What’s in This Article:
What the New DCAA Guidance Means for Your Accounting
What Is a Nontraditional Defense Contractor?
How Are Nontraditional Defense Contractors Different From Traditional Contractors?
What Does Accounting Look Like for a Nontraditional Defense Contractor?
Does DCAA Still Audit Nontraditional Defense Contractors?
What About Cost-Reimbursement Contracts?
How the New CAS Thresholds Affect NDC Eligibility
Financial Controls NDCs Should Still Maintain
A Different Approach to Defense Contract Accounting
What the New DCAA Guidance Means for Your Accounting
Defense contracting has traditionally come with a hefty set of accounting and compliance requirements. For startups, technology companies, engineering firms, and other commercial businesses, those requirements can make pursuing Department of Defense (DoD) contracts seem more complicated than the work itself.
Recent legislation may change that.
Section 1826 of the FY2026 National Defense Authorization Act (NDAA) exempts qualifying nontraditional defense contractors (NDCs) from several government contracting requirements, including certain accounting, pricing, and business-system rules.
On October 6, 2026, the Defense Contract Audit Agency (DCAA) issued Audit Alert 26-CCLD-010(R), addressing how auditors should handle those exemptions.
The changes could make DoD contracting more accessible to commercial businesses. But they also raise important questions: Who qualifies? What accounting requirements still apply? And does a company need specialized government accounting software to compete?
What Is a Nontraditional Defense Contractor?
Despite the name, a nontraditional defense contractor doesn’t have to be a startup or a company pursuing its first government contract.
Under 10 U.S.C. § 3014, an NDC is an entity that is not currently performing, and has not performed during the one-year period preceding the DoD solicitation, a DoD contract or subcontract subject to full Cost Accounting Standards (CAS) coverage.
That distinction is important. A company may already have government contracts and still qualify as nontraditional.
For example, a technology company that has performed fixed-price DoD contracts exempt from CAS may qualify. So might an engineering firm whose previous government work was subject only to modified CAS coverage.
Small businesses frequently qualify because contracts and subcontracts with small business concerns are generally exempt from CAS. However, small-business status and NDC eligibility are separate legal classifications.
The deciding factor is the company’s applicable DoD contracting history, not simply its age, revenue, or number of government customers.
How Are Nontraditional Defense Contractors Different From Traditional Contractors?
Traditional defense contractors may have to comply with extensive government-specific accounting, pricing, and business-system requirements, depending on their contracts.
These can include formal accounting-system criteria, cost estimating requirements, purchasing-system reviews, and detailed rules governing how contract costs are accumulated and reported.
Section 1826 changes that framework for qualifying NDCs.
The legislation provides exemptions from ten specific requirements:
- Accounting System Administration — DFARS 252.242-7006
- Earned Value Management System — DFARS 252.234-7002
- Cost Estimating System Requirements — DFARS 252.215-7002
- Material Management and Accounting System — DFARS 252.242-7004
- Contractor Property Management System Administration — DFARS 252.245-7003
- Contractor Purchasing System Administration — DFARS 252.244-7001
- Contractor Business Systems — DFARS 252.242-7005
- Special Cost or Pricing Requirements — DFARS 215.407
- Certified Cost or Pricing Data Requirements — 10 U.S.C. § 3702
- Contract Cost Principles and Procedures — FAR Part 31
These are statutory exemptions, not proposed regulatory changes.
However, they are not blanket exemptions from all government contracting requirements. They apply to qualifying NDC products and services under DoD contracts, subcontracts, and agreements. Other laws, civilian agency requirements, and applicable contractual obligations may still apply.
The legislation also permits the relevant contracting authority to waive or modify exemptions or apply individual requirements through an approved written determination.
Contractors should therefore examine their solicitation and contract terms rather than assume every exemption applies without qualification.
What Does Accounting Look Like for a Nontraditional Defense Contractor?
For finance leaders, the most practical question is whether the company needs to replace its existing accounting system with specialized government contracting software.
In many cases, it may not.
A company performing straightforward fixed-price work may be able to continue using its commercial accounting system, provided it can satisfy the contract’s financial and reporting requirements.
The accounting needs may be different for cost-reimbursement contracts or projects requiring detailed labor and cost reporting.
Regardless of the accounting software used, an NDC should generally be able to:
- Track revenue and expenses by contract or project when necessary
- Maintain reliable employee time and labor-cost records
- Identify direct project costs and shared operating expenses
- Support proposal pricing with reasonable assumptions
- Reconcile project costs to the general ledger
- Retain payroll, purchasing, vendor, and billing documentation
- Produce accurate financial information for management and government reviews
Consider an engineering company using its existing accounting software to manage commercial projects.
If it wins a fixed-price DoD contract, it may only need to expand its project tracking and reporting capabilities. Purchasing an entirely new accounting platform could be unnecessary.
On the other hand, if that company pursues cost-reimbursement work, it may need more detailed job costing, indirect-cost allocations, and labor reporting.
The accounting system should meet the contract’s requirements without adding unnecessary complexity.
Does DCAA Still Audit Nontraditional Defense Contractors?
Yes. Being classified as nontraditional does not eliminate DCAA oversight.
The October 2026 DCAA guidance addresses how auditors should evaluate contractors claiming NDC status and respond to the statutory exemptions.
DCAA may still verify whether a company qualifies as nontraditional and review financial information needed for authorized audit or pricing purposes.
Although qualifying NDCs are exempt from certified cost or pricing data requirements under 10 U.S.C. § 3702, that exemption does not prevent contracting officers from requesting other information needed to determine whether proposed prices are fair and reasonable.
