Podcast: NDAA Introduction and Overview of FY22 Themes

Dan Sennott: Hello, I'm Dan Sennott, a partner here at Holland & Knight in the National Security Practice. I help both traditional and nontraditional defense contractors who are looking to either expand their business in the DoD, or help them navigate current DoD contractor regulatory requirements. Prior to joining Holland & Knight last year, I was the Republican staff director on the House Armed Services Committee. I spent about six years on the committee, and prior to that I was in the U.S. Army for about 21, serving as an armor officer and then eventually as a judge advocate. One of my final assignments was actually here in the Pentagon, serving as the liaison between the Army and Congress. I'm joined today by Marissa Serafino from our Public Policy & Regulation Practice Group. Marissa, tell us a little bit about your background and what you're currently doing at the firm.

Marissa Serafino: Thanks, Dan. I am Marissa Serafino, as Dan mentioned. I'm an associate in the firm. I joined the Public Policy & Regulation Group about five years ago. I'm also on the National Security team here at Holland & Knight, handling NDAA, helping companies with insider threat issues, etc. And before joining the firm, I was with Senator Shaheen on the Hill for about four and a half years. And I handled energy, environment and appropriations which very much led into NDAA work.

Dan Sennott: That's great. So we're excited to be working on a series of podcasts. We're going to break down the FY22 National Defense Authorization Act over the next few podcasts. And so I'll be joined by partners from throughout the firm that specialize in the many different areas of law and policy that the NDAA covers. And we'll also talk about some of the associated major laws that are being passed or considered in Congress right now. This week, though, we're going to focus on general themes in the FY22 NDAA, which was signed by the President on December 27th of last year. Isn't that right, Marissa?

What is the NDAA?

Marissa Serafino: That's right. So this year, and like other years, the NDAA has been this must-pass piece of legislation. But before we get into that, Dan, would you mind just giving our listeners a general overview and reminding us about what the NDAA is?

Dan Sennott: Sure. The National Defense Authorization Act is a yearly authorization of funding and policy for the entire Department of Defense. It also includes national security programs within the Department of Energy. So think National Nuclear Security Administration, the NNSA. In general, in order for the DoD to spend money. Congress must both authorize and appropriate the funding. So the NDAA is the authorization piece of that. And then we've got the defense appropriations bill, which we're hearing potentially will probably be passed in late March, early April. And that's the appropriation of that same funding. So the bill is written and negotiated by the House and Senate Armed Services Committee. Those are the committees of jurisdiction for the authorizers. It's normally pretty bipartisan, actually, and it's one of the few bills that still goes through what's called regular order. So that's when I think back to Schoolhouse Rock and how a bill becomes a law that is the traditional way in which a bill becomes a law. So the bill originates within the committee. A markup of the bill is then held in which members can submit amendments and then after it passes out of the committee, it goes through the whole house for consideration of their amendments. And then it's passed. Now the Senate, meanwhile, is doing the exact same thing and going through that same process with their version of the bill. Then, when both the House and the Senate are completed with their versions, they meet in what's called conference to reconcile the differences and come up with a final bill that's passed by Congress and then sent to the President for signature. The NDAA is considered, as Marissa mentioned, must-pass legislation. It's been passed every year for the past 61 years, and I'm not aware of any other legislation that has that long of a record. And mostly it's attributable, I think, to the bipartisan nature of the legislation and the importance of national security and making sure that we're taking care of our service members. As a result, you may see provisions in the bill that are not purely defense related. That's because members who have other priorities understand that if they can get their bill attached to the NDAA, it's going to ultimately become law.

The NDAA is considered must-pass legislation. It's been passed every year for the past 61 years, and I'm not aware of any other legislation that has that long of a record. And mostly it's attributable, I think, to the bipartisan nature of the legislation and the importance of national security and making sure that we're taking care of our service members.

Nongermane NDAA Provisions

Marissa Serafino: So what are some examples of non-defense related or nongermane provisions that end up in the NDAA?

Dan Sennott: So this year's bill has a few of them. There's Homeland Security matters. There's an entire section on financial services matters. There's Department of the Interior matters, and some of those have to do with Department of Defense property. Others don't. And then in one of our future podcasts, here's an interesting one we'll be talking about semiconductors and the CHIPS Act. Now the CHIPS Act was originally authorized in a previous NDAA. And now what's being considered under USICA and the America Competes is actual funding for that authorization for the CHIPS Act.

Defense Related NDAA Provisions

Marissa Serafino: So the NDAA is one of the most important vehicles that we have. I think it's an opportunity to get legislation passed. So, in terms of the FY2022 NDAA bill, which authorizes $768.2 billion in defense spending, which is a five percent increase over the previous year, and also $25 billion more than what President Biden requested in his annual budget. Dan, could you give us a high level overview of the defense related activities that are covered in the previous year's NDAA?

