Non-Traditional Defense Contractor Exemption 2026: NDAA Section 1826

Most defense contractors have never been under full Cost Accounting Standards coverage. That is the top tier of CAS, and it applies to the largest contracts. A contractor under full coverage has to follow every CAS rule that fits its work. It also has to write down how it accounts for costs, file that with the government, and then stay bound to it.

Full coverage is also what the non-traditional defense contractor exemption 2026 turns on. Enacted as Section 1826 of the FY2026 defense authorization act, it lifts ten named requirements from the work a qualifying firm supplies to the Department of Defense. No dollar cap limits it, so it reaches large opportunities as well as small ones.

Three of the ten change how you keep your books: FAR Part 31 cost principles, certified cost or pricing data, and the DFARS business system clauses.

But the ten have not moved together, and that is the fact most coverage misses. DoD has already implemented two of them. class deviation 2026-O0048, Revision 1, dated 22 July 2026, states on its face that it implements “sections 811(a)(5), 812(c), and 1826 (8) and (9)” of the FY2026 Act, and exempts nontraditional defense contractors from certified cost or pricing data and the related special cost and pricing requirements, unless waived. For the other eight, including FAR Part 31 and the business system clauses, the regulations sit unchanged and nothing in the Act sets a deadline for changing them.

So the question is not whether you qualify. It is which of the ten have actually reached the regulations a contracting officer applies, and what to do about the rest.

The accounting answer is clear, and the rest of this article is about what to do about it.

Does the Non-Traditional Defense Contractor Exemption Apply to You?

You qualify if two things are true on the day the Department issues its solicitation, the day it asks for bids:

• You are not currently performing a DoD contract under full CAS coverage, and
• You have not performed one at any point in the previous twelve months [10 U.S.C. 3014].

Two words in that test do a lot of work.

Full. Modified CAS coverage does not disqualify you. Only full coverage does.

Solicitation. The clock runs to the day the work is solicited, not the day it is awarded. Status is therefore tested afresh on every pursuit. It is a rolling condition, not a label your company carries. A firm that comes out of full coverage qualifies again twelve months later.

The word “non-traditional” suggests small or new. It means neither. A firm whose $200 million of DoD work is all competitively awarded firm-fixed-price has never been under full coverage. It qualifies on the same terms as a company with its first subcontract.

Which of your contracts were CAS-covered in the first place?

A CAS-covered contract is a negotiated contract that is not exempt from the Cost Accounting Standards [48 CFR 9903.201-1(a)]. Every CAS-covered contract then carries a type of coverage, and full is the top tier [48 CFR 9903.201-2]. So full coverage sits inside CAS-covered, not beside it. A contract that was never CAS-covered was never full-coverage either. The regulation lists nine categories that sit outside every CAS requirement [48 CFR 9903.201-1(b)]. Four of the nine account for the great majority of exempt work in practice.

• Small businesses. Size decides it, not whether the work was set aside.
• Firm-fixed-price work won on adequate price competition No certified cost or pricing data is submitted, and no dollar ceiling applies.
• Commercial items bought under commercial procedures. A software firm selling a commercial product has always sat here.
• Contracts under $7.5 million This holds provided your business unit carries no CAS-covered contract worth $7.5 million or more.

The other five cover sealed bids, smaller negotiated contracts, foreign governments, prices set by law, and one named ship program.

On the $7.5 million route, the regulation and the statute now disagree. The regulation still prints the category, but the statute behind it was repealed by the FY2026 Act [P.L. 119-60 §1806(d)(1)(B)]. The Cost Accounting Standards Board has said it intends to remove the regulation to match. Which text governs is a question for your counsel and the contracting officer. The bookkeeping response costs nothing: record which category each of your contracts falls into, and date the record. A contemporaneous file beats a reconstruction two years later.

What makes coverage full?

A single CAS-covered award of $50 million or more, or $50 million or more in net CAS-covered awards during your preceding accounting period [48 CFR 9903.201-2(a)]. Below that, coverage is modified, which asks less of you. Modified coverage leaves your nontraditional status intact.

Crossing into full coverage is a documentation project as much as a compliance question. It also triggers a CAS Disclosure Statement, which puts your cost accounting practices on file with the government and binds you to them. We cover how the FY2026 Act changed these thresholds separately.

