CAS 408: Compensated Personal Absence Rules and Compliance

CAS 408 is the Cost Accounting Standard that tells federal contractors under full CAS coverage how to measure and assign the cost of paid time off. Codified at 48 CFR 9904.408, it covers vacation, sick leave, holidays, and other compensated personal absences, and its rules push those costs into the accounting period where the entitlement was earned and spread them pro rata across the period’s final cost objectives.¹ Getting it wrong exposes a contractor to price adjustments, interest, and formal disputes, so the mechanics deserve close attention.

What Counts As Compensated Personal Absence

The standard reaches any period when an employee is away from work but still drawing pay under an employer plan or custom. Vacation, sick leave, and holidays are the familiar categories. Less obvious ones qualify too: jury duty, military leave, and bereavement all fall inside CAS 408 when the employer pays the employee during the absence. Each separate plan or custom is analyzed on its own, so a contractor with distinct vacation and sick leave policies treats them independently rather than as a single pool.²

Some payments that look similar sit outside the standard. Severance pay, performance bonuses, and other compensation not tied to a defined absence from work are handled under different rules. The test is whether the payment compensates the employee for a specific period away from work; if the money is really about ending employment or rewarding output, CAS 408 is not the right home for it.

Who Has to Comply

CAS 408 is mandatory only for contractors operating under full CAS coverage. Modified coverage pulls in just four standards (CAS 401, 402, 405, and 406), and CAS 408 is not among them.³ That distinction matters more now because the coverage thresholds moved.

Section 1806 of the FY2026 NDAA doubled the full-coverage trigger from $50 million to $100 million. Full coverage now requires either a single CAS-covered contract award of at least $100 million or net CAS-covered awards of $100 million or more during the preceding cost accounting period. The same provision raised the contract-level threshold for any CAS applicability from roughly $2.5 million to $35 million.⁴ Awards between $35 million and $100 million fall under modified coverage, so CAS 408 does not apply to them.

Several categories of contracts are exempt from CAS entirely, regardless of dollar value:

Sealed bid contracts.
Contracts and subcontracts with small business concerns.
Commercial item acquisitions authorized under FAR 12.207.
Firm-fixed-price contracts awarded on adequate price competition without certified cost or pricing data.
Contracts under $7.5 million, if the business unit is not currently performing any CAS-covered work valued at $7.5 million or more.
Contracts with foreign governments or their agents.
Contracts where the price is set by law or regulation.

These exemptions are set out in 48 CFR 9903.201-1(b).⁵

The Two Core Rules

CAS 408 has a two-part fundamental requirement. First, the cost of compensated personal absence is assigned to the cost accounting period in which the entitlement was earned, not the period in which the leave is used. Second, the total absence cost for a period is allocated pro rata on an annual basis among that period’s final cost objectives.⁶

The first rule rules out a simple cash-basis approach. If an employee earns two weeks of vacation during 2026, the cost belongs in 2026 even if the vacation is taken in 2027. Accrual timing prevents contractors from shifting leave costs between periods in ways that could inflate billings on one set of contracts and understate them on another.

The second rule keeps the cost from clustering on whichever contracts happen to be active when employees actually take time off. A contractor running several contracts at once cannot dump vacation cost onto a single cost-plus contract just because most people took leave during the months that contract was busiest. The absence pool spreads across the period’s work.

Vested vs. Non-Vested Leave

The standard defines entitlement as an employee’s right, whether conditional or unconditional, to a determinable amount of compensated personal absence or pay in lieu of it. The timing test is what the employer would owe if the employee were terminated for lack of work or another non-disciplinary reason. Compensated personal absence is treated as earned at the same time and in the same amount as that termination liability arises.²

That test cleanly separates two types of leave.

Vested Leave

Vested leave is any balance the employer must pay out at termination regardless of why the employee leaves. Vacation is the common example. When policy says departing employees receive a cash payment for unused vacation, those hours are vested, and the cost is recognized in the period the employee earns the entitlement because the financial obligation is fixed. Contractors can estimate the liability using current or anticipated future wage rates, and they can calculate it employee by employee or through reasonable estimates based on sample data and historical experience.⁷ Whichever method is chosen has to be applied consistently.

Layoff provisions add a wrinkle. If a vacation plan pays pro-rata vacation to employees laid off for lack of work, that additional exposure has to be in the accrual at all times, not just when layoffs look likely. The estimate can be built from individual employee data or calculated for the workforce as a whole using historical patterns.⁸

Non-Vested Leave

Non-vested leave creates no payout obligation at termination. Sick leave is the classic case: employees accrue it while employed, but unused hours evaporate when they leave. Without a determinable termination liability, CAS 408 recognizes the cost only in the period it is actually paid.² In practical terms, non-vested sick leave runs on a pay-as-you-go basis. Each period is charged for what was actually spent, not for a projected liability.