Such information may include historical pricing, labor estimates, supplier quotations, or actual cost data when appropriate.
DCAA’s guidance also addresses procedures for handling reasonable information requests that contractors decline to satisfy.
For companies claiming NDC status, documentation of their contracting history and CAS coverage may be just as important as the financial information supporting their proposals.
What About Cost-Reimbursement Contracts?
Cost-reimbursement contracts deserve particular attention because the government pays based on costs incurred, subject to applicable contractual limitations.
Although Section 1826 exempts qualifying NDC products and services from FAR Part 31, FAR 16.301-3 separately requires contractors receiving cost-reimbursement awards to have accounting systems adequate for determining costs applicable to the contract or order.
This means an exemption from certain DFARS accounting-system requirements does not necessarily eliminate the need for detailed project accounting.
An NDC performing cost-reimbursement work may still need to:
- Accumulate costs separately for each contract
- Identify direct and indirect costs
- Allocate shared expenses using supportable methods
- Maintain labor records supporting contract charges
- Prepare accurate billings and reconcile them to accounting records
The contract should establish how reimbursement and cost documentation requirements will be handled, particularly where the statutory FAR Part 31 exemption applies.
Companies considering cost-reimbursement work should review these provisions before award, rather than discovering their accounting system cannot support the contract after performance begins.
How the New CAS Thresholds Affect NDC Eligibility
Another significant development occurred on October 1, 2026, when updated CAS thresholds took effect.
The Cost Accounting Standards Board increased:
- The basic CAS applicability threshold from $2.5 million to $35 million
- The full CAS coverage threshold from $50 million to $100 million
The changes also eliminated the former $7.5 million trigger-contract concept and provided transition provisions for certain contractors previously subject to full CAS coverage.
Because NDC eligibility depends on full CAS coverage, these changes may allow some established contractors to qualify for nontraditional status when they otherwise would not have.
However, the thresholds are not general company-revenue limits. CAS coverage depends on factors such as contract awards, exemptions, business-unit circumstances, and applicable transition rules.
Companies with existing government contracts should review their coverage history rather than determine eligibility based solely on annual revenue.
Financial Controls NDCs Should Still Maintain
Exemptions from government-specific compliance rules can reduce administrative costs, but they do not eliminate the business risks associated with poorly managed contracts.
A company can win a profitable-looking defense contract and still experience cash flow problems if payroll obligations arise well before customer payments.
Likewise, an NDC that does not monitor project costs may discover too late that labor overruns or subcontractor expenses have eroded its margins.
Beyond meeting contractual requirements, finance teams should have reliable information about project profitability, cash flow, labor utilization, and upcoming financial commitments.
These are ordinary financial management practices, but they become especially important when a company enters a new market with unfamiliar contract terms.
A Different Approach to Defense Contract Accounting
The FY2026 NDAA creates meaningful opportunities for qualifying nontraditional defense contractors by reducing several longstanding compliance burdens.
For many commercial companies, entering the defense market may no longer require adopting every accounting and business-system practice associated with traditional government contractors.
Still, the type of contract, applicable exemptions, and specific reporting requirements will determine how much financial infrastructure a company needs.
The distinction is straightforward: fewer regulatory requirements can simplify the accounting process, but reliable financial information remains essential to pricing contracts, managing profitability, and supporting continued growth.
Reach out to CJA to learn more about Nontradional Defense Contractors!
FREQUENTLY ASKED QUESTIONS
Does a nontraditional defense contractor need a DCAA-approved accounting system?
Not necessarily. Section 1826 exempts qualifying NDC products and services from specified DFARS accounting-system requirements unless those requirements are lawfully applied or modified. However, cost-reimbursement contracts still require adequate accounting capabilities under FAR 16.301-3. There is no universally DCAA-approved accounting software product.
Can a nontraditional defense contractor use QuickBooks or other commercial accounting software?
Potentially. Commercial software may be sufficient for certain contracts if it can support the required accounting, cost tracking, and financial reporting. More complex contracts may require additional processes, software capabilities, or reporting tools.
Do nontraditional defense contractors need indirect cost rates?
Not necessarily for every contract. However, indirect cost rates can be important for pricing, cost-reimbursement billing, profitability analysis, and financial planning. The level of detail required depends on the contract and applicable terms.
Can an established DoD contractor qualify as nontraditional?
Yes. A company with previous DoD contracts may qualify if it meets the statutory test concerning current and prior work subject to full CAS coverage.
Are nontraditional defense contractors exempt from certified cost or pricing data?
Section 1826 exempts qualifying NDC products and services from the certified cost or pricing data requirements of 10 U.S.C. § 3702, subject to the statute’s waiver and modification provisions. Contractors may still need to provide other information supporting price reasonableness.
Do these exemptions apply to civilian government contracts?
Not automatically. Section 1826 addresses DoD contracts, subcontracts, and agreements. Civilian agency contracts may involve different requirements.
Can a company lose nontraditional defense contractor status?
Yes. NDC eligibility depends on the company’s DoD contracting history and the statutory one-year lookback period. A company that begins performing work subject to full CAS coverage may no longer meet the definition for future qualifying solicitations.
How should an NDC prepare for its first cost-reimbursement contract?
The company should confirm that its accounting system can identify contract-specific costs, support labor charges, allocate indirect expenses, reconcile billings, and provide the financial information required by the contract. The contract’s reimbursement and accounting provisions should be reviewed before award.
