By Elena McGovern and Michael Wang, National Security Team
Capstone believes the FY26 National Defense Authorization Act (NDAA) will create opportunities for innovative nontraditional defense contractors while increasing the risk to incumbent vendors. The US government seeks to support critical defense supply chains by leveraging commercial technology, providing direct funding to vulnerable suppliers, including manufacturers of critical minerals, and securing private sector financing.
Procedural Overview
Congress is gearing up to pass the NDAA, the annual must-pass piece of legislation that expresses Congress’ intent regarding national security and defense policy. Although it is distinct from the defense appropriations process, it is essential for the Department of Defense (also known as the Department of War), as it enables legislation for the department’s activities. Specifically, it provides the DoD with the legal authorities to execute its policies. Initiatives and reforms will often require new authorities, and many programs also require reauthorization after a certain period of time. Therefore, tracking key developments within the NDAA is essential for understanding the direction of policy and priorities across the DoD.
Capstone believes that the criticality of the NDAA means that the FY26 NDAA will make it through Congress and be signed into law in December 2025—a typical timeframe for the NDAA. Process-wise, the Senate has not yet passed its version of the NDAA, but an informal conference between both chambers is likely to have started to facilitate the formal conference process. Congress generally aims to complete conferencing before Thanksgiving. The compromise NDAA language, established through conferencing, will reveal which provisions are most likely to be enacted into law.
Capstone has analyzed both the House and Senate versions of the NDAA and has determined several key themes and priority areas that we believe are likely to be included in the final NDAA language and are likely to have significant investment implications for investors and companies in the defense ecosystem.
Priority Areas
Acquisition reform, building up the defense industrial base, and increasing defense innovation are major themes in both versions of the NDAA. We note that these three key themes are not new concepts but rather reflect long-standing challenges that Congress has been trying to rectify for years. Given the current Republican trifecta in place, Congress is being very ambitious with its effort to make meaningful changes in these issue areas through the FY26 NDAA that we believe could have a lasting impact on the DIB and the investment landscape.
Acquisition Reform: Positive for Tech-Enabled and New Defense Entrants, Negative for Defense Primes
Congress’ main priority in the FY26 NDAA is acquisition reform. Over the years, the DoD’s acquisition system has been criticized as being too ponderous to respond to new requirements and unable to control cost growth. At present, each chamber has its own standalone bill that would enact reforms. However, while the House’s SPEED Act and the Senate’s FORGED Act differ in scope and substance, both seek to simplify existing regulations to dramatically increase the responsiveness of the acquisition system and reduce the time required to get companies on contract. The current clumsy acquisition process undermines the attractiveness of the government as a customer for many commercial and innovative companies that might otherwise have significant capabilities to offer.
The House’s SPEED Act proposes five major reform efforts, including, but not limited to, overhauling the requirements generation process, empowering acquisition officers (along with formally defining the authority of Program Executive Officers), making existing authorities more flexible, and incentivizing private sector investment in the DIB. Specific provisions also mandate the DoD to review commercial buying practices and consider the adoption of commercial accounting standards. If passed as is, this legislation would, in theory, reduce the regulatory burden on and provide more certainty to companies doing business with the government, as the DoD wants to decrease the time between requirement generation and contract award.
On the other hand, the Senate’s FORGED Act would radically reshape the structure of the acquisition process to force greater adoption of commercial solutions rather than the largely bespoke nature of defense procurement today, which leads to high cost, high complexity, and a reduction of competition and innovation. Of note are provisions that widen the definition of non-traditional defense contractors, which was previously determined by whether or not a contractor had performed a contract subject to DoD cost accounting standards, to include entities that do not have significant R&D or bid costs reimbursed by the DoD, and exempt them from select regulations and have them treated like commercial entities, reducing the regulatory burden for these companies.
In addition, the Senate would also change how programs are managed to a portfolio-based model. It is still unclear the daily impact such a change would have on the defense industry, but it could result in more flexibility from a capability portfolio manager, rather than a program manager who is siloed to only manage their particular program, creating managers with a more holistic perspective. A potential result of such a move could be the creation of more opportunities, eroding some of the traditional advantages held by program incumbents.
Capstone believes that a version of these provisions will likely survive conferencing and make it into the final version of the FY26 NDAA and will have significant impacts on A&D firms. The promotion of commercial or non-traditional defense contractors would disrupt the stranglehold that the defense primes (Lockheed Martin Corp., Boeing Co., Northrop Grumman Corp., RTX Corp., and General Dynamics Corp.) currently hold over defense dollars, both in terms of goods and services. Even in segments without commercial analogues, increased competition could erode the market share held by defense primes. Non-traditional defense contractors, including large newcomers and smaller innovative companies, might find it easier to edge into large franchises held by the primes. In addition, large commercial companies might find it easier to compete in the DoD ecosystem as relaxed regulations would reduce their need to establish a wholly separate sales pipeline from their commercial products. While lots of military equipment is purpose-built, areas like tech may have analogues that would be very attractive to the DoD.