Here is how that works in practice. A firm with $70 million of revenue across six competitively awarded firm-fixed-price DoD contracts holds no CAS-covered award at all, so it qualifies. It then wins one $60 million cost-reimbursement contract. That award is CAS-covered, and a single award above $50 million carries full coverage. The firm loses its status while it performs that contract, and for twelve months after it stops.

Notice what did the work there. The $60 million contract counted because it was CAS-covered. The six firm-fixed-price contracts never counted, whatever their value, because exempt contracts are not CAS-covered awards at all.

What Comes Off Your Books

Section 1826 names ten requirements. Grouped by what they actually do to an accounting system, they come to four things.

1. The general ledger stops carrying unallowable cost segregation

FAR Part 31 decides which costs the government will reimburse. It disallows named expenses and caps allowable employee compensation at a benchmark set for each contractor fiscal year. It also requires you to separate allowable costs from unallowable ones in the ledger. That compensation cap reaches all employees on contracts awarded since June 24, 2014, not only senior executives [FAR 31.205-6(p)(4)].

Section 1826 removes Part 31 from qualifying DoD work. Where an award is confirmed as exempt, a company entering defense contracting does not have to rebuild its chart of accounts around unallowable cost accounts. Its existing commercial practices are enough for the cost principles on that work.

That holds unless you hold a CAS-covered contract under modified coverage. Modified coverage requires Standard 9904.405, Accounting for Unallowable Costs [48 CFR 9903.201-2(b)(1)]. It also leaves your nontraditional status intact. So a qualifying firm holding modified-coverage work has a contract that lifts FAR Part 31 and still carries a CAS clause on unallowable costs. What 405 asks once Part 31 is gone is a question for your counsel and the contracting officer. The bookkeeping answer does not wait on it: keep those accounts.

One caution belongs here, and it is a ledger question rather than a legal one. The exemption attaches to the products and services a qualifying firm supplies, not to the company. If a single award mixes qualifying and non-qualifying work, your ledger has to tell the two apart by CLIN or by cost objective. A firm running qualifying DoD work, non-qualifying DoD work and civilian work is running three cost regimes in one set of books. The exemption does not simplify that.

2. The certified cost or pricing data package stops being assembled

The exemption also reaches the certified cost or pricing data requirement at 10 U.S.C. 3702, whatever the contract is worth. That removes a substantial proposal-support exercise, and with it the exposure that comes from getting the submission wrong: defective pricing carries price reductions and potential False Claims Act consequences.

Before treating that as an exit, know how wide the requirement is. It is often described as applying only to a prime contract expected to draw a single bid. It also reaches modifications and subcontracts, and neither the codified FAR 15.403-4 nor the Revolutionary FAR Overhaul text that replaced it carries a one-bid limit.

The dollar threshold is where the split has already closed for DoD, and it closed in a document that never appears in the Federal Register. The codified FAR 15.403-4 still reads $2.5 million, and the FAR Overhaul moved the threshold to 15.403-3, so a reader who looks up 15.403-4 in the deviated text finds a certificate form rather than a figure.

Under class deviation 2026-O0048, Revision 1, DoD contracting officers must use the Overhaul Part 15 “in lieu of the text codified at 48 CFR chapter 1”, and deviated DFARS 215.403-3(a) directs them, in lieu of FAR 15.403-3(a), to obtain certified cost or pricing data when a prime contract is expected to exceed $10 million and is awarded after June 30, 2026. Subcontracts follow the prime: $10 million where the prime was entered into after that date, $2.5 million where it was entered into on or before it, unless the prime contract says otherwise.

The bookkeeping consequence is specific. Which figure applies to you turns on the date the prime contract was entered into, not on the date of your subcontract. Record that date in the contract file for every flow-down you receive, because a subcontractor cannot work out its own threshold without it.

A separate provision already gives nontraditional contractors a lighter route. On subcontracts up to $5 million, 10 U.S.C. 3702(a)(3)(B) lets a nontraditional contractor submit prices it has actually paid instead of full cost or pricing data. Whether the broader exemption replaces that narrower route is a legal question, and DoD has not resolved it.

What that means for your records is not ambiguous. The prices-paid route is a documentation regime, not an absence of one. It runs on purchase history: prices you paid for the same goods and services, supportable as fair and reasonable against cost data from the last twelve months. That file has to be kept as you go. It cannot be assembled at proposal time.

