New Year, New Rules for Department of War Contractors

Key implications of sweeping new exemptions for nontraditional defense contractors 

The 2026 National Defense Authorization Act (NDAA) signed by President Trump this past December contains a provision that could reshape the Department of War (DoW) contracting ecosystem: Section 1826, “Exemptions for Nontraditional Defense Contractors,” creates sweeping regulatory relief for firms that have not held a full Cost Accounting Standards (CAS) covered contract in the prior year.

The provision applies to a large portion of commercial firms, startups, and small businesses that historically have not served the defense market due to the cost and complexity of government‑unique compliance requirements such as CAS.

New Exemptions for Nontraditional Defense Contractors

Under Section 1826, nontraditional contractors are exempt from a broad range of Defense Federal Acquisition Regulations (DFARS) and Federal Acquisition Regulation (FAR) rules, including:

• Business Systems: Nontraditional contractors are exempt from submitting government-approved internal business systems typically used to assess cost controls and compliance, including:
  • Accounting (DFARS 242‑7006)
  • Earned Value Management System (DFARS 234‑7002)
  • Estimating (DFARS 215‑7002)
  • Material Management and Accounting System (DFARS 242‑7004)
  • Government Property Management (DFARS 245‑7003)
  • Purchasing (DFARS 244‑7001)
• Special Cost or Pricing Areas (DFARS 407): Nontraditional contractors are exempt from requirements governing defective pricing, make or buy, and forward pricing rate agreements.
• Required Cost or Pricing Data and Certification (10 USC 3702): Nontraditional contractors are exempt from submitting certified cost or pricing data or providing related certifications typically mandated for higher-dollar or noncompetitive procurements.
• Cost Principles and Procedures (FAR Part 31): Nontraditional contractors are exempt from the rules governing cost allowability, allocability, and reasonableness for government reimbursement purposes.
  • Importantly, the FAR Part 31 exemption carries no dollar threshold, making this NDAA one of the most sweeping regulatory changes in recent memory.

Impact on the Defense Contracting Base: A Lower Bar for New Entrants

These exemptions align with a broader push by Congress and the DoW to expand and diversify the industrial base, accelerate procurement, and encourage commercial participation.

Under Section 1826, new entrants—particularly software, artificial intelligence, cyber, and dual‑use technology firms—will find it easier to pursue defense opportunities without standing up expensive cost‑accounting infrastructures or certified cost/pricing teams. Alongside a higher CAS threshold, this part of the NDAA should open the door to more companies.

Crucially, however, these rules are tied to the FY2026 NDAA signed in December and will be subject to change following future elections.

Implications for Traditional Contractors

Traditional contractors—still bound by CAS, the Truth in Negotiations Act (TINA), DFARS business‑systems audits, and FAR 31—may find themselves at a competitive disadvantage when bidding against exempt nontraditional firms, which will now have lower compliance costs. Reduced cost transparency and the absence of FAR 31 requirements also may complicate the government’s ability to ensure price reasonableness, potentially shifting more pricing risk onto contracting officers.

Consequently, traditional prime contractors may increasingly subcontract work to nontraditional exempt entities, which would alter cost‑structure dynamics. For example, exempt subcontractors may not provide the same level of cost or pricing detail, raising challenges for prime contractors that still must meet their own DFARS and FAR obligations.

A New Paradigm in Cost, Pricing, and Accounting Requirements

Section 1826 will transform the defense contractor community, expanding opportunities for new entrants while creating myriad compliance, cost, and competitive hurdles for traditional players.

Yet since the new provision is subject to change, significant uncertainty remains. In a few years, will we again see the government reimburse contractors for FAR 31 unallowable costs incurred by nontraditional contractors?

For now, both traditional and nontraditional contractors will need to assess how the DoW’s contracting model is shifting and take proactive steps to ensure success in this new regulatory landscape.