NDAA would let large contractors keep ‘non-traditional’ status indefinitely

Among the more than 1,000 provisions in the 2026 National Defense Authorization Act is a seemingly modest change to the definition of “non-traditional defense contractor,” which could allow companies with billions of dollars in defense contracts to maintain that status forever.

This change in Section 821 of the bill creates a new pathway for companies to qualify as non-traditional.

Any firm that allocates less than $1.1 million in independent research and development and bid-and-proposal costs to cost-reimbursement contracts in a given year would be considered non-traditional, regardless of their total Defense Department contract revenue.

The change would benefit companies that do most of their defense work through firm-fixed-price contracts, which do not allow for separate reimbursement of overhead costs.

The proposed law has passed the House and awaits approval by the Senate before going before President Trump for his signature.

Currently, a company qualifies as non-traditional if it has not performed any defense work as a prime or sub in the last year that is subject to cost accounting standards.

The proposed change means a company could maintain non-traditional status indefinitely, as long as it does not allocate more than $1.1 million in R&D and bid-and-proposal costs to contracts that are subject to cost-accounting standards.

The change is significant because DOD is increasing its use of Other Transaction Authority procurements, where non-traditional contractors have an advantage because they can bid directly on OTAs. Traditional defense contractors have to team with a non-traditional to pursue the work, or agree to significant cost-sharing to bid on an OTA.

Industry observers have told us the change could allow major defense technology companies to structure their contracts as firm-fixed price to maintain their non-traditional status, even as their defense revenues grow into the billions.