Materiality Defined
Materiality is a key principle in accounting and financial reporting, which helps determine if an omission or misstatement would significantly impact decision-making. If the discrepancy would impact stakeholders or decision-makers, the information is deemed material.
In government contracting, materiality comes into play in different contexts such as a price reduction for defective certified cost or pricing data, accounting for a direct cost as an indirect cost, and a Cost Accounting Standards (CAS) non-compliance.
Is Materiality Defined in the FAR or CAS Rules?
Despite its significance in government contracting, materiality is not defined in the Federal Acquisition Regulation (FAR) or CAS rules. While the CAS rules do not define materiality, they do provide guidance on factors that should be considered when determining materiality.
This article will discuss materiality in the context of the CAS, as well as two common scenarios that typically impact government contractors.
Why Materiality Matters More After the FY 2026 NDAA
While the materiality framework itself has not changed, the environment in which it is applied has shifted significantly.
Beginning June 30, 2026, CAS applicability will be limited primarily to:
- Contracts $35 million and above
- Contractors approaching or exceeding $100 million in CAS‑covered awards
As a result:
- Fewer contractors will be CAS‑covered
- Those that are covered by CAS will face heightened scrutiny, making materiality determinations more consequential
For large contractors, materiality will increasingly be the primary mechanism for resolving CAS issues efficiently as the CAS Board evaluates potential simplification and consolidation of standards.
How the Cost Accounting Standards Board Approaches Materiality
Under 41 U.S.C. § 1502, the Cost Accounting Standards Board (CASB) has exclusive authority to prescribe, amend and rescind CAS and its interpretations. The CAS rules are codified at 48 CFR Chapter 99, and the related contract clauses adopted by the FAR Councils appear at FAR 52.230‑1 through 52.230‑6.
Pursuant to FAR 52.230‑2, a contractor must agree to a price adjustment when:
- It makes a cost accounting practice change to comply with a new or revised CAS,
- It makes a voluntary cost accounting practice change, or
- It fails to comply with an applicable CAS or its disclosed practices, resulting in increased costs to the government.
Importantly, neither FAR 52.230‑2 nor FAR 52.230‑6 conditions the government’s right to a price adjustment on materiality. In other words, the CAS rules themselves do not require a cost impact to be material before an adjustment may be calculated.
This distinction is critical: materiality is an administrative judgment issue rather than a CAS entitlement issue.
How FAR Part 30 Determines CAS Materiality
Although the CASB has not formally defined materiality, the FAR Council filled this gap through FAR Part 30, which governs CAS administration:
- FAR 30.601 assigns the Cognizant Federal Agency Official (CFAO) responsibility for determining whether a CAS change or noncompliance occurred and how cost impacts should be resolved.
- FAR 30.602 directs the CFAO to evaluate materiality using the criteria in 48 CFR 9903.305.
Those criteria provide that no single factor is determinative, and that the CFAO must consider where applicable:
- The absolute dollar amount involved
- The amount of contract cost relative to the amount under consideration
- The relationship between the cost item and the cost objective
- The impact on government versus non‑government work
- The cumulative effect of individually immaterial items
- The cost of administering a contract price adjustment
It is appropriate to consider whether such impacts:
- Tend to offset one another
- Tend to be in the same direction and hence to accumulate into a material amount
- The cost of administrative processing of the price adjustment modification
If the cost to process exceeds the amount to be recovered, it is less likely the amount will be material.
The FAR requires the CFAO to document the basis for determining whether a cost impact is material or immaterial. If the cost impact is determined to be immaterial, no contract price adjustment is made, although the contractor may still be directed to correct the noncompliance on a prospective basis.
Conversely, if the cost impact is determined to be material, the CFAO must follow the procedures set forth in FAR 30.603 through 30.606, as applicable, and make appropriate adjustments to the contract price.
How the Raytheon Case Shaped CAS Materiality Determinations
The Raytheon Company, Space & Airborne Systems decision provides an important reminder that materiality determinations cannot be outcome driven.
In that case, the CASB rejected a CFAO’s materiality determination that was based primarily on the fact that the accounting change increased government costs. The board emphasized that:
- All 9903.305 criteria must be considered
- While one factor may outweigh others, the CFAO must demonstrate that the full analysis occurred.
This case remains a cornerstone for contractors challenging overly simplistic or inadequately documented materiality determinations.
How Can Government Contractors Leverage the Requirements for Determining Materiality?
Contractors should treat 48 CFR 9903.305 as a defensive checklist. When preparing a cost impact or responding to a CAS noncompliance:
- Address each applicable criterion explicitly
- Quantify rate impact, not just dollar impact
- Analyze whether impacts offset or accumulate
- Compare the cost of recovery to the administrative burden
- Consider whether the issue is isolated or systemic
For example, a $200,000 cost impact may appear material in isolation, but when evaluated against $100 million of contract cost, minimal rate movement and high administrative burden, a well‑supported case for immateriality may exist.
How Materiality Applies Beyond CAS
Although this article focuses on CAS, materiality is equally relevant in:
- Defense Contract Audit Agency (DCAA) incurred cost audits
- Accounting system reviews
- Cost allowability disputes
- Forward pricing rate negotiations
In many cases, materiality analysis helps contractors prioritize risk, avoid unnecessary system changes and frame audit responses more effectively.
Using Materiality To Manage Regulatory Risk
Materiality is not a loophole. It is a required, documented judgment grounded in regulation. As CAS applicability narrows and compliance expectations rise for larger contractors, materiality will increasingly define the difference between a theoretical issue and a contract‑level adjustment.
Contractors that understand how to analyze, document and defend materiality are far better positioned to manage CAS risk efficiently in the post‑2026 regulatory landscape.
Guiding You Forward
If you have questions concerning materiality, CAS compliance or other government contracting matters, our government contracting consulting professionals can help you evaluate risk, document defensible materiality determinations and navigate complex FAR and CAS requirements.
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