What DCAA’s New Audit Alert Means for Nontraditional Defense Contractors

On October 6, 2026, the Defense Contract Audit Agency issued Audit Alert 26-CCLD-010(R), its guidance to auditors on the nontraditional defense contractor (NDC) exemptions in Section 1826 of the FY2026 National Defense Authorization Act. The alert confirms that qualifying NDCs are exempt from ten cost, pricing, and business system requirements on Department of War contracts, including the FAR Part 31 cost principles and certified cost or pricing data. It also tells auditors that DCAA keeps a role on those contracts. Auditors are directed to verify whether a company meets the NDC definition, and DCAA will continue to support contracting officers with audits and advisory services before and after award, including evaluating the data needed to determine a fair and reasonable price. For contractors, NDC status is a claim DCAA will check, and the records behind it, including labor records, still need to hold up.

Firms that advise contractors on DCAA matters read the alert the same way. In an October 20 advisory, Dentons summarized DCAA’s position as exemption from TINA and Part 31 without exemption from DCAA. Redstone Government Consulting noted that the memo says little about how incurred cost reviews will work on contracts where Part 31 no longer applies. Contractors working out what this means for daily operations can start with the baseline controls described on our DCAA audit-ready timekeeping page.

What counts as a nontraditional defense contractor?

Under 10 U.S.C. § 3014, a nontraditional defense contractor is an entity that has not performed, for at least one year before the Department of War solicits sources, any Department of War contract or subcontract subject to full Cost Accounting Standards (CAS) coverage. The test looks only at full CAS coverage, so a company with modified coverage can still qualify. It also looks only at Department of War work. Redstone points out that a company holding a fully CAS-covered contract with the Department of Homeland Security, and only modified coverage on its defense contracts, can still meet the definition.

A large share of the industrial base already qualifies. A July 2025 study by George Mason University’s Baroni Center for Government Contracting, cited by Forvis Mazars, estimated that more than 90 percent of the defense industrial base meets the definition. That figure is an estimate, and the study was published before the FY2026 NDAA and the new CAS thresholds took effect. The CAS Board’s final rule, effective October 1, 2026, raised the threshold for full CAS coverage from $50 million to $100 million and the basic CAS applicability threshold from $2.5 million to $35 million (Covington, Hunton). The Board estimated that the higher full-coverage threshold reduces the number of business segments under full coverage from 773 to roughly 564. Some of those segments may qualify as NDCs over time, though the timing depends on how their existing contracts are covered.

What does Section 1826 exempt?

Section 1826 exempts the products and services NDCs provide under Department of War contracts, subcontracts, and agreements from these ten requirements:

1. Certified cost or pricing data under 10 U.S.C. § 3702, the Truthful Cost or Pricing Data statute (formerly TINA)
2. FAR Part 31, Contract Cost Principles and Procedures
3. DFARS 215.407, Special Cost or Pricing Areas
4. DFARS 252.242-7005, Contractor Business Systems
5. DFARS 252.242-7006, Accounting System Administration
6. DFARS 252.215-7002, Cost Estimating System Requirements
7. DFARS 252.234-7002, Earned Value Management System
8. DFARS 252.242-7004, Material Management and Accounting System
9. DFARS 252.244-7001, Contractor Purchasing System Administration
10. DFARS 252.245-7003, Contractor Property Management System Administration

The head of the contracting activity can waive any of these exemptions, in whole or in part, with a written determination. The Department of War has implemented five exemptions through DFARS class deviations issued between July 22 and September 9, 2026, covering DFARS Parts 215, 231, 234, 244, and 245, and posted on the Defense Pricing, Contracting, and Acquisition Policy website. DCAA’s alert states that more class deviations are in development for the remaining business system clauses. The alert directs auditors to recognize all ten exemptions unless the head of the contracting activity waives or modifies one with a written determination. Dentons reads this as DCAA treating the five exemptions without class deviations as already in effect.

