DOW Memo Signals Major Push Toward Commercial Accounting, Fixed Pricing and Faster Acquisition

The U.S. Department of War (DOW or Department) on September 14, 2026,  issued a memorandum titled "Fostering One Strong Industrial Base" (the Strong Industrial Base Memo or Memo) that directs a broad set of reforms to DOW policies and practices governing defense acquisition cost accounting, pricing, auditing and contractor oversight.

The Strong Industrial Base Memo builds on Executive Order (EO) 14402, "Promoting Efficiency, Accountability, and Performance in Federal Contracting" (April 30, 2026) (EO 14402), which established fixed-price contracts – or contracts that tie profit to performance-based metrics when appropriate – as the default and preferred procurement approach across the executive branch. Holland & Knight previously summarized that EO. Additionally, the Strong Industrial Base Memo draws on DOW's August 18, 2026, memorandum on Supplier Cost and Pricing Transparency (the Supplier Cost & Pricing Memo).

The Memo states that DOW "must buy faster, simpler, and more competitively to get speed and volume." Its central theme is reducing government-unique accounting, audit and business-system burdens – particularly for commercial companies, nontraditional defense contractors and new entrants to the defense industrial base – while preserving cost and pricing visibility where competition or market data are insufficient.

This Holland & Knight alert summarizes the Strong Industrial Base Memo's key directives and identifies what takes effect immediately versus what is dependent upon implementing guidance, rulemaking, Cost Accounting Standards Board (CASB) action or additional statutory authority. It provides practical recommendations for defense contractors and other stakeholders within the defense industrial base.

Why It Matters

The Memo sets out a broad acquisition-reform agenda that, if implemented as directed, could materially change the compliance and oversight framework for companies that do business with DOW:

• DOW would seek to substantially narrow Cost Accounting Standards (CAS) coverage while employing Generally Accepted Accounting Principles (GAAP)-based accounting to the maximum extent permitted by law and proposing that remaining CAS requirements be limited to covered contracts and the indirect-cost pools material to those contracts rather than triggering broader companywide CAS coverage.
• Fixed-price contracting would remain the default and preferred approach while DOW reiterates that cost-reimbursement contracting remains appropriate for research and development of major systems and otherwise should be the exception.
• Audits and business-system reviews would become risk-based, with DOW directed to establish commercial-aligned criteria and accept certification by a registered independent public accounting firm against those criteria in place of a separate Department review.
• Commercial-product and commercial-service determinations would be faster and more durable, with DOW directed to establish a 15-business-day decision standard for complete requests and to give prior Department determinations continuing effect unless reversed in writing by a head of contracting activity.
• Other Transaction (OT) and consortium-based acquisition policy would be revised, including new guidance on project-level eligibility, a direct-award preference, fee transparency, nontraditional contractor participation and follow-on production planning.
• DOW profit policy would be revised to place greater emphasis on value delivered, risk carried, private capital invested, efficiency, performance and the financial health of fragile supply-chain chokepoints.

At the same time, the Strong Industrial Base Memo is a departmental policy directive; it does not amend the Federal Acquisition Regulation (FAR)/Defense Federal Acquisition Regulation Supplement (DFARS), CAS or underlying statutes. Some directives are effective immediately, while others require class deviations, Component Acquisition Executive (Component) guidance, DFARS rulemaking, CASB action or potentially additional statutory authority. Contractors should therefore distinguish between requirements already in effect and the significant implementation actions that will occur over the coming months.

Background: EO 14402 and the Fixed-Price Default

EO 14402 establishes fixed-price contracts as the default and preferred method of procurement across the executive branch. For purposes of the EO, "fixed-price contracts" includes fixed-price contracts under FAR Part 16 and, when appropriate, contracts that tie profit to performance-based metrics. Any use of a non-fixed-price contract must be justified in writing by the contracting officer to the agency head. For DOW contracts, written approval at the agency-head level is additionally required when the non-fixed-price contract – or, for a hybrid contract, the non-fixed-price portion – exceeds $100 million, subject to the EO's permitted delegation. That additional approval requirement does not apply to contracts supporting emergency, major disaster or contingency operations or to contracts involving research and development or preproduction development for major systems acquisition. The EO also directed each agency to review its 10 largest non-fixed-price contracts within 90 days, subject to those same categories of exceptions, and requires semiannual reporting to the Office of Management and Budget. For a fuller discussion of EO 14402, see the aforementioned Holland & Knight alert.

