Pentagon Cost-Transparency Memo Lets COs Demand Actual Costs on Non-CAS Deals

Defense contracting officers now have written authority to demand actual cost data from primes and their suppliers on deals that fall outside the Cost Accounting Standards, a shift that puts the decision of when a company must open its books in the hands of individual COs. The Department of War set out that authority in an Oct. 1 memorandum, "Implementation of Supplier Cost and Pricing Transparency," which a PilieroMazza client alert published Oct. 13 says establishes policies and procedures to "secure cost visibility across DOW’s acquisition portfolio, when necessary."

The memo also hardens enforcement of Cost and Software Data Reporting with 30-day demand letters and contract withholds, makes any ERP data access voluntary, and lays out a sector-by-sector profit policy. The law firm's attorneys, Isaias Alba IV, Lauren Brier, Josie Farinelli and Kristine Crallé, warn that although transparency is a key objective, the guidance "may have the opposite effect for government contractors because it leaves individual contracting officers (COs) to determine when such visibility is" necessary.

The original memo text was not available for this report; its contents are described here as PilieroMazza reported them.

How the Oct. 1 Memo Turns the August and September Policies Into CO Instructions

The Oct. 1 document implements two earlier memoranda: "Supplier Cost and Pricing Transparency," issued Aug. 18, and "Fostering One Strong Industrial Base," issued Sept. 14. According to a companion PilieroMazza analysis, the August memo directed full supply-chain transparency at every tier for negotiations valued at $10 million or more, excluding commercial off-the-shelf items, and ordered the Under Secretary of War for Acquisition and Sustainment to ensure delinquent CSDR reports are submitted within 30 days. That memo said DOW does not intend to cap profit, while also promising to negotiate aggressively for revised terms "where negotiation outcomes are not aligned with sound business deals."

The September memo said DOW would move from government-unique CAS to Generally Accepted Accounting Principles across all contracts to the maximum extent permitted by law, and made fixed-price contracts the default consistent with Executive Order 14402. Within 60 days, by Nov. 13, DOW plans to propose to the CAS Board that exemption become the default and that remaining CAS coverage be limited to sole-source, cost-based development or incentive-fee procurements, applied contract by contract. Until the board acts, any solicitation that could bring a business unit under full CAS coverage needs written approval from the USW(A&S).

When Can a CO Demand Actual Costs on a Non-CAS Contract?

Under the Oct. 1 memo, a CO may request actual cost information at both the prime and supplier levels, even on a contract not subject to CAS, if the CO determines the information is necessary to establish a fair and reasonable price. The memo leaves the Truth in Negotiations Act intact. COs remain bound by 10 U.S.C. 3705 as implemented in FAR 15.402 and 15.403, so they must first try other means, such as adequate price competition, market pricing, sales data or data from sources other than the contractor, before asking for certified cost or pricing data.

PilieroMazza's key takeaway is that a CO may ask for certified data under the memo, but a contractor "may not be legally required to provide it for an acquisition not subject to CAS absent a contractual or statutory requirement to do so." In that case, the memo tells COs to request data other than certified cost or pricing data, a practice the firm notes COs already use.

Where TINA does apply and a contractor refuses to hand over requested data, the memo directs the CO to immediately coordinate with the Defense Contract Audit Agency to initiate a TINA audit.

CSDR Demand Letters and Withholds on ACAT II Programs

The memo calls Cost and Software Data Reporting essential to DOW's ability to generate realistic cost estimates and support negotiations. CSDR applies only to Acquisition Category II and larger contracts valued at more than $50 million. When a contractor misses a required CSDR report, COs must issue a formal demand letter immediately, requiring submission within 30 days. If the report still does not arrive, COs must, at a minimum, apply withholds where the contract permits until it is received.

No New Accounting Systems, and ERP Access Stays Voluntary

The memo clarifies that contractors should not have to implement new accounting systems or build special data formats. Requested cost information is limited to "data immediately available in the form in which the contractor regularly maintains it." CAS-covered contractors can keep supplying actual cost data from a CAS-compliant system; contractors outside CAS should supply data kept under GAAP.

The August memo had floated application programming interfaces tied to contractors' enterprise resource planning systems to automate push-only access to actual cost data. The Oct. 1 memo says any such initiative would come through formal rulemaking and participation would be strictly voluntary. PilieroMazza cautions that "permitting the Government automated access to your organization’s ERP comes with numerous risks" that contract, IT, finance and legal teams should work through together before anyone volunteers.

Sector Profit Benchmarks and Tiered Profit-Sharing

Under a section titled "Modernized Profit Policy and Commercial Sector Alignment," the memo directs COs to tailor profit models using sector-specific commercial benchmarks, while stating those benchmarks are not intended to operate as profit caps. For hardware and weapon systems, profit should align with commercial manufacturing risk-to-reward ratios, including self-funded facilitization, non-recurring engineering investment and execution risk. Software and IT services margins should reflect commercial Software-as-a-Service margins and R&D investment. Services and sustainment should look to commercial logistics and third-party maintenance rates.

For sole-source or long-term production programs, the memo encourages a "Tiered Profit-Sharing" mechanism: the parties negotiate a realistic base margin, then share profits from efficiencies realized over time. Primes using it must flow similar terms down to key suppliers. DOW intends to pursue the profit principles through formal rulemaking.

What It Means for Contractors

Stephanie Kostro, president of the Professional Services Council, told Federal News Network's Federal Drive that contractors should anchor on their contracts. Discussing the September memo, she said, "The memo itself is not self-implementing." She also flagged the gap between the Pentagon's approach and the CAS Board's rules from earlier this year: "When there is daylight between what the CAS Board is doing and what the Pentagon is doing, there is the eventuality that it will create confusion."

Practically, a CO's request for certified data on a non-CAS deal is a signal to check the contract and statutory thresholds before answering. Primes should review subcontracts for clauses that let them collect supplier cost data and protect it. Programs above $50 million with lagging CSDR submissions face withholds, where their contracts permit, once the 30-day clock runs out. And the profit and ERP provisions both wait on rulemaking, which gives industry a comment window to shape them.