The $900 billion National Defense Authorization Act (NDAA) passed by Congress includes a “non-traditional” provision warned by analysts to benefit the United States’ biggest defense contractors.
Section 821 of the NDAA stipulates that companies already with billions of dollars’ worth in Pentagon contracts can maintain non-traditional status by keeping research and development costs, as well as bid-and-proposal costs, below $1.1 million. Total DoD revenue overall wouldn’t affect such status.
The provision, one of about 1,000 included in the NDAA’s final version, may allow large defense tech firms to tap into Other Transaction Authority (OTA) procurements that typically are reserved for and benefit smaller contractors still emerging in the market.
“Procurement reform allows non-traditional contractors to bid, sort of skipping over some of the bureaucracy, if you will, that deterred them,” Anita Antenucci, founder and managing partner of 3wire Partners, told Military.com. “That migration has been happening for a long while.
“It's a good thing in my mind to be able to let more companies bring ideas to the national security market and get them directly into at least prototypes, if not production.”
Military.com reached out for comment to many of the United States’ largest defense contractors, as well as the Pentagon. None responded by press time except Boeing, which declined to comment.
Cutting Through Red Tape
Prior to working for the independent investment and merchant bank, 3wire, with a portfolio of investments in defense, Antenucci spent about three decades conducting mergers and acquisitions, specifically in aerospace defense.
The new NDAA provision may entice more people and companies “by giving them a shortcut through some bureaucracy” that could impact innovation and procurement for the national security industrial base, she said.
“You could have thought of the war as an incubator for attracting a lot more great technology into the fight."
She analogized it with the U.S. needing to deploy new technologies in the midst of the Gulf War “against fights that we weren't prepared for, IED specifically.” She interacted with numerous defense companies that successfully deployed innovative systems and technology into the battlefield through joint urgent operational needs.
“You could have thought of the war as an incubator for attracting a lot more great technology into the fight,” she said. “And this OTA has attempted to continue that outside of the direct fight when you don't have a joint battlefield requirement, but you do have a requirement. OTA has been a really useful tool for attracting companies to be able to get real money quickly to deliver systems, and this is just an expansion of that.”
The jury is still out on whether bigger defense companies like Boeing, Lockheed Martin or General Dynamics, etc. will prosper even more from this provision. But Antenucci said change in the industry has been “gradual” for decades now as it has become much more of a traditional business following the dynamics of publicly traded companies and private equity dynamics.
“It's been capitalized from the ‘50s and ‘60s when it was probably a lot of privately held businesses, to the ‘80s when it was a very dedicated group of companies—whether they're private or public. Now it's an industry that looks like any other sector.”
Defense Industry: Then and Now
The transition from more traditional capital, financial management tools and approaches being used have now attracted early-stage capital, which she added has not been true at scale.
“It might have been true on the fringe, but it wasn't true at scale for a very long time,” she said. “Now, there is a lot of volume and a lot of dollar accumulation of earlier stage capital supporting companies to become suppliers into the national security industrial base. Many of them are still at lower TRL (Technology Readiness Levels), delivering prototypes as opposed to full-on systems.
“But that is a dramatic transformation in the industrial base, potentially available to the customer, to the government, or to the foreign governments as well, because it gives them a lot more to choose from.”
That can also impact national defense in a more practical manner by encouraging a more pragmatic environment built upon competition and capital. It doesn’t mean that every company attempting to get into the industry will benefit, though the playing field is available to them.
OTAs overall have expanded “very consistently” the past 10-15 years, she added.
“If one of the No. 1 reasons that capital has been less attracted to the government industrial base over the years is all the rules, and this is a shortcut, then of course it's going to attract more people to say, ‘Well, maybe I can sell into that market,’” she said.
She added: “The idea that venture capital could put money into an idea and see it be purchased on a production volume, on a faster timeline, because there aren't as many of the traditionally required rules in place is part of what's attracting them all into the space.”