What the Strong Industrial Base Memo Does Now: Immediate Effects

The Strong Industrial Base Memo is effective on signature and states that "[n]o discretionary study, pilot, working-group determination, or approval not required by law may delay these actions."

Several directives take effect immediately:

1. CAS Coverage Gate. Effective immediately, before issuing a solicitation that could bring a business unit not previously subject to CAS under full CAS coverage, DOW must obtain written approval from the Under Secretary of War for Acquisition and Sustainment (USW(A&S)) for the acquisition strategy. The request must assess competition, commercial acquisition, competed fixed-price structures, available exemptions and existing waiver authority and explain why none can meet the requirement without new full CAS coverage. The approval concerns the acquisition strategy only; it does not determine CAS applicability, grant an exemption or a waiver, or authorize omission of a required provision or clause. The USW(A&S) must decide within 15 business days or elevate the request to the Deputy Secretary.
2. Discretionary Business-System Reviews. Effective immediately, a discretionary business system review requires a written determination of specific, material risk by the cognizant contracting activity coordinated with the requiring Component Acquisition Executive or designee. For multi-component facilities, the Defense Contract Management Agency (DCMA) will identify the cognizant component. Accordingly, discretionary government review may no longer be initiated solely as a matter of routine; the required risk determination must support the review.
3. Forward Pricing Rate Agreements. The Strong Industrial Base Memo directs DCMA to immediately work with the Defense Contract Audit Agency (DCAA) to overhaul the approach to establishing and maintaining forward pricing rate agreements (FPRAs). The revised approach is to draw on rate data maintained in the ordinary course of business, with FPRAs used only where they accelerate recurring, high-volume negotiations and enable a more efficient process for both DOW and industry.
4. Anti-Delay and Implementation Guardrails. The Strong Industrial Base Memo states that implementing guidance may not add requirements beyond the Memo and applicable law and that no discretionary study, pilot, working-group determination or approval not required by law may delay the directed actions. The Memo also provides that no new organization or compliance framework will be created and requires subordinate Department guidance that is inconsistent with the Memo to be revised within 90 days.

The Strong Industrial Base Memo also establishes several major reform workstreams with specified implementation timelines:

Efficiency Assurance on Fixed-Price Contracts and OTs

Within 30 days, DOW is to issue a joint enforcement-posture statement clarifying that for fixed-price contracts and OTs, to the extent the performer bears the cost risk, a performer that becomes more efficient against a fairly negotiated price keeps the savings for that contract and DOW captures efficiencies only prospectively in the next negotiation at a fair margin. The statement will scope enforcement priorities and be incorporated into the forthcoming profit-policy revision. It will not waive statutory remedies for fraud or defective pricing, CAS price adjustments where CAS applies or final indirect-cost-rate settlement on cost-reimbursement work.

Narrowing CAS and Adopting GAAP as the Default

The Strong Industrial Base Memo directs DOW to move away from government-unique CAS and accept GAAP-based accounting "to the maximum extent the law permits." Some of the directed actions can be implemented by DOW under existing authority, while broader changes to CAS itself require action by the CASB.

CASB Proposals

Within 60 days, DOW is to submit proposals to the CASB that would 1) make CAS exemption the default, including through a class exemption where legally available, 2) confine remaining CAS coverage to major-scale, cost-based development contracts awarded without adequate price competition, 3) attach remaining CAS coverage to the covered contract and indirect-cost pools material to that contract, rather than to the company, business segment or supply chain as a whole, and 4) modernize the CAS Disclosure Statement into a short certification that contract cost accounting follows the contractor's annual GAAP financial statements audited by a registered independent public accounting firm, supplemented only by legally required disclosures and a schedule of departures, in a machine-readable, versioned electronic format.

