Article 2: Bypassing the Bureaucracy: A Guide to DoD’s Fast-Track Funding Vehicles
Effective government contracting vehicles - such as the Other Transactions Authorities (OTAs) – are important tools for modernizing DoD procurement and incentivizing defense industrial renewal.
1. Overview of the 2025 Defense Acquisition Landscape
The United States defense industrial base is navigating a period of profound transformation, driven by the convergence of geopolitical instability and technological disruption. For new entrants - specifically startups, scale-ups, and non-traditional defense contractors - the environment in late 2025 presents a complex paradox. On one hand, the Department of Defense (DoD) has never been more explicit in promoting commercial first innovation to counter peer adversaries in the Pacific and Eastern Europe. On the other hand, the traditional bureaucratic machinery of procurement is experiencing a critical legislative seizure with the review of the National Defense Authorization Act (NDAA) for Fiscal Year 2026 introduced in July 2025. The NDAA contains a new focus on software, biology, and autonomy and many good ambitions to break the acquisition barriers. There are efforts to expand on Commercial Solutions Opening (CSO), introduce Portfolio Acquisition Executive, establish the BOOST Program, and revolutionize how DoD buy commercial products. However, the successful execution will be the real challenge. Secretary Hegseth’s remarks on November 7 signaled an urgent push to speed acquisition and reshape the Department of Defense’s industrial relationships, but the accompanying memoranda listed a mix of directives and implementation details from which emerged an incoherence between the rhetorical urgency and the practical, institutional work required to deliver change to a very complex military system.
Why is the practical implementation of the intended measures to modernize our military apparatus so difficult? Why will it likely take a long time to complete? First, rapid fielding requires synchronized changes in requirements, contracting vehicles, budgeting, and testing. Statutory or budgetary constraints will need to be removed. Second, lasting change depends on modernizing incentives, training, and removal mechanisms for acquisition personnel: memos can propose personnel reforms, but cultural change will take sustained leadership and measurable performance frameworks. Third, short-term pressure to deliver can concentrate procurement with firms that already meet compliance thresholds, potentially reducing competition unless explicit measures protect small and non-traditional suppliers.
2. A few steps forward… with obstacles along the way
Fortunately, there are already steps that the government is taking in the right direction. For instance on April 9, 2025, President Trump issued an Executive Order (14265) on “Modernizing Defense Acquisitions and Spurring Innovation in the Defense Industrial Base,” to speed up procurement, boost commercial tech use, and reform the DoD acquisition system by prioritizing faster, flexible methods like Other Transaction Authorities (OTAs) and the Adaptive Acquisition Framework, while also mandating reviews for canceling underperforming programs and retraining the acquisition workforce for agility and innovation.15 Potential, beneficial outcomes from this modernization process might include:
Market effects: faster procurement will alter demand signals for defense suppliers and will further affect investment incentives, especially for venture-backed small businesses.
Labor and human capital: the need for workforce modernization will shift skill premiums and training needs encouraging new initiatives and courses at universities and at technical societies for students and for mid- and late-career professional development.
Innovation incentives: rewarding risk-taking will change firms’ behaviors (especially large traditional defense contractors), will redistribute R&D allocation, and will further promote entry in the defense market by non-traditional suppliers.1 2 3
This should encourage new partnership between large defense system integrators (familiar with defense contracting and already in charge of large existing programs of record) with small businesses that are agile and able to rapidly develop, test, and deploy new technologies (such as sub-systems) as suppliers
However, Executive Order 14306 signed on June 6th, 2025 titled “Sustaining Select Efforts to Strengthen the Nation’s Cybersecurity” which amends Executive Order 13694 (from the Obama Administration) and Executive Order 14144 (from the Biden Administration) introduces some potential new barriers. This Executive Order updates federal expectations for secure software practices and third‑party supply‑chain transparency, directing agencies and standards bodies to operationalize requirements that vendors must meet when supplying federal systems. These actions revive and amend prior cybersecurity EOs and assign concrete tasks to agencies and NIST to update guidance and frameworks.16
It preserves certain cybersecurity priorities while rescinding or modifying other selected instructions. Specifically, it directs agencies to operationalize specific protections, such as secure software development practices and third-party software supply-chain transparency. It also assigns concrete responsibilities to agencies including NIST for standards work and Treasury for sanctions implementation. Key implementation tasks and agency roles. There are several potential economic and industrial outcomes from the present requirements, including some significant barriers:
Firms supplying federal agencies may face increased near-term costs to align with updated secure-software and supply-chain transparency requirements, raising compliance spending and, again, potentially favoring larger incumbents with compliance capacity. This will drive one‑time and recurring compliance costs across software development, supply‑chain transparency, auditing, and legal/risk functions; small suppliers could face ~$50k-$500k in initial costs while mid‑sized firms may see ~$250k-$2M, and large incumbents ~$1M+ depending on scope and contracts.