The illustrations in 48 CFR 9904.408-60 sharpen the point. A company that accumulates half a day of sick leave per month, with no cap, still cannot accrue those costs if it does not pay out unused sick leave at termination. Even highly predictable usage does not create an accrual; only a termination liability does.⁸ Contractors that change a sick leave policy to add a termination payout convert non-vested leave into vested leave, and the accounting has to shift with the first cost accounting period the changed plan applies to.² Missing that transition is the kind of oversight that draws auditor scrutiny.

Year-End True-Up and Wage Rate Adjustments

At the end of each cost accounting period, estimated leave accruals are reconciled against the actual liability. If employees received salary increases during the year, the value of accrued leave has to reflect the higher rates. The regulation lets contractors estimate at either current or anticipated wage rates, but the chosen method has to be used consistently from period to period.⁷

For vested leave, the true-up closes the gap between what was estimated and what is actually owed at period-end, including any layoff-related pro-rata exposure. For non-vested leave, there is no accrual to adjust; the costs charged simply equal the amounts paid during the period. Either way, the total costs assigned across all contracts should match the actual benefit expenses paid or legally owed.

Where CAS 408 Departs From GAAP

Contractors keeping both CAS and GAAP books have to watch for a real divergence on compensated absences.

Under GAAP (ASC 710), an employer accrues a liability for compensated absences when four conditions are met: the obligation is attributable to services already rendered, the rights vest or accumulate, payment is probable, and the amount can be reasonably estimated. The word doing the work there is “accumulate.” GAAP requires accrual of accumulated rights even when they are not vested, as long as payment is probable. A sick leave plan where unused hours carry forward and are likely to be used generates a GAAP accrual.

CAS 408 is narrower. It keys on the termination-liability test: no termination obligation, no determinable liability, no accrual. The practical result is that CAS 408 typically produces a smaller accrual for non-vested leave than GAAP does. A contractor may carry a sick-leave accrual on its financial statements while reporting those same costs on a cash basis for government contract costing. Keeping both records correct is one of the quieter demands of CAS compliance.

Consequences of Noncompliance

When a contractor fails to follow CAS 408 and the failure increases costs to the government, the contract clause at FAR 52.230-2 requires a price adjustment to recover those increased costs, plus interest. The interest rate tracks the IRS underpayment rate under 26 U.S.C. § 6621(a)(2), which is the federal short-term rate plus three percentage points; for the second quarter of 2026 that rate is 7 percent.⁹ Interest runs from the government’s overpayment until the adjustment is finalized, so unresolved matters get more expensive over time.

The administrative track sits in FAR 30.605. After a DCAA auditor flags a potential noncompliance, the contracting officer has 15 days to disagree or issue a written notice to the contractor. The contractor has 60 days to respond, either defending compliance or showing the cost impact is immaterial. If the noncompliance stands, the contractor describes the practice change needed to correct it within 60 days and submits a General Dollar Magnitude proposal quantifying the impact, followed if necessary by a more detailed cost-impact proposal.¹⁰

One rule turns a routine adjustment into something sharper. Normally the government cannot recover more than its actual increased cost across affected contracts. But if the contractor changed a cost accounting practice and knew (or should have known) about the change at the time of price negotiations without disclosing it, the government can recover amounts exceeding its increased cost.⁹ Disclosure of practice changes during negotiations is therefore a real obligation, not a formality.

If the parties cannot agree on whether a noncompliance occurred or how large the adjustment should be, the disagreement becomes a formal dispute under the Contract Disputes Act (41 U.S.C. Chapter 71), with the time, cost, and uncertainty that entails.

1
eCFR. 48 CFR 9904.408-20 – Purpose
2
eCFR. 48 CFR 9904.408-50 – Techniques for Application
3
Acquisition.GOV. Part 9903 – Contract Coverage
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Congress.gov. S.1071 – National Defense Authorization Act for Fiscal Year 2026
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eCFR. 48 CFR 9903.201-1 – CAS Applicability
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eCFR. 48 CFR 9904.408-40 – Fundamental Requirement
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eCFR. 48 CFR 9904.408-50 – Techniques for Application
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eCFR. 48 CFR 9904.408-60 – Illustrations
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Acquisition.GOV. Cost Accounting Standards
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Acquisition.GOV. Processing Noncompliances