The Strong Industrial Base Memo Separately Directs Several Nearer-Term Department Actions

• Within 30 days, DOW is to prohibit Department Components from imposing on CAS-exempt awards and other transactions the equivalent of CAS coverage, disclosure obligations, business-system reviews or practice-change governance under another name – what the Memo describes as "shadow CAS." Cost data from exempt performers is to be requested as already maintained in their books and records.
• Within 60 days, DOW is directed to issue a CAS waiver policy and standing justification templates for new entrants, predominantly commercial segments and businesses transitioning out of small-business status.
• Within 30 days, DOW is to recommend a qualified Department representative to the CASB to advance CAS-to-GAAP conformance.
• DOW is directed to apply immediately the higher CAS thresholds enacted in Section 1806 of the fiscal year (FY) 2026 National Defense Authorization Act (NDAA), as implemented through a Department class deviation and the CASB's 2026 threshold rule as it takes effect.
• DOW is directed to use the separate statutory relief for nontraditional defense contractors enacted in Section 1826 of the FY 2026 NDAA.

Practical Note – Significant Implementation Questions Remain: How much of the Strong Industrial Base Memo's CAS-to-GAAP transition DOW can accomplish under existing authority, and how much will require further CASB action or additional statutory authority, remains uncertain.¹ The CASB has exclusive statutory authority under 41 U.S.C. § 1502 to prescribe, amend and rescind CAS, so DOW cannot itself effect changes to the CAS standards. DOW can, however, take steps within its own authority, including applying the higher CAS thresholds enacted in the FY 2026 NDAA, using existing exemption and waiver authorities, prohibiting "shadow CAS" requirements on exempt awards and requiring senior-level acquisition-strategy approval before issuing a solicitation that could bring a business unit not previously subject to CAS under full CAS coverage.

The line between prohibited "shadow CAS" and legitimate requests for cost, pricing and accounting information will also require careful implementation. The Strong Industrial Base Memo makes clear that requesting information does not, by itself, create a cost-reimbursement contract or CAS coverage and does not alter the thresholds or exceptions applicable to certified cost or pricing data. At the same time, the Memo states that no new accounting systems or special data formats will be required and that information provided by industry will be used only for authorized government purposes and not made available to another company for that company's own use.

Faster Commerciality Determinations

Within 45 days, the Strong Industrial Base Memo directs DOW to establish a process under which commercial product and commercial service determinations are completed within 15 business days of a complete request. The Memo also directs that prior DOW commercial determinations carry forward for subsequent procurements unless reversed in writing by a head of contracting activity.

The 15-business-day standard could materially accelerate commerciality determinations. The directive that prior DOW determinations carry forward also reinforces existing statutory protections for prior commercial determinations. Commercial-product and commercial-service acquisitions are generally exempt from certified cost or pricing data requirements and CAS coverage.

Practical Note: Contractors should identify pending commerciality requests that may benefit from the forthcoming 15-business-day process and preserve prior DOW commercial determinations for use in subsequent procurements.

Cost and Pricing Data Reforms

The Strong Industrial Base Memo carries forward the Supplier Cost & Pricing Memo, which directed cost and pricing transparency across all tiers of the supply chain for negotiations involving products and services valued at $10 million or more, regardless of whether certified cost or pricing data is required and called for access to actual cost information at both the prime and supplier levels, except for Commercially Available Off-the-Shelf (COTS) items. The Strong Industrial Base Memo preserves that objective but adds guardrails governing how DOW requests and uses such information. It also makes clear that requesting information does not, by itself, create a cost-reimbursement contract or CAS coverage and does not alter the statutory thresholds or exceptions applicable to certified cost or pricing data under 10 U.S.C. §§ 3702–3703.

Within 30 days, DOW is to implement supplier cost and pricing transparency procedures consistent with the August 18 memorandum. Those procedures are to require contracting officers to obtain price information first and cost information only to the extent necessary to establish a fair price, request cost information in the form in which the contractor already maintains it, use information received only for the pricing action for which it was requested and prohibit automated access to contractor systems without express contractual authorization and applicable security protections.

