The Fiscal Year 2026 National Defense Authorization Act Expands Defense Procurement Sourcing Restrictions Related to Critical Minerals and Advanced Batteries

In parallel, the FY 2026 NDAA also reauthorizes and expands the U.S. Development Finance Corporation (DFC)—a key tool for financing critical minerals projects overseas and supporting diversification of the critical minerals supply chain.

Taken together, the DFARS sourcing restrictions create a demand signal for diversification of supply chains, and the DFC provides a tool to support that goal. As we discuss below, DoD contracts and subcontractors should map their supply chains for exposure to “specialty metals” or “covered materials” subject to DFARS restrictions at various stages of the supply chain, evaluate pathways to utilize exceptions, consider engaging in stakeholder initiatives to accelerate compliance, and explore opportunities to diversify supply chains through the DFC or other U.S. Government funding tools. 

DFARS Sourcing Restrictions: Specialty Metals and Covered Materials
DoD critical-mineral sourcing restrictions most commonly arise under two statutory regimes implemented through DFARS: (1) the specialty metals restriction in 10 U.S.C. § 4863 and implementing DFARS regulations; and (2) the “covered materials” restriction in 10 U.S.C. § 4872 and implementing DFARS regulations.

Specialty Metals
Under 10 U.S.C. § 4863 and implementing DFARS regulations, “specialty metals” contained in DoD’s acquisitions of certain end items and components¹ and “specialty metals” directly purchased by DoD must be melted or produced in the United States and “specialty metals” incorporated in items delivered under DoD contracts must be melted or produced² in the United States, its outlying areas, or a “qualifying country.”³

“Specialty metals” are defined as:

1. 1.  Steel—

(A) with a maximum alloy content exceeding one or more of the following limits: manganese, 1.65 percent; silicon, 0.60 percent; or copper, 0.60 percent; or

(B) containing more than 0.25 percent of any of the following elements: aluminum, chromium, cobalt, columbium, molybdenum, nickel, titanium, tungsten, or vanadium.

2.  Metal alloys consisting of nickel, iron-nickel and cobalt base alloys containing a total of other alloying metals (except iron) in excess of 10 percent.

3.  Titanium and titanium alloys.

4.  Zirconium and zirconium base alloys.

The DFARS contain a number of detailed exceptions to these restrictions including, among others, electronic components, commercially available off-the-shelf (COTS) with certain exceptions, certain fasteners that are commercial products, items manufactured in a “qualifying country”, certain de minimis thresholds, non-availability and national security waivers.

Covered Materials Restrictions and FY 2026 NDAA Changes
Under 10 U.S.C. § 4872, among other things, DoD is prohibited from procuring: (1) any covered material melted or produced in any covered nation, or (2) any end item that contains a covered material manufactured in any “covered nation,” subject to exceptions.

“Covered nations” include the Democratic People’s Republic of Korea (DPRK), China, Russia and Iran.

Before FY 2026 NDAA amendments, “covered materials” include:

• SmCo magnets;
• NdFeB magnets;
• Tantalum metals and alloys;
• Tungsten metal powder; and
• Tungsten heavy alloy or any finished or semi-finished component containing tungsten heavy alloy;

The statute and DFARS implement a staged expansion of supply-chain coverage. Effective through December 31, 2026, the restriction applies to any covered material melted or produced in any covered country, or any end item, manufactured in any covered country, that contains a covered material. For each covered material, the DFARS regulations provide particular stages of production for which the restrictions enter into effect and relevant timelines for entry into effect and exceptions applicable to the covered material. Effective, January 1, 2027, the restriction applies to any covered material mined, refined, separated, melted or produced in any covered country, or any end item, manufactured in any covered country, that contains a covered material.

The FY 2026 NDAA includes a number of changes outlined below.

