Executive Summary
- What’s new: President Trump issued a new executive order increasing government scrutiny and oversight in defense contracting; restricting stock buybacks, dividends and executive pay during periods of underperformance; and prioritizing defense production over investor returns.
- Why it matters: The order introduces stricter compliance requirements for defense contractors, with potential consequences including restrictions on stock buybacks, dividend distribution and executive compensation, that could impact all contractors providing critical weapons, supplies and equipment.
- What to do next: Defense contractors should consider conducting proactive self-assessments of contract performance, updating internal compliance programs and closely monitoring upcoming changes to ensure compliance with new restrictions and performance expectations.
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On January 7, 2026, President Donald Trump issued a new executive order (EO) aimed at realigning defense contractors’ incentives to prioritize domestic investment, timely delivery and quality over investor returns. The EO reflects a broader policy shift in government procurement, focusing on accelerating defense procurement and revitalizing the defense industrial base. The EO seeks to do this through two mechanisms: (1) a review and assessment of underperforming contractors providing critical weapons, supplies and equipment that are engaging in stock buybacks or corporate distributions, with the potential for follow-on action to address the underperformance; and (2) restricting share buybacks, dividends and executive pay during the period of underperformance or failure to sufficiently invest in production capacity.
Summary of the Executive Order
The Trump administration has undertaken efforts over the course of the past year to overhaul the federal procurement process, most notably through changes to the Federal Acquisition Regulations. This EO marks the latest shift in defense contracting policy, introducing stricter oversight and incentivizing contractor performance over investor returns.
Contractors targeted for review. By February 6, 2026, and on a continuing basis thereafter, the secretary of war1 (Secretary) is directed to conduct a review to identify defense contractors for “critical weapons, supplies, and equipment” that are underperforming on their contracts or insufficiently prioritizing government contracts and that have engaged in stock buybacks or dividend distribution during the period of underperformance.
Defense contractor review. The Secretary is directed to provide the contractors identified above with notice describing the nature of the underperformance and engage with them as needed to resolve the issues. Within 15 days of such notice, recipients may submit a board-approved remediation plan for the Secretary’s review. If such a remediation plan is not submitted within 15 days of the notice or if it is deemed insufficient, the Secretary may seek remedies.
Potential remedial and enforcement options. The EO identified potential remedies using authorities in the Defense Production Act (DPA) and other contract authorities. While the EO does not spell out these remedies, contractors could expect a range of actions to include the Department of War (DoW) using the DPA authorities to direct contract prioritization or allocation of materials or facilities to specific military projects at the expense of commercial operations or foreign obligations. Other existing contract remedies could include show-cause notices, reduced award fees for incentive-based contracts, withheld payments, negative past-performance reviews and termination for default. The EO notes that when imposing such remedies, the Secretary will take into consideration the financial condition of the defense contractor, the economic viability of relevant programs and the potential mutual benefits from sustained government growth opportunities paired with contractor capital investments.
Additionally, the Secretary is directed to consider ceasing ongoing advocacy efforts or denying new advocacy requests for underperforming contractors competing for a Foreign Military or Direct Commercial Sale. Further, the chairman of the Securities and Exchange Commission is directed to consider adopting amendments to stock buyback rules to prohibit underperforming contractors from relying on the safe harbor under Exchange Act Rule 10b-18.
New Defense Federal Acquisition Regulation Supplement (DFARS) clauses. By March 8, 2026, and for procurement efforts going forward, the Secretary is required to take steps to include new provisions in any future defense contracts, including renewals. Such provisions will include:
- A prohibition on any stock buybacks or corporate distributions during a period of underperformance, as determined by the Secretary.
- Mandating that executive compensation be tied to performance metrics, such as on-time delivery and increased production, rather than short-term financial gains.
- A potential cap on executive base salary at current levels (with adjustments for inflation) until the contractor aligns with performance metrics. This could be addressed under an updated version of the existing DFARS provision making unallowable executive compensation exceeding a certain threshold, or it could be implemented through new regulations on the issue.
Although the EO appears to require implementation of these clauses in “any” future defense contracts, it is possible that DoW will narrow the implementation of these requirements to exclude simplified acquisitions, acquisition of commercial off-the-shelf products, commercial contracts or defense contracts below a minimum dollar threshold, as DoW has generally done with prior comparable regulatory actions.
Practical Considerations for Defense Contractors
Given the speed of the identification and remediation timelines, defense contractors should consider conducting proactive self-assessments of their contract performance and updating internal compliance programs to align with new restrictions on stock buybacks, dividends and executive compensation. Of note, the EO does not clarify what constitutes underperformance or insufficient investment, so contractors should ensure their assessments are broad enough to cover all potential issues. Additionally, since government oversight of contractors’ work is built into the new framework, it is prudent for contractors to prepare for more rigorous performance monitoring and reporting and to consider investing in additional capabilities if needed.
Although the EO’s stated focus is on “large,” “major,” “traditional” defense contractors, as well as “contractors for critical weapons, supplies, and equipment,” it is possible that the restrictions, prohibitions, and scrutiny could extend to any defense contractor — even those for whom sales to the U.S. government represent a small portion of their business. All defense contractors should consider carefully reviewing upcoming contract awards for any added compliance obligations under the EO unless and until additional clarifications are provided by the Secretary. Subcontractors and other parties on the procurement chain should also be prepared for additional pressures and challenges as prime contractors rev up their performance and compliance efforts.
Next Steps and Recommendations
Despite the short timeframes outlined in the EO for implementation, the EO leaves a number of questions unanswered, granting significant discretion to the Secretary on how the new policy will be implemented. We expect that new and revised Defense Federal Acquisition Regulation Supplement clauses and industry guidance will be forthcoming to address implementation of the EO.
Overall, defense contractors should consider closely monitoring the upcoming changes to ensure compliance and taking proactive steps to prepare for increased performance expectations by conducting internal trainings and briefings on new performance requirements, and actively engaging with contracting officers and legal counsel to clarify their obligations and address potential risks. Defense contractors are also well-advised to assess existing and upcoming contracts for exposure to new restrictions and enforcement mechanisms.
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1 Congress hasn’t yet acted on the Trump administration’s renaming of the Department of Defense as the Department of War.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.