3. Six business systems stop being audited, and the payment withholding goes with them

Seven of the ten requirements cover six business systems: accounting, estimating, purchasing, property, material management, and earned value management. The seventh is the umbrella clause at DFARS 252.242-7005, where payment withholding lives.

The withholding is widely misdescribed, so it is worth stating plainly. A material weakness in one system lets the government withhold 5 percent of amounts due. Material weaknesses in more than one system let it withhold 10 percent. It does not stack at 5 percent per system.

Getting back down to 2 percent takes three things together, and the first is a deadline your bookkeeper has to hit:

• an acceptable corrective action plan submitted within 45 days of the notice,
• a contracting officer determination that you are effectively implementing it, and
• the reduction then applies only to withholding tied to the weaknesses that plan covers [DFARS 252.242-7005(e)].

That clause has a limit worth knowing whether or not Section 1826 reaches you. It applies only to contracts subject to CAS, and small businesses are outside CAS at any contract value. An adequate accounting system still matters either way, because a cost-reimbursement award requires an accounting system adequate for determining applicable costs [FAR 16.301-3(a)(3)].

4. The estimating system stops being disclosed, and one section number shows the whole problem

Section 1826 also names DFARS 215.407, which carries estimating system disclosure, maintenance and review, along with forward pricing rate agreements, make-or-buy programs and should-cost review.

One piece of that is already in force. Deviated DFARS 215.105-5 now reads that, unless waived, nontraditional defense contractors are not required to submit a make-or-buy plan, and it points to PGI 215.403-71(b)(5) for the waiver and notification procedure [class deviation 2026-O0048, Revision 1]. That is the paragraph to name when you ask a contracting officer how a waiver would be issued, because the waiver is what decides whether your exemption survives the award.

Now look at what the statute did not touch. Section 1826 exempts the estimating system policy at 215.407. It does not exempt 215.408, which is the instruction that puts the estimating system clause into a solicitation. A contracting officer following the DFARS to the letter still inserts it.

That is the whole problem in one section number.

And what stays on your books either way

Exemption is not immunity. You still have to show what you delivered, what you billed, and how you supported the price. Four obligations survive untouched.

• The False Claims Act. It applies to every government contractor regardless of CAS status [31 U.S.C. 3729]. Accurate timekeeping and invoice support stay essential.
• Statutory cost prohibitions. These live in Title 10, not in FAR Part 31. Exemption from Part 31 does not repeal them [10 U.S.C. 3744].
• Price reasonableness. Contracting officers still have to find your price fair and reasonable [FAR 15.402]. Without certified cost data, market comparisons and pricing history become your primary evidence.
• Civilian agency work. Section 1826 covers DoD only. NASA, DOE, HHS and GSA contracts carry FAR Part 31 and CAS exactly as before.

Why Not To Rely On It Yet

Whether Section 1826 binds on a given award is a legal question. Your counsel and your contracting officer answer it, not your accountant. Three facts decide what you do about it, and all three show up in your books long before anyone writes a legal opinion.

The statute is unconditional. Section 1826 says qualifying work “shall be exempt.” It orders no rulemaking and sets no effective date. Twenty sections earlier in the same Act, Congress gave DoD 120 days to update the DFARS on a different matter. So it plainly knows how to order implementation when it wants to.

Eight of the ten have not reached the regulations. The DFARS business system clauses and FAR Part 31 sit unchanged, with their prescriptions still telling contracting officers to insert them, and no rule covering them has been published in the Federal Register.

Do not read that as nothing having happened. Paragraphs (8) and (9), the certified cost or pricing data pieces, were implemented for DoD by class deviation on 22 July 2026, and a class deviation is not published in the Federal Register at all. It is a memorandum to DoD components, it binds their contracting officers, and it remains in effect “until rescinded or incorporated into the FAR, DFARS, and DFARS PGI”. Checking the codified page, or the Federal Register, would tell you nothing had changed. Both answers would be wrong.

That also means the deviation reaches DoD components only. Absent a deviation of their own, NASA and Coast Guard contracting officers still work from the codified FAR.

Section 1826 is itself uncodified, printed in the notes beneath 10 U.S.C. 3014 rather than in the section. It is law either way, but it is not where a contracting officer looks.

And your existing contracts sit outside the argument entirely. If your current award contains the business systems clause, that clause is a term of the contract you signed. Your accounting system has to satisfy it until the contract is modified.

The first two facts leave two defensible readings, and nothing yet reconciling them. Here is what each one costs you.

