JUST IN: Defense Industrial Base Continues to Face Headwinds, NDIA Report Says

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The defense industrial base — already strained by lack of funding and a shifting security environment —will also have the political and policy trends of a new administration to contend with, an annual report released Feb. 26 by the National Defense Industrial Association stated.

The "Vital Signs 2025" health of the defense industrial base report opens with the acknowledgement of a “profound” and “welcome” shift in the policy discourse in Washington regarding the importance of a strong, resilient defense industry over the last several years.

However, it cited several major policy and political trends that will “test the nascent work to re-posture the U.S. [defense industrial base] for great power competition.”

The report points out that the incoming administration inherited political conditions it called conducive to breaking up a centralized acquisition system that prioritized reducing risk over speed and innovation, but doing so will require a balanced public policy approach.

Rather than creating exceptions to policies, regulations and authorities that give quick starts to nontraditional contractors, the policy conversation needs to focus on reducing the regulatory burden on all contractors and sharing more risk between the government and contractor to allow for more open competition, the report stated.

It also highlighted the ever-present lack of funding, noting that by March 14, the government will have hit the “grim milestone” of operating under a continuing resolution for a total of 1,925 days over the last 16 years, which is over five full years of “slamming on the brake,” the report said.

Another tension the report highlighted was shared risk, which it said U.S. policy objectives are struggling to balance. Some examples included traditional defense industrial base companies operating under increasing scrutiny and oversight, costly regulatory requirements for nontraditional defense contractors and continuing barriers to small and nontraditional companies.

“The next 12 months will test the U.S. defense ecosystem. Many pending policy and political debates could result in suboptimal zero-sum solutions that bias toward producing and fielding certain technologies over the holistic suite of capabilities the Joint Force requires,” the report read.

The report collected public financial data, Defense Department contract data and proprietary NDIA polling data, polling government and industry on the defense industrial base, offering 76 actionable policy recommendations in the near, medium and future term.

According to private sector respondents, the most pressing issues facing the defense industrial base were: complex and protracted procurement processes at 64 percent, federal budget processes at 61 percent and supply chain challenges at 54 percent.

For government respondents to the same question, 63 percent put federal budget processes at the top, 58 percent said supply chain challenges and 54 percent said identifying, recruiting and retaining talent/workforce issues.

The report breaks down five pillars of how best to tackle the challenges facing government and industry, starting with prioritizing sufficient and stable budgets. While defense spending is sizable, it is not the driver of national debt, the report said.

NDIA members “strongly endorse” congressional efforts to increase defense spending during the fiscal year 2026 appropriations process, noting the impact of funding disruptions and stop-work orders on defense industrial base companies.

Recommendations for the industrial base’s funding woes included Congress enacting the fiscal year 2025 Appropriations Act “as soon as possible” and enacting the full-year fiscal year 2026 Appropriations Act before Sept. 30.

Pillar 2 of the report focused on advancing the Department of Defense digital modernization and transformation, highlighting challenges with intellectual property and data rights, discussing modular open systems approaches, technical data rights, cybersecurity and artificial intelligence and autonomy.

Among the report’s recommendations were Congress and the department ensuring intellectual property cadres, contracting specialists and training programs have adequate resources, establishing clear and consistent [controlled unclassified information] identification and marking guidance and increasing investment in critical AI and autonomous technologies.

The third pillar focused on modernizing foreign military sales and technology cooperation, noting that a strong network of global and regional alliances and partnerships serves as the diplomatic and military operational center of gravity in national deterrence.

Polling showed that the biggest barrier to doing business with foreign customers is the International Traffic in Arms Regulations, according to 55 percent of respondents. The report discussed modernizing and streamlining foreign military sales and leveraging direct commercial sales, with recommendations to include clearly identifying FMS reform objectives and ensuring appropriate resources to fill FMS roles.

Pillar four, restoring industrial readiness powerhouses, identified the ability to adequately prepare for surge production under protracted conflict as a “key challenge” facing the defense industrial base.

The report said  neither the federal government nor the investor community incentivizes the defense industrial base to have significant surge capacity and identified maintaining a workforce as a top issue.

Recommendations included the executive and congressional branches review the impacts of prevailing wage rates and labor categories, align public and private skilled trades definitions and include training expenses for targeted, potential-employee training programs.

Lastly, Pillar 5 emphasized reinforcing resilient supply chains. The section highlighted supply chain harmonization and critical minerals, with recommendations ranging from resourcing second-source suppliers in military budget requests to interagency coordination and industry collaboration to harmonize supply chain restrictions and requirements.

The report concluded that the United States is grappling with “serious economic, social, and security challenges at home, and they deserve urgent and serious responses. At the same time, the world is growing more dangerous, fractured, and volatile. The new administration and 119th Congress are inheriting their defense options from previous generations of leaders, but they are also creating the options and risks their successors will inherit. In a crisis, one thing leaders cannot buy is more time.”

Time and consistency are immutable factors for both military readiness and defense industrial readiness, it said. “The clock is ticking.”

To access the full report, visit https://www.ndia.org/vitalsigns.

Topics: Defense Contracting, Defense Innovation, Industrial Base