The NDAA is signed, and at over 3,000 pages, it could be your holiday read
Interview transcript
Terry Gerton Congress did finish up the National Defense Authorization Act last week, and the president signed it before they left town. What does PSC think is really important about the enacted version?
Stephanie Kostro What a great question, Terry. You know, I am a legislative nerd. I was on the House Armed Services Committee staff for a while. And this is a bill that, I’m not alone in looking forward to it every year. And PSC, as you know, represents services and solutions contractors. We have about 400 member companies. And so this is the legislative vehicle that we track very, very closely. There is a lot to like in the fiscal year 2026 version of the NDAA that’s been enacted. We can walk through a few of them if you want.
Terry Gerton Let’s do that because there are a lot of provisions, it’s 3,000 pages long.
Stephanie Kostro I think the last time I saw it, it was 3,086 pages, which, I mean, that is a doorstop if I’ve heard of one, right? And it is a lot to go through. So there are several topics that in the defense contracting community we track very closely. One of them over the last few years has been this definition of a non-traditional defense contractor. What does that mean? Who qualifies as non-traditional, etc. So let’s walk through a little bit of what made it into the final enacted version. There has been a definition of non-traditional defense contractors. It has not been amended. The one that has been on the books for a while is the one that continues to be on the books. And I’ll just walk you through what that definition is. A non-traditional defense contractor is, “an entity that is not currently performing and it has not performed for at least the one-year period preceding the solicitation of sources by the Department of Defense or War for the procurement of or any transaction, that they’ve not had any contract or subcontract for the department that is subject to full coverage under the cost accounting standards that are elsewhere in the U.S. Code.” So Terry, this is basically, if you’ve had a firm fixed price contract, you are a defense contractor, you are traditional defense contractor. But there are some contractors who have not been subject to these cost accounting standard, and those guys will still not be subject to those provided that they don’t change their contract type. That to me is the fact that they’re staying consistent, it is the … I mean I hate to say this, the traditional definition of non-traditional defense contractors. But what the new law does is provide certain exemptions for these kinds of contractors. Those exemptions include, again, the cost accounting system. It does reduce their audit burden because they don’t have to have a cost accounting system like traditional defense contractors, and it eliminates the need for the defense contract audit agency to approve their accounting system. That is one important exemption that is available for these non-traditionals. Another one is they can use their own project management tools and methodologies. They don’t have to use what is often required for traditionals, this earned value management system, EVMS. In addition, they can use commercial pricing methodologies, they don’t have to use a formal cost estimating system like traditionals. And they can use commercial inventory management systems. They don’t have to use the Department of Defense or War’s material accounting requirements. So these are just a handful of the exemptions that are available to the non-traditionals.
Terry Gerton And that is a way of easing the burden for them to be competitive in the defense space, right?
Stephanie Kostro That’s exactly it. It’s a matter of waiving or providing exemptions for certain requirements that can be very, very costly to implement. Now, we have traditional defense contractors who look at this and go, hey, I would love to be exempt from that as well. I think that is something that will go to the Hill for the next cycle and talk about being fair to industry as a whole and making sure that we are not creating a de facto set aside for non-traditionals of, hey, this group of contracts because you can be very, very cost competitive, you don’t have to implement these costly systems and we’re gonna siphon money or funnel money towards you. And I think that is a fair observation. At the end of the day, the Professional Services Council, as I mentioned, represent lots and lots of contractors and they’re not afraid of competition, but they would like it to be fair competition and be subject to the same kinds of requirements. And so as we move forward, that is the message that we’ll be taking forward.
Terry Gerton And what else in here catches your eye?
Stephanie Kostro Oh, there was a lot of media activity regarding the CPARS, which is this performance rating system that contractors go through. What I find fascinating is that what was proposed as the NDAA was going through markup and passage in both of the chambers, they talked about, hey, CPARS this performance rating system, can be time consuming. It can be burdensome not only for the contractor, but also for the contracting officer. There was a movement afoot to only have negative performance ratings available. Like you only had to report when things weren’t going well. Contractors in our world went back and said, but we do want the government to recognize when things are going right. Just focusing on the negative seems to only tell half the story. What the final bill does is very, very interesting. It doesn’t change CPARS — you can have negative and positive ratings — but what it does do is add a broader acceptance of past performance so that if you’ve done commercial work, private sector projects, or non-department of defense or war government work, you can submit those as past performance. And so what that does is an optional avenue where you can just add this additional performance reviews from your portfolio. What it does is it adds to the story it doesn’t take away from it.
