Is DCAA Going Away? What the 2026 Reforms Change for Small Contractors

Since mid-September, small government contractors have been reading headlines about acquisition reform, fewer audits, and a lighter FAR. The natural question is whether DCAA is on its way out, and whether a small company still needs a DCAA-compliant accounting system. This guide is for anyone at a small contractor who needs to know what actually changed, what still applies, and what to keep doing.

The short version: DCAA is not going away. A law enacted in December 2025 exempts nontraditional defense contractors from some Department of War accounting requirements. A September 14, 2026 memo directs DCAA to audit based on risk, and two FAR overhaul proposals trim paperwork. None of it removes the need to track cost by contract on cost-type work. Under a risk-based approach, complete and traceable records can help show that the evidence you already have is sufficient.

The law: exemptions for nontraditional defense contractors

The largest change is already law. Section 1826 of the National Defense Authorization Act for Fiscal Year 2026 (Pub. L. 119-60, enacted December 18, 2025) applies to contracts, subcontracts, and agreements of the Department of Defense, now the Department of War. It exempts products and services from nontraditional defense contractors from ten requirements, including:

• The DFARS clause on accounting system administration (252.242-7006).
• The DFARS clause on contractor business systems (252.242-7005).
• The requirement to submit certified cost or pricing data.
• FAR Part 31, the contract cost principles.

The head of the contracting activity can waive the exemption, or apply one or more of the requirements to a specific contract, with a written determination.

Who qualifies. Under 10 U.S.C. 3014, a nontraditional defense contractor is an entity that is not performing, and has not performed in the year before the solicitation, any Department contract or subcontract subject to full coverage under the Cost Accounting Standards. DCAA's audit alert directs auditors to verify whether a contractor meets this definition, and DCAA is establishing a process to track contractors that claim the status.

How it is being implemented. According to DCAA's October 6, 2026 audit alert, the Department has issued five class deviations so far, covering certified cost or pricing data, purchasing systems, FAR Part 31, earned value management, and property management systems. Deviations for the other business system clauses are still being developed.

What DCAA's role looks like. The same audit alert tells auditors to support contracting officers "through audits or advisory services tailored to meet the contracting officer's needs for both pre-award and post-award activities." Contracting officers may request actual cost information when they need it to determine a fair and reasonable price, and the alert states that nontraditional defense contractors "must still comply with reasonable data requests."

What the law does not change.

• Cost-reimbursement contracts still have a FAR condition. FAR 16.301-3 allows a cost-reimbursement contract only when the contractor's accounting system can adequately segregate, accumulate, and allocate the costs of the contract, in the wording of the FAR overhaul's Part 16. Section 1826 does not list Part 16 among its exemptions.
• Civilian agencies are not covered. The exemption applies to Department of War contracts. Work for agencies such as NIH, NASA, or the Department of Energy follows the existing rules.

The memo: risk-based audits

On September 14, 2026, the Deputy Secretary of War signed a memo titled "Fostering One Strong Industrial Base." Most of it is about how the Department buys. These are the parts of its implementation appendix that touch audits and accounting systems:

• Risk-based audits. Within 60 days, the Under Secretary of War (Comptroller) is to direct that the Department "consider a contractor's audited GAAP financial statements and internal-control attestations before performing additional work."
• Every audit has to justify itself. Each audit "will identify the risk, its materiality to a government decision, the records needed, and why existing evidence is insufficient." In other words, an auditor has to explain why the records you already have are not enough before asking for more.
• No repeat audits, no reopened years. No office is to request an audit of a cost or system that has already been audited, or "reopen closed years absent indicators of fraud or material misstatement."
• Fewer discretionary business system reviews. Effective immediately, a discretionary review requires a written determination of specific, material risk by the cognizant contracting activity.
• CPA certification as an alternative. Within 60 days, the Department is to publish commercial-aligned criteria for contractor business systems and a class deviation accepting a registered independent public accounting firm's certification against those criteria in place of a Department review.
• Simpler accounting system criteria. Within 90 days, estimating system and material management and accounting system (MMAS) requirements are to be folded into simplified, commercial-aligned accounting system criteria, with their separate reviews retired.
• A look at DCAA's and DCMA's roles. Within 90 days, the Director of Administration and Management is to deliver options for "clarifying roles and charters, eliminating duplication, and addressing workforce effects" across the contract oversight enterprise, DCAA and DCMA included.

The accounting system piece matters most for a small contractor. Outside the CAS core, the memo says accounting system adequacy will be assessed against the FAR's condition for the contract type, "satisfied by the contractor's GAAP books and a contract-level ledger meeting applicable allowability rules." In plain terms: clean books, plus cost tracked by contract, with unallowable costs kept out.

What the memo does not do

The memo directs work; it does not finish it. Most of its changes depend on class deviations, criteria, and guidance due over the next 30 to 90 days, so the deadlines run to roughly mid-November (60 days) and mid-December (90 days). Clauses already in a contract come out through "bilateral no-cost modifications" that contracting officers are to offer "at the next practicable opportunity," so until your contract is modified, its clauses still apply.

The memo is also explicit about what it leaves alone:

• On profit policy: "Nothing in this action alters applicable cost-allowability requirements for cost-reimbursement work."
• On fixed-price efficiency, it does not waive "final indirect-cost-rate settlement on cost-reimbursement work," the process an incurred cost audit supports.
• Overall, it does not direct "the scope, findings, or conclusions of any audit," or alter any authority vested by statute.

