Interview transcript

Terry Gerton We’ve got the new National Defense Authorization Act. It’s signed into law and there’s a lot in it as we’ve talked on other episodes, 3,000 plus pages. But we’re going to drill in on a particular part today, section 1826. Talk to us about why you think that provision is so important.

Dan Ramish So Terry, this provision, 1826, is titled “Exemptions for Non-Traditional Defense Contractors,” and it includes three important exemptions on defense contracts for companies that qualify as non-traditional defense contractors. Those companies will be exempt from the FAR Part 31 cost principles, certified cost repricing data requirements under the Truth in Negotiations Act, and then contractor business systems requirements. And there are provisions that allow for the head of contracting activity or their delegate to waive exemptions or modify or partially apply them, but those are unlikely to be used that much because there’s a requirement to notify Congress when they use that authority. And notably these exemptions don’t apply to civilian agency contracts, only defense agency contracts. There are some questions about how that’ll be implemented, But this provision is very important because it’s very broad in scope. Non-traditional defense contractors are defined as any contractors that aren’t currently performing a CAS-covered contract, a contract covered by the Cost Accounting Standards, and that haven’t performed a CAS-covered contract in the last year. This is a large percentage of the defense industrial base. It includes all small businesses because contracts and subcontracts with small businesses are exempt. Broader than that, George Mason’s Baroni Center for Government Contracting estimated earlier this year that only 7.5 Percent of the Defense Industrial Base could not qualify as a non-traditional defense contractor. So this is very broad in scope of coverage for Defense Industrial base companies.

Terry Gerton And the exclusion is actually going to increase with other provisions in the NDA a correct.

Dan Ramish Yes, so there are also threshold increases under the cost accounting standards. There is an increase on the individual contracts that are subject to CAS. It used to be that there was a trigger contract mechanism and some contracts as low in value as $2.5 million would be covered. Now, the new threshold for individual contracts will be $35 million and then there’s a second threshold for full CAS coverage which includes all of the cost accounting standards, and that increased from $50 million to $100 million. So the number of companies that are subject to full CAS coverage will be even lower after these threshold increases go through.

Terry Gerton So pretty clearly, if you’re working in the defense contracting space, you’re going to need to read these provisions in close detail. But let’s take the three exemptions that you talked about and kind of walk through them one at a time. Let’s first talk about the cost principles. What are they and when do they apply?

Dan Ramish So the contract cost principles that are in FAR Part 31 govern the costs that the government will pay under cost reimbursement contracts and other flexibly priced contracts. And the government also looks to the cost principles when they’re negotiating fixed price contracts when cost analysis is required, although for fixed price contracts, the cost principles aren’t binding on the contractor. So really we’re talking about cost reimbursements contracts primarily, and the government in cost reimbursable contract agrees to pay the contractor based on the contractor’s actual incurred costs, typically with an added fee, rather than based on fixed prices. And the government uses cost type contracts when there are significant risks of uncertainty in contract performance, when they can’t define what’s going to be needed under the contract with sufficient certainty. And the Government assumes the risk of cost increases or overruns and in contrast to fixed price contract where the contractor bears the cost risk. But in these scenarios, the government uses the cost principles to tell the contractor what contract costs it will or will not cover. And so as part of this, there are various unallowable costs that the government says as a matter of policy, they won’t pay for. So the most famous of these is alcoholic beverages. Alcohol has been an unallowed cost since 1986. Other common examples are lobbying and political activity expenses or entertainment costs like sports or concert tickets. There are other types of costs like legal costs or compensation costs that aren’t strictly prohibited but have kind of complicated rules for how to recover the costs and when the costs are allowable. So these are complicated rules and challenging to follow. They require complex policies and procedures and training on the part of contractors to make sure that they aren’t charging the government costs that they are allowed to. So being relieved of this burden is significant.

Terry Gerton Sounds like contractors might be wiping their brow here, but are there other pieces of the cost rules that folks should be concerned about?

