The 8(a) small business contracting program is coming under the microscope of its biggest user.

The Defense Department is joining a growing list of agencies auditing the use of sole source contracts through the 8(a) program.

Experts warn that DoD’s decision to launch this new audit signals that this 40-year-old small business development program is teetering further on the edge.

“It’s not a death knell, but it’s absolutely going to leave a mark. It’s absolutely going to hinder our ability to bring some of that new technology, that new manufacturing capability to the federal marketplace. That’s probably my bigger concern,” said Norm Abdallah, executive vice president at Hui Huliau, a Native Hawaiian-owned firm in the 8(a) program, in an interview with Federal News Network. “We’re behind in terms of the ability to manufacture here in the U.S., and have outsourced that beyond what one should in the defense of their own country, and so hindering the ability for us to help bring some of that to bear in the U.S. marketplace is probably the biggest concern.”

Abdallah said the 8(a) program is an avenue for companies to enter the market, obtain past performance experience in the federal sector and learn the ropes so DoD, and really every agency’s, ongoing distrust and scrutiny of the program is likely going to impact the government in bigger ways than expected.

Secretary Pete Hegseth posted a video on X on Friday explaining that the Pentagon is worried about two main things: The 8(a) program is a diversity, equity and inclusion (DEI) program, and it’s wrought with fraud.

We are taking a sledgehammer to the oldest DEI program in the federal government—the 8(a) program. pic.twitter.com/c9iH8gcqG7

— Secretary of War Pete Hegseth (@SecWar) January 16, 2026

“Providing these small businesses with opportunities is a laudable goal, but over the decades, as it happens, the 8(a) program has morphed into swamp code words for DEI, race-based contracting. And here’s the worst part, in many, many instances, these socially disadvantaged businesses, they don’t even do work. They take a 10%, 20%, sometimes 50% fee off the top, and then pass the contract off to a giant consulting firm, commonly known as beltway bandits. For decades, this program, 8(a) has been a breeding ground for fraud, and this administration is finally doing something about it,” Hegseth said. “Effective immediately, I’m ordering a line-by-line review of every small business sole source, 8(a) contract that is over $20 million, and we’ll look at everything smaller than that too. The Department of War has the biggest chunk of 8(a) spending by far, 10 times more than any other agency. So our cleanup, it’s going to be 10 times tougher.”

DoD’s audit will include two phases. Hegseth said if a contract doesn’t make meet the DoD’s goal of increasing lethality, they will terminate it.

“We have no room in our budget for wasteful DEI contracts that don’t help us win wars, period, full stop. Second, we’re doing away with these pass through schemes. We’ll make sure that every small business getting a contract is the one actually doing the work, and not just some shell company funneling your money to a giant consulting firm,” he said. “This approach is, of course, not meant to hurt small businesses, and that’s not the point. America is full of great, amazing small businesses. This is part of a larger effort to transform our acquisition ecosystem into one that makes sense for the threats we face in the 21st century.”

An email to DoD seeking more details about the audit and a timeline for the audit wasn’t returned.

Experts say Hegseth’s decision to review sole source contracts worth at least $20 million is directed at Native American, Alaskan Native, Hawaiian Native and other tribal companies. Congress raised the sole source threshold for these firms to $100 million from $22 million in 2020. Firms not belonging to one of these groups have a sole source threshold of $5.5 million for manufacturing and $8.5 million for non-manufacturing contracts. These non-tribal or native firms can receive a sole source contract up to $20 million with certain justifications and approvals.

While experts say Congress may not act to change the law, the ongoing audits by the Small Business Administration, the Treasury Department, the General Services Administration and now DoD are sending signals that, at least for sole source contracts, the program doesn’t work.

A former DoD acquisition executive, who requested anonymity because their current company still does business with DoD, said he believes federal small business goals are at risk across the board, and while they may not be affected this year, in two to four years, agencies will see a huge reduction in their industrial base.

The former DoD executive said the administration is sending an inconsistent message to the federal contracting community. The audits and the reduction of staff in small business offices are sending one message that small businesses aren’t important. But then the White House, and DoD particularly, are expressing the desire to attract new participants to the federal market, including non-traditional companies. The executive said these companies typically depend on small business offices and programs like 8(a) to help them get a foot in the door.

John Shoraka, a former associate administrator of government contracting and business development at SBA and now the co-founder and managing director of GovContractPros, an advisory services firm specializing in federal procurement, said DoD’s audit is part of a concerted effort by the administration to undermine the 8(a) program.

“I think if you look at the dollars in the 8(a) program, especially at DoD, some will point to the fact that they actually went up in 2025. But the challenge that we saw across a lot of our clients was that offer letters that have to go through the district office in order for a sole source award to happen were being held up and or never being processed. So we saw a slowdown in sole source awards,” he said. “I think given what we’ve seen with respect to the SBA audit, given what we’ve seen with respect to the number of 8(a)s being approved, in 2024 there was something like 500 plus 8(a)s approved. In 2025, I think the last count I saw was 66 approved. So given the audits, the slowdown in processing, I think contracting officers are looking over their shoulders. I think in the short term, given the current administration and the current congressional makeup, if you will, we will see a trend away from the 8(a) program.”

