Section 1826 of the FY 2026 National Defense Authorization Act shifts DoD treatment of nontraditional defense contractors from discretionary to mandatory exemptions from key cost and business system requirements. With no dollar threshold and rulemaking still pending, government contractors must evaluate timing, contract status, and downstream compliance implications.
Highlights
- Mandatory Exemptions. Section 1826 of the FY 2026 National Defense Authorization Act requires the Department of Defense to exempt qualifying nontraditional defense contractors from certified cost or pricing data, FAR Part 31, and multiple DFARS Business System requirements, shifting prior discretionary authority to a statutory mandate.
- No Dollar Threshold. Neither existing DFARS commercial treatment nor Section 1826 establishes a limiting dollar threshold, expanding potential applicability across contracts, subcontracts, and agreements with DoD.
- DoD Implementation. The statute applies to Department of Defense awards, but DFARS rulemaking is still pending, creating timing and interpretation considerations for new awards and modifications.
- Scope of Exemptions. Section 1826 expressly removes requirements related to business systems, Truthful Cost or Pricing Data, and certain pricing controls, while leaving open questions regarding Cost Accounting Standards and statutory allowable cost provisions.
- Operational Impact. Contractors must evaluate eligibility, contract status, and downstream compliance implications, particularly where existing awards, subcontract flowdowns, and internal systems were structured around traditional cost-based requirements.
The idea of getting new companies to join the defense industrial base is nothing new. As part of the January 31, 2018 Final Rule for Defense Federal Acquisition Regulation Supplement (DFARS): Procurement of Commercial Items (DFARS Case 2016–D006), Department of Defense (DoD) introduced the provisions now in DFARS 212.102(a)(iv)(A) and 252.215-7013 to allow DoD contracting officers to “treat supplies and services provided by nontraditional defense contractors as commercial products or commercial services.” DFARS 212.102(a)(iv)(A) states:
This permissive authority is intended to enhance defense innovation and investment, enable DoD to acquire items that otherwise might not have been available, and create incentives for nontraditional defense contractors to do business with DoD. It is not intended to recategorize current noncommercial other than commercial products or commercial services; however, when appropriate, contracting officers may consider applying commercial product or commercial service procedures to the procurement of supplies and services from business segments that meet the definition of “nontraditional defense contractor” even though they have been established under traditional defense contractors. The decision to apply commercial product and commercial service procedures to the procurement of supplies and services from nontraditional defense contractors does not require a commercial product or commercial service determination and does not mean the item is commercial;
Since 2018, DoD has had the ability to remove the application of certified cost or pricing data, pricing based on FAR part 31, cost accounting standards, and DFARS Business Systems, as FAR part 12 commercial procedures do not allow for these requirements.
The 2026 National Defense Authorization Act (NDAA) Section 1826, Exemptions for Nontraditional Defense Contractors, is going to change this from a “permissive authority” to a requirement for many of the existing barriers to entry. Section 1826(a) states “contracts, subcontracts, or agreements of the Department of Defense, [for] products and services provided by nontraditional defense contractors (as defined in section 3014 of title 10, United States Code) shall be exempt from” certified cost or pricing data, FAR part 31, DFARS Business Systems, make-or-buy programs, forward pricing rate agreements, and should cost reviews. One small step for rulemaking (we hope), one giant leap for industry.
What is a Non-Traditional Defense Contractor?
10 USC 3014 states the term non-traditional defense contractor, “means an entity that is not currently performing and has not performed, for at least the one-year period preceding the solicitation of sources by the Department of Defense for the procurement or transaction, any contract or subcontract for the Department of Defense that is subject to full coverage under the cost accounting standards prescribed pursuant to section 1502 of title 41 and the regulations implementing such section.”
What We Know
Limited to the Department of Defense (DoD)
2026 NDAA Section 1826(a) states: “For the purposes of contracts, subcontracts, or agreements of the Department of Defense…”
DFARS Treatment as Commercial
DFARS 212.102(a)(iv)(A) and 252.215-7013 allow DoD contracting officers to use FAR part 12 commercial procedures for contractors that meet the DFARS 202 definition of a “nontraditional defense contractor.” While removing many FAR requirements (e.g., TINA and CAS), the contracting officer is limited to fixed-price, fixed-price with economic price adjustment, and fixed labor rate contracts only.
Subcontractor Treatment as Commercial
The May 5, 2024, Defense Pricing and Contracting (DPC) Memorandum “Treatment of Nontraditional Defense Contractors,” allows higher-tier contractors to determine their suppliers as nontraditional defense contractors for treatment as commercial, provided the DoD contracting officer reviews and accepts the determination by the higher-tier contractor that its supplier meets the definition of a nontraditional defense contractor.
2026 NDAA Section 1826
2026 NDAA Section 1826 will exempt contracts, subcontracts, and agreements for nontraditional defense contractors from:
- DFARS 252.242-7006 Accounting System Administration;
- DFARS 252.234-7002 Earned Value Management System;
- DFARS 252.215-7002 Cost Estimating System Requirements;
- DFARS 252.242-7004 Material Management and Accounting System;
- DFARS 252.245-7003 Contractor Property Management System Administration;
- DFARS 252.244-7001 Contractor Purchasing System Administration;
- DFARS 252.242-7005 Contractor Business Systems;
- 10 USC 3702 Required cost or pricing data and certification (Truthful Cost or Pricing Data Act – aka TINA);
- DFARS 215.407 Special cost or pricing areas:
- Defective certified cost or pricing data (DCAA audit support of voluntary disclosure of defective pricing);
- Make-or-buy programs;
- Forward pricing rate agreements;
- Should-cost review; and
- Estimating systems; and
- FAR Part 31 Cost Principles and Procedures.
