DoD Asks Industry How to Lower Cost Accounting Barriers for Commercial Firms — What It Signals for Small Business Contractors

Published August 27, 2026 | TIKC NewsWire

The Pentagon is asking industry a rare question: what is slowing you down, and how do we fix it? DoD is looking for ideas on how to streamline data and audit requirements for business systems as it seeks to lower compliance costs and make it easier for commercial firms to do business with the department. In an open letter to DoD stakeholders, Michael Duffey, the department’s top acquisition official, and Michael Powers, acting Pentagon comptroller, asked industry to recommend “common sense contract accounting changes.” For commercial firms — including small businesses — that have historically avoided defense contracting because of its complex accounting and audit requirements, this letter is the clearest signal yet that DoD’s compliance burden may be getting lighter.

Why This Matters — The Compliance Barrier Has Been Real

Defense contracting’s accounting requirements are among the most complex in the federal marketplace. Cost Accounting Standards — a set of 19 standards governing how contractors accumulate and allocate costs under government contracts — apply to contractors above certain threshold levels and create significant compliance infrastructure requirements: dedicated accounting systems, cost pools and allocation methodologies, annual CAS disclosure statements, and regular audits by the Defense Contract Audit Agency. For commercial firms with standard commercial accounting practices, standing up a CAS-compliant accounting system can cost hundreds of thousands of dollars and require years to fully implement.

The result has been a two-track defense market: established traditional contractors who have made the CAS investment over decades, and commercial firms — including innovative technology companies and small businesses — that have avoided defense contracting because the compliance cost to enter exceeds the expected contract value in early years. DoD has been trying to address this divide through Other Transaction Agreements, Commercial Solutions Openings, and other alternative procurement mechanisms. The Duffey-Powers letter signals a potentially more fundamental approach: changing the underlying accounting requirements themselves.

What Changes Could Actually Look Like

The letter does not specify which accounting requirements are under review — it solicits industry recommendations. But based on the feedback DoD has received through prior reform efforts and the specific framing around “data and audit requirements for business systems,” the most likely targets include simplification of the earned value management system requirements for smaller programs, modification of CAS applicability thresholds to exempt more commercial item and small business contracts, streamlining of DCAA audit procedures for firms below certain revenue thresholds, and reducing the business systems compliance requirements — accounting, estimating, material management, purchasing — that trigger on cost-type contracts above specific thresholds.

Each of these changes, if implemented, would meaningfully lower the barrier to entry for commercial firms and small businesses pursuing cost-reimbursement and hybrid contracts with DoD. The fixed-price EO has pushed DoD toward fixed-price contracts as the default — but many technology development, research, and services contracts remain cost-type by necessity. Making those contracts accessible to commercial firms and small businesses is the gap this reform effort is trying to close.

How Small Businesses Should Respond

The open letter creates an unusual opportunity for small businesses and commercial firms to directly shape DoD procurement policy. Industry associations and individual firms can submit recommendations through the DoD acquisition policy channels identified in the Duffey-Powers letter. The most effective responses will be specific — naming the exact requirement that creates disproportionate burden, quantifying the compliance cost, and proposing a specific modification with a clear rationale for why it maintains adequate government oversight while reducing unnecessary burden.

Small businesses that have avoided defense contracting because of accounting compliance costs should pay particular attention to the outcome of this process. If DoD implements meaningful CAS threshold increases or DCAA audit simplifications for commercial firms and small businesses, the addressable market for defense contracting expands significantly — and businesses that have been building their financial infrastructure and past performance in anticipation of this opening will be positioned to move quickly when it comes.

The Bottom Line

The Pentagon’s open request for accounting reform recommendations is the clearest signal in years that DoD’s compliance burden may actually be getting lighter for commercial firms and small businesses. The process is early — recommendations must be developed, evaluated, and translated into regulatory changes — but the direction is right and the political mandate behind it is real. If you have avoided defense contracting because of accounting compliance barriers, watch this process closely. And if you have specific recommendations about requirements that create disproportionate burden without adding meaningful oversight value, this is the moment to make your voice heard. Brick by brick — the walls that have kept commercial firms out of defense contracting may finally be coming down.

Frequently Asked Questions

What are Cost Accounting Standards and why do they matter?

Cost Accounting Standards are a set of 19 standards issued by the Cost Accounting Standards Board that govern how contractors accumulate and allocate costs under government contracts above certain thresholds. CAS compliance requires dedicated accounting systems, disclosure statements, and DCAA audits. For commercial firms and small businesses, the cost of CAS compliance can be a significant barrier to entering the defense market.

What is the Duffey-Powers letter asking for?

Pentagon acquisition chief Michael Duffey and acting comptroller Michael Powers issued an open letter to DoD stakeholders soliciting industry recommendations for common sense changes to contract accounting data and audit requirements that would lower compliance costs and make it easier for commercial firms to do business with DoD. The letter is an open request for input — not a notice of proposed rulemaking.

How can small businesses participate in this process?

Submit specific recommendations through the DoD acquisition policy channels identified in the Duffey-Powers letter. Effective responses name the exact requirement creating disproportionate burden, quantify the compliance cost, and propose a specific modification with a clear rationale. Industry associations can amplify individual firm recommendations through collective submissions.

References

Federal News Network. (2026, August). DoD Eyes Accounting Reforms to Lower Barriers for Commercial Firms. https://federalnewsnetwork.com/defense-main/2026/08/dod-eyes-accounting-reforms-to-lower-barriers-for-commercial-firms/

PilieroMazza. (2026, August 20). Weekly Update for Government Contractors — August 20, 2026. https://www.pilieromazza.com/weekly-update-for-government-contractors-and-commercial-businesses-august-20-2026/

About the Author

Melanie Patterson

Founder & CEO of Team Integrity Knowledge Center and creator of GovCon iSource. Former nurse turned entrepreneur with over 10 years guiding small, women-owned, and minority-owned businesses to over $10 million in government awards. Build, grow, scale — brick by brick. Contact