Dan Ramish Well, so one important caveat to this cost principles exemption is that there are statutory provisions addressing allowability of certain costs, like alcohol, for example. And so it’s unlikely that the Department of Defense will be able to just wipe the slate clean. They’ll need to establish new and presumably vastly streamlined rules that balance the other statutory constraints. It’ll have to be shorter than the about 75 pages of rules that make up the cost principles.

Terry Gerton Dan Ramish is a partner at Haynes Boone. Dan, we’ll continue on this topic here. The next piece up is certified cost or pricing data.

Dan Ramish Yes, so certified cost or pricing data is a requirement that originates in the Truthful Cost or Pricing Data Act, which is popularly and formally referred to as the Truth in Negotiations Act or TINA. And when the government is buying products or services from a contractor and there isn’t enough competition or commercial market forces for the contracting officer to determine that the price is fair and reasonable, the contracting officers is required to request certified cost of pricing data. So, survey cost pricing data includes all facts that prudent buyers and sellers would reasonably expect to affect price negotiations. So, it’s kind of intended to address those non-competitive scenarios to put the government negotiator on equal footing. The common types of cost pricing data could include anything from vendor quotes to internal data about business prospects or operation costs or information about management decisions that could affect costs. And the contractor is required to identify and provide the cost of pricing data to the government and certify that the data are current, accurate and complete. And as with the cost principles, failure to comply with the current, accurate, complete requirement in certifying certified cost of price data could create liability, liability for defective pricing, or potentially fraud liability under certain circumstances. So this presents risk as well and requires policies and procedures to ensure that the appropriate data is collected and provided to the government and updated appropriately during negotiations.

Terry Gerton The third set of exemptions are from the DoD business systems rules. Tell us more about that.

Dan Ramish DoD business systems rules are another fairly extensive area requiring defense contractors to maintain adequate business systems for accounting, earned value management, estimating material management, property management, and purchasing. And if the Department of Defense determines that a contractor’s business systems have material weaknesses, the government can withhold substantial amounts from contract payments. So this is another area where each these systems requires complex compliance apparatus. And with the withholding risk, this is an important area for contractors who are subject to it and its requirements are prescriptive and burdensome on contractors and so another area where this will provide significant relief.

Terry Gerton You mentioned at the beginning that there’s the potential that the Secretary of Defense can waive these exemptions. Waving exemptions seems like a double negative. It means holding people accountable to the original standards, right? So what would be the circumstances that would warrant a waiver?

Dan Ramish So the language talking about this, you know, there’s a requirement for congressional notice and it gives kind of a sense of where there might be circumstances for a waiver. If a waiver is issued, then the Secretary of Defense is required to provide congressional defense committees a notice of the waiver. And that notice is required include a discussion of efforts made to adapt the acquisition approach for the product or service with respect to which such waiver was granted. So, I think there’s an understanding that there will be circumstances where it’s excessively challenging, for example, the government to have assurances that it’s obtaining fair and reasonable prices or where there are concerns about the types of costs that it is covering. And so there is this kind of escape valve. But the fact that the Secretary of Defense has to notify Congress when they do it will be a significant deterrent for reusing this. So it’s unlikely that this waiver authority will undermine the broader effects of the rule.

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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.

Interview transcript

Terry Gerton When we talk about the National Defense Authorization on the Federal Drive, we often get into the weeds of technical provisions around acquisition or force structure or policy. But your organization, the Secure Families Initiative, has been advocating for a very different type of provision, the Military Family Bill of Rights. First, tell us a little bit about SFI, and then tell us about this campaign.

Brandi Jones Absolutely, Terry. Our organization, Secure Families Initiative, it’s an organization founded by active-duty spouses and currently led by active-duty spouses. So we have a very unique lens into our everyday lives and also our community because we hear from people who are currently serving their families all over the US and all over world. And so having this vantage point and the ability for us to then advocate on behalf of our families, we’ve really been able to put together some awesome legislation points that really get to the root of the issues that we’re hearing in our community. So I’ve been very blessed to be the organizing director here at Secure Families Initiative for the past four years. And I was just really able to take a vision of meeting with families on a bi-weekly basis, specifically our families of color, all over the U.S. And the world and hearing what issues were impacting them. No matter where they were, I would say, I heard something as a throughline and that was concern for safety for the spouses and their children as we’re asked to change our permanent duty station every few years. So it really was like the foundation of hearing these stories and kind of saying, what if we developed legislation that really helped to get to the heart of the issues we’re hearing?

