President Donald Trump has issued an executive order titled "Prioritizing the Warfighter in Defense Contracting," introducing new policies aimed at accelerating defense procurement and strengthening the defense industrial base. The order mandates restrictions on defense contractors' executive pay and stock buybacks, particularly for those identified as underperforming.
Order Overview and Objectives
The executive order outlines a policy to ensure the U.S. military possesses robust warfighting capabilities by enhancing the defense industrial base. It asserts that some defense contractors have prioritized investor returns over the timely delivery and quality of defense items. The stated goal is to prevent defense contractors from failing contractual obligations while engaging in large stock buybacks, thereby enabling the Department of War to achieve national security objectives, ensure efficiency, and uphold accountability to military personnel, as stated by Chief Pentagon Spokesman Sean Parnell.
Key Provisions
The order establishes several key provisions:
- Prohibition on Financial Distributions: Defense contractors identified as underperforming are prohibited from paying dividends or buying back stock until they demonstrate the ability to produce products on time and within budget. Future contracts, including renewals, must also incorporate provisions prohibiting stock buybacks and corporate distributions during periods of underperformance, non-compliance, insufficient investment, or inadequate production speed.
- Contractor Identification: The Secretary of War is tasked with identifying, within 30 days and on an ongoing basis, contractors supplying 'critical weapons, supplies, and equipment' who are:
- Underperforming on contracts.
- Not investing sufficiently in necessary production capacity.
- Not adequately prioritizing U.S. government contracts.
- Demonstrating insufficient production speed.
- Engaging in stock buybacks or corporate distributions during periods of identified underperformance.
- Remediation Process: Upon identification, the Secretary will notify the contractor of the issues. Contractors will be required to submit a remediation plan, potentially approved by their board of directors, within 15 days to address performance concerns. A 15-day negotiation period is also outlined to resolve issues.
- Enforcement Actions: If a remediation plan is deemed insufficient or a resolution is not reached within the negotiation period, the Secretary is authorized to initiate immediate actions. These actions are intended to expedite production, prioritize the U.S. military, and restore the contractor to sufficient performance, investment, and production. Such measures may include voluntary agreements, enforcement under the Defense Production Act, and contract enforcement mechanisms within Federal Acquisition Regulations.
- Executive Compensation: The order mandates that future contracts link executive incentive compensation to performance metrics such as on-time delivery, increased production, and facilitation of investments and operating improvements to expand U.S. stockpiles and capabilities, rather than short-term financial indicators like free cash flow or earnings per share driven by stock buybacks. For contractors identified with underperformance, the department could cap executive base salaries at current levels, with inflation increases, to scrutinize incentive compensation. This initiative aims to directly limit what companies can pay executives, shifting from previous government reimbursement limits.
- International Sales Advocacy: In consultation with the Secretaries of State and Commerce, the Secretary of War will consider ceasing advocacy efforts or denying new advocacy cases for underperforming contractors seeking international sales.
- SEC Regulations: The Chairman of the Securities and Exchange Commission is directed to consider amending regulations governing stock buybacks under Rule 10b-18 to prohibit the use of safe harbors for identified defense contractors.
Expert Analysis and Concerns
Experts have offered various perspectives on the executive order's implementation and potential impact:
- Existing Tools and New Remedies: Alan Chvotkin, a Protorae Law member, noted that while the government already possesses tools for contractor accountability, the executive order introduces new remedies such as restricting stock buybacks and capping executive compensation.
- Challenges in Implementation: Chvotkin indicated that defining specific performance parameters will be a primary challenge, as accountability is complex and not solely the contractor's responsibility.
- Shared Responsibility: Stan Soloway, a federal acquisition expert, stated that the executive order appears to assume contractors are solely responsible for cost overruns, without acknowledging other contributing factors. Soloway highlighted the order's lack of provisions for the Defense Department's responsibility, noting that cost overruns and and delays can stem from changing requirements, rigid specifications, and budget uncertainties. A 2007 study by the Defense Science Board also identified constantly changing government requirements as a significant cause of cost overruns and schedule delays.
- Government Accountability: David Berteau, president of David Berteau & Associates, emphasized the importance of shared responsibility between government and contractors, suggesting the executive order does not enhance government accountability. Berteau questioned how the order's implementation would directly lead to improved contract performance and stated that its goal of encouraging investment over shareholder returns requires assurance of investment returns. He cited Lockheed Martin's agreement with the Pentagon to expand Patriot missile production as an example of investment facilitated by long-term government commitment. Berteau also expressed concern that the order appears to focus more on penalizing contractors than fostering partnership.
- Ambiguity: Both Chvotkin and Soloway noted ambiguity regarding implementation standards and metrics, particularly concerning executive incentives for long-term performance. The term "critical" regarding weapons, supplies, and equipment also lacks a clear definition within the order.
Implementation and Next Steps
The executive order targets contractors supplying "critical weapons, supplies and equipment," though the term "critical" requires further definition. While the order generally applies to "all contractors," its primary focus is anticipated to be traditional defense contractors.
Within 60 days, the Secretary of War must ensure that all future defense contracts incorporate the specified provisions. The Defense Department is expected to issue guidance for the Secretary's review, likely led by the undersecretary for acquisition sustainment office. This guidance will define contracting provisions related to critical weapon systems, outline new contract provisions and modifications for existing ones, and establish key performance parameters, requirements for remediation plans, and potential additional remedies. The Defense Department did not comment on the timeline for formal guidance or the number of underperforming contractors identified.
The order also clarifies that it does not impair existing legal authorities of executive departments or agencies or the functions of the Office of Management and Budget. It is to be implemented consistent with applicable law and subject to the availability of appropriations, and it does not create any enforceable rights or benefits against the U.S. Government or its entities.