DoD’s decision to audit the 8(a) program comes after Treasury and SBA announced similar audits earlier this fall. SBA is looking at the entire program and companies had to submit data to the agency by Monday.

The SBA general counsel’s office is driving the audit, which is unusual because usually these things are either done by the inspector general or program office.

Fraud, DEI concerns unfounded

Shoraka said while the questions being asked by SBA, and now eventually DoD, are legitimate questions, the approach is causing some chaos.

“A lot of our clients reached out to their district office and the district office was actually unaware that those letters had originally gone out with respect to the audit, so there was a disconnect there. The field offices aren’t sure how the data is going to be used, or who’s going to use it, or what they’re looking at,” he said. “From my perspective, given the types of questions that were asked, I think it leads to the question, are there pass throughs happening? Because there was a lot of questions with respect to, who are your subcontractors, who are your vendors, et cetera. So the question is, and I think what SBA was looking at is, are there pass throughs and who’s really in control? Is the disadvantaged individual really owning, operating and benefiting from the 8(a) company? And I think those are legitimate questions. But again, there are legitimate processes and mechanisms to monitor that, including the annual review, which occurs every year on every single 8(a) company.”

The former DoD acquisition executive said while there are concerns about the use of sole source awards over $20 million to tribal companies, the allegations of fraud and the belief that the 8(a) program is a DEI program are unfounded. He said DoD should go to Congress and change the law to reduce the risk of large sole source contracts turning into pass throughs.

Experts agreed that while no program is perfect and there probably are some challenges, the 8(a) program is typically well overseen and maintained.

In fact, Abdallah, from Hui Huliau, said most 8(a) firms spend a lot of time meeting the compliance requirements. But he said it’s also a shared responsibility for oversight with the government.

“There are several folks that have responsibility in there. The first one is the contracting officer. In some cases, they’ve got to approve subcontracts. But more basically, with SBA, we go through a review every year where we have to submit our financials, what work did we do and what work happened?” he said. “They worry about the business mix, how much of your work was set aside versus not set aside? Quite honestly, what means you got the work by some means other than the 8(a) program, be that a subcontractor to another straight commercial, et cetera. So there are lots of hooks to watch it. Do they audit the books, per se, to check for percentages? That’s less common. But it’s part of your overall review.”

Shoraka added there are a significant number of regulations or requirements to mitigate the risk of pass throughs, and most rules allow for legitimate subcontracting.

One thing all of the experts pointed out is that the program is set up to help the 8(a) firm grow and learn, but they still have to do at least 51% of the work under services contracts and 15% of the work under construction contracts.

Shoraka said what is being lost in this entire discussion is there is more fraud in non-small business socio-economic programs across government than there are in the 8(a) and other small businesses initiatives.

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© AP Photo/Kevin Wolf

Congressional appropriators are backing the Pentagon’s push to speed up weapons buying, but warn that speed “must be factored alongside cost, performance, lethality and scalability.”

The House released the final 2026 minibus funding package early Tuesday, which includes money for the Departments of Defense, Homeland Security, Labor, Education, Housing and Urban Development, Transportation and Health and Human Services. If passed, the bill would increase defense spending to more than $839 billion — roughly $8.4 billion above the White House’s fiscal 2026 request. House leaders plan to vote on the package later this week. 

Congressional negotiators said they “strongly support” the Defense Department’s acquisition reforms, but pushed back on the Pentagon’s efforts to seek additional authorities or changes to its budget and appropriations framework until it fixes its internal processes. 

“Rapid delivery of ineffective weapon systems at exorbitant cost will not serve the warfighter well,” the appropriators wrote. 

Lawmakers also raised concerns about joint requirements process reform and deep cuts to the department’s acquisition workforce that could jeopardize its ability to carry out Defense Secretary Pete Hegseth’s acquisition reform agenda.

Budget flexibility

Hegseth recently unveiled a plan to overhaul the department’s acquisition system — some of those reform proposals made it into the fiscal 2026 defense policy bill, which became law in December.

At the very end of the document, Hegseth instructed the department to “improve budget flexibility.” 

“Where additional authorities are required, the [undersecretary of defense for acquisition and sustainment], in coordination with the military departments, shall develop a legislative engagement plan to ensure Congress is informed of and aligned with proposed reforms requiring any statutory change,” Hegseth wrote. “All actions will comply with applicable statutes, appropriations law, and procurement integrity requirements.”

That language was likely to become a friction point with Congressional leaders, and now appropriators are saying that reforms laid out in Hegseth’s memo are “internal in nature,” and that the Defense Department needs to “demonstrate progress on these internal procedures and administrative measures” before pursuing additional budget flexibility.

For instance, lawmakers said above-threshold transfer and reprogramming requests are often slowed because “a significant amount of the subcommittees’ time is consumed by waiting for the department to provide requested additional details and justification for these requests.”

“Providing this information alongside the submission of the request would accelerate consideration and create a nimbler process without altering existing authority or reprogramming thresholds,” the appropriators said.

Congressional leaders urged the department’s comptroller and the services’ assistant secretaries to work with the House and Senate Defense Appropriations Subcommittees to improve the amount of detail and justification provided in reprogramming submissions.

