Summary: The FY 2026 National Defense Authorization Act (NDAA) introduces some of the most significant federal acquisition reforms in decades; raising thresholds, expanding exemptions, and encouraging commercial participation in federal contracting. While these changes meaningfully lessen compliance burdens for certain contractors, they do not eliminate the government’s expectation for disciplined accounting, internal controls, and cost visibility. For contractors kicking off 2026 proposal cycles, the NDAA presents both opportunity and risk. Organizations that understand where compliance is truly optional versus where it remains essential will be best positioned to compete, price effectively, and protect margins. This article outlines the NDAA provisions with the greatest impact on accounting and operations and explains how contractors can translate policy reform into practical and profitable execution.
Introduction
The National Defense Authorization Act (NDAA) for Fiscal Year 2026 is widely viewed as one of the most consequential legislative acts in recent years. Since its passage, government contractors have been abuzz with questions about what these sweeping changes mean for compliance, budgeting, indirect rate strategy, and internal controls. Many are asking whether the NDAA eases traditional federal contracting burdens, or if it simply shifts them. The truth is probably somewhere in between.
Below are the key NDAA provisions poised to have the greatest impact on accounting processes, internal controls, and compliance requirements in the year ahead.
Section 1806: Major Shifts in Cost Accounting Standards (CAS) Applicability
Section 1806 significantly increases the dollar thresholds that trigger CAS applicability:
- Contracts and subcontracts below $35 million are now exempt from CAS. This is a substantial increase from prior thresholds.
- The threshold for full CAS coverage rises to $100 million, which may significantly decrease the number of contractors subject to the full accounting provisions.
These changes are aimed at reducing administrative burden and encouraging greater participation from small and mid-sized firms. This could also drive down the cost of compliance and add more price competition. Fewer companies will be required to maintain full CAS compliant systems, easing proposal preparation and allowing for more cost accounting practice changes and contract administration demands.
Section 1826: Broad Exemptions for Nontraditional Defense Contractors
Section 1826 creates wide‑ranging exemptions for “nontraditional defense contractors” or companies that have not performed a fully CAS‑covered contract in the past year. These contractors are now exempt from:
- FAR Part 31 cost principles
- Truthful Cost or Pricing Data Act (formerly TINA)
- DFARS Business Systems requirements (e.g., accounting, estimating, and property management systems)
These exemptions are designed to attract innovative commercial firms, startups, and technology companies that historically avoid federal procurement due to its heavy compliance structure. One note is that there were no exemptions for Cybersecurity Maturity Model Certification (CMMC) cyber requirements.
Section 1804: Higher Thresholds for Cost or Pricing Data
Section 1804 increases a key acquisition threshold:
- The threshold for certified cost or pricing data increases from ~$2 million to $10 million for prime contracts. This is effective for contracts entered into after June 30, 2026.
- Subcontract thresholds increase in parallel.
By reducing the number of procurements requiring granular cost transparency, DOW hopes to streamline acquisitions and make it easier for commercial firms to compete. Additional adjustments across procurement thresholds further reduce procedural burdens in smaller acquisitions.
The Compliance Reality: What Contractors Still Cannot Ignore
While parts of the NDAA reduce regulatory burdens, they do not eliminate fundamental accounting and compliance responsibilities.
Accounting and other business systems
Even as certain regulatory requirements are eased, the fact that federal agencies may continue to rely on past practices and employ scorecard-based evaluations that favor contractors with strong internal infrastructure and contract type cannot be ignored. In many cases, solicitations for major contract vehicles award considerable evaluation points for contractors that possess approved business systems, such as an adequate accounting system, an approved contractor purchasing system, or Earned Value Management System (EVMS) certification.
Some Government-Wide Acquisition Contracts (GWACs) specifically mandate an official government audit approval of these business systems. Others may accept independent third-party certifications as evidence of compliance. This means that even if a contractor qualifies as a nontraditional entity exempt from DFARS system rules, demonstrating robust internal systems can provide a significant competitive edge in proposal evaluations.