If NIST guidance is widely adopted, standardization could reduce integration friction and lower long-run costs of secure development, improving productivity across the defense and civilian tech sectors. NIST will publish the final version of the updated Secure Software Development Framework (SSDF) in March 2026.17
Some important changes introduced by this executive order are relevant to AI, IoT, Quantum-security, and dual-use or commercial items. :
Companies that sell “dual-use” or commercial-off-the-shelf (COTS) IoT devices to the government (e.g., base security cameras, smart facility sensors), are contractually required to have the United States Cyber Trust Mark by January 2027.
Defense contractors need to align their software development lifecycle to the forthcoming updates to NIST SP 800-218 and consider joining the new NIST industry consortium which started on August 1, 2025, to help shape these standards before they become mandatory compliance requirements.
DoD and DHS are integrating AI vulnerabilities into their standard incident tracking. Companies delivering AI/ML models to the DoD should expect new contract clauses requiring report “AI compromises” (e.g., model inversion attacks, poisoning) just as they would report a traditional network breach.
Companies that provide encrypted communications gear or software to the DoD, need to ensure their roadmap supports TLS 1.3 by 2030 and begins integrating Post-Quantum Cryptography standards.
3. Is the US defense market accessible or impenetrable?
So what are viable options for companies seeking to maintain their competitive edge or enter the defense market in the upcoming years? The narrative that the DoD is impenetrable is outdated; however, the narrative that it is easily accessible is equally misguiding - as we can see from the recent list of executive orders.
In addition, the market has evolved into a multi-nodal ecosystem where funding does not flow linearly from a requirement to a contract. Instead, it flows through a mesh of innovation hubs (DIU, AFWERX, Army Futures Command), state-level accelerators (Massachusetts SHIELD, Texas Capital Factory, California CADENCE), and private investors enablers (Shield Capital, a16z). Success in this environment requires a sophisticated understanding of “capital stacking”, the art of blending non-dilutive government grants with dilutive private investments and state level incentives.
4. The Shift to Agile Acquisition
The current fiscal year has been mainly focused on identifying commercial innovations that can be rapidly customized to military use. By integrating the core tenets of the “SPEED Act” (Streamlining Procurement for Effective Execution and Delivery), Congress has effectively redrawn the acquisition map to favor “non-defense players”—specifically venture-backed startups and commercial scale-ups that have historically avoided engaging in defense contracts.
The most significant tactical change is the elevation of the Truthful Cost or Pricing Data Act (TINA) threshold. The latest draft raises the ceiling for certified cost and pricing data to $10 million (up from the previous $2 million). For a commercial software firm or an autonomous drone startup, this is a fundamental change; it removes the requirement to implement legacy, government-specific accounting systems (CAS) for mid-sized contracts. This exemption is designed to allow “dual-use” companies to sell to the Pentagon using the same business models they use for commercial enterprise clients, effectively lowering the cost of entry for non-traditional innovation.
To maintain momentum on promising prototypes, the DoD has instituted “bridge” mechanisms such as the Air Force’s Strategic Funding Increase (STRATFI) and Tactical Funding Increase (TACFI). These programs are designed to mimic late-stage venture capital rounds, requiring startups to bring matching private funds to the table to unlock large government tranches ($3 million to $15 million).4 This requirement has fundamentally altered the relationship between defense startups and venture capitalists. It is no longer possible to treat government revenue and private equity as separate spheres; the DoD now explicitly requires private capital validation as a prerequisite for its largest innovation awards.
5. Federal Funding Opportunities: Navigating the Maze
The federal government remains the ultimate customer and the largest source of non-dilutive capital. However, the mechanisms for accessing this capital vary wildly in terms of speed, compliance burden, and strategic utility. Understanding the nuances of each “front door” is essential for resource allocation. In Table 1 we summarize the key attributes of the primary federal funding mechanisms available to new entrants in the current landscape and compare different funding options and requirements. In the appendix we provide a more in depth description of each funding source.