Congress gave the department some budget flexibility in 2024 but stopped short of granting broader authorities the department and reform advocates have been seeking that would allow DoD to move money more freely within its accounts without explicit congressional approval.

The Defense Department has also been pushing to change the hardware-centric budgeting model Congress uses to plan and execute the Pentagon’s spending by moving away from the traditional “colors of money” tied to different phases of weapons development. And while DoD has run several pilot projects to test the idea, lawmakers have been hesitant to authorize broader adoption of the approach due to the department’s inability to provide Congress with sufficient data showing the new approach would be more effective than traditional appropriation practices.

“To date, the agreement observes no new or compelling justification or quantitative analysis to support proposals that would alter the current appropriations framework, including with respect to reprogramming thresholds, notification requirements, new start guidelines, or consolidation into a single color of money,” the appropriators said.

“Consideration of legislative changes to the appropriations structure is premature until the Department has demonstrated full and effective use of its existing flexibilities and addressed persistent internal delays,” they added.

Army’s agile funding request rejected

While appropriators approved all 13 budget line-item consolidations requested by the Army in its fiscal 2026 budget, they flatly rejected the Army’s “agile funding” request to raise notification threshold for reprogramming or transfers from $15 million to $50 million for procurement programs and to $25 million for research and development efforts.

“The Department already has sufficient authorities to restructure its internal programming and budgeting processes, and many current challenges with execution can be solved by actions within the Department and do not require statutory change or congressional intervention … Increasing reprogramming thresholds alone is unlikely to improve program execution. Decisions to unilaterally move funding in the year of execution without sufficient oversight introduce uncertainty to both the programs impacted and the industrial base, increasing the risk of development and procurement delays,” the appropriators said.

“The House and Senate Defense Appropriations Subcommittees discourage the secretary of defense and the service secretaries from submitting future requests of this nature,” they added.

Joint requirements reform risks

The Defense Department kicked off the process of dismantling its decades-old Joint Capabilities Integration and Development System (JCIDS) process last year — and Hegseth ordered the Joint Requirements Oversight Council (JROC), which oversees the process, to stop validating service-level requirements to the “maximum extent permitted by law.”

House and Senate appropriators said they support the reform but want more detail on how defense officials plan to mitigate potential risks, such as the military services potentially prioritizing service-specific solutions over joint ones or top-down decision-making stifling bottom-up innovation.

The deputy secretary of defense, vice chairman of the Joint Chiefs of Staff and service secretaries have 60 days to brief appropriators on how they plan to address those risks. 

Workforce is the linchpin of acquisition reform

DoD leaders have long warned that the depth of this administration’s workforce cuts could cripple the department’s ability to execute Hegseth’s acquisition reforms.

Appropriators echoed those concerns, saying they are “concerned that recent reductions to the acquisition workforce, the effects of which have yet to be realized, will negatively affect the Department of Defense’s ability to achieve the initial speed and agility sought by this reform effort.”

Lawmakers directed the defense secretary along with service secretaries to submit an acquisition workforce strategy, including a comprehensive assessment of the personnel needed to execute Hegseth’s and Congress’ proposed acquisition reforms.

If you would like to contact this reporter about recent changes in the federal government, please email anastasia.obis@federalnewsnetwork.com or reach out on Signal at (301) 830-2747.

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Interview transcript:

Terry Gerton I want to start with Secretary Hegseth’s Arsenal of Freedom tour. He’s taking his pitch on the road and recently spoke at the Lockheed Martin Air Force plant in Fort Worth, Texas. I know you’ve been following this, the developments in defense procurement for quite a while. What are you hearing at this point?

Stephanie Kostro So Terry, this “Arsenal of Freedom” is a month-long tour, and it really is Secretary Hegseth going around to various places. He started out in Newport News, here in Virginia, talking with shipbuilders about what it means to be part of the team, right? Being part of the arsenal of freedom and in making things faster, more efficiently, etc. He then went out to California and spoke with folks, and then most recently, just last week in Texas, visiting Lockheed Martin as you mentioned, but also SpaceX. And so talking to folks about, what does it mean to be part of the arsenal of freedom? This is building on his November 7th Arsenal of Freedom speech that he gave here at Fort McNair in the D.C. area. And it is really about reviving this team mentality of, “we are in this together.” Against that backdrop, of course, we have recent activity in acquisition transformation, but also an executive order that came out earlier this month about limiting executive compensation for defense contractors, limiting dividends and also share repurchases or stock buybacks. And so this is a very interesting time to be in the defense industry.

Terry Gerton Stephanie, with all of the changes in the FAR and the DFAR and now the Defense Appropriation Act that’s in law, do you think that DoD has the policy tools it needs and wants to accomplish its transformation?