Terry Gerton As you’ve built this campaign, you talked about the invisible weight of service and you alluded to it there. Can you share more about what that looks like in real life? What are the protections that the families that you hear from are looking for?

Brandi Jones Yeah, it is really. I would say the weight of service is very invisible for our families, but also I would say that federal-state line that we cross when we go to live on installation is also invisible. Like there isn’t exactly a notification to our spouses and children that, you know, you’re now going to be on federal property, which has a different set of laws than on the state side of that line. And so because that line is invisible, like our service, it leads to a lot of grey area and I would say lack of protection that you might find on the state side sometimes because at the end of the day, our spouses and children, we are not federal employees. We are not active-duty men and women who serve and so we’re complete civilians behind the gates. And the things that I’ve heard from our families because of that issue is, you know, when I have an issue that comes up as a spouse, I don’t have a direct line of communication to the commander of the base. Even though that person is in charge of this installation, there’s no policy that says that they need to speak to me directly or that I can speak to them directly. And also I’ve had stories like I’ve been told that these resources were going to be available to me when I arrived on the installation or in the area. But then when I got here, there wasn’t any room at the child development center for me to have daycare or a home for me to live in. And so that leads to a lot of reliance on our neighbors, which is what is really, I would say, encouraged throughout the Department of Defense to our military families, like, use your neighbor for help. But what we’ve come to find out by talking to our families is you don’t necessarily know who your neighbor is like you do in a civilian, a state-side-of-the-line community. And that’s because when we cross onto federal property, there isn’t necessarily, like for instance, Megan’s Law, which when you’re in the town and you’re purchasing homes or renting, you get to research your area. You can see if there’s somebody who is a predator or [perpetrator of] sexual assault. And when we come onto that federal property line, we don’t have access to that information of someone who may be working on the installation or maybe someone who is a spouse of a service member, has a background in this instance that we would never know. And so how we kind of came to that conclusion about our safety and the concerns of that is by saying, we know that crime happens on installation because we have a military police department, yet unlike on our civilian state-side of that line, we don’t have access to any of that information. So, you know, when I’m waking up and I’m not inside of the base, I’m able to hear on local radio or in the local paper, like what were the crimes that happened that day? What can I be heightened and aware of that might be going on in this community to protect myself and my children? But on installation we don’t have access as the spouse or dependent of a service member to that information.

Terry Gerton I’m speaking with Brandi Jones. She’s the organizing director of Secure Families Initiative. So Brandi, you’ve just mentioned one really important feature of the Bill of Rights, access to information about crime and convictions on military installations. Tell us some of the other key provisions in the Military Families Bill of rights.

Brandi Jones Another thing that kept coming up when we heard from our spouses was not really, ahead of a PCS, having any information given to us as spouses about the place that we’re going to be moving to. So all this actually happens, I would say, is that you kind of get your installation duty station and the way that you’re given that information is by your service member. And so you find out, okay, now you’re going to, let’s say, Camp Lejeune, North Carolina. So as a spouse, the onus is on you and as a service number to then find out all information that you could imagine to the law that would go into relocating your family. So ahead of time, you’re not provided anything about the education system, the availability of special needs education. You’re not providing anything about like the data of the area, the racial, ethnic demographics of the area. Like we were speaking earlier, like the crime statistics of the area, or really any information — you have to go out and kind of start this search on your own about anything related to where you’re going to be asked to move. And so having thought through, like what would be some provisions that would really help our families, immediately on our Military Family Bill of Rights, we asked for more information and we asked that that information be provided to our families 45 days prior to our PCS, our Permanent Change of Duty Station.

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