New Ways of Contracting: Positive for Tech-enabled and New Defense Entrants, Negative for Defense Primes
The Senate NDAA is particularly forward-leaning with its efforts to relax contracting requirements, especially for non-traditional defense contractors. They are proposing an expansion of the ability to award Other Transactions (OTs), also referred to as Other Transaction Authorities (OTAs), to rapidly procure critical capabilities. OTAs are legally binding agreements that the government technically does not consider contracts, meaning that they are exempt from the Federal Acquisition Regulation and Defense Federal Acquisition Regulation Supplement, FAR and DFARS, respectively. OTAs are increasingly becoming the preferred way for the DoD to pursue innovation and prototyping work due to their lower administrative burden.
Making OTAs more ubiquitous would help non-traditional defense contractors win business with the DoD. In addition, both the House and Senate are mandating that all OTAs will need to be reported by the DoD, like other expenditures. These moves represent how the DoD is embracing OTAs are a regular way of doing business with the Department. A second-order consequence could be greater visibility in the OTA space, helping companies without pre-existing relationships identify these more innovative opportunities in the wider DoD ecosystem, and particularly companies with capabilities that can be adapted to a variety of missions.
Another provision in the Senate mandates revisions to the DFARS to enable “consumption-based solutions,” which allows the DoD to purchase capabilities that can be metered and billed at actual usage rates. For example, companies that provide cloud or cybersecurity services to the DoD could take advantage of this new model. This represents further flexible mechanisms for the DoD to do business and may enable more flexible business models when working with the US Government.
Direct Industrial Base Support: Positive for Lower Tier Contractors in the Supply Chain
Consistent with the broad-based revival of industrial policy in recent years, and particularly under the Trump administration, draft FY26 NDAA provisions would create new mechanisms for the DoD to directly intervene in the DIB, mirroring those of the existing Defense Production Act (DPA), which is outside of the purview of the Armed Services Committees. Functionally, this empowers the Armed Services Committees to push for more direct DIB support rather than rely on a non-defense-focused committee; the Senate version of the NDAA, in particular, significantly expands the DoD’s authorities and, subsequently, the committee’s oversight over direct investments into the defense space. There are also provisions to help the DoD address capacity shortages, supply chain vulnerabilities, and workforce challenges that enable the Defense Department to more proactively address existing challenges.
Both the House and Senate versions of the FY26 NDAA are seeking to dramatically expand the scope of the Defense Industrial Base Fund. If enacted, this fund would be able to provide direct support to companies in the form of financial incentives, including purchase commitments, which the DoD has historically shied away from, as well as an expansive new authority to take equity stakes in businesses. The fund would also be empowered to intervene at any level of the value chain in key industries, including:
- Castings and forgings;
- Kinetic capabilities, including sensors, targeting systems, and delivery platforms;
- Microelectronics;
- Machine tools, including but not limited to subtractive, additive, convergent, stamping, forging, abrasive, metrology, and other production equipment;
- Critical minerals, materials, and chemicals;
- Workforce for the defense industrial base;
- Advanced manufacturing capacity, including echelon manufacturing forward in the Indo-Pacific Command theater;
- Unmanned vehicles, including subsurface, surface, land, air, one-way, attritables, and launch and recovery platforms;
- Manned aircraft;
- Ground systems;
- Power sources;
- Ship and submarine, including assembly and automation technologies and capabilities, new or modernized infrastructure for new construction or maintenance and sustainment, and battle damage repair;
- Other materiel solutions required to support Indo-Pacific Command operational plans as required;
- Defense space systems.
These expansive categories essentially cover every aspect of military supply chains with few, if any, limitations.
This fund would further cement an emerging theme in how the DoD and the broader US government are approaching strategic sectors, namely, allowing the DoD to take ownership positions in private companies. A practical demonstration of what this may look like is the recent DoD investment into MP Materials, one of the sole magnet manufacturers in the US, from earlier this year. While there were real questions about the authorities used for this deal, the NDAA would clearly pave the way for additional investments of this kind. Capstone believes this language will survive conferencing as both versions of the legislation include this major authority.
Another potentially impactful provision in the Senate NDAA is the establishment of the Economic Defense Unit (EDU) to directly manage the US’s economic security competition, focusing on the China threat. The EDU would coordinate with the DoD’s Office of Strategic Capital to provide the DoD with a nonmilitary tool to support critical industries and engage directly with the private sector. Capstone believes that critical minerals will be a heavy initial focus of the EDU and further demonstrates the willingness of the DoD to get directly involved with industry. For investors in the defense supply chain or looking at overseas assets implicated directly in national security, the EDU could facilitate many opportunities to access government funding and public-private partnerships in order to counter Chinese influence across strategic sectors.
