On December 8, 2025, the U.S. House and Senate Armed Services Committees released the text of “the final negotiated language for” the National Defense Authorization Act (NDAA) for fiscal year 2026 (FY26). The bill, which the Committees “urge” their colleagues in Congress to pass “quickly,” is over 3,000 pages long (the Committees have released several resources with summaries) and covers many topics of interest to federal contractors. This article focuses on a new rule that could have a significant impact on the federal procurement process: a requirement for the U.S. Department of Defense (DoD) to develop procedures for withholding portions of contract payments from incumbent contractors during a bid protest and, if the protest is later dismissed as lacking merit, keeping the money.
What is the gist of the new rule agreed upon by the Armed Services Committees?
The Committees’ Joint Explanatory Statement summarizes Section 875 of the FY26 NDAA as “authoriz[ing] the Secretary of Defense to withhold up to 5 percent of certain payments to an incumbent contractor who files a bid protest which is dismissed by the Comptroller General based on a lack of any reasonable legal or factual basis.” If enacted, the bill would require the incumbent contractor to forfeit the withheld payments if the U.S. Comptroller General (i.e., the U.S. Government Accountability Office, or GAO) dismisses the protest for lack of factual or legal basis.
Haven’t we seen similar proposals from Congress before?
Yes. As Venable wrote last year, Section 885 of the FY25 NDAA required DoD and GAO to submit a proposal for a pilot “loser pays” rule in protests of DoD procurements before the GAO. (That article also summarizes earlier initiatives in Congress with similar goals.) GAO’s response to the FY25 NDAA was that “DOD does not capture data to develop benchmarks to support a process to recoup costs from unsuccessful protesters,” and “DOD protests at GAO have declined 48 percent over the last 10 years and less than 2 percent of procurements are protested, and DOD’s view is that there is not a need for cost collection and the challenges associated with such a requirement.”
When would the new rule go into effect?
The bill states that DoD must revise the Defense Federal Acquisition Regulation Supplement (DFARS) to establish procedures for this new requirement “[n]ot later than 180 days after the date of the enactment of” the FY26 NDAA.
Under what circumstances would contract payment withholding occur?
Absent changes in the FY26 NDAA before final passage, defense contractors will have to await DoD’s issuance of regulatory guidance to know exactly when a bid protest would result in withholding of portions of contract payments.
The reason is that Section 875 of the FY26 NDAA does not expressly state when withholding will be mandatory vs. discretionary. Instead, it states that DoD must “establish procedures for a contracting officer of the Department of Defense to withhold payment of covered amounts to an incumbent contractor during the period of pendency resulting from a bid protest by such incumbent contractor.” And the Joint Explanatory Statement notes that the bill merely “authorizes” DoD to withhold payments, rather than requiring it to do so in all circumstances.
Nevertheless, it is clear that for the new withholding requirement to apply, the protester would have to be an “incumbent contractor” for a “covered contract.”
How does the bill define “incumbent contractor” and “covered contract”?
Section 875 defines “incumbent contractor” as “a contractor for a contract with the Department of Defense for the acquisition of goods or services by the Department that are the same or substantially similar to goods or services to be acquired by the Department under a new or follow-on contract that is the subject of a bid protest.”
The bill similarly defines “covered contract” as “a contract entered into by the Secretary of Defense with an incumbent contractor for the procurement of goods or services during the period of pendency that are the same or substantially similar to goods or services to be acquired by the Department under the contract previously awarded to the incumbent contractor.”
How long will an incumbent contractor that files a bid protest experience withholding?
Withholding will occur during the “period of pendency,” which the bill basically defines as the period of performance for a new award or extension that the incumbent contractor received due to the bid protest. More specifically, Section 875 defines the term as follows:
The term “period of pendency” means the period of performance under a contract that was awarded or extended because the Secretary of Defense—
(A) received notice of a bid protest submitted by the incumbent contractor to the Comptroller General of the United States; and
(B) was prohibited from awarding a new contract during the pendency of such bid protest under section 3553(c) of title 31, United States Code.
How much of each contract payment would be withheld?
Here again, defense contractors would need to await rulemaking for more details because the bill does not require a specific amount to be withheld (although it does establish a cap on withholding). Section 875 defines the “covered amounts” to be withheld as “an amount that is not greater than five percent of the total amount to be paid to an incumbent contractor but for the withholding of payment under” the bill.
Although Section 875 does not say so explicitly, it appears that the five percent figure is meant to represent an estimate of the additional profit/fee that the contractor would have gained during the bid protest. The Joint Explanatory Statement notes that Section 875 grew out of a proposal in the U.S. House of Representatives’ version of the FY26 NDAA, which would have “establish[ed] procedures for a contracting officer to seek disgorgement of certain profits or fees earned by the incumbent contractor[.]”
When will an incumbent defense contractor have to forfeit the withheld contract payments?
