Deputy Secretary of Defense Stephen Feinberg’s Sept. 15 memo directs the Pentagon to accept commercial accounting practices across contracts as far as the law allows, while narrowing the reach of a previous effort that had unsettled defense companies. The memorandum, titled “Fostering One Strong Industrial Base,” promotes Generally Accepted Accounting Principles, or GAAP, as an alternative to the government’s Cost Accounting Standards, or CAS. Breaking Defense reported that analysts viewed the change as both an acquisition reform measure and a correction to the Pentagon’s Aug. 18 position.
“We will accept GAAP-based accounting across all contracts to the maximum extent the law permits,” Feinberg wrote in the memo. He framed the policy as part of an effort to modernize contract cost and pricing rules while asking companies to provide cost and pricing information they already maintain when the department requests it. The memo therefore pairs a less government-specific accounting framework with continued demands for information about contract costs.
The adjustment follows concern that the August memo could extend traditional compliance oversight to commercial and non-traditional companies. Those firms have generally been less accustomed to the accounting requirements associated with CAS-covered defense work. Jerry McGinn, director of the Center for the Industrial Base at the Center for Strategic and International Studies and a former senior defense acquisition official, said the earlier memo was poorly received because its meaning was unclear. The new document, in his assessment, connects the policy to the Pentagon’s industrial-base strategy and presents implementation as a process.
Bill Greenwalt of the American Enterprise Institute said the earlier approach risked applying traditional compliance requirements to companies that had not operated under them. He argued that the consequences could have been significant for firms seeking to challenge established defense-industry practices, including the possibility that some would leave the market. Greenwalt characterized the new memo as an effort to limit the damage from the earlier policy, although the Pentagon continues to defend that order as necessary to ensure fair treatment across the industrial base.
CAS currently creates a divided system for companies selling to the Defense Department. Major defense contractors typically encounter the standards through CAS-covered contracts, while many non-traditional companies do not. McGinn estimated that roughly 7 percent of companies doing business with the Pentagon are CAS-compliant, but said those firms accounted for approximately $300 billion to $400 billion in obligations last year. That group covers major programs including aircraft carriers, submarines and fighter aircraft, according to the Breaking Defense account.
The new policy does not immediately eliminate CAS. The Pentagon remains legally required to apply the standards to sole-source development programs until it can work through the government-wide CAS Board to change the rules. In the interim, the department plans to use existing authorities to limit CAS for commercial companies and new entrants. The stated approach would apply CAS at the program level rather than broadly at the company level, potentially allowing a contractor to face different accounting requirements depending on the work it performs.
That shift raises operational and corporate questions. Alek Jovovic of CSIS said companies and policymakers will need to determine the business effects of moving from CAS-compliant companies to CAS-compliant programs. Greenwalt described the proposal as potentially allowing traditional defense firms to become non-traditional for some purposes, depending on the contracts they pursue. Companies and the CAS Board would then need to work through how a transition from CAS to GAAP accounting could occur, he said.
The implementation issue is particularly important for newer programs built around lower-cost production, including the Family of Affordable Mass Munitions and low-cost interceptors, McGinn said. Roman Schweizer of TD Cowen wrote that the new memo appeared less focused on imposing additional oversight than on removing barriers that discourage companies from working with the Pentagon. The Aerospace Industries Association said it supported streamlining business-system requirements and continuing the move toward GAAP, but warned that extensive cost and pricing requests could still undermine efforts to attract companies, investment and innovation.
Schweizer said Congress and industry would likely seek input into how the changes are implemented and did not view the document as the final word. McGinn described it as part of a continuing Pentagon reform effort rather than a standalone transformation.