Key Takeaways
- • Deputy Secretary of Defense Stephen Feinberg issued a September 2026 memo titled "Fostering One Strong Industrial Base" that reverses a contentious August directive by pivoting the Pentagon from Cost Accounting Standards (CAS) toward Generally Accepted Accounting Principles (GAAP) for defense contracts, addressing industry concerns about excessive government oversight of proprietary pricing data.
- • The August memo was broadly rejected by industry and analysts, who feared aggressive Pentagon oversight would discourage non-traditional defense contractors from entering the market; Feinberg's new directive effectively acknowledges this overreach and repositions Pentagon policy toward removing barriers rather than imposing new compliance burdens.
- • The shift targets a bifurcated system where approximately $300–$400 billion in Pentagon obligations flow to CAS-compliant major defense firms, while non-traditional contractors operate under lighter accounting requirements; the new memo aims to transition from company-by-company CAS compliance to program-by-program application, potentially allowing traditional firms to operate under GAAP on selective contracts.
- • Industry reaction is cautiously optimistic, though concerns persist: the Aerospace Industries Association welcomed the shift away from CAS but flagged continued demands for extensive cost and pricing data as potentially counterproductive to attracting new market participants and capital.
- • Implementation remains uncertain and will likely require Congressional input and coordination with the government-wide CAS Board; analysts characterize the memo as part of an ongoing acquisition reform journey rather than a final policy statement.
Summary
Deputy Secretary of Defense Stephen Feinberg's September 2026 memo "Fostering One Strong Industrial Base" represents a significant course correction in Pentagon defense acquisition policy, reversing an approach outlined in an August directive that triggered substantial pushback from the defense industry and policy analysts.
The August memo, which sought to impose more aggressive Pentagon oversight of contractor pricing practices and compliance standards, was received poorly across the sector. Industry participants—particularly non-traditional firms the Pentagon has actively courted to disrupt the defense industrial base—expressed concern that the directive would grant the Department excessive access to proprietary financial information. According to Bill Greenwalt of the American Enterprise Institute, the August memo attempted to apply traditional government compliance oversight uniformly to all contractors, including commercial and non-traditional companies. "That would have had serious ramifications to the firms trying to disrupt the status quo. I think they got the message on that, that those firms weren't happy and could exit the market," Greenwalt noted.
Feinberg's new memo abandons this approach, instead signaling the Pentagon's intent to shift away from Cost Accounting Standards (CAS)—historically required for government-only sole source contracts—toward Generally Accepted Accounting Principles (GAAP), the commercial accounting standard. "We will accept GAAP-based accounting across all contracts to the maximum extent the law permits," Feinberg wrote, framing the move as part of broader efforts to "completely transform and modernize our contract cost and pricing ruleset." The memo emphasizes "transparency and partnership" while suggesting industry should not face government pressure to divulge proprietary financial data already maintained internally.
The policy shift addresses a structural problem in current Pentagon contracting: approximately $300–$400 billion in annual obligations flow to CAS-compliant major defense firms covering major programs such as carriers, submarines, and fighter jets, while only around a small percentage of Pentagon contractors are CAS-compliant. Feinberg's approach aims to convert this company-by-company CAS requirement into a program-by-program framework, allowing traditional contractors to operate under GAAP standards on selective contracts. "It looks like they are providing a way for traditionalists to become non-traditional depending on what contracts they pursue," Greenwalt observed, characterizing this as a "shift" that will require corporate restructuring and coordination with the CAS Board.
Analyst and industry reactions reflect qualified approval tempered by implementation concerns. Jerry McGinn of CSIS's Center for the Industrial Base characterized the August memo as poorly understood, noting that the new directive "articulates that it's a process" rather than a dramatic reversal. TD Cowen's Roman Schweizer noted the September memo "seems less about imposing new oversight & more about removing barriers that discourage companies from doing business" with the Pentagon. However, the Aerospace Industries Association's Eric Fanning cautioned that "continued demands for extensive cost and pricing data could undermine the Department's broader objective of attracting more companies, capital, and innovation." Analysts emphasize this memo is not final; Congressional input and CAS Board coordination will shape implementation, and the shift represents one step in an ongoing acquisition reform initiative launched by Defense Secretary Pete Hegseth in November 2025.
The August memo, which sought to impose more aggressive Pentagon oversight of contractor pricing practices and compliance standards, was received poorly across the sector. Industry participants—particularly non-traditional firms the Pentagon has actively courted to disrupt the defense industrial base—expressed concern that the directive would grant the Department excessive access to proprietary financial information. According to Bill Greenwalt of the American Enterprise Institute, the August memo attempted to apply traditional government compliance oversight uniformly to all contractors, including commercial and non-traditional companies. "That would have had serious ramifications to the firms trying to disrupt the status quo. I think they got the message on that, that those firms weren't happy and could exit the market," Greenwalt noted.
Feinberg's new memo abandons this approach, instead signaling the Pentagon's intent to shift away from Cost Accounting Standards (CAS)—historically required for government-only sole source contracts—toward Generally Accepted Accounting Principles (GAAP), the commercial accounting standard. "We will accept GAAP-based accounting across all contracts to the maximum extent the law permits," Feinberg wrote, framing the move as part of broader efforts to "completely transform and modernize our contract cost and pricing ruleset." The memo emphasizes "transparency and partnership" while suggesting industry should not face government pressure to divulge proprietary financial data already maintained internally.
The policy shift addresses a structural problem in current Pentagon contracting: approximately $300–$400 billion in annual obligations flow to CAS-compliant major defense firms covering major programs such as carriers, submarines, and fighter jets, while only around a small percentage of Pentagon contractors are CAS-compliant. Feinberg's approach aims to convert this company-by-company CAS requirement into a program-by-program framework, allowing traditional contractors to operate under GAAP standards on selective contracts. "It looks like they are providing a way for traditionalists to become non-traditional depending on what contracts they pursue," Greenwalt observed, characterizing this as a "shift" that will require corporate restructuring and coordination with the CAS Board.
Analyst and industry reactions reflect qualified approval tempered by implementation concerns. Jerry McGinn of CSIS's Center for the Industrial Base characterized the August memo as poorly understood, noting that the new directive "articulates that it's a process" rather than a dramatic reversal. TD Cowen's Roman Schweizer noted the September memo "seems less about imposing new oversight & more about removing barriers that discourage companies from doing business" with the Pentagon. However, the Aerospace Industries Association's Eric Fanning cautioned that "continued demands for extensive cost and pricing data could undermine the Department's broader objective of attracting more companies, capital, and innovation." Analysts emphasize this memo is not final; Congressional input and CAS Board coordination will shape implementation, and the shift represents one step in an ongoing acquisition reform initiative launched by Defense Secretary Pete Hegseth in November 2025.
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