6. Final Thoughts
OTAs have been successful mechanisms adopted to increase speed of innovation in spite of the bureaucracy and complexity of the US defense apparatus. It is also important to keep informed about new initiatives from DIU, DARPA, and the various innovation agencies from AF, SF, Army, Navy, SOCOM, etc. The defense industry should shift their internal processes to take advantage of these types of innovation pathways and engage in strategic partnerships with the whole defense innovation ecosystem to better leverage new contracting vehicles aimed at the US military apparatus modernization.
Appendix: Deep dive into government contracting vehicles
In this appendix we summarize five of the most important government contracting vehicles available to large and/or small businesses, as listed in table 1.
A.1 Other Transaction Authorities (OTAs)
Other Transaction Authorities (OTAs) have shown to be very effective contracting solutions for defense innovation over the past five years. OTAs are legally distinct from standard procurement contracts; they are not subject to the Federal Acquisition Regulation (FAR), which allows for significantly greater flexibility and speed.1
OTAs are authorized under 10 U.S.C. § 4022 (formerly § 2371b). This statute allows the DoD to enter into transactions for prototype projects directly relevant to enhancing the mission effectiveness of military personnel. Crucially, to use an OTA, the contractor must be a “non-traditional defense contractor”—defined as an entity that has not performed a fully Cost Accounting Standards (CAS)-covered contract for at least one year prior, or a small business. It is important to note that if a traditional prime contractor wants to use an OTA, it must typically cost-share (pay for 1/3 of the project) or partner with a non-traditional entity.2
The single most powerful feature of the OTA is the production transition authority. Under 10 U.S.C. § 4022(f), if a prototype project funded by an OTA is successfully completed, the DoD can award a follow-on production contract or transaction to the participant without further competition. The strategic implication is that a startup can win a relatively small competitive prototype OTA (e.g., $500,000) from an organization like DIU. If they deliver a successful prototype, they can then negotiate a production contract worth tens or hundreds of millions of dollars without having to bid against incumbents (large defense contractors). This is the mechanism that has been used by companies like Anduril to scale rapidly.3
A.2 Small Business Innovation Research (SBIR) Program
While in the current pause waiting for reauthorization in a modified form, the SBIR program remains one of the main contracting vehicles for small businesses (with less than 500 employees) to enter the military industry market. It is expected that Congress will eventually reauthorize the program, with some modifications to avoid alleged misuse by a small number of “SBIR Mills”.
The SBIR program is structured to move technology from ideation to commercialization. This funding is non-dilutive and allows companies to retain full ownership of their intellectual property, granting the government only “Government Purpose Rights”.6
Phase I (Feasibility Study): This phase typically awards between $150,000 and $275,000 for a duration of 6 to 12 months. The objective is to determine the feasibility of the proposed concept. In the “Open Topic” option - pioneered by the Air Force - this phase is often used for new solution demonstration and “customer discovery.5
Phase II (Prototype Development and Testing): This is the core R&D phase, leveraging $1.25 million to $1.8 million over 24 months. Success in Phase I is a prerequisite. The goal is to design, build, and test a prototype. Before the end of the Phase II contract, the funding agency can award a Phase II Enhancement (at the government customer discretion). If a company has already invested in R&D and has already proven the feasibility of a concept, in some solicitations, it is possible to submit a ”Direct-to-Phase II” proposal.
Phase III (Commercialization): Once a company has demonstrated the technology, federal agencies have the authority to award follow-on contracts on a sole-source basis, without further competition. This bypasses the Competition in Contracting Act (CICA), saving contracting officers 12-18 months of administrative work.1 Furthermore, during this Phase the small business could raise external funding from private investors or defense contractors to receive matching funding from the awarding agency.