Stephanie Kostro There are two elements of the answer here. One is, with the fiscal year 2026 National Defense Authorization Act, which was just signed into law last month, they received a lot of new authorities, a lot of a sense from Congress about the ways in which this should be tackled. There is language there about technical data rights and intellectual property. There were things in there about how to define a nontraditional defense company, etc. But I don’t think that was sufficient; we still have work to do. And so does the department have all of the authorities and resources it needs to move forward? I think we’re going to see a lot of legislative proposals come out of the department for this next round of the NDAA, the fiscal year ’27 NDAA. And I think we’ll see things about acquisition workforce. We’re going to see things about working outside of the Federal Acquisition Regulation way of doing contracts. That is code for things like Other Transaction Authority or commercial solutions openings, etc. I don’t think they have everything they need. Part of the Arsenal of Freedom tour and the rollout of this acquisition transformation is to look at how the department can buy things more effectively and more efficiently. That’s time, not having cost overruns, etc. And so all of this is sort of coming together, in a way, to ultimately really transform the way the department buys. And I’m very excited to be part of this.

Terry Gerton Having the rules and authorities is only one piece. What’s your sense of whether the acquisition culture and workforce are aligned to actually accomplish the goals?

Stephanie Kostro Culture is the hardest element of any kind of transformation, right? I do think they’re trying to empower contracting officers and other key members of the acquisition workforce, program managers, contracting officer representatives, etc. This is a longer-term issue, and I think they are trying to tackle it through training programs, etc., letting folks know tools are at their disposal and giving them the authority to go ahead and use those tools. Now, folks don’t get into acquisition within the civil service because they’re risk-loving. A lot of times they get into it because they want to do things very smartly, very efficiently and oftentimes they look back on precedent to see how things were done before. Layer over that, Terry, the fact that we lost a lot of contracting personnel through deferred resignation programs, voluntary early retirement programs and reductions in force. So we are trying to rebuild the workforce in numbers as well as in training. I don’t think they’re there yet; I do think there’s a path to get them there. I’m eager for industry to work with the Department of War and others about how to train effectively and to let industry folks sit in the same training as the government folks, so everyone’s hearing the same thing.

Terry Gerton Stephanie, before we leave this topic, you touched on the executive order about defense contractors and compensation and buybacks. There’s a lot of unknowns still in how that will play out, but what are you hearing from your members?

Stephanie Kostro Our members were very eager to hear how the Professional Services Council would summarize that EO. So we did put out — based on the fact sheet from the White House, based from some interactions we’ve had with administration officials — our interpretation of it. That said, we’ve also asked our member companies, and we have 400 member companies and the majority of them do business with the Department of War and the intelligence community, “hey, what questions for clarification would you like us to ask?” And that list is growing. It is very long. It’s things like, is this really just for publicly traded companies? What about privately owned, or S corps and LLCs? The reason I mentioned that, Terry, is S corps and LLCs will often pay out a dividend to an executive at the company so that executive can pay taxes. They pay out of dividend, so it’s not only a dividend payment, it’s executive compensation, but it’s really just to go ahead and pay federal taxes. What do people do in that regard? How do they explain this? If they have a parent company that is overseas in Europe or elsewhere, how do they explain this executive order to those folks? And that executive compensation, there’s a limit if the company is underperforming, and all of this is predicated on the company’s underperforming — either cost overruns or schedule overruns. How do they explain this to folks? And is it really just about government contracts, or what if you’re a commercial and a government company and your executive compensation is based usually on both elements, commercial and government? So how do you go ahead and limit compensation there? This is a fascinating area to be engaged with the government on. We are all learning this together.

Terry Gerton As Secretary Hegseth tries to walk this tightrope between encouraging defense contractors to be on the team and work with us, and at the same time kind of tightening the screws on enforcement and compensation, the president has said he wants to spend $1.5 trillion on defense next year. That’s a lot of money. How is that going to get spent, do you think?

Stephanie Kostro Oh, it is an eye-catching number, right? $1.5 trillion when we are roughly $1 trillion now are just under, and it is a huge increase. Now, we’ve had large increases in the defense budget in other times in U.S. history. In the early 1950s with the Korean War, the Reagan buildup that some of us remember from the ’80s. Some of us who are listening may not remember it. They may not have been born yet, and that’s okay too. You know, there is some precedent for huge increases in the defense spend. The question here becomes, if the department and the military services are going for commercial-first mentality to prioritize speed of award and innovation, etc., they certainly can spend that money throughout the defense ecosystem. The question that we have is really, what is the organizing construct for this? What would we be spending the money on? Would it be shipbuilding, combat aircraft, the logistics piece, which always tends to be an issue? We also know operations and maintenance accounts are sometimes used and reprogrammed away if they’re not spent by a certain time, because it’s one-year money at the department, it gets reprogramed away. It’s going to be an interesting mathematical problem to tackle. In addition, I would mention, we had the reconciliation bill, the One Big, Beautiful Bill Act that passed and was signed into law last July. That infused a bunch of cash into both the Department of Defense and the Department of Homeland Security. I understand some of that money hasn’t been apportioned and provided to the departments yet, but we are now at this point in January of 2026 talking about, what would a reconciliation bill look like for 2026? Congress can pass one per fiscal year. The one that was passed last July was the one for fiscal ’25. What happens this year? There are a lot of different mechanisms to get that money through Congress and over to the government to apportion to the department.

Terry Gerton Well, speaking of 2026 appropriations, it looks like Homeland Security and Defense will be two of the last bills out, hopefully before the end of this month. What are you hearing from folks on the Hill?

