What's Happening?
The final version of the 2026 National Defense Authorization Act (NDAA), which is awaiting President Trump's signature, does not include a provision that would have expanded the definition of non-traditional defense contractors. Initially, the Senate's
version of the bill proposed a new pathway for companies to achieve this designation, based on a threshold for research-and-development and bid-and-proposal costs allocated to defense contracts. This change would have allowed firms spending less than $1.1 million on these costs annually to be considered non-traditional, regardless of their total revenue from the Department of Defense. Such a designation would enable companies to directly pursue Other Transaction Authority (OTA) contracts, which are becoming more prevalent. However, the House and Senate removed this provision during the reconciliation of their respective versions of the bill.
Why It's Important?
The exclusion of the expanded definition for non-traditional defense contractors from the NDAA has significant implications for the defense industry. Had it been included, the change would have opened up new opportunities for companies to engage in defense contracts without the traditional constraints. This could have particularly benefited major defense technology companies by allowing them to maintain non-traditional status and access OTAs, even as their defense revenues grow. The decision to exclude this provision maintains the status quo, requiring traditional contractors to partner with non-traditional ones or agree to significant cost-sharing to pursue OTAs. This outcome preserves existing competitive dynamics within the defense contracting landscape and may limit the entry of new players into the market.
What's Next?
With the NDAA now finalized without the expanded definition, defense contractors will continue to operate under the existing framework. Companies seeking to benefit from OTA contracts will need to navigate the current requirements, which may involve forming partnerships or adjusting their cost structures. The decision may prompt further discussions within the industry and among policymakers about the balance between fostering innovation and maintaining fair competition. Stakeholders in the defense sector will likely monitor the impact of this decision on contract awards and industry dynamics closely.