Dollar Threshold
Neither the DFARS treatment as commercial under DFARS 212.102(a)(iv)(A) and 252.215-7013 nor the 2026 NDAA Section 1826 exemption has a limiting dollar threshold for application.
What We Do Not Know
2026 NDAA Section 1826 – Changes to Regulations
When will the DFARS be updated to reflect the statutory requirements of Section 1826 of the 2026 NDAA? This section of the NDAA includes no time requirement. Most NDAA sections state that, at the end of the section, DoD has a set number of days from the NDAA’s enactment to implement the statutory requirement. Seeing how this aligns with the Acquisition Transformation Strategy announced by DoD in November of 2025, we hope it is set as a top priority.
Cost Accounting Standards (CAS)
Will DoD, during the rulemaking process, add CAS to the list of exemptions? Let us hope so as the Acquisition Transformation Strategy states: DoD “strongly endorses and actively supports recent OMB-led Cost Accounting Standards (CAS) Board activity that has taken an aggressive approach to reduce the CAS regulatory requirements; reduce burden on contractors; remove barriers for new defense contractors;” and “will continue to work with the CAS Board to increase CAS applicability thresholds … to reduce the number of CAS covered contracts going forward and encourage new non-traditional defense contractors to participate in defense acquisition…”[i]
FAR part 31 vs. 10 USC Ch. 273: Allowable Costs
2026 NDAA Section 1826 states “contracts, subcontracts, or agreements of the Department of Defense, [for] products and services provided by nontraditional defense contractors … shall be exempt from … Part 31 of the Federal Acquisition Regulation, or successor regulation.” Yet the statutory requirements of 10 USC Ch. 273: ALLOWABLE COSTS, including specific unallowable costs, penalties, and the burden of proof placed on the contractor to support the reasonableness of indirect costs, were not removed. DoD will have to resolve this conflict during the rulemaking process.
What You Need to Remember
Contracts and subcontracts that have already been awarded prior to when the final rules implementing the statutory requirement are issued will not change. Requests for modification to these awarded contracts and subcontracts will be required to apply these exemptions, provided DoD and the higher-tier government contractor are willing to consider such action.
The underlying intent of both DoD and Congress is to increase the defense industrial base, reduce compliance costs, increase competition, leverage the existing commercial marketplace for technologies, focus the determination of a fair and reasonable price on pricing information rather than cost data, and create a more flexible acquisition process. These are all great goals and aspirations. Are you ready to convince a DoD Contracting Officer or a higher-tier government contractor’s buyer as to how you are supporting these goals and aspirations?
The Redstone GCI team has a great deal of experience (i.e., many of us worked for DoD for over 30 years) and based on that experience, most government employees, including contracting officers and program managers, are very risk-averse. Yet the Acquisition Transformation Strategy is asking them to operate “with speed and rigor … [as well as] take risks that result in successful outcomes.”[ii] If we want this to work, contractors will have to help by providing the right information to decision-makers.
Maintaining Compliance While Navigating New Exemptions
Redstone Government Consulting’s team of experts supports government contractors in understanding evolving Department of Defense requirements and implementing accounting systems that align with compliant cost accounting practices. Even with expanded exemptions for qualifying non-traditional defense contractors, most DoD contracts still carry specific compliance expectations beyond those found in standard commercial agreements. Government contractors that newly meet the nontraditional definition should carefully evaluate which existing controls and processes remain necessary rather than discontinuing compliance efforts altogether.
Likewise, new government contractors must recognize that federal contracting continues to require structured accounting, purchasing, and internal control practices. Our team assists clients with contract clause reviews, accounting system design and assessments, indirect rate development, business system readiness, and training for accounting, contracts, and leadership teams to help ensure regulatory alignment under both traditional requirements and newly available exemptions.
Frequently Asked Questions (FAQs)
- What is a non-traditional defense contractor? A non-traditional defense contractor is a company that has not performed a Department of Defense contract or subcontract subject to full Cost Accounting Standards coverage during the 1-year timeframe before a new DoD solicitation. This definition focuses on recent contract history, not overall company size or experience.
- What changed under the FY 2026 NDAA? The new law requires DoD to exempt qualifying non-traditional defense contractors from certain cost and business system requirements. Previously, DoD contracting officers had discretion to apply similar relief using commercial procedures. The change shifts that flexibility to a statutory requirement.
- Which requirements may no longer apply? For qualifying government contractors, exemptions may include certified cost or pricing data, certain DFARS business system requirements, and the use of FAR Part 31 cost principles. These exemptions are limited to DoD contracts, subcontracts, and agreements and do not automatically apply to other federal agencies.
- Is there a dollar threshold for these exemptions? The statute and related DFARS commercial treatment do not establish a specific dollar threshold. This means the exemptions are not limited to smaller awards and could apply across a wide range of contract values.
- When do these changes take effect? The statutory change is in place, but implementing updates to the DFARS are still pending. Government contractors should monitor rulemaking and understand that existing contracts awarded before implementation will not automatically change without modification.
- Why does this matter for government contractors? These changes can significantly affect pricing approaches, compliance systems, and internal controls. Contractors must assess whether they qualify, how current awards are structured, and how future DoD opportunities may be evaluated under the revised framework.
[i] Acquisition Transformation Strategy – Section “Maximize Acquisition Flexibility through Reduced Regulations and Processes” Subsection “Common-Sense Accounting: Transition from arcane Cost Accounting Standards (CAS) to commercially used Generally Accepted Accounting Principles (GAAP)” Page 24.
[ii] Acquisition Transformation Strategy – Section “Elevate and Empower the Acquisition Workforce to Rapidly Deliver Capability” Subsection “Incentivize the Workforce: Pay our acquisition professionals well and hold them responsible for getting the best deals for the warfighter, no matter what it takes” Page 18.