One line of the memo is easy to misread: "No new accounting systems or special data formats will be required." It comes right after "we will ask suppliers for the cost and pricing information they already keep," in a paragraph about the data the Department requests from suppliers. It does not change the FAR condition for cost-reimbursement contracts described above.

Two FAR overhaul proposals that touch your books

Separately from the memo, the FAR Council published proposed rules on September 18, 2026 as part of the FAR overhaul. Two of them reach into the accounting side of a small GovCon. Both are proposals. Their comment periods closed on October 19, 2026 without an extension, and neither takes effect until the FAR Council publishes a final rule. We track where each one stands on our GovCon Updates page.

A shorter incurred cost submission. FAR Case 2026-006 (91 FR 59476) would shorten the final indirect cost rate proposal under clause 52.216-7. It changes what you submit, not the records behind it: the proposal does not touch record retention or the government's right to audit, and an incurred cost audit still samples transactions and traces them to timesheets, payroll, and the general ledger, as we explain in The Incurred Cost Audit, Explained for Small GovCons. The schedules it would drop or trim:

• The Form 941 payroll reconciliation schedule.
• Detailed labor data for time-and-materials and labor-hour contracts (summary data stays).
• Subcontract detail below the certified cost or pricing data threshold.
• Fee computations for completed contracts.

No more preaward survey section in the FAR. A companion proposed rule (91 FR 59584) would remove FAR 9.106, "Preaward Surveys," the section that refers contracting officers to the preaward survey forms. The proposed text keeps the general responsibility standard: a prospective contractor must have "the necessary organization, experience, accounting and operational controls" to perform. The proposal does not address the accounting system review or the SF-1408, and the form is still in use: on October 1, 2026, the agencies that issue the FAR asked OMB to extend its approval of the preaward survey forms, the SF-1408 among them (91 FR 62518). The checklist on the SF-1408, segregating direct and indirect costs, accumulating costs by contract, and timekeeping that supports labor distribution, remains a practical checklist for what an adequate system looks like.

What changes and what doesn't

Area	What is changing	What stays the same
Nontraditional defense contractors (Department of War contracts)	By law, exempt from ten requirements, including the DFARS accounting system clause and FAR Part 31, unless the contracting activity applies them in writing	Cost-reimbursement contracts still require a system that segregates and accumulates costs by contract; contracting officers can request actual cost data; civilian agencies are not covered
DCAA audits	Directed to be risk-based, considering existing evidence such as audited GAAP financial statements first	DCAA still audits; current contract clauses still apply until modified
Closed years	Not to be reopened without indicators of fraud or material misstatement	Records for open years still need to support every cost claimed
Business system reviews	Discretionary reviews need a written determination of material risk; CPA certification is planned as an alternative	An adequate accounting system is still expected on cost-type work
Incurred cost submission	Proposed: fewer schedules, no Form 941 reconciliation schedule	The audit still samples and traces transactions to source records
Preaward survey	Proposed: the FAR section that tells contracting officers when to request a preaward survey (FAR 9.106) would be removed	Before award, a contractor must still have "the necessary organization, experience, accounting and operational controls"

Why records matter under risk-based audits

Under the memo, an auditor who wants more records first has to explain why the records a contractor already has are not enough. That puts the focus on what you already keep. A contractor whose timesheets, payroll, and general ledger already tie together can answer from those records; one that has to rebuild a year from spreadsheets has less to show when the question comes.

Paul Calabrese, a former DCAA auditor (GRF CPAs & Advisors), named missing backup documentation as the biggest mistake he saw on the proposal side in one of our DCAA Ready sessions:

"The biggest mistake is people develop these rates, but they don't have backup documentation."

Paul Calabrese, a former DCAA auditor (GRF CPAs & Advisors)

The reforms do not change that. This short video makes the case for building the system before you need it:

What to do now

1. Read the clauses in your current contracts. Under the memo, clauses already in a contract apply until the contract is modified.
2. Keep daily timekeeping and labor distribution running. They are the basis of any incurred cost submission, short or long.
3. Watch for the published criteria. The commercial-aligned accounting system criteria and the CPA certification class deviation are due around mid-November. They will show what "adequate" looks like under the new model.
4. If you have audited financial statements, keep them current. The memo directs auditors to consider audited GAAP financial statements before asking for more work.
5. If you pursue cost-type work, keep a pre-award checklist. The FAR still conditions a cost-reimbursement contract on an accounting system that can segregate, accumulate, and allocate its costs. The SF-1408 criteria remain a practical checklist; our guide to the DCAA pre-award accounting system review walks through it.

For a refresher on which review applies to which kind of contract, see Which DCAA Audit Will You Actually Face?. The cost accounting side of the reforms, including the new CAS thresholds, is covered in Does CAS Apply to Small Businesses?

Why you still need a DCAA-compliant accounting system

None of the reforms removes the need for records that tie hours, payroll, and the general ledger together. The DFARS accounting system clause may not apply to nontraditional defense contractors on Department of War contracts, as explained above, but the FAR condition for cost-reimbursement contracts and the rules of civilian agencies still do. Even under the simpler criteria the memo directs, an adequate system means GAAP books plus a contract-level ledger that meets the allowability rules. For many small contractors, labor cost by contract is the part of that ledger that takes the most manual work. WiseCost builds that evidence on top of the QuickBooks Online you already use, with no migration:

FAQ

The Bottom Line

The 2026 reforms change which requirements apply to small defense contractors, how DCAA chooses what to audit, and how much paperwork a contractor submits. They do not change what a contractor on cost-type work needs underneath: time recorded by contract, labor distributed consistently, and records that tie back to payroll and the general ledger.

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