Stephanie Kostro I’m hearing that they’re trying really, really hard to avert a shutdown. And I think we’re going to get there. I’m not a betting person, Terry, you know, I’ve talked about that in the past. And I’m not in this case, either. The chance for a shutdown is never zero. That said, the experience that we all had back in October and November last year would indicate that there really is no appetite for a shutdown this year. The National Defense Appropriations Act and the DHS [bill] I think are probably the last because they want to get everything done before they tackle those. Those are the two departments that received the lion’s share of the money from the reconciliation bill, One Big Beautiful Bill Act last year, and they are looking to get more money in a reconciliation bill this year. So I’m not surprised to hear that those are last, but I actually don’t think that indicates that they’re very far apart on the numbers.

Terry Gerton And on those two departments, PSC is sponsoring a trip in January to the border to do some on-site research. Tell us about that plan.

Stephanie Kostro I am so excited about this. PSC has not typically done this. I do know other entities have done this, I used to be at a think tank where we would do things like this. We are bringing almost 30 different companies out to California next week, Jan. 28 and 29, to do a behind-the-scenes access with the Customs and Border Protection folks who are out there. And the ports of LA and Long Beach, the ports at entry, the land ones over at San Ysidro and Otay Mesa, really talking with folks on the ground there about what their requirements are. This is really focused on technology. How do we use technology and the art of the possible to protect our borders? Now, I would hasten to add, Terry, border security is not a partisan issue in many, many ways. The Biden administration, the Obama administration, the previous Trump administration all focused on border issues in different ways. Our companies really want to mention to folks on the ground, here is technology that you may not have experience with that is up-and-coming. How can we leverage it to better secure our borders? Talking about cargo screening, etc. I think this is a really good opportunity for companies to sit down with folks who are in the field and hear about what they need.

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On Monday, US Defense Secretary Pete Hegseth said he plans to integrate Elon Musk's AI tool, Grok, into Pentagon networks later this month. During remarks at the SpaceX headquarters in Texas reported by The Guardian, Hegseth said the integration would place "the world's leading AI models on every unclassified and classified network throughout our department."

The announcement comes weeks after Grok drew international backlash for generating sexualized images of women and children, although the Department of Defense has not released official documentation confirming Hegseth's announced timeline or implementation details.

During the same appearance, Hegseth rolled out what he called an "AI acceleration strategy" for the Department of Defense. The strategy, he said, will "unleash experimentation, eliminate bureaucratic barriers, focus on investments, and demonstrate the execution approach needed to ensure we lead in military AI and that it grows more dominant into the future."

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Castelion, a California-based defense technology firm founded by former SpaceX engineers, confirmed that Secretary of War Pete Hegseth visited the company’s headquarters this week. According to the company, Hegseth met with engineers working on rapid-production missile technologies designed to restore industrial agility and increase the pace at which U.S. forces can field advanced weapons. During […]

President Donald Trump took aim at defense contractors Wednesday, announcing new restrictions on executive pay and stock buybacks as part of the administration’s push to speed procurement and revitalize the defense industrial base. 

In an executive order issued late Wednesday, Trump said companies “are not permitted in any way, shape, or form to pay dividends or buy back stock, until they are able to produce a superior product, on time and on budget.”

The order directs Defense Secretary Pete Hegseth to identify defense contractors providing critical weapons, supplies and equipment that are “underperforming, not investing their own capital into necessary production capacity, not sufficiently prioritizing U.S. government contracts, or whose production speed is insufficient as determined by the Secretary,” while simultaneously engaging in stock buybacks or corporate profit distributions. 

Contractors identified under the review must be notified and given an opportunity to submit a remediation plan within 15 days to address performance issues. 

If disputes over underperformance issues cannot be resolved within 15 days or the remediation plan is deemed inadequate, the defense secretary “may initiate immediate actions to secure remedies for the secretary that will expedite production, prioritize the U.S. military and return the contractor to sufficient performance, investment, prioritization and production, to the maximum extent permitted by law.”

The executive order also directs the Defense Department to ensure that future contracts with new or existing defense contractors include provisions prohibiting stock buybacks and corporate profit distributions during periods of underperformance, contract noncompliance, insufficient investment, or “insufficient production speed as determined by the secretary.”

The government already has a whole set of tools in its toolbox to incentivize, reward or penalize companies based on their performance, and the executive order relies in part on mechanisms the Defense Department already uses. What is different, however, are the remedies the administration is focusing on — and the main challenge in implementing this executive order will be defining the key parameters contractors are going to be held accountable for, Protorae Law member Alan Chvotkin said.

“The remedies of no stock buybacks and caps on executive compensation — that’s not a remedy that the government already has available to it,” Chvotkin told Federal News Network. “It’s not so binary to say it’s 100% of contractor’s problem or zero of the contractor’s problem, and that’s where the hard work is going to come on each of these major programs — defining the specific parameters that the department is expecting.”

Stan Soloway, president and CEO of Celero Strategies and federal acquisition expert, said the executive order seems to presume that any cost overrun is the fault of the contractor without recognizing that “not all cost overruns are created equal.”

