“BREAKING DEFENSE “ By Julia Gledhill
“Congress established Cost Accounting Standards to protect taxpayers from misallocated costs or unreasonable expenses in military contracts. Cost Accounting Standards serve an entirely different purpose than Generally Accepted Accounting Principles (GAAP).“
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“Christopher Kubasik — CEO of L3Harris Technologies, Inc. and Chairman of the Aerospace Industries Association — recently published an open letter to the Department of Government Efficiency (DOGE), recommending the elimination of Cost Accounting Standards (CAS) in the name of efficiency. It’s a clever attempt to position a traditional defense contractor as an ally of new thinking, but it comes with a big caveat: Eradicating these standards would only promote more Pentagon waste.
As Kubasik explains, Congress established Cost Accounting Standards to protect taxpayers from misallocated costs or unreasonable expenses in military contracts. This remains true today. CAS are a set of accounting principles used to price certain government contracts — specifically, what are known as “cost-based” contracts. These are contracts that are priced based on the actual or expected cost of performing the work. Without CAS, contractors could essentially charge the government whatever they want — regardless of actual costs incurred.
Kubasik argues that Cost Accounting Standards are duplicative because contractors are already required to comply with Generally Accepted Accounting Principles (GAAP), suggesting that they “replace” CAS. But Cost Accounting Standards serve an entirely different purpose than GAAP.
GAAP provides the basis for financial reporting at the highest level, the 30,000-foot view of a company’s financial performance, including its cash flows and profitability. GAAP are enforced by the Securities and Exchange Commission (SEC) to protect investors — so that they have a full understanding of a company’s financial position, including assets and liabilities. GAAP exists to provide financial information about companies so that investors and creditors can make informed decisions before investing or extending credit to companies.
The SEC does not concern itself with the minutiae of contract costing — or the process through which companies determine how to charge the government on cost-based government contracts. In fact, the government established Cost Accounting Standards in 1970 because the General Accounting Office (now known as the Government Accountability Office, an arm of Congress) concluded that GAAP were inadequate for determining how companies allocate costs to relevant government contracts. This reality has not changed, and Generally Accepted Accounting Principles are inappropriate for companies to use in determining the costs that should be charged to government contracts.
In contrast, Cost Accounting Standards provide contractors with criteria to measure and assign costs to specific contracts. It outlines how to allocate costs between government contracts and non-Federal work — guidance that is still absent from GAAP. Cost Accounting Standards are also the mechanism through which the government recoups funds when contractors do not consistently apply established cost accounting practices, charging the government for unreasonable costs.
The ability to recover taxpayer dollars improperly charged by contractors is vital to effective oversight, without which inefficient spending abounds. Generally Accepted Accounting Principles do not enable the government to recoup such costs.
One need only confer with recent history to understand the importance of Cost Accounting Standards. In 2020 the Defense Contract Management Agency reported over $3.1 billion in CAS compliance issues in active litigation with contractors. That amount did not include informal disputes that had not yet ripened into litigation. Far from pesky red tape, the Cost Accounting Standards enable the government to hold contractors accountable for wasteful spending. So while Pentagon contractors may claim that they find CAS to be burdensome, they provide the government critical insight into the costs of performing a government contract. Without these standards, the government, on behalf of American taxpayers, would not be able to meaningfully challenge contractors when they engage in overcharging.
Efficient spending requires contractor accountability. The Pentagon cannot monitor performance on military contracts without visibility into contractors’ cost expenditures. The government not only uses this cost information for current contracts, but also to price future contracts. Absent the cost information provided by Cost Accounting Standards, the government is at the mercy of contractors to provide accurate and complete contract cost information without accounting gimmicks. There is no doubt that the absence of these standards would result in increased contract costs.
Without Cost Accounting Standards, the Pentagon loses much of its ability to hold contractors accountable for unreasonable expenses borne by the government, increasing military spending in both the short and long-term. Eliminating these standards would be irresponsible, resulting in potentially billions of dollars in wasteful spending at the expense of taxpayers.”
ABOUT THE AUTHOR
Julia Gledhill is a Research Associate for the National Security Reform Program at the Stimson Center. She focuses her research and writing on Pentagon spending, military contracting, and weapon acquisition.
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