Dan Sennott: Sure. So it covers all DoD activities, so everything from: think, operation and maintenance funding, that's the day to day operation and running of the services, to acquisition of major weapons systems, to military personnel matters like the running of the military health system and military pay for service members, to research and development of emerging technology and cybersecurity solutions. It also covers national security programs within DOE., which I mentioned, namely an NNSA, which is responsible for the U.S. nuclear weapons arsenal. In addition to funding and policies related to military readiness, the bill is, as I mentioned, pretty broad, and there are both defense and non-defense things. It provides policies related to strategic competition with China and Russia, which we'll be talking a little bit about in a future podcast, environmental remediation and security, government contracting, emerging technology, you name it.

It covers all DOD activities, so everything from: think, operation and maintenance funding, that's the day to day operation and running of the services, to acquisition of major weapons systems, to military personnel matters like the running of the military health system and military pay for service members, to research and development of emerging technology and cybersecurity solutions.

What's New in the NDAA FY22 Bill?

Marissa Serafino: So in terms of the major investments that we saw in this year's bill, what's new? What should we look out for in the future?

Dan Sennott: You know, one of the major issues and you alluded to it in this year's bill was the DOD top line funding level. The President's budget request was for around $715 billion, and that would have represented a 1.6 percent increase over the previous year. But back in 2018, there was a bipartisan National Defense Strategy Commission that found in order to keep pace with readiness and continue to modernize the military, we needed to see a three to five percent annual budget increase above inflation, so it would be three to five percent plus whatever the inflation rate is. Therefore, in this past year's bill, an amendment was introduced to add an additional $25 billion to the top line and that was to get us to that five percent. Now that passed on a bipartisan basis in both HASC and SASC and ultimately ended up in the final bill. So you may be wondering where did that additional money go? Much of it went to the services to fund unfunded requirements, and quite a bit goes to modernization efforts, development and acquisition of emerging technologies. So I think that's going to be a major emphasis in this coming year as they look to spend this money.

One of the major issues and you alluded to it in this year's bill was the DoD top line funding level.

Marissa Serafino: And you're going to do another segment specifically on emerging tech, correct?

Dan Sennott: That that is correct. Yeah, you can be looking forward to that.

Acquisition Reform

Marissa Serafino: Great. So let's talk about some of the other areas covered in the bill. What about acquisition reform?

Dan Sennott: Okay, this is an interesting one. Because each year, for the past several years, the NDAA has included provisions designed to improve the acquisition process. And this year is no different. As you know, navigating the Department of Defense acquisition process can be pretty challenging. There are a lot of rules. There's the FAR, the Federal Acquisition Regulation. And then there's also DFAR, which is the Defense Federal Acquisition Regulation specifically targeting DoD. And there has been, you know, a lot of desire on the part of both DoD and Congress to make sure that commercial suppliers and small businesses and medium sized businesses and nontraditional defense contractors are able to kind of navigate that process and sell their wares. We'll be talking about some of these initiatives in a future podcast, but I just want to highlight a couple of main ones.

Navigating the Department of Defense acquisition process can be pretty challenging. There are a lot of rules.

A few years back, Congress put in law a preference for DoD contracts to, where possible, make sure that they were firm fixed price contracts instead of cost plus contracts. So the difference really is in a firm fixed price contract that would be like if the government wanted to buy a bunch of Apple iPhones, right? They would pay whatever $800 per iPhone and that would get them the entire completed product. There is another method which is cost plus contracting, where the government will reimburse the company for research and development and labor and materials and all these other things. And they will on top of that, add in an additional percentage, typically 15 percent, but it can vary for profit in that latter scenario of a cost plus contract. It's really the government that's bearing all the risk of research and development and potential failures, etc. Where on a firm fixed price contract, once you've negotiated it, if the cost of materials goes up or if there's a labor shortage, that's all going to have to be, that contract still has to be fulfilled. And so the risk has shifted to the commercial market. So that was kind of the thinking a while ago, there was a reflection that a lot of technical innovation was coming from private industry and that in order to leverage that innovation, DoD should be purchasing products that are fully designed and developed by those private companies instead of DoD bearing that cost and risk of R&D. We'll see what impact removing this preference for firm fixed price contracts will have on this approach coming in the future. So that'll be something we'll have to take a look at. Last year's bill also had a major effort to reorganize the defense acquisition statutes. Prior to this effort, the laws that govern defense acquisitions were scattered all over the code, meaning that small and medium sized businesses, like the ones we talked about before trying to do business with DoD, had a real tough time understanding everything they needed to do in order to get contracts. Putting these authorities all in one place in the U.S. code makes it easier to understand all of those requirements. Now that's a big effort and this year's bill continues that process of implementing that reorganization.

