Government contractors face changes in how they do business.
Key takeaways
Government priorities include speeding up acquisitions, strengthening the supply chain and increasing AI use.
Successful contractors will align their processes to meet the government’s objectives.
President Joe Biden signed the fiscal year 2024 National Defense Authorization Act (NDAA) into law in December. It includes provisions to expedite the U.S. Department of Defense (DOD) procurement of goods and services, strengthen the defense supply chain, protect the nation and increase the use of artificial intelligence (AI) to improve data analysis.
Middle market defense contractors must understand the changes in the DOD acquisition landscape and keep up with defense priorities. Having a clear understanding of how the government can acquire their services or products will help contractors win and expedite government procurement.
Accelerating the government’s time to value
Section 800 of the act addresses the DOD’s contract-acquisition process. The DOD is speeding up the procurement of mission-critical products, allowing commercial companies easier entry into the supply chain.
This development may benefit both the DOD and middle market companies. But it will be critical for defense contractors to understand the differences between acquisition procedures.
Section 875 seeks to unwind commercial products or services purchased through contracts subject to Federal Acquisition Regulation (FAR) Part 15. Currently, the DOD has to justify why an acquisition is commercial and should be exempt from FAR Part 15 procedures. Section 875 reverses this requirement to assume all products and services are commercial by default and requires contracting officers to justify why an acquisition is not commercial.
If a rule is enacted consistent with section 875, top performers can position their products as commercial items to use the streamlined acquisition process under FAR Part 12—a regulation that eliminates the need for cost and pricing data based on the presumption that a fair and reasonable price is established in an open market. This allows contracting officers to rely on market efficiencies to support the price of services or products, lowering the administrative burden and shortening the time it takes the DOD to get what it needs from the defense industrial base.
In a 2018 report to Congress, the U.S. Government Accountability Office analyzed the time the DOD took to award 129 weapon-related systems contracts. The results ranged from less than a month to over four years, as shown in the table below.
While the report did not disclose how many commercial items were part of the study, it did say that a $7 million commercial item was awarded within just 20 days. Commercial businesses would face fewer barriers to entry to become defense contractors if this example became the norm. A shorter, streamlined procurement process is much easier for a capital-constrained startup with innovative ideas to navigate. The government would benefit from greater competition among America’s best and brightest entrepreneurs.
Few companies produce critical technologies and components, and those few have significant bargaining power. The FAR Part 12 streamlined acquisition process will help lower the barrier of entry, enticing commercial businesses to join the defense industrial base. The increase in suppliers will balance the bargaining power between producers and buyers in that sector while strengthening our defense supply chain and uplifting our economy.
Strengthening our supply chain
Supply chain resilience is at the heart of the NDAA. As supply chains normalized from pandemic shocks, geopolitical conflicts erupted around the world.
Conflicts in the Middle East have disrupted shipping lanes in the Red Sea, the most important waterway connecting Asia and East Africa to Europe.
In response to this disruption, section 856 of the NDAA establishes a pilot program to analyze and monitor the supply chains of five covered weapons platforms to identify the following:
- Critical suppliers
- Risks, vulnerabilities and related mitigation strategies
- Impediments to and opportunities for the expansion of production
The NDAA says the government may use AI to improve data analysis capabilities as part of the pilot program. This pilot is a great opportunity for middle market defense contractors to deliver advanced, AI-powered analytical tools. It also aligns with President Biden’s recent executive order to use AI to promote innovation and advance American leadership abroad. However, the order also stresses the importance of developing a safe, secure and responsible approach to AI. Middle market defense contractors must establish adequate internal control frameworks to meet the objectives and requirements of the administration and NDAA for the development, maintenance and deployment of AI solutions.
Section 856 also requires the government to provide annual reports that identify vulnerabilities, solutions and efficiencies gained from removing obstacles in our supply chain.
Based on the goals of the pilot program, contractors should prepare for heightened data requests and AI governance requirements (e.g., supplier records, contract data and so on). While contractors associated with the five selected weapons systems must prepare immediately for the pilot, others should see this as a sign of what is to come. We recommend that contractors assess their purchasing system’s capabilities and their contract function’s level of detail and accessibility of records.
CONSULTING INSIGHT: The middle market AI playbook
Artificial intelligence is changing how organizations do business, with tools and applications creating valuable opportunities for increased productivity and deeper insights. But before you can implement an effective AI strategy, you must understand how to align rapidly evolving solutions to your business processes and goals.
Learn more about successfully deploying an effective AI strategy in our new guide.
Also, as defense contractors develop new and improved AI solutions, they must do so in a responsible manner. This will entail following standards for AI safety and security, protecting Americans’ privacy, and advancing equity and civil rights as laid out in Executive Order 14110, Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence. We recommend that middle market defense contractors seek guidance from advisors who specialize in security and privacy risk to develop internal control frameworks to test, develop and deploy AI solutions.
We expect the pilot results to highlight the need for contractors to friendshore, or establish trade routes with ally countries. This will be no easy feat. It requires many strategic supply chain decisions and accurate data that allows those decisions to be made with confidence.
Protecting our nation
The NDAA includes provisions to protect against specific near-peer threats. Section 805 prohibits procuring goods or services produced or developed by Chinese military companies.
Section 812 says businesses with contracts classified under NAICS 5416 (management, scientific and technical consulting services) must certify that neither the company, its subsidiaries nor its affiliates provide consulting services to covered foreign entities—primarily Russia and China. We assume most contractors can certify this provision. However, section 812 also provides an exception for companies that maintain an auditable conflicts-of-interest mitigation plan. We look forward to learning how this exception will be applied through the Defense Federal Acquisition Regulation Supplement.
Section 812 is one more effort to help the U.S. disentangle from China. As this trend continues, we recommend that global defense contractors think critically about their businesses’ international footprint, with a focus on their compliance function and their security and privacy risk advisors. Accountability will continue to increase, meaning sound data, strategic management and transparent processes will be paramount.
The takeaway
The NDAA contains critical provisions to help the DOD work faster, be more resilient and protect national security. Contractors must prepare for the disruption that comes with change. Companies will succeed by demonstrating agility and aligning their internal processes to meet the DOD’s security and supply chain resilience objectives.
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