Navy Raises CAS Thresholds, Ends CAS 407 to Align with GAAP
The Navy raises CAS applicability thresholds and rescinds CAS 407, adopting GAAP for contractors.
Why it matters: Legal and compliance teams must adjust to higher CAS thresholds and the elimination of CAS 407, affecting contract audit requirements and risk management.
- CAS applicability threshold increases from $2.5 million to $35 million, narrowing affected contracts.
- Full CAS coverage threshold rises from $50 million to $100 million, reducing full CAS compliance obligations.
- CAS 407, which imposed unique government cost accounting, is rescinded to align with GAAP.
- The Department of the Navy directs a transition toward commercial GAAP and existing financial controls for contractor accounting.
On September 1, 2026, the Cost Accounting Standards (CAS) Board announced final rules effective October 1, 2026, marking a significant shift in government contractor accounting oversight. These changes affect contractors working with the Department of the Navy and other defense-related entities.
First, the CAS Board rescinded CAS 407, a standard that required special cost accounting measures for pensions under government contracts. Eliminating CAS 407 aligns contractor accounting practices with Generally Accepted Accounting Principles (GAAP), simplifying compliance and reducing audit complexities.
Second, the Board increased the CAS applicability thresholds substantially. The minimum contract amount subject to any CAS coverage rose from $2.5 million to $35 million, while contracts subject to full CAS coverage must now be valued at $100 million or more, up from $50 million. These higher thresholds reduce the number of contracts and contractors subject to detailed CAS requirements.
Supporting these adjustments, the Department of the Navy issued a memorandum titled "Fostering One Strong Industrial Base" on September 14-15, 2026. The memorandum directed Navy leadership to expand competition and reduce CAS compliance to cases where government-specific standards are demonstrably necessary. It emphasized reliance on commercial GAAP accounting and existing corporate financial controls over government-unique standards.
For legal professionals managing government contracts, these changes mean revisiting contract clauses that incorporate CAS provisions and preparing for increased use of commercial audits. Compliance teams should adjust risk management strategies accordingly, as audit focus shifts away from CAS-specific requirements to more standardized financial controls.
While this regulatory evolution aims to lower compliance burdens and foster a more competitive contracting environment, legal counsels must monitor contract amendments and agency guidance closely during implementation to ensure adherence and mitigate risks associated with the transition.
By the numbers:
- $35 million — new minimum contract value for partial CAS coverage
- $100 million — threshold for full CAS coverage after changes
- October 1, 2026 — effective date of CAS Board final rules
Yes, but: The shift simplifies compliance but may create transitional challenges as contractors and auditors adjust from CAS to GAAP frameworks.
What's next: Legal teams should watch for agency-specific guidance clarifying contract clause updates and audit procedures following these CAS reforms.