We'll see what impact removing this preference for firm fixed price contracts will have on this approach coming in the future. So that'll be something we'll have to take a look at.

Emphasis on Emerging Technologies: Hypersonics and Cyber-Related Provisions

Marissa Serafino: That's really interesting, and I think a lot of our clients would be interested to hear more about that. In terms of, let's go into emerging tech and some other technology issues here. So the department has excitingly placed a renewed emphasis on hypersonic capabilities after recent revelations that the Chinese are more advanced in this area than previously thought. What does the bill contain in terms of hypersonics?

Dan Sennott: I think we're going to see a continued emphasis on this, definitely from the Department of Defense's perspective. There is $300 million for hypersonics R&D, $438 million for hypersonic prototyping, $111 million for hypersonic engineering and manufacturing development. And then there's also an additional pot of money for hypersonic defense capability. So how do we defend against attacks from hypersonic weapons? So there's close to $310 million to develop a hypersonic defense capability. Now that's almost $62 million more than requested in the president's budget request. And then finally, there's $51 million dollars for joint hypersonic technology development. So that'll be one where there is an awful lot of emphasis and a lot of money that's being dedicated to that.

Another one I would highlight for you is cyber. There's about 40 cyber-related provisions in this bill, and that's not unusual. Every year, there are a lot of cyber-related provisions. A number of these provisions are designed to boost cyber capabilities and operations at federal agencies and across the Department of Defense. So just a few that I'll mention: there's, of course, a requirement that DoD provide a report on how cybersecurity maturity model certification so that CMMC, which a lot of folks obviously are familiar with and are concerned about, when is that going to be implemented and how is it going to be implemented? So there is a reporting requirement that DoD provide information about how that CMMC compliance is going to affect small businesses. And I think that's really an acknowledgment, some of the challenges that the private industry is facing in navigating CMMC. There's another provision that requires DoD. to establish an executive agent for the DoD-wide procurement of cyber data, products and services. What we've seen over the last few years is each one of the services and even lower each individual units acquiring their own cyber data, products and services. And so it can be disjointed. And so they're really trying to get a handle on that and make sure that it is more consolidated, the acquisition strategy is more consolidated. And then there's an additional provision that requires each of the services to identify legacy applications and software and eliminate any that are no longer required. And that's along the same lines to try and clean up a lot of the variance that we see.

There's about 40 cyber-related provisions in this bill, and that's not unusual. Every year, there are a lot of cyber-related provisions. A number of these provisions are designed to boost cyber capabilities and operations at federal agencies and across the Department of Defense.

And then, China, and that is great power competition or the new term strategic competition, which the Department of Defense is now using. China is a big part of this bill. There are several provisions designed to better compete with China, many of which will impact how U.S. companies do business with China and reshoring manufacturing capabilities back to the U.S.. We'll be covering that specifically in a follow on podcast. And then I'll just leave you with one final one, which is artificial intelligence and machine learning. The bill has several provisions on AI and machine learning aimed at leveraging solutions from commercial vendors and we'll have an emerging technology podcast in the future that will cover both R&D and AI and machine learning. 

Takeaways for Key Stakeholders

Marissa Serafino: There's a lot to unpack there, and I think we'll get into some of that in future episodes, as you mentioned. One last question that we'll leave the listeners with: so for businesses that are seeking or are currently defense contractor, what should these businesses take away from last year's NDAA?

Dan Sennott: Yeah, I think this NDAA, I think, recognizes that now more than ever, private industry is the primary source of innovation. And so you see that in acquisition strategies and acquisition reform. And you see that in a lot of other areas that really we are more than ever relying on nontraditional defense contractors to be able to provide that innovation. There also remains a bipartisan commitment to funding the Department of Defense to keep it competitive with China and Russia. And then finally, the bill continues with our recent theme of encouraging the reshoring of manufacturing and mining back to the U.S., and we'll be touching on that as well. But Marisa, any parting thoughts that you have on NDAA and on our series.

This NDAA, I think, recognizes that now more than ever, private industry is the primary source of innovation. And so you see that in acquisition strategies and acquisition reform. And you see that in a lot of other areas that really we are more than ever relying on nontraditional defense contractors to be able to provide that innovation.

Marissa Serafino: Just to say that this year's process will be interesting as the processes typically are, I think, we're pushed back a little bit because of the appropriation season. But I'm sure many of the things you've mentioned, Dan, will continue to be trends in the NDAA. We'll see more of them. So excited to hear the rest of your episodes.

Dan Sennott: Great, well, thanks so much, Marissa, and for being here, and we look forward to talking with you on future podcasts. And for now, have a great day.

Marissa Serafino: Thanks for having me.