• If the exemption applies to your award, the saving is structural: no unallowable cost segregation, no business system documentation to maintain and defend, no estimating disclosure, no certified cost data package. That is headcount and calendar, not software.
• If it does not, you need all of it working on day one of performance. Building those systems during performance is the expensive way, and it happens under audit.

Those two costs are not symmetric, and that settles the planning question. Keeping a system you turned out not to need costs you its carrying cost. Dismantling one you did need costs you a rebuild under audit, on someone else’s schedule. Until a deviation, a rule or a written determination tells you which position applies, the accounting decision is not close. On certified cost or pricing data that document now exists for DoD work, which is exactly why the pre-award question is worth asking in writing.

What To Do Before You Sign

1. Get the scope in writing. Read the solicitation first and mark which of the ten it carries. Look for FAR Part 31, certified cost or pricing data language, and the DFARS business system clauses. Then raise Section 1826 in the pre-award exchange and ask the contracting officer to confirm which ones the award will carry. Asking costs nothing, and a written answer turns an open question into a contract term your accounting scope follows. Expect a no, or silence, because the officer is working from a DFARS that still prescribes the clauses. A refusal settles nothing about the statute. Treat it as information about what you are buying, and put it in your price.
2. Confirm your status, and date it. Pull every active DoD contract and subcontract. Identify any under full CAS coverage, not merely subject to CAS, and note which exemption category each contract falls into. Redo it for each pursuit, because the test runs to the solicitation date. Your own memo and a contracting officer’s written confirmation are different instruments, and only one of them is a term of your contract.
3. Ask about using your own CPA. Section 873 of Public Law 114-92 directs DoD to establish procedures for small businesses and nontraditional contractors to hire their own CPA to certify the accounting system for audits required by regulation. That authority sits in the notes to 10 U.S.C. 3702. The same provision excepts awards under $7.5 million from certified cost data requirements, through a BAA, SBIR, STTR, multiyear contract or block buy. A narrower records examination exception covers BAA and SBIR only. Both run until October 1, 2029. If your DoD work arrives that way, ask which applies before you budget for a government audit.
4. Price your own baseline. The components are countable: unallowable cost segregation in the ledger, business system documentation and internal audit, and the staff hours spent supporting government audits. Total them and you have what the exemption is worth to your firm. That is also what you put at risk by accepting a large cost-reimbursement award.
5. Keep the two regimes apart in the ledger. If you will run qualifying DoD work, non-qualifying DoD work and civilian work in one company, your books have to separate them by contract, CLIN or cost objective. Set that up before the first invoice, not after the first audit question.
6. Keep dual capability. Civilian work still carries Part 31 and CAS. One full CAS-covered award costs you the status for at least a year and brings every requirement back with it. Do not dismantle anything until your contract mix genuinely justifies it.

Two questions remain open, and both are legal rather than accounting. One is whether the exemption displaces the prices-paid route on subcontracts. The other is how it flows down to a nontraditional subcontractor under a traditional prime. Take both to counsel. Neither changes what your records should show while you wait.

Frequently Asked Questions

Key Takeaways

• Qualifying turns on full CAS coverage, not on size. Three categories are the usual routes outside CAS: small business, competitively awarded firm-fixed-price work with no certified cost data submitted, and commercial items. A fourth, for contracts under $7.5 million, is where the regulation and the statute disagree.
• What comes off is a large block of GovCon accounting work. Unallowable cost segregation, the certified cost data package, six audited business systems, and estimating system disclosure.
• The statute and the regulations disagree, and that is a legal question. The accounting decision does not wait on it. Keep the capability, price as though the requirements apply, and get the scope confirmed in writing.
• Ask about the independent CPA route. For BAA, SBIR and STTR work under $7.5 million, DoD is directed to allow your own CPA to certify your accounting system. Those exceptions run to October 1, 2029.
• Exemption is not immunity. The False Claims Act, Title 10 cost limits, price reasonableness and CAS 405 on modified-coverage work all survive.

For firms that qualify, the non-traditional defense contractor exemption 2026 puts a real block of compliance cost in play. How much of it you actually get is decided in the pre-award conversation, not in the statute.

Amerifusion Bookkeeping helps government contractors confirm their CAS status, structure accounting systems for the rules as they currently stand, and keep audit-ready records whatever their exemption status. Take the free Compliance Readiness Check to see where you stand, or book a discovery call with our CPA-managed team.