Both versions of the NDAA include provisions that would work to address workforce shortages, particularly for skilled workers in the defense field, and reduce dependence on foreign supply chains, particularly those associated with China. These efforts demonstrate the seriousness with which the DoD and Congress are treating security across the defense industrial base. Capstone believes that opportunities for US investors exist throughout the value chain, especially as the DoD is exploring more creative ways to leverage its authorities and funding, including seeking close collaboration with the private sector.
Other Areas of Interest in the FY26 NDAA
Shipbuilding: Capstone has been following shipbuilding policy and appropriations developments closely, particularly following the significant attention that US naval and commercial shipbuilding received beginning with President Trump’s first State of the Union speech, the creation of a maritime-focused office at the National Security Council, and the April Executive Order “Restoring Maritime Dominance.” However, neither version of the NDAA incorporates the key elements of the SHIPS for America Act, a bill focused on supporting the US shipbuilding industry, including through a combination of industry investment incentives and other efforts.
Passage of the SHIPS for America Act as legislation as a standalone bill was always unlikely in our view due to political headwinds and the complexity of Congressional committee jurisdictions, given the range of elements that included changes to the tax code. However, we believed that the NDAA represented the best vehicle for passage of at least some elements of the bill.
While the NDAA supports shipbuilding and signals congressional interest in the industry, including provisions that seek to close gaps in the industrial base, the more revolutionary aspects of the SHIPS for America Act, including those aimed at expanding US maritime security programs, are not present. Capstone still believes that shipbuilding enjoys significant bipartisan support, but future legislation in this area appears unlikely over the next six months, despite continued lobbying efforts, including those from major US labor unions, to push the SHIPS for America Act.
Strengthening US Supply Chains for Small Drones: The US government has been focused on placing restrictions on unmanned aircraft systems (UAS), or drones, from China in recent years, including placing restrictions on the use of drones from the major Chinese producer DJI. In addition to excluding UAS technology from undesirable providers, the Senate version of the FY26 NDAA specifically aims to bolster the US industrial base’s capacity to produce drones, particularly small unmanned aircraft systems (sUAS). The specific provision requests a strategy from the DoD, in coordination with the Defense Innovation Unit (DIU), the military services, and the Defense Advanced Research Projects Agency (DARPA), to develop a plan to strengthen US capacity in this regard. It also requires a plan to prioritize government funding to onshore production, establish private facilities for that production, establish government-owned, contractor-operated (GOCO) and government-owned, government-operated (GOGO) facilities for production. Finally, the Senate version would also require an assessment of the capacity and capabilities of the US industrial base for sUAS.
Adding TP-Link Technologies as Covered Telecoms Equipment: Stripping Chinese-made telecoms equipment from US government and commercial systems has also been a longstanding goal of the US government, dating back to the original “rip and replace” efforts focused on Huawei and ZTE. One provision of the FY26 NDAA would direct the Secretary of Defense to evaluate designating TP-Link Technologies Co., Ltd. products as covered telecommunications equipment under Section 889 of the John S. McCain NDAA for FY 2019, which would prohibit their use by federal agencies and contractors. We believe inclusion of this section in the final version of the bill would affirm the existence of bipartisan support to restrict the use of TP-Link products in the US and support our expectation that the Department of Commerce will ban the sale of TP-Link products.
Quantum Technology: One theme continued from previous years’ NDAAs is continued interest in quantum computing and sensing. The DoD has long been interested in the military applications of quantum technology in precision navigation and timing, communications, and computing. Both the House and Senate have been supportive of R&D efforts in this space, including Defensive Innovation Unit (DIU) initiatives. The House would authorize the construction of a quantum communications corridor for the US Navy to connect certain installations, national labs, and universities. We expect the DoD to continue its investment in quantum technology and for Congress to continue supporting these moves.
What’s Next
The Senate is expected to pass its version of the FY26 NDAA in the next few weeks, although that timeline may be disrupted by the ongoing government shutdown and other matters. A move to conferencing is still expected in November, and we expect a complete compromise bill on or around Thanksgiving. Then, both chambers of Congress will vote on it to send it to the President. Historically, the NDAA is generally always passed in December.
Capstone will continue to monitor the legislation as it leaves conferencing to understand which provisions survive the negotiations.
Elena Mcgovern, Managing Director
Michael Wang, Vice President
Read more from our National Security Team:
From Nvidia to Naval Drones: How China Competition Could Impact the Campaign Trail