“The [executive order] is full of vagaries and ambiguity. It is going to be very interesting to determine how they measure whether a company is performing … There’s no mention about the responsibility the Defense Department has for cost overruns and program delays. While companies are far from perfect, all too often, the delays are driven by changing requirements, by requirement rigidity, lack of flexibility in the requirements and by budget uncertainties,” Soloway told Federal News Network. 

Back in 2007, the Defense Science Board, for instance, examined three troubled programs — the Littoral Combat Ship, the presidential helicopter and the Army’s Comanche helicopter — and found that constantly changing government requirements were a major driver of cost overruns and schedule delays. The Packard Commission reached the same conclusion two decades before the Defense Science Board issued its report.

“Accountability is key here, but there is a shared responsibility between the government and contractors. There are many tools to hold contractors accountable, but way fewer tools to hold the government accountable. This EO doesn’t do anything to make the government more accountable,” David Berteau, former president and CEO of the Professional Services Council and now president of David Berteau & Associates, told Federal News Network.

“The disconnect of this EO is if the desired outcome is better contract performance, how can implementing this EO produce better results? That isn’t clear to me. Someone will have to write implementation guidance that does that. I spent a lot of my career writing implementation guidance, and I have a hard time seeing implementing this in such a way that it produces better performance quickly,” he added.

If the goal of the executive order is to push companies to invest in production capacity and capability rather than shareholder returns, that approach only works if there are returns on that investment, Berteau said.

Lockheed Martin’s recent deal with the Pentagon to increase Patriot missile interceptor production to about 2,000 missiles a year is a significant step toward that approach, Berteau said. Lockheed agreed to fund an expansion of its Patriot missile factory in exchange for a seven-year commitment from the Pentagon.

“We have to wait to see the implementation guidance to get a sense of what the real goal is, better contract performance leading to faster deliveries or what,” Berteau said.

“It is critical that the relationship between the government and contractors be one of shared responsibility and partnership, particularly around defining and deciding what the contract will give you and the structure of the contract to make sure the government will get what it needs. There is a lot about this EO that doesn’t seem to be about strengthening that partnership. It seems to be more about punishing one side of the equation,” he added.

The Defense Department did not respond to questions about whether contractors should expect formal guidance in the coming weeks or how many underperforming contractors it has already identified.

“After numerous years of failing to meet contractual obligations, under President Trump’s order, defense contractors will no longer be allowed to leave our warfighters behind while giving themselves massive payouts from stock buybacks. This will give Department of War the ability to meet national security objectives and ensure efficiency and accountability. Our obligation is to our warfighters; not Wall Street,” Chief Pentagon Spokesman Sean Parnell told Federal News Network in a statement. 

Executive pay

In one of his Truth Social posts, Trump said no executive should be allowed to make more than $5 million, but the figure did not make it into the executive order.

Instead, the president directed the defense secretary to ensure future contracts require executive compensation to be tied to performance — such as on-time delivery, increased production and “all necessary facilitation of investments required to rapidly expand the United States stockpiles and capabilities” — rather than short-term financial metrics like cash flow or earnings per share driven by stock buybacks.

If a contractor has “engaged in underperformance, non-compliance, insufficient prioritization of the contract, insufficient investment, or insufficient production speed,” the department could cap executive base salaries at current levels.

Executive compensation was a contentious issue in 2013, when President Barack Obama called on Congress to cap executive pay at $400,000.

A cap on executive compensation already exists in some form — contractors can pay their executives whatever they choose, but the government only reimburses costs up to a certain limit.

The executive order, however, goes a step further — it’s shifting from how much the government will reimburse the contractor to limiting how much the company can pay its executives.

“Pretty significant difference, but maybe they’ll fall back on the same mechanisms. I don’t know that yet. Nobody in the department is talking yet about how they’re going to implement this. I’m sure they’re still trying to work that out,” Chvotkin said.

“I think there’s a fair question, broadly speaking, in commerce, generally, not just in the government market, about executives having the right incentives to drive long-term performance and excellence. But I don’t know what the standards are going to be, what the metrics are going to be.  There’s a ton of ambiguity in here,” Soloway said.

Who does the EO apply to?

While the executive order targets contractors that provide “critical weapons, supplies and equipment,” it doesn’t clearly define the term “critical.” 

Chvotkin said new contracts could easily specify which vendors qualify as critical suppliers or require all new contracts to include the provisions laid out in the executive order.

And while the executive order is broadly aimed at “all contractors,” Chvotkin said its likely target is traditional defense contractors rather than the commercial firms the Pentagon has been trying to attract. 

“I think it’s all contractors, but fixed-price contractors — less likely, they’re going to have binary decision. Commercial contractors, where the effort is to bring more of them in, but probably not as many of them have the triggers, the buyback, the sort of where the government is reimbursing for executive compensation as they do for many of the traditional defense contractors,” Chvotkin said. 

What’s next?

Chvotkin said the Defense Department is likely to issue general guidance to programs on how to carry out the secretary’s review.

“I think they’ve already done quite a bit of that, but I would expect [the undersecretary for acquisition sustainment office] to lead a fair amount of that responsibility to describe what those contracting provisions are relating to critical weapon systems and supplies and equipment. They’ve got to identify those first, then catch up with everybody else on a rolling basis,” Chvotkin said. 