Terry Gerton And Stephanie, there’s been a lot of conversation over this year about acquisition reform. Do you see any of that conversation reflected now in the statutory language?
Stephanie Kostro I see so much of it, and I think as I talk to my colleagues at other associations within government contracting, we focused a lot on what was in the Senate called the FoRGED Act, and on the House side it was called the SPEED Act, streamlining acquisition. We find a lot of elements of both of those chamber initiatives in the final bill. I’ll give you an example. The SPEED Act was really about making sense of the acquisition system. And It’ll sound familiar to you, Terry, when you think about the “arsenal of freedom” speech that Secretary Hegseth gave back on November 7th. He talked about portfolio acquisition executives instead of program executive offices, having contracting officers as part of the team with the program managers, etc., and these portfolio acquisition, executives. You heard about from Secretary Hegseth, reforming or transforming the requirements process, looking at matters related to commercial products and commercial services, all of that is in the statutory language. So they are mutually reinforcing what the secretary is trying to do at the Department and what the bill does here. There is clearly a lot of conversations between Hill staff and Pentagon staff and I think that level of collaboration is going to be fruitful at the end of the day.
Terry Gerton What kind of timeline are you anticipating for this new language to actually become practice?
Stephanie Kostro Against all of this activity on the defense side, Terry, is this revolutionary FAR overhaul. One of the concerns voiced by the executive branch is that they’re trying to streamline the rules while legislation like the NDAA is, they’re adding to the rules. And so I think because these rules have, or rather these initiatives have been pre-coordinated or collaborated upon, this won’t fall victim per se to the revolutionary FAR overall. We will see rulemaking on this. I would also note that when Secretary Hegseth launched his transformative strategy for acquisition at the Pentagon, he had some very, very near-term targets. He wanted guidance going to folks 45 days later or 60 days later. Those timelines are coming to fruition here in the next two weeks. So we should see programs and milestone initiatives coming out of the services and hopefully we can engage Secretary Hegseth and his staff on what all of that means. The rulemaking always lags some at least you know six months or so after the law and I think that’s going to that’s going to be pushing the envelope a bit on timelines here.
Terry Gerton Stephanie, it sounds then like there’s lots of good news in the NDAA for defense contractors if they can take the time to read it all the way through. But there might be some news that’s not quite so thrilling for them. There was rumor about an executive order last week. Tell us about what’s going on there.
Stephanie Kostro So the rumors are that there is an executive order in draft form that talks about four defense contractors, executive compensation, dividends, and a limit on stock buybacks. This is very interesting. You know, we in the defense world take on these large projects, these major defense acquisition programs, etc. There are multi-year programs, costs can slip, schedules can slip. And there are tools within the executive branch and within contracting offices to help address those. Cure notices, for example, can come out of program or contracting officers, etc. There are also, there’s something called a Nunn-McCurdy breach, when you have costs and schedule overruns, it does trigger something in law about a review and steps that you can take to address it. It sounds like this executive order — we haven’t seen the language, but rumor has it — that it talks about executive compensation, forcing dividends, limiting stock buybacks as a way to influence industry’s behavior so that there aren’t so many cost overruns and schedule overruns. Again, haven’t seen the language. We are looking forward to seeing it and seeing how it works in practice. Again, there are tools in the toolbox to help address these things. And I hope that they’re referenced in this executive order.
Terry Gerton Does that fit with some of the reforms in the NDAA that we were just talking about?
Stephanie Kostro It does, I think, it comes back down to, is a negotiation a one-off or does a negotiation continue on through the life of a project? And I think if you look at commercial models or if you look at what the defense contractors have done in the past, that negotiation, once you sign the contract, that doesn’t mean it’s the end of the discussions, right? And so as we move forward, I think these are mutually reinforcing. But again, I haven’t seen the language of the executive order. I look forward to seeing it when it’s published. And I do hope that The Pentagon and the White House and others know that we are here as an association and as an industry to collaborate with them and get to the right answer for everybody, including the American taxpayer.The post The NDAA is signed, and at over 3,000 pages, it could be your holiday read first appeared on Federal News Network.