In the lead-up to the Trump inauguration, Chris Kubasik, CEO of aerospace and defense giant L3Harris Technologies, made a significant contribution to the debate on defense acquisition reform with an open letter. Addressed to Elon Musk and Vivek Ramaswamy (in their roles leading the “Department of Government Efficiency”, or “DOGE”), the letter proposed four key areas for improvement in government procurement:
- Eliminate duplicative Cost Accounting Standard (CAS) requirements.
- Establish a central contracting arm within the Office of the Secretary of Defense.
- Raise the threshold for requiring certified cost and pricing data.
- Limit contractor protest filings.
While each suggestion warrants discussion, this article focuses on Kubasik’s call to eliminate CAS requirements.
What are Cost Accounting Standards?
Cost Accounting Standards (CAS) are a set of rules and regulations that dictate how defense contractors account for costs on government contracts. Established in 1970 by the independent Cost Accounting Standards Board (CASB), these standards are mandatory for all companies doing business with the U.S. government. Contractors must comply with CAS when estimating, accumulating, and reporting costs, a process that can be complex and often requires specialized consultants.
The purpose of CAS is to ensure fair pricing and prevent overcharging, safeguarding taxpayer dollars.
CAS in Practice: A Balancing Act
While established defense contractors like L3Harris have dedicated teams to navigate the DoD’s procurement environment, CAS presents unique challenges for companies accustomed to the commercial sector. A key issue is the conflict between CAS and Generally Accepted Accounting Principles (GAAP), the standard in commercial accounting. This divergence has been cited as a reason why some commercial companies avoid defense-related R&D.
A Missed Opportunity for Reform?
The 2017 National Defense Authorization Act (NDAA) aimed to address this issue by mandating the alignment of CAS with GAAP “to the greatest extent feasible.” This was a promising step, intended to lower barriers for new entrants to the defense contracting arena and generate significant cost savings. Simplifying CAS would allow commercial companies to more easily apply their expertise to defense projects, fostering innovation and competition. Furthermore, aligning CAS with GAAP promised to reduce administrative overhead, eliminate waste, and potentially mitigate fraud, leading to substantial savings.
Kubasik’s Bold Proposal: Beyond Alignment
Kubasik’s letter went further, advocating for the complete abolition of CAS, rather than simply aligning it with GAAP. His argument rests on the belief that a free market approach would ensure fair pricing.
This proposal reflects a frustration that the 2017 NDAA mandate to harmonize CAS with GAAP seems to have stalled, leaving defense procurement as complex and expensive as ever. While a complete abolition of CAS is unlikely to gain congressional support, Kubasik’s call to action raises important questions.
The Challenges of a Free Market Solution
While the DoD is moving toward increased use of fixed-price contracts, cost-plus contracts still represent a significant portion of spending. Additionally, competition at the prime contractor level is limited to a small group of large companies, and not all contracts are competitively bid. These factors suggest that a pure free-market approach might not always guarantee the best value for taxpayers.
The Path Forward
Despite the challenges, Kubasik’s intervention is a valuable contribution to the ongoing debate on defense procurement reform. It highlights the need for a renewed focus on streamlining regulations and fostering greater competition. It will be interesting to see how Congress addresses the issue of Cost Accounting Standards in the coming years. The goal should be a system that balances accountability and efficiency, attracting the best talent and technology to the defense sector while ensuring responsible stewardship of taxpayer funds.