“From the contracting folks, I would expect a broad set of contract provisions, both modifications to existing contracts, as well as provisions to go into new solicitations and new contracts to be awarded. That includes the identification of the key performance parameters for each solicitation and new award, the requirement for the company if notified by the Department of Defense or the contracting officer of the failure to adequately meet the performance objectives, the requirement for the remediation plan and then the additional remedies that the department might ask for as part of either the failure of the contractor to meet the original contract performance of projections or the remediation plan,” he added.

Jason Miller contributed to this report.

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Lawmakers said the fiscal 2026 defense policy bill that became law earlier this month would deliver “the most significant acquisition reforms in a generation.” But some of the more sweeping proposals introduced in the House and Senate versions of the bill were ultimately scaled back or dropped entirely from the final version of the legislation.

A similar dynamic played out inside the Pentagon. A draft acquisition memo circulated prior to Defense Secretary Pete Hegseth’s speech to defense executives and senior military acquisition officials outlined a far more aggressive overhaul of how the department would develop and buy military capabilities than what emerged in the final version of the memo and the Acquisition Transformation Strategy.

But a number of provisions from the House’s SPEED Act and Senate’s FoRGED Act that survived negotiations are still expected to be impactful, including measures aimed at streamlining prototyping, accelerating the transition of technologies into production and expanding opportunities for small businesses and new entrants.

Easing regulatory burdens for nontraditional contractors

The bill, for example, exempts nontraditional defense contractors from some of the Pentagon’s accounting, audit and compliance requirements, lowering barriers to entry for new defense technology companies. A nontraditional defense contractor is defined as a contractor that hasn’t held a Cost Accounting Standards-covered contract in the last year, which is the vast majority of the defense industrial base — George Mason’s Baroni Center for Government Contracting estimates that only 7.5 percent of the defense companies fall outside that definition. The Senate also pushed to expand the definition of nontraditional defense contractors, but the provision was dropped from the final version of the bill.

The legislation also expands the type of past performance that may be considered — the department is required to issue guidance on when it should accept a wider range of past performance, including commercial or non-government work as valid past performance. It also requires the Defense Acquisition Regulations Council to “identify and eliminate specific, unnecessary procedural barriers that disproportionately affect the ability of small business concerns and nontraditional defense contractors, to compete for contracts with the Department of Defense.”

Small and medium-sized Defense Department contractors will also gain access to an online platform offering digital resources, training and services aimed at increasing awareness of and facilitating compliance with defense acquisition requirements.

Faster paths from prototype to production

The bill also expands the Pentagon’s ability to use Commercial Solutions Openings — a competitive process used to acquire innovative technologies. CSOs are typically difficult to transition, but the legislation allows the department to move successful CSOs into production, including through sole-source contracts. The provision also expands CSOs to include commercial products, commercial services and nondevelopmental items instead of limiting their use to “innovative” technologies.

Another provision raises the minimum award for the Accelerate the Procurement and Fielding of Innovative Technologies program to $10 million.

The bill also gives combatant commanders the authority to experiment with, prototype and demonstrate new technologies and allows a successful experimentation to serve as justification for moving directly into production. 

Stan Soloway, president and CEO of Celero Strategies and federal acquisition expert, said the provisions aimed at accelerating the transition to production and giving officials clearer authority to favor small businesses and new entrants reflect the department’s long-standing effort to work around traditional program processes and system integrators. But given the complexity of many programs, “it remains to be seen how much it actually changes on major systems, but it could definitely impact smaller ones” he told Federal News Network.

Data rights and IP

At the same time, there is a seeming contradiction in the bill.

Despite broad bipartisan support, right-to-repair provisions were stripped from the final version of the bill, but “provisions like the one that talked about DoD having the authority to re-engineer components when it thinks doing so will be quicker and less expensive than having additional units produced by the original equipment manufacturers, is sure to raise hackles,” Soloway said.

“IP and technical data rights are hugely important issues. And it is fair to say that both government and industry have tended to view them as zero sum games. But if DoD wants to build meaningful bridges to emerging (and existing) firms and technology, the answer lies in both sides being willing to negotiate, at the very beginning of a program, how those questions will be handled. It is hard … but simply stating that DoD can do this when they think it is in their best interests, is probably not the most balanced path forward,” Soloway said.

Workforce largely absent

Despite some of the significant acquisition changes, the legislation barely addresses the workforce — a gap Soloway said could undermine the reforms.

The success of these reforms will hinge on whether the department can equip its workforce with the skills needed to operate differently. Otherwise, the system can quickly revert to its old ways.

“Without an aggressive, broad-based and sustained workforce initiative, it is hard to see the workforce having the tools or the confidence to take the kind of reasoned risks the legislation, and Secretary Hegseth, claim to want them to take,” Soloway said

“Overall, workforce morale and trust in leadership is at a very low ebb. If change is going to happen, dealing with that reality is job one. But, to date, nothing this administration has done would suggest they have any plan on how to do that,” he added.

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The Army is creating a dedicated artificial intelligence and machine-learning career field for officers as it pushes to integrate AI more deeply into its operations.

The new 49B specialty establishes artificial intelligence and machine learning as an official “area of concentration” for Army officers, a move the service says will help accelerate its transformation into a more data-centric and AI-enabled force.