Contractors should recognize this advantage and proactively seek independent reviews of their accounting and other business systems to reference in their proposals. The major systems evaluated include:
- Accounting System
- Estimating System
- Material Management & Accounting System (MMAS)
- Purchasing System
- Government Property
- Earned Value Management Systems (EVMS)
Core cost accounting practices
Additionally, the NDAA changes do not remove fundamental requirements tied to certain contract types. If a contractor pursues a cost-reimbursement contract, the government will require an adequate accounting system and adherence to FAR Part 31 cost principles, regardless of NDC status. FAR 16.301-3 explicitly limits use of cost-type contracts to contractors with an accounting system able to track costs properly. In other words, even a “nontraditional” contractor must step up to full compliance when accepting a cost-type award.
Despite legislative shifts, contractors must continue to uphold core cost accounting and internal control practices, including:
- Timekeeping
- Direct vs. Indirect cost segregation
- Accurate and compliant timekeeping
- Robust internal controls across all financial processes
- Clear treatment of allowable vs. unallowable costs
- Adequate documentation supporting all transactions
- Reliable business systems tailored to contract types and growth goals
These core cost accountability practices remain non-negotiable whenever actual costs are being billed to the government, and these principles remain essential not just for compliance but for margin visibility, audit readiness, and scalable growth.
Internal controls and documentation
Contractors, even those benefiting from relaxed rules, should maintain sound internal controls and documentation standards. Adequate policies for time charging, expense approvals, subcontract management, and cost recording are not just bureaucratic requirements but also best practices for sound financial management, budgeting, and cost control. These controls help prevent mischarging or compliance failures that could lead to disputes or False Claims Act issues.
Additionally, if your status changes (e.g., your company grows into a CAS-covered entity or decides to bid on a cost-type effort), having the right controls in place will make the transition smoother. Think of the NDAA’s flexibility as allowing more scalability. You can start small without heavy systems, but building scalable processes early on means you won’t be caught flat-footed by a later compliance need.
Can contractors simplify budgeting and indirect cost structures under these reforms?
If you fall under the new CAS exemption thresholds or qualify as an NDC, you might not be required to calculate indirect cost rates in the government-prescribed manner or allocate every cost as strictly direct or indirect per FAR definitions. However, contractors should still budget for overhead and G&A in a rational way and price contracts to cover their true costs.
You may choose to adopt more commercial-style pricing (e.g. commercial item rates or wrap rates) where possible, but it’s wise to keep the ability to map costs to pools and bases if needed. Contractors should maintain an accounting system that is compliant with FAR requirements to help ensure full cost visibility and to be prepared for future growth into cost-based contracts.
Focus Areas for Contractors in 2026
As federal procurement increasingly leans towards commercial procurement practices and traditional contracting, seasoned contractors should:
- Evaluate whether the new thresholds allow for simplified pricing models.
- Assess indirect rate structures for competitiveness under both FAR‑based and commercial contracts and understand how this impacts contract margin by contact type.
- Revisit internal controls to ensure efficiency without sacrificing compliance.
- Prepare for continued use of scorecard‑based evaluations and business system compliance influencing award outcomes.
- Maintain readiness for cost‑type opportunities, which still require an accounting discipline that is fully compliant with FAR requirements.
- Establish compliant CMMC practices.
Final Thoughts
The FY 2026 NDAA represents a pivotal moment for government contractors, offering new opportunities, relaxed thresholds, and pathways for commercial firms to enter the defense market. However, while some regulatory burdens have eased, the need for strong financial controls, compliant accounting practices, and business system readiness remains unchanged, and the outputs from these systems can even be more critical with new competition in the federal marketplace.
At a minimum, a commercial company looking to enter the federal space should still establish following accounting and operation processes and controls:
- Ability to track sales to specific contracts and revenue streams
- Robust budgeting and forecasting
- Timekeeping procedures that provide evidence of approval and an audit trail
- Understanding of travel and expense requirements
- Understanding of conflict of interest, ethics, kickbacks, and gratuities regulations
- Sound contract and subcontract templates
- Basic understanding of labor requirements and regulations (e.g. Davis Bacon and Service Contract Labor Standards)
- Basic understanding of cyber requirements (e.g. NIST, CMMC)
Contractors that learn to adapt early will be best positioned to grow, compete, and maximize profitability in the evolving defense landscape.