Watch Point: The Strong Industrial Base Memo carries forward DOW's ability to look through a prime contractor to suppliers when needed, but the practical scope of lower-tier visibility remains unsettled. Commercial products and commercial services are excepted from certified cost or pricing data requirements under 10 U.S.C. § 3703(a)(2), but 10 U.S.C. § 3705 separately permits contracting officers to request data other than certified cost or pricing data to the extent necessary to determine price reasonableness, subject to statutory limitations on requests relating to commercial products and services. The implementation question will be how DOW applies that authority across lower tiers while respecting those statutory protections, contractual confidentiality obligations and the Strong Industrial Base Memo's restrictions on how information is requested and used. Prime contractors may face increased requests to obtain supplier information, while suppliers should review relevant confidentiality and data-sharing provisions in their agreements.

Other Transactions and Consortium Reform

The Strong Industrial Base Memo directs significant changes to DOW's use of prototype OTs under 10 U.S.C. § 4022. Section 4022 authorizes prototype projects directly relevant to enhancing DOW mission effectiveness or improving platforms, systems, components or materials but generally requires at least one of four conditions to be met: 1) at least one nontraditional defense contractor or nonprofit research institution participates to a significant extent, 2) all significant nongovernment participants are small businesses or nontraditional defense contractors, 3) nonfederal sources contribute at least one-third of the total prototype-project cost or 4) the senior procurement executive determines in writing that exceptional circumstances justify use of an OT.

Specifically, the Memo directs:

• Within 45 days, DOW is to issue interim OT policy, followed by a reissued OT Guide within 120 days thereafter. The policy is to define participation "to a significant extent" based on a unique contribution material to the prototype project, without using percentage-of-workshare or dollar thresholds as eligibility tests; prefer fixed-amount, milestone-based payment structures; require the agreements officer, before award, to document the applicable statutory eligibility basis, relying where lawful on offeror self-certification against standard representations and conducting additional verification by exception, with a 10-business-day period for any additional eligibility determination; and require follow-on production planning for every prototype OT.
• Within 60 days, Component Senior Procurement Executives are to publish preapproved justification templates for exceptional-circumstances determinations under 10 U.S.C. § 4022(d)(1)(D) and establish a 10-business-day signature standard.
• Within 30 days, DOW is to issue a consortium policy addressing project-level eligibility, a preference for direct awards and fee transparency.

Watch Point: The forthcoming OT and consortium policies will need to operate within the existing statutory framework of 10 U.S.C. § 4022. Section 4022 requires use of competitive procedures to the maximum extent practicable when entering prototype OTs. It already permits follow-on production contracts or transactions to be awarded without further competition when the statutory conditions are satisfied, including use of competitive procedures to select participants for the prototype transaction and successful completion of the prototype. For consortium-based OTs, current law also permits follow-on production upon successful completion of an individual prototype or prototype subproject and does not require completion of all activities within the consortium. The forthcoming guidance will therefore be important in determining how DOW operationalizes project-level eligibility, the stated direct-award preference and prototype-to-production planning within those existing authorities.

Risk-Based Audits and Contractor Business-System Oversight

The Strong Industrial Base Memo directs DOW to shift toward risk-based audit and business-system oversight that relies first on evidence contractors already maintain or generate and focuses government effort on risks material to acquisition decisions.

• Within 60 days, the Under Secretary of War (Comptroller) is to direct risk-based auditing that considers a contractor's audited GAAP financial statements and internal-control attestations before additional government work is performed. Each audit must identify the risk, its materiality to a government decision, the records needed and why existing evidence is insufficient. No office is to request an audit of a cost or system that has already been audited, or reopen closed years, absent indicators of fraud or material misstatement.
• Within 90 days, DOW is to consolidate contractor business-system requirements and retire duplicative review regimes. Among other changes, estimating-system and material-management-and-accounting-system (MMAS) requirements are to be incorporated into simplified, commercial-aligned accounting-system criteria.
• Within 60 days, DOW is to publish clear, specific and publicly available commercial-aligned business-system criteria and issue a class deviation accepting certification by a registered independent public accounting firm against those criteria in place of Department review. Where practicable, the effective date is to align with the contractor's annual financial-statement audit cycle.
• Within 90 days, DOW is to align the contract-oversight enterprise to eliminate duplication, clarify DCAA and DCMA responsibilities and charters, preserve mission-critical contract administration, and account for workforce effects and staffing constraints.