• Clarification regarding entry into effect. The FY 2026 NDAA clarified that DoD may not, effective January 1, 2027, enter into a contract for any “covered material” mined, refined, or separated in any “covered nation.” Because the Act addresses DoD’s authority to enter into contracts effective January 1, 2027, the restrictions will primarily affect solicitations and awards entered into on or after that date, although contract modifications and supply-chain flowdowns may still raise issues for legacy programs.
• Addition of new minerals. The FY 2026 NDAA adds molybdenum, gallium and germanium to the definition of “covered materials.” The restrictions applicable to gallium and germanium take effect on December 18, 2027. The restrictions applicable to molybdenum apply on the same timelines that apply to other “covered materials.”
• Recycled material exceptions expanded and clarified. The FY 2026 NDAA adds an exception involving the use of recycled material to produce covered material, reflecting an intent to encourage recycling capabilities as a means of diversifying supply chains.

- For SmCo magnets, the FY 2026 NDAA adds an exception for magnets manufactured from recycled material if the milling of the recycled material and sintering of the final magnet takes place in the United States. An exception already existed for NdFeB magnets.

- The FY 2026 NDAA adds an exception for tantalum, tungsten or molybdenum produced from recycled material if the contractor demonstrates to DoD that (i) the recycled material was produced outside a covered nation, and (ii) the melting of the recycled material and any further processing and manufacturing takes place in the United States or in the country of a qualifying foreign government.

• Waiver alignment between 10 U.S.C. § 4863 and § 4872. 10 U.S.C. § 4872 includes national security waiver authority based on a determination by specified DoD officials. The FY 2026 NDAA clarifies and modifies this waiver structure by providing that if a national security waiver is issued under 10 U.S.C. § 4863, the waiver is also applicable to the 10 U.S.C. § 4872 restrictions for the same covered material or end item.

Stakeholder Engagement and Supply Chain Initiatives
In addition to sourcing restrictions, the FY 2026 NDAA includes several provisions that create structured opportunities and potential incentives for contractor engagement aimed at identifying and scaling DoD-compliant supply chains.

Temporary National Security Waiver Framework for Disclosed “Noncompliant Items”
Section 833 establishes a temporary national security waiver framework intended to encourage supply-chain transparency. Contractors that discover a “noncompliant item” through supply chain illumination efforts and promptly disclose it to the responsible program manager may be eligible for an interim national security waiver issued by specified DoD officials.

The interim waiver would allow a contractor to:

• accept delivery of an end item that contains a noncompliant item if the program manager determines the noncompliant item does not represent a security, safety or flight risk; and
• make payment for delivery of the end item.

“Noncompliant items” include items not compliant with the requirements of 10 U.S.C. §§ 4863 and 4872. Following waiver issuance, the contractor must take corrective measures described in the statute. The waiver authority expires January 1, 2028, and the statute requires congressional briefings in 2026 and 2027.

Voluntary Registration of Compliance (Public Repository)
Section 836 directs DoD, by January 1, 2027, to establish and maintain a public online repository through which vendors may voluntarily register and attest that certain covered products comply with specified domestic and allied sourcing requirements, including 10 U.S.C. §§ 4863 and 4872. DoD is also directed to encourage registration by putting in place policies and procedures to disclose noncompliance with applicable registration requirements, support remedial measures, and connect vendors with appropriate DoD programs or offices.

Working Group to Accelerate Qualification of DoD-Compliant Sources
Section 837 directs DoD, within 180 days of enactment (or by June 2026), to establish a working group charged with developing recommendations to (1) enhance information exchange between DoD and defense industrial base contractors about compliant materials, and (2) accelerate qualification of compliant materials and integration into DoD contractor supply chains.

The working group will sit within a collaborative forum established by Section 1844, intended to convene government and various stakeholders to address defense industrial base manufacturing challenges. The working group’s responsibilities include, among other things, identifying processes for exchanging information between DoD and contractors with appropriate safeguards; streamlining the identification, testing, and qualification of compliant sources and materials; identifying compliant sources at each step of the supply chain; and recommending ways to reduce reliance on noncompliant sources.

New Battery Sourcing Restrictions
Section 842 provides that DoD must procure “advanced batteries and cells whose functional cell components and technology, whether as end items or embedded within warfighting and support systems, are not owned, sourced, refined, or produced” by a FEOC.⁴ Note that these restrictions are in addition to the FEOC restrictions put in place for battery and storage companies seeking to claim the Investment Tax Credit (ITC) or (Production Tax Credit), though there is some overlap between the Section 842 requirements and the definition of Specified Foreign Entities (SFEs) in the tax code.

Effective dates are phased in as follows: New acquisitions: January 1, 2028; Standard batteries: January 1, 2029; Existing acquisitions: January 30, 2031.

Exclusions and exceptions include:

• Batteries or battery cells acquired for certain non-defense-related uses; COTS acquired for use only in equipment maintenance; and acquisitions for DoD research, development, testing, and evaluation (RDT&E).
• Advanced batteries or advanced battery cells where (i) final assembly is carried out by a non-FEOC, (ii) the product is produced without technology licensed from a FEOC, and (iii) more than 95% of the costs are from non-FEOC sources.
• A non-availability waiver for one year if statutory conditions are met.

Implications for Companies
With regard to the changes to the FY 2026 NDAA outlined above, key issues and opportunities for companies include:

• DoD contractors and subcontractors at all tiers should assess their supply chain exposure to “covered materials” including at the mining, refining and separation stages, and evaluate alternative compliant sources.
• DoD contractors and subcontractors at various tiers should evaluate whether recycled-material pathways or waiver mechanisms could be relevant for constrained materials, and begin FEOC diligence for battery supply chains in advance of the 2028–2031 phase-in.
• Vendors to DoD contractors and subcontractors should assess compliance with the various DFARS sourcing provisions and consider registering on the forthcoming public repository for opportunities to supply DFARS compliant material.
• Companies should consider engaging in the various stakeholder initiatives outlined above to help address and accelerate compliance with DFARS sourcing provisions.
• Companies should consider opportunities under various bilateral and plurilateral initiatives (discussed in our alert here) to diversify supply chains or for sourcing or providing feedstock for companies involved in the critical minerals production value chain, and the potential for funding agencies to support relevant projects. 

^{[1] The end items include aircraft; missile and space systems; ships; tank and automotive items; weapon systems; and ammunition.}

^{[2] Produce means—(i) Atomization; (ii) Sputtering; or (iii) Final consolidation of non-melt derived metal powders. 48 C.F.R. § 252.225-7009.}

^{[3] “Qualifying country” means a country with a reciprocal defense procurement memorandum of understanding or international agreement with the United States in which both countries agree to remove barriers to purchases of supplies produced in the other country or services performed by sources of the other country, and the memorandum or agreement complies, where applicable, with the requirements of section 36 of the Arms Export Control Act (22 U.S.C. 2776) and with 10 U.S.C. 2457. Accordingly, the following are qualifying countries: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom of Great Britain and Northern Ireland.}

^{[4] A FEOC is defined as a foreign entity: (A) designated as a foreign terrorist organization by the Secretary of State under section 1189(a) of title 8; (B) included on the list of specially designated nationals and blocked persons maintained by the Office of Foreign Assets Control of the Department of the Treasury (commonly known as the “SDN list”); (C) owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation (as defined in section 2533c(d) [1] of title 10); (D) alleged by the Attorney General to have been involved in activities for which a conviction was obtained under various laws; and (E) determined by the Secretary of Energy, in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States; and includes (1) Contemporary Amperex Technology Co., Ltd. (CATL’). (2) BYD Co., Ltd. (3) Envision Energy, Ltd. (4) EVE Energy Company, Ltd. (5) Gotion High Tech Co., Ltd. (6) Hithium Energy Storage Technology Co., Ltd. (7) Any successor to an entity specified in paragraphs (1) through (6).}