Traditional SBIR topics describe specific requirements and pre-selected solutions to military needs. (e.g., “Develop a new polymer for tank treads”, “Develop a drone that can transport a 100lb cargo”). In recent years, organizations like AFWERX and Army Applications Laboratory (AAL) introduced “Open Topics,” which ask the innovation community to suggest solutions to certain military needs. “What commercial technology do you have that could be used for military applications?” This inverted the model, allowing companies with existing commercial products (SaaS platforms, drones, logistics software) to adapt them for defense use.4 5
A.3 Commercial Solutions Opening (CSO) and DIU
The Defense Innovation Unit (DIU) acts as a bridge between the DoD and the commercial technology sector, exclusively utilizing OTAs to move at commercial speeds. DIU utilizes a solicitation method known as the Commercial Solutions Opening (CSO). This process is designed to be frictionless for commercial companies.
DIU posts simplified problem statements on its website. These are not 100-page specifications but broad challenges (e.g., “Blue UAS,” “Space Logistics”). Instead of a complex proposal, applicants submit a “Solution Brief.” This is typically a slide deck (maximum 15 slides) or a short white paper (maximum 5 pages).8 The focus is on the commercial product’s capabilities, the modification required for DoD use, and the company’s viability. Selected companies are invited to pitch directly to DoD end-users. This interaction allows for real-time feedback and negotiation, unlike the “black box” of FAR-based contracting. Successful pitches lead to a Prototype OTA. DIU aims for a “solicitation to award” timeline of 60-90 days, although recent data suggests an average closer to 120-137 days.9
In 2025, DIU has expanded its focus to include energy resilience (specifically nuclear supply chains for military installations), autonomous systems (Replicator initiative), and biotechnology.10 The unit is also moving towards “allied” innovation, running challenges relevant to AUKUS partners (Australia and UK).11
A.4 The AI Exploration opportunity (AIE) and DARPA
While DIU focuses on adopting mature commercial tech, DARPA focuses on high-risk, high-reward scientific breakthroughs. DARPA operates on the “Heilmeier Catechism,” a rigorous framework for evaluating proposals.10 11 12
In 2025, DARPA’s “AI Forward” initiative has been a dominant theme. This program seeks to develop trustworthy AI systems for national security. A key mechanism here is the AI Exploration (AIE) opportunity. AIEs utilize “Other Transaction” agreements to award funding rapidly (within 90 days) for short-duration feasibility studies (18 months).12 This allows DARPA to move at the speed of the AI market.
For startups spinning out of universities, the YFA program is a critical entry point. The 2025 solicitation covers topics from quantum sensing to complex chemical systems.13 While primarily academic, these awards often lay the IP foundation for deep-tech startups.
A.5 Broad Agency Announcements (BAA)
While OTAs focus on rapid prototyping and SBIRs on small business commercialization, Broad Agency Announcements (BAA) serve as the more traditional, primary vehicle for basic and applied research. Authorized under FAR 35.016, BAAs allow government labs such as the Office of Naval Research (ONR), Air Force Research Lab (AFRL), and Army Research Lab (ARL) to solicit ideas for general scientific study rather than specific operational requirements. Unlike a standard contract that demands a specific product, a BAA asks for “advancements in the state of the art.”
To reduce the administrative burden on industry, most BAAs utilize a distinct two-step mechanism that saves time and capital. Instead of submitting a comprehensive 50-page proposal immediately, applicants first submit a brief “White Paper” or “Quad Chart” (typically 3–5 pages). This document outlines the technical concept and its potential impact. Government technical points of contact (TPOCs) review the white paper and issue a formal notification to either “encourage” or “discourage” a full proposal.
This feedback loop prevents companies from wasting resources on expensive proposal writing for concepts that do not align with current internal funding priorities.