Watch Point: The practical impact of these reforms will depend on how DOW defines the commercial-aligned criteria, scope of independent public accounting firm certification and DCAA/DCMA responsibilities under the revised oversight model. The Memo also directs several system-specific changes, including narrowing earned value management to major development and long-duration production programs where the government retains cost risk; retiring the separate system-validation regime in favor of integrated baseline reviews and contractor-provided schedule, actuals and estimate-at-completion information; relying on FAR property-stewardship requirements; increasing purchasing-system-review thresholds; and establishing a 90-government-day period for disposition of contractor corrective action plans. Existing contract requirements will not disappear automatically; to the maximum extent permitted by law and contract, Components are directed to cease enforcing superseded requirements. Contracting officers are to offer bilateral, no-cost modifications removing affected clauses at the next practicable opportunity.

Profit-Policy Rethink

Within 90 days, DOW is to initiate DFARS rulemaking to revise its profit policy so that negotiated margins better reflect value delivered, risk carried and private capital invested rather than cost incurred alone. The Memo further directs that commercial margins inform negotiations but not operate as profit caps; that the revised policy reward efficiency, speed and performance; consider the financial health of fragile supply-chain chokepoints; and address sustained loss positions prospectively through fair pricing of future work. The action does not alter applicable cost-allowability requirements for cost-reimbursement work.

Current DFARS policy generally requires contracting officers to use a structured approach to develop pre-negotiation profit or fee objectives when certified cost or pricing data is obtained, with the weighted-guidelines method ordinarily serving as the default structured approach. The forthcoming rulemaking will determine how the Memo's new profit-policy considerations are incorporated into or alter that framework.

Regulatory Housekeeping – Eliminating Unsupported Requirements

Within 90 days, DOW is instructed to require that recurring reviews, checklists, data demands and approvals imposed through Department-, Component- or office-level policies outside the FAR and DFARS identify the specific legal or regulatory authority on which they are based. Requirements without an identified basis are to be suspended from new use and will lapse unless reaffirmed by the responsible Component Acquisition Executive within 30 days. The Memo also directs Components not to recreate retired regimes through local policies, checklists, approvals or contract clauses.

This directive reaches beyond formal FAR and DFARS requirements to Component- and office-level processes that may have become embedded in acquisition practice without a clearly identified legal or regulatory basis. If implemented as directed, it could eliminate duplicative or unsupported procedural requirements and reduce administrative burden for both contractors and government acquisition personnel.

Demand-Side Industrial-Base Tools

Within 180 days, the Defense Innovation Unit (DIU), with support from DOW acquisition leadership, is to scale the Department's use of advance market commitments, building on the Drone Dominance initiative.² The Memo contemplates commitments that may include aggregated demand from U.S. allies and are intended to create stronger demand signals, reward demonstrated performance and delivered production scale, and help build more resilient supply chains. Unlike traditional capacity investments that primarily subsidize the supply side, advance market commitments seek to reduce investment risk by providing a credible demand signal tied to future performance or production.

The structure, scope and sectors targeted by these commitments remain to be developed. Among the key implementation questions are how DOW will aggregate U.S. demand with demand from U.S. allies, what acquisition or industrial-base authorities will support the commitments, and what performance or production milestones will trigger government purchasing commitments. Companies in markets where uncertain demand constrains private investment or production scaling should monitor this workstream closely as DIU develops the implementing approach.

Implications for Existing Contracts

The Strong Industrial Base Memo is not limited to new awards. To the maximum extent permitted by law and contract, it directs Components to cease enforcing superseded requirements and directs contracting officers to offer bilateral, no-cost modifications removing affected clauses at the next practicable opportunity.

Separately, EO 14402 directed each agency head, within 90 days of the April 30, 2026, order, to review and, to the maximum extent practicable and consistent with law, seek to modify, restructure or renegotiate the agency's 10 largest non-fixed-price contracts to facilitate greater use of fixed prices and performance-based incentives. The review excludes contracts involving research and development or preproduction development for major systems acquisition and contracts supporting emergency, major disaster or contingency operations.

Practical Note: Contractors should identify existing clauses, business-system requirements or other oversight obligations that may be superseded by forthcoming implementation actions and consider whether a bilateral, no-cost modification may be appropriate once the relevant requirement has been retired. The Strong Industrial Base Memo does not itself rewrite existing contract terms; until an affected clause is removed or otherwise modified, contractors should continue to comply with their existing contractual obligations.

