board
- Major defense firms: The approximately 7 percent of firms that are CAS-compliant today — and that accounted for roughly $300–$400 billion in obligations last year — will watch whether program-by-program application changes their compliance footprint and internal cost systems.
- Non-traditional and commercial entrants: Those firms that balked at the August memo’s transparency demands may see the new language as an opening, but Eric Fanning’s warning about “continued demands for extensive cost and pricing data” signals lingering friction over proprietary financial information.
- The government-wide CAS Board and Congress: By law the CAS Board must be involved to convert standards to GAAP for sole-source development programs, and Roman Schweizer expects both Congress and industry will seek input on how the changes are enacted.
The Feinberg memo reads as a strategic pivot: it reins in a more aggressive oversight posture expressed in mid‑August while keeping the department’s stated objective of a single, more market-friendly acquisition baseline. Implementation — from the CAS Board’s actions to company-level restructuring and exactly what cost and pricing information DoD will continue to request — remains the practical test. As Jerry McGinn put it, the effort “is very much in line with the administration’s priorities, but it’s a journey.”
