FY25 NDAA: Promoting Nontraditional Acquisition While Securing the Supply Chain, and More

On December 23, 2024, President Biden signed into law the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2025. The annual bill authorizes spending for the Department of Defense (DOD) while setting other priorities and amending defense procurement law. This year, among many other things, Congress balanced goals of expediting acquisition and expanding the defense industrial base, on the one hand, against competing interests in circumventing private intellectual property rights and securing the supply chain, on the other. This post highlights provisions of particular interest to government contractors, their investors, and legal practitioners.

Streamlined Acquisition Pathways and Nontraditional Defense Contractors

Several provisions of the FY25 NDAA reflect a renewed sense of urgency in fielding innovative technologies. For example, Section 804 formally codifies the Middle Tier of Acquisition (MTA) pathways, first introduced in the FY16 NDAA, to expedite and reduce regulatory burdens on rapid prototyping and rapid fielding efforts. Similarly, Section 805 formally codifies the Software Acquisition Pathways, first introduced in the FY20 NDAA, with modified requirements and acquisition timelines to better align with the iterative nature of software development. And Section 861 codifies a pilot program introduced in the FY22 NDAA to accelerate the procurement and fielding of innovative technologies through competitive, merit-based solicitations, with preferences for small businesses and nontraditional contractors. Even with respect to more traditional major defense acquisition programs, Congress attempted to streamline the requirements for obtaining Milestone A and Milestone B approvals in Sections 806 and 807, respectively.

Congress also expanded DOD's authority to award other transaction (OT) agreements for prototyping projects and follow-on production efforts. Under Section 816, prototype OTs of more than $100 million now can be authorized by the head of an individual contracting activity (rather than the agency's senior procurement executive), and prototype OTs of more than $500 million can be authorized by the senior procurement executive (rather than requiring an under secretary). Section 817 clarified that the authority in 10 U.S.C. § 4022(f) to award sole-source follow-on production contracts extends broadly to any contract or OT to "produce, sustain, or otherwise implement the results of a successfully completed prototype project for continued or expanded use" by DOD, and may be used for any number of separate sole-source follow-on production awards based on the same underlying prototype OT. In turn, Section 888 requires DOD to establish a process to track OT awards to small businesses and nontraditional defense contractors, while minimizing reporting requirements of such businesses to the extent practicable. Data collection will focus on both the number and value of awards made to small businesses and nontraditional defense contractors, including transactions carried out through consortia.

There are other overtures to entice nontraditional contractors into the defense industrial base. Section 815 permits nontraditional defense contractors to submit prices previously paid for their goods or services instead of cost or pricing data for subcontracts valued up to $5 million, while Section 863 extends for another five years, through October 1, 2029, a pilot program exempting certain awards[1]to small businesses and nontraditional defense contractors from requirements to provide certified cost or pricing data or submit to audit. Section 864 further permits contracting officers to evaluate a nontraditional defense contractor's price or fee for commercial products or services using an alternative "capability-based" analysis that examines fitness for a particular purpose, technical expertise and resources required for production, the company's financial projections or business model, DOD's estimated cost avoidance or increased capacity afforded by the product or service, and input from anticipated users on the potential value added by the improved capabilities or production processes resulting from the product or service.

In a similar vein, Congress seeks to increase connection points between DOD and private-sector investors. Section 230 encourages the creation of programs whereby employees of DOD's Office of Strategic Capital can pursue temporary assignments with venture capital firms, private equity firms, or other similar groups, with the hope they will learn about "critical and emerging defense industrial base capabilities" and gain an understanding of "the strategic role that venture capital and private equity operations have in shaping future sustainment and modernization requirements for the defense industrial base."

Intellectual Property

At the same time it seeks to pull innovative commercial businesses and investors into the defense industrial base, Congress remains concerned that private intellectual property rights may hinder DOD's mission. Section 882 of the FY25 NDAA directs DOD activities to establish procedures for reverse-engineering or re-engineering items for which the government lacks technical data or sufficient data rights to permit manufacture of the item, particularly where (1) production of the item may be required for point of use manufacturing or for a contested logistics environment; (2) the manufacturer of the item will not meet the schedule for delivery needed to maintain weapon system readiness or responsiveness; or (3) the item may only be acquired by entering into a sole-source contract and the agency determines reverse-engineering or re-engineering would be beneficial to sustain training or DOD operations.

As we have written before, a broader data rights grab is underway in the name of implementing a modular open systems approach (MOSA), initiated in past NDAAs and expanded by DOD's recent implementing regulations. Congress declined to legislate further data rights changes in the FY25 NDAA, but under Section 819, DOD now must publish any open interface standards for implementing MOSA in contracts. Service acquisition executives may request approval from the Secretary to withhold disclosure, but that request can only be made "with respect to a specific contract."

Supply Chain Security and Foreign Competition

Other provisions of the FY25 NDAA reveal consternation about defense supply chain vulnerabilities. For example, Section 812 expands DOD's authority to purchase excess supplies (i.e., more than two years' worth) "to protect against identified risk of supply chain disruptions." Congress remains concerned with potential connections to China. Soon, under Section 853, contractors providing semiconductors or related manufacturing equipment or design tools to DOD will be required to certify they do not also provide such products to the Chinese technology firm Huawei. And as of June 30, 2026, Section 851 will prohibit the award of DOD contracts to concerns that do business with lobbyists for Chinese military companies.

Turning back home, Section 848 instructs the Under Secretary of Defense for Acquisition and Sustainment to create a list of all items exempted from the domestic sourcing requirements of the Berry Amendment (10 U.S.C. § 4862) based on determinations of nonavailability in "satisfactory quality and sufficient quantity" at U.S. market prices. Once prepared, DOD must share this list with its industry partners and with Congress.

Turning to the sky, Section 1601 revises and formally codifies the Air Force's Space Contractor Responsibility Watch List for underperforming or potentially vulnerable contractors. A contractor may be included on the list based on poor past performance, inadequate management or financial controls, or security concerns, including unmitigated vulnerabilities arising from foreign ownership, control, or influence. Once listed, a company may not bid on or receive contracts or subcontracts for Air Force space systems and programs, absent a written determination of compelling reasons for the award. A contractor may request to be removed from the watch list, but the contractor must demonstrate that the problem resulting in placement on the watch list has been satisfactorily remediated.

Bid Protests and Claims

Congress included two provisions of particular interest to government contracts litigators. One is Section 885, which requires the Government Accountability Office (GAO) to prepare a report proposing measures to reduce the number of bid protests it receives. We discuss those proposed changes in more detail on a previous post.

The other, Section 803, overturns a Federal Circuit decision affecting the process for appealing a unilateral contract definitization by DOD. As we have discussed on this blog, the Federal Circuit previously held that DOD's unilateral definitization of contract price is not itself a "claim" or a contracting officer's final decision for purposes of initiating an appeal at the Armed Services Board of Contract Appeals (ASBCA) or U.S. Court of Federal Claims. This meant a contractor had to present a claim to a contracting officer challenging the same definitization that the contracting officer had just made, before the contractor could file an appeal. The statute now addresses this by explicitly stating a unilateral definitization shall be considered a final decision appealable to the ASBCA or Court.

Thomas Lee, an associate in our Washington, D.C. office and Ethan Sterenfeld, a law clerk in our Washington, D.C. office, contributed to the writing of this article.

[1]Specifically, awards of less than $7.5 million made pursuant to a technical, merit-based selection procedure, such as a broad agency announcement, or pursuant to the Small Business Innovation Research (SBIR) program.

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