Many research directorates maintain “Long Range” or “Standing” BAAs that remain open for up to five years. This provides a continuous “open door” for innovators, independent of fiscal year cycles. Relationship-Based Funding: Because BAAs are evaluated on technical merit and importance to agency programs rather than low price competition they facilitate direct dialogue. For a deep-tech company, identifying the right TPOC listed in a Long Range BAA and socializing a white paper is often the most effective way to secure initial research funding outside of the rigid dates of the SBIR calendar.18
A.6 The Cash Prize Competition Model (e.g. Army xTech Program)
Some agencies or programs offer cash prizes as a distinct alternative. For instance, the Army’s xTech program offers prize money as generally unrestricted capital, unlike traditional contracts, which require deliverables and oversight. Competitions like xTechSearch 9 (running through late 2025) involve multiple rounds. Finalists receive cash prizes (e.g., $5,000 for a white paper, $25,000 for a finals pitch).14
The true value of xTech is not the cash, but the associated “Accelerator.” In addition, winners are often invited to submit a proposal for a Phase I SBIR or a Direct-to-Phase II award. In the current environment - where SBIR open solicitations are paused - being a “pre-vetted” winner of an xTech competition can position a company to receive funding immediately once authorities are restored.15
Similarly, there are startup accelerators (Techstars, NATO DIANA, MassChallenge, etc…) that offer a small amount of money, mentoring, and support as part of the participation to their programs (with or without equity). In Massachusetts there are additional programs like the MassVenture START (Phase I and II) that provide non-dilutive grants ($100K-$500K) and technical assistance to companies that have won SBIR/STTR Phase II contracts. These funds focus specifically on commercialization activities not covered by federal grants, to support early-stage, high-growth, “though tech” companies. 13 14
References
DoD Expands Opportunities for Startups and Emerging Defense Innovators | BakerHostetler, accessed December 2, 2025, https://www.bakerlaw.com/insights/dod-expands-opportunities-for-startups-and-emerging-defense-innovators/
Scaling Nontraditional Defense Innovation, accessed December 2, 2025, https://innovation.defense.gov/Portals/63/DIB%20Scaling%20Nontraditional%20Defense%20Innovation%20250113%20PUBLISHED.pdf
DoD Contracting for Startups 101 | Andreessen Horowitz, accessed December 2, 2025, https://a16z.com/dod-contracting-for-startups-101/
SBIR & STTR Programs Overview - DARPA, accessed December 2, 2025, https://www.darpa.mil/work-with-us/communities/small-business/sbir-sttr-overview
Small Business Innovation Research and Small Business Technology Transfer Programs (15 USC §638) | Adaptive Acquisition Framework, accessed December 2, 2025, https://aaf.dau.edu/aaf/contracting-cone/sbir-sttr/
AFWERX - Air Force Research Laboratory, accessed December 2, 2025, https://www.afrl.af.mil/RG/
DIU Solution Brief Requirements - Defense Innovation Unit, accessed December 2, 2025, https://www.diu.mil/solution-brief-guidance
Advancing DoD Operations With Software Acquisition Reform - Defense Innovation Unit, accessed December 2, 2025, https://www.diu.mil/latest/advancing-dod-operational-capabilities-with-software-acquisition-reform
Defense Innovation Organizations at Fed Supernova 2025, accessed December 2, 2025, https://www.diu.mil/latest/defense-innovation-organizations-at-fed-supernova-2025
Commercial Solutions Opening (CSO) | www.dau.edu, accessed December 2, 2025, https://www.dau.edu/acquipedia-article/commercial-solutions-opening-cso
AI Forward | DARPA, accessed December 2, 2025, https://www.darpa.mil/research/programs/ai-forward
DARPA Seeks Innovative Proposals from Early Career Researchers at US Institutions, accessed December 2, 2025, https://www.darpa.mil/news/2024/yfa-2025
xTechSearch 9 - Army SBIR|STTR Program, accessed December 2, 2025, https://armysbir.army.mil/topics/xtechsearch-9/
xTechIgnite - xTechSearch, accessed December 2, 2025, https://xtech.army.mil/competition/xtechignite/
Modernizing Defense Acquisitions and Spurring Innovation in the Defense Industrial Base - The White House, accessed December 15, 2025, https://www.whitehouse.gov/presidential-actions/2025/04/modernizing-defense-acquisitions-and-spurring-innovation-in-the-defense-industrial-base/
Sustaining Select Efforts to Strengthen the Nation’s Cybersecurity and Amending Executive Order 13694 and Executive Order 14144 - The White House, accessed December 15, 2025, https://www.whitehouse.gov/presidential-actions/2025/06/sustaining-select-efforts-to-strengthen-the-nations-cybersecurity-and-amending-executive-order-13694-and-executive-order-14144/
Executive Order 14306 -– Sustaining Select Efforts to Strengthen the Nation’s Cybersecurity and Amending Executive Order 13694 and Executive Order 14144 - NIST, accessed December 15, 2025, https://www.nist.gov/itl/executive-orders/strengthening-and-promoting-innovation-nations-cybersecurity
Broad Agency Announcement - DLA, accessed December 15, 2025, https://www.dla.mil/Strategic-Materials/Business/Broad-Agency-Announcement/