What will DCAA still do on NDC contracts?

The alert tells auditors that evaluation approaches for NDCs will differ from those used for traditional defense contractors, and it lists four considerations:

1. Verify NDC status by determining whether the contractor meets the statutory definition in 10 U.S.C. § 3014
2. Recognize the ten exemptions unless they have been waived or modified in writing
3. Work with contracting officers to understand their specific data requirements for NDC proposals and contracts
4. Support contracting officers through audits or advisory services for both pre-award and post-award activities

Contracting officers keep final responsibility for determining fair and reasonable prices. The alert states that they may request actual cost information at both the prime and supplier levels when needed, following the data hierarchy in 10 U.S.C. § 3705 as implemented in FAR 15.402 and 15.403. NDCs must still comply with reasonable data requests, and if a contractor or subcontractor refuses, auditors are directed to pursue formal data denial procedures. DCAA is also establishing a process to monitor and track contractors that claim NDC status, and it will issue more guidance as implementation progresses.

Contractors following DCAA’s current audit priorities for labor records can find more context in our review of DCAA’s FY2025 Report to Congress.

The alert does not address how incurred cost reviews will work on contracts exempt from Part 31. Redstone expects auditors on Part 31-exempt contracts to check that costs were paid in the normal course of business, that they were required by that contract’s scope of work and not another contract’s, and that they were accounted for under generally accepted accounting principles.

Why do labor records still matter on exempt contracts?

Several requirements that depend on labor records sit outside the ten exemptions. FAR 16.301-3 allows a cost-reimbursement contract only when the contractor’s accounting system is adequate for determining the costs that apply to the contract. Section 1826 removes the DFARS accounting system clause for NDCs, but FAR 16.301-3 is not on the exemption list. For new cost-type work, the government typically evaluates adequacy with the SF 1408 preaward survey, which looks for a timekeeping system that identifies each employee’s labor by intermediate or final cost objective and a labor distribution system that charges direct and indirect labor to the correct cost objectives.

Time-and-materials and labor-hour contracts carry their own requirement. FAR 52.232-7 requires contractors to substantiate vouchers with evidence of actual payment and with individual daily job timekeeping records. That clause is also outside Section 1826, and so is False Claims Act exposure for inaccurate labor billing, which we covered in Timekeeping and the False Claims Act.

Redstone’s expectations for incurred cost reviews and DCAA’s guidance on data requests point the same direction. Actual cost information for labor comes from the hours employees charge to each contract. Showing that a cost belongs to one contract and not another depends on those hours landing on the correct contract and charge code each day. Those same records feed future estimates. Redstone notes that contracting officers will still expect historical cost data as the basis of estimate when it is available, even when the data does not need to be certified.

NDC status can also change. A company that begins performing a Department of War contract with full CAS coverage stops qualifying for solicitations issued during the following year, and its new awards can carry the cost principle and business system requirements again. Labor charging practices kept consistent during the exempt period make that transition easier, because the timekeeping and labor distribution history already exists when an auditor asks for it.

What should contractors do now?

1. Document NDC eligibility. Keep a verifiable list of Department of War contracts and subcontracts showing the awarding agency, award date, period of performance, level of CAS coverage, and dollar value. This list is the evidence DCAA will use to confirm status.
2. Track waiver requests. Ask contracting officers to notify you when a waiver from the head of the contracting activity is under consideration, along with the concern behind it, and respond early.
3. Keep cost data ready. Contracting officers can request actual cost information from primes and suppliers, and NDCs must comply with reasonable requests. Maintain historical labor and cost data that supports price reasonableness, even when certification is not required.
4. Keep labor charging consistent. Apply the same daily timekeeping controls to exempt contracts that you apply to cost-type and T&M work, so labor records support allocation, vouchers, and any future accounting system review.
5. Watch for new guidance. Monitor DFARS class deviations and further DCAA guidance on the business system clauses that have not been implemented yet.