Under Section 875, DoD’s new procedures will mandate forfeiture when the U.S. Comptroller General (i.e., GAO) dismisses a bid protest ground for lack of reasonable legal or factual basis. The text states:
FORFEIT.—The procedures developed in accordance with this section shall provide that payment amounts withheld under paragraph (1) from an incumbent contractor during a period of pendency resulting from a bid protest by such incumbent contractor shall be forfeited by the incumbent contractor upon the determination by the Comptroller General of the United States to dismiss such bid protest based on a lack of any reasonable legal or factual basis becoming a final determination.
The bill further defines “final determination” to mean either that GAO has rejected a request for reconsideration of the dismissal, or that the time period for submitting such a request has expired.
As discussed below, this is another area in which DoD regulation would have to fill in details, such as whether forfeiture is required where only a portion of a bid protest is dismissed, and what bases for dismissal constitute a lack of reasonable factual/legal basis.
Will this new rule apply to protests at the U.S. Court of Federal Claims (COFC), or just protests at the GAO?
Section 875 applies to bid protests of DoD procurements filed before the GAO.
What questions does the bill leave open?
Unless Congress makes further amendments prior to the bill becoming law, Section 875 of the FY26 NDAA would leave a number of important issues to be addressed as DoD implements it. Examples include the following:
- Would DoD require contracting officers to withhold contract payments from incumbents for all protested procurements, leave which procurement to which the rule applies to the contracting officer’s discretion, or something in between (e.g., making withholding discretionary for procurements below a monetary threshold and mandatory above it)?
- Relatedly, how would DoD implement the new rule? It seems likely that DoD would develop and incorporate a standard DFARS contract clause requiring withholding and forfeiture. If that is DoD’s implementing mechanism, DoD would need to determine which contracts will include the clause.
- What would the standard be for determining how much to withhold, and who within DoD would make that decision? The bill would authorize up to five percent of the contract payment, but DoD may conclude that in many cases, such an amount would be inappropriately high and unduly deter bid protests, which serve as a primary means of ensuring that procurement law is followed. Moreover, if Congress’s intent is that the withholding and forfeiture reflect profit/fee, DoD may consider whether it has the ability to ensure the amount correlates to the contractor’s actual cost experience.
- Would DoD refine the standard for who is an “incumbent contractor”? The bill’s definition is general, and questions could arise regarding when this new rule applies, particularly when DoD components change, add, delete, or combine requirements over time such that it is debatable whether a true “incumbent” exists.
- What constitutes “a lack of any reasonable legal or factual basis”? Under its regulations, GAO dismisses “[p]rotests that lack a detailed statement of the legal and factual grounds of protest … or that fail to clearly state legally sufficient grounds of protest,” 4 C.F.R. § 21.5(f), which DoD may determine reflects the bill’s intent. But GAO also dismisses protests for other reasons, such as where the protest presents a matter of contract administration or is untimely. DoD’s regulations may have to parse GAO decisions to define which grounds for dismissal will trigger forfeiture and which will not.
- What happens if only a portion of a bid protest is dismissed as lacking factual or legal basis? GAO frequently dismisses one or more protest grounds in a given procurement, while at the same time denying or sustaining others on the merits. It would likely strike some as unfair and contrary to Congress’s purposes to interpret the bill as requiring forfeiture of profit when an incumbent contractor correctly identifies that DoD violated procurement law, solely because one relatively minor protest ground was dismissed in the process.
- How would GAO respond to this new rule? Would GAO be more hesitant to dismiss a protest ground, knowing that it could cost the protester significant sums in lost profit? Note that GAO need not formally dismiss a protest ground that it believes lacks merit. Instead, GAO can and sometimes does simply inform the procuring agency that it need not respond to a protest ground in its Agency Report, and then (in the interest of ensuring an expeditious process, as required by CICA) GAO may simply decline to address the ground in its final decision on the merits.
- How would defense contractors and legal practitioners approach this new rule? Incumbent contractors might be more likely to consider filing a bid protest at COFC, rather than GAO, to avoid the risk of forfeiture. Whether the U.S. Department of Justice would be as willing to voluntarily stay performance by the new awardee (there is no automatic CICA stay in COFC protests) pending a protest in light of this new rule would remain to be seen. Note also that in most cases, contractors cannot protest task order procurements at COFC and so may not have this option in such a case anyway.
Conclusion
Defense contractors should continue to monitor the FY26 NDAA as it makes its way to full passage in Congress and to the president’s desk. Assuming the Armed Services Committees’ agreed-upon language becomes law, defense contractors should also track DoD’s implementation of this new rule, including outstanding questions such as those mentioned above. Finally, consider consulting with counsel experienced in federal contracting when assessing whether to file a bid protest involving a DoD procurement, and subscribing for further updates from our firm’s Government Contracts Practice Group at https://www.venable.com/insights/subscription-center.