The Army will roll out the new career field in phases. Army officers interested in transferring will be able to apply through the service’s Voluntary Transfer Incentive Program beginning Jan. 5. Selected officers are expected to formally transfer into the new career field by October 2026. 

“We’re building a dedicated cadre of in-house experts who will be at the forefront of integrating AI and machine learning across our warfighting functions,” Army Spokesperson Lt. Col. Orlandon Howard said in a statement.

The Volunteer Transfer Incentive Program allows active-duty officers in the competitive category to voluntarily transfer into a different branch or functional area based on Army manning needs. Human Resources Command typically opens application windows once or twice a year, depending on a branch’s strength and personnel requirements.

Officers selected for transfer will incur a three-year active-duty service obligation, which will begin after completion of all required training.

The specialty will be open to all officers eligible for the voluntary transfer program, but those with advanced academic degrees or technical experience in AI- and data-related fields are expected to be more competitive candidates.

Selected officers will undergo graduate-level training and “gain hands-on experience in building, deploying and maintaining” the service’s AI-enabled systems.

The Army is also considering expanding the specialty to include warrant officers in the future.

The service created a new robotics tech warrant officer career field earlier this year to provide tactical units with in-house experts who can deliver robotic and autonomous capabilities directly to soldiers. The role includes training on unmanned and counter-unmanned systems, as well as networking, software engineering, electronic warfare, artificial intelligence and machine learning.

The decision to establish a new AI and machine-learning career pathway for officers comes amid a broader transformation effort aimed at preparing the Army for future warfare and optimizing its force structure and workforce. Earlier this year, Defense Secretary Pete Hegseth directed the Army to enable AI-driven command and control at theater, corps and division headquarters by 2027, field unmanned systems across every division by the end of 2026, and accelerate the integration of counter-UAS capabilities at the platoon level by 2026. 

The Army also brought in four senior executives from tech giants like Palantir and Meta to be part of Detachment 201, the service’s new executive innovation corps. The four men were sworn into the Army Reserve as direct-commissioned officers in June and work at companies heavily invested in artificial intelligence and machine learning.

Meanwhile, the Defense Department has been pushing the use of large language models across the force — earlier this month, the department launched GenAi.mil, a platform designed to put “frontier AI models” into the hands of warfighters. DoD selected Google Cloud’s Gemini for Government as the first AI deployed on the new platform. 

“The future of American warfare is here, and it’s spelled AI,” Hegseth said.

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Defense Secretary Pete Hegseth has directed all department heads to recognize “outstanding” Defense Department civilian employees with cash bonuses.

A Dec. 15 memo authorizes Pentagon leaders to award the top 15% of civilian employees bonuses worth 15% to 25% of their basic pay, capped at $25,000.

Hegseth said if department heads want to recognize more than 15% of their civilian workforce with cash awards, they can do so within their internal budget.

“Since the dawn of the Republic, civilian employees have played an essential, foundational role in driving the success of America’s military and ensuring it prevails on the battlefield. Over the past 10 months, Defense Department civilians upheld that proud tradition through their steadfast support of the worldwide mission of U.S. armed forces and their dedication to executing the transformational changes necessary to revive the warrior ethos, rebuild our military, and reestablish deterrence,” Hegseth said in the memo.

“These achievements have not been easy. The uncertainty and adversity inherent in all periods of change can test even the most elite workforce. Further, the longest Government shutdown in American history imposed severe strain on our civilian workforce. The resilience our civilian teammates have demonstrated throughout this challenging time is an inspiration and deserves to be recognized,” he added.

Department heads are required to coordinate with their financial management and comptroller organizations to confirm funding availability for these awards. 

Hegseth said the effort to reward the department’s “very best” civilians is separate from any previously issued awards and directed department heads to issue the bonuses by Jan. 30.

“I am enormously grateful for the incredible contributions of our entire civilian workforce, and I am proud to work with everyone in the Department, military and civilian, in defending our nation,” Hegseth said.

The memo builds on earlier guidance from Undersecretary of Defense for Personnel and Readiness Anthony Tata that seeks to expand the use of civilian workforce incentives and awards to recruit and retain top talent. The document encourages broader use of existing incentives, including cash awards up to 20% of basic pay and time off awards up to 80 hours per year, to “recognize exceptional civilian contributions,” particularly in high-impact or hard-to-fill roles. It also eases approval requirements for large cash awards.

The memo to recognize top talent comes amid Hegseth’s broader push to shrink and reshape the Pentagon’s civilian workforce — an effort he once described as “clearing out the debris.”

The department has lost more than 60,000 employees since the beginning of the Trump administration through voluntary separation programs, reaching the 5% to 8% reduction goal Hegseth set earlier this year. In addition, the Defense Department, along with other federal agencies, remains under a near-total civilian hiring freeze that has been extended indefinitely to further reduce the size of the federal workforce. 

President Donald Trump and Hegseth also announced “warrior dividend” bonuses for service members last week, which Trump suggested would be funded by tariff revenue. The payment is actually a one-time basic allowance for housing stipend and will be paid using funds Congress appropriated to the DoD in the One Big Beautiful Bill Act to supplement the basic allowance for housing.

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