Implementation Timeline

The Strong Industrial Base Memo's Appendix sets out an aggressive schedule of implementation actions. The table below summarizes key deadlines, calculated from the Memo's September 14, 2026, signature date unless otherwise noted.

Practical Guidance for Contractors and the Defense Industrial Base

The Strong Industrial Base Memo is highly directive and operationally specific, but much of its practical impact will depend on implementation. Contractors should distinguish between provisions that are already effective and reforms that still depend on class deviations, Component guidance, DFARS rulemaking, CASB action or other implementing measures.

Near-term preparation nevertheless makes sense. Contractors should identify where the Strong Industrial Base Memo may provide relief from existing government-unique requirements, where it may result in new or different cost and pricing requests, and where forthcoming implementation could affect pending proposals, existing contracts, accounting and business-system obligations, and supply-chain relationships.

The chart below offers practical considerations for different segments of the contracting community.

Bottom Line

The Strong Industrial Base Memo sets a clear direction toward greater reliance on commercial accounting practices, market-based pricing, fixed-price and performance-oriented acquisition, risk-based oversight, and broader use of flexible acquisition and demand-side tools. Some directives are already in effect, but many of the Memo's most consequential reforms depend on forthcoming class deviations, Component guidance, DFARS rulemaking, CASB action and other implementation. Contractors should monitor those actions closely and not assume that existing contract clauses or compliance obligations have changed unless and until the applicable requirement is formally modified or superseded. Early preparation will position contractors to take advantage of new flexibilities and respond effectively as requirements change.

For more information about the topics discussed in this alert, please contact the authors.

Notes

¹ CAS-covered contracts may be subject to either full or modified CAS coverage; modified coverage generally requires compliance only with CAS 401, 402, 405 and 406, while full coverage requires compliance with all applicable CAS. The Memo's immediate acquisition-strategy approval requirement applies only to solicitations that could bring a business unit newly under full CAS coverage. Following amendments enacted in the FY 2026 NDAA, CAS generally applies to negotiated prime contracts and subcontracts exceeding $35 million, as adjusted for inflation, unless an exemption applies. Statutory exemptions include contracts, subcontracts or portions thereof for commercial products or commercial services; contracts, subcontracts or portions thereof for which the price is set by law or regulation; and firm-fixed-price contracts, subcontracts or portions thereof awarded on the basis of adequate price competition without certified cost or pricing data. The CASB may exempt classes of contractors and subcontractors and establish procedures for individual waivers. Agency heads also retain statutory waiver authority in specified circumstances, including for qualifying predominantly commercial segments on contracts or subcontracts below $100 million, as adjusted for inflation, and in exceptional circumstances when necessary to meet agency needs. The CASB had already taken significant steps toward CAS-GAAP conformance before issuance of this Memo. A final rule published July 8, 2026, and effective August 7, 2026, rescinded CAS 408 and 411 in their entirety and most provisions of CAS 404 (Capitalization of Tangible Assets) and CAS 409 (Depreciation of Tangible Capital Assets), transferring certain retained requirements from CAS 404 and 409 elsewhere within the CAS regulations. The CASB concluded that the government's interests in the areas covered by the rescinded provisions could be adequately protected through reliance on GAAP together with remaining CAS and FAR requirements. A separate final rule published September 1, 2026 (effective October 1, 2026) implements several FY 2026 NDAA Section 1806 changes. Among other things, the rule increases the basic CAS applicability threshold from $2.5 million to $35 million, eliminates the former $7.5 million trigger-contract concept, raises the thresholds for full CAS coverage and Disclosure Statement requirements from $50 million to $100 million, increases the regulatory agency-head waiver threshold from $15 million to $100 million, and clarifies application of CAS thresholds and exemptions to indefinite-delivery contracts.

² Drone Dominance is a DOW initiative structured as an iterative $1 billion program to purchase small, lethal drones at scale while expanding the U.S. industrial base. The program uses recurring competitive "Gauntlet" challenges and is intended to provide a steady demand signal, with a goal of purchasing more than 200,000 drones by 2027.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.