The Pentagon is beginning a broad overhaul of how the U.S. government evaluates defence contractors, with officials moving to reduce specialized accounting and audit requirements that have long made it harder for commercial companies to compete for military work.
The change follows a memorandum signed September 15, 2026, by Deputy Secretary of War Steve Feinberg. The document directs the department to rely more heavily on standard commercial accounting practices, market-based pricing and risk-based audits.
Although the U.S. department is now formally using the name Department of War in its public releases, the Pentagon remains the familiar public reference for the headquarters and the wider defence bureaucracy.
Table of Contents
What the Pentagon is changing
The new policy targets the Cost Accounting Standards and other government-specific compliance systems used for certain defence contracts. Officials say those requirements can impose costs on businesses before they have secured meaningful work, potentially discouraging smaller companies and commercial technology firms from entering the defence market.
Under the plan, the department intends to make generally accepted accounting principles, or GAAP, the normal starting point for contractor financial information. Government-specific accounting requirements would be reserved for narrower categories of work where the department says the additional controls are necessary.
The policy also instructs acquisition officials to attach demanding oversight requirements to individual contracts rather than automatically applying them across an entire company or business unit.
Why the Pentagon says reform is needed
The department argues that its existing system has contributed to a defence industrial base that is less competitive and more expensive than it should be. Its stated goal is to bring more suppliers into the market while speeding up the delivery of weapons, equipment and services.
The memorandum says officials should use competition, comparable sales and reliable price histories to set prices whenever those tools are available. When no comparable market exists, contracting officials may seek cost and pricing information already maintained by a company instead of requiring a new accounting system or special data format.
The approach is designed to support the department’s wider acquisition reforms, including a preference for fixed-price contracts and expanded use of alternative contracting tools. The Pentagon says those changes are intended to increase production speed and reduce barriers for companies that do not traditionally depend on government business.
New deadlines and oversight requirements
The plan is not a complete withdrawal of government oversight. It includes several deadlines and approval requirements aimed at limiting abuse and protecting public funds.
- The department will ask the Cost Accounting Standards Board to make exemption the default for most work, while retaining coverage for selected high-risk, cost-based development contracts.
- Contracting officials are directed to use higher cost-accounting thresholds created under the Fiscal Year 2026 National Defense Authorization Act.
- Senior officials must approve acquisition strategies that would place a new business unit under full government accounting coverage.
- Commercial product and service determinations are expected within 15 business days.
- Independent public-accounting firm certifications may replace some separate government reviews.
- Government audits are to focus on higher-risk contracts and avoid duplicating reviews already completed by qualified auditors.
The Pentagon also says profit decisions should account for the value delivered, risk accepted and private capital invested, rather than being based only on a company’s costs.
What the move could mean for Canadian readers
The changes are an American procurement decision, but they could affect Canada indirectly because Canadian companies often participate in North American defence supply chains or compete for contracts connected to U.S. military programs.
Lower administrative barriers could make it easier for technology firms, manufacturers and specialized suppliers to seek U.S. defence work. That could create additional opportunities for companies with expertise in areas such as drones, cybersecurity, artificial intelligence, advanced materials and satellite systems.
At the same time, Canadian suppliers would still face export-control, security-clearance and treaty-related requirements. Simplifying U.S. accounting rules would not automatically remove those separate obligations.
The policy may also influence future discussions about defence production capacity across North America. Canada’s planned and existing participation in U.S.-linked aerospace and defence programs means that changes to American purchasing practices can affect supplier demand, contract competition and production timelines beyond the United States.
What happens next
The memorandum sets out a direction for implementation rather than an instant replacement of every defence procurement rule. Agencies must now issue guidance, adjust acquisition procedures and determine which contracts require continued government-specific accounting treatment.
The practical effect will depend on how contracting officers interpret the new risk-based approach and how quickly the department changes its regulations. Companies will also be watching to see whether reduced paperwork leads to faster awards and broader competition, or whether new reporting expectations emerge during implementation.
For now, the Pentagon’s message is that defence contracting should become a line of business rather than a corporate identity built around a separate government compliance system. The department says it wants more suppliers, faster production and oversight focused on contracts where the financial and national-security risks are greatest.
Frequently Asked Questions
What is the Pentagon changing?
The U.S. defence department is reducing reliance on specialized government accounting and audit requirements for some contractors and moving toward commercial accounting practices.
Will defence contractors stop being audited?
No. The policy calls for risk-based audits and continued government oversight for higher-risk contracts and work without reliable market pricing.
Why is the Pentagon making this change?
Officials say existing rules can discourage commercial companies from competing for defence work, limit supplier diversity and increase procurement costs.
Could Canadian companies be affected?
Potentially. Canadian firms that participate in U.S.-linked defence supply chains may encounter lower accounting barriers, although export controls and security requirements would still apply.
When will the new rules take effect?
The September 15, 2026 memorandum begins the policy shift, but agencies must still issue implementation guidance and revise procurement procedures before all changes are operational.
Fact-Checked: Key facts were checked against the U.S. Department of War’s September 15, 2026 memorandum and official defence acquisition information.
Disclaimer: The policy is still being implemented, so its practical effect on contractors and cross-border suppliers may change as further guidance is issued.