Overview: A new executive order (EO) issued January 7, 2026 is putting fresh pressure on defense contractors – and, by extension, their subcontractors – to perform and invest in ways the government expects. This “Prioritizing the Warfighter in Defense Contracting” EO significantly broadens what counts as contractor underperformance beyond just missing delivery dates. It introduces stricter oversight and consequences aimed at realigning contractor priorities away from shareholder payouts and toward timely, on-budget delivery of military equipment[1][2]. Below we explain the EO’s key provisions and discuss what they mean for prime contractors and subcontractors, with both an explanatory and advisory lens.
Broader Criteria for “Underperformance”
Under the new EO, a defense contractor may be deemed “underperforming” not only for falling behind on contract requirements, but also for broader business decisions that suggest misaligned priorities. Specifically, the Secretary of War/Defense is directed to identify any contractors (involved in critical weapons, supplies, or equipment) that are either:
- Underperforming on their contracts, e.g. behind schedule or failing to meet requirements;
- Not investing necessary capital to expand production capacity for defense needs;
- Not sufficiently prioritizing U.S. government contracts (perhaps favoring commercial work or new deals over existing obligations);
- Exhibiting insufficient production speed to meet military demand;
and that have, during that period, engaged in stock buybacks or dividend distributions to shareholders[3]. In other words, if a contractor has been plowing profits into shareholder returns (buybacks/dividends) while lagging on defense work, it risks an “underperforming” label. The exact thresholds for underperformance or insufficient investment are not defined in the EO, leaving much to the Secretary’s discretion[4]. This broad, somewhat subjective scope has raised concerns in industry that even factors like prioritization and investment – which traditionally were business judgments – can now trigger government enforcement if the Pentagon deems the contractor isn’t doing enough for the warfighter.
Notably, the EO’s policy reflects a view that defense firms have “prioritized investor returns over the Nation’s warfighters,” contributing to delays and supply shortfalls[1][2]. By widening the definition of underperformance, the administration aims to realign contractor incