On January 7, an Executive Order titled “Prioritizing the Warfighter in Defense Contracting” was issued. Its message to the defense industrial base is clear: get your act together – start performing defense contracts and delivering on time—or else.
The “or else” is significant. If the Secretary of Defense, at his sole discretion, determines that a contractor has misplaced priorities—such as paying dividends or buying back stock while failing to perform contracts, invest in production capabilities, or maintain adequate production speed—the contractor will have 15 days from notification to submit a board-approved remediation plan.
If the remediation plan is deemed insufficient, or if the contractor and DoD cannot resolve these issues within a 15-day negotiation period, the Secretary may take action to expedite production and “return the contractor to sufficient performance, investment, prioritization, and production,” consistent with the Defense Production Act, FAR, and DFARS. Additionally, the Secretary, in conjunction with State and Commerce, may decide that the underperforming contractor should be denied government advocacy for future Foreign Military Sales (FMS) or Direct Commercial Sales.
The EO also directs that, within 60 days, defense contracts must include terms that:
- Prohibit stock buybacks and dividend distributions when a contractor is failing to perform, comply, prioritize, or sufficiently invest in production.
- Tie executive compensation to contract delivery, increased production, and capital investments aimed at boosting the U.S. stockpile. Not meeting these metrics will result in executive base salaries being capped until compensation is “directly” and “fairly” tied to delivery and production performance.
Holding defense contractors accountable to their contractual requirements is a good and necessary thing — it directly impacts the stockpile. But isn’t the government supposed to enforce these standards at contract award and throughout performance already?
The FAR requires that contracts only be awarded to responsible contractors—those who comply with delivery schedules, meet contract terms, possess adequate production and technical capabilities, and maintain a satisfactory performance record. If a contractor cannot meet these standards, suspension or debarment should follow.
The government deciding that a private company is insufficiently prioritizing its work, failing to adequately invest in capital improvements or R&D, or ill-advisedly issuing dividends seems to outside its lane. Does the government have the expertise to run a business and conduct the financial and operational analysis needed for capital investment decisions? Plus, the EO does not define what constitutes “insufficient” capital investment—something defense contractors would need to know to comply with the EO.
It will be interesting to see how this plays out.
The major defense contractors do need to deliver on time and on budget—but this approach may not be the best way to achieve that.
