New Executive Order places focus on defense contractors’ performance

President Donald Trump has issued an Executive Order (EO) titled, “Prioritizing the Warfighter in Defense Contracting,” which states that underperforming defense contractors are prohibited from prioritizing stock buy-backs and corporate distributions at the expense of production, innovation, and on-time delivery.

The January 7, 2026 EO directs the Secretary of War (Secretary) to implement various enforcement strategies focused on “defense contractors for critical weapons, supplies, and equipment” that the Secretary determines to be underperforming on or failing to prioritize their United States government contracts, and who, during periods of such underperformance, have “engaged in any stock buy-back or corporate distribution.”

In this alert, we discuss the EO and its proposed enforcement strategies.

Enforcement strategies

The enforcement strategies proposed in the EO include “providing the contractor with the opportunity to submit a remediation plan approved by its board of directors.” If such plan is deemed insufficient by the Secretary, the EO authorizes the Secretary to initiate immediate actions to broadly secure remedies that will expedite production and return the contractor to sufficient performance through the use of voluntary agreement[s] with the contractor, in addition to using any available contract enforcement mechanisms prescribed by the Federal Acquisition Regulation (FAR), Defense Federal Acquisition Regulation Supplement (DFARS), and Defense Production Act.

Separately, the EO broadly directs the Secretary to ensure that future contracts “with any new or existing defense contractor” including any contract renewals:

1. “Contain [] a provision prohibiting both any stock buy-back and corporate distributions by the contractor during a period of underperformance, non-compliance with the contractor’s contract, insufficient prioritization of the contract, insufficient investment, or insufficient production speed as determined by the Secretary”


2. “Stipulate that executive incentive compensation . . . will be linked to on-time delivery, increased production, and all necessary facilitation of investments and operating improvements required to rapidly expand our United States stockpiles and capabilities,” and


3. “Allow the Secretary . . . to require that executive base salaries of the [underperforming or noncompliant] contractor be capped at current levels, with increases allowed for inflation . . . for a time period sufficient to allow the Secretary to scrutinize the incentive portion of executive compensation to ensure it is directly, fairly, and tightly tied to the above metrics.”

The EO also encourages the Chairman of the Securities and Exchange Commission (SEC) to “consider whether to adopt amended regulations governing stock buy-backs under Rule 10b–18 that would prohibit use of the relevant safe harbor” for such underperforming defense contractors. Additionally, the EO authorizes the Secretary, in coordination with the Secretaries of State and Commerce, “to cease ongoing advocacy efforts or deny new advocacy cases” for such underperforming contractors that are “competing for international Foreign Military or Direct Commercial Sale[s].”

Conclusion

The extent to which enforcement actions will be carried out under this EO remains an open question. However, the institution of enforcement mechanisms based on a subjective standard – including what will be considered insufficient production or underperformance under a defense contract – and the potential effects on a defense contractor’s executive compensation structure and overall realization of profit, could have significant implications for the defense industrial base. Defense contractors are encouraged to consider how their investment decisions and profit distributions will be perceived and be prepared to explain that any such actions do not interfere with efficient production and effective performance under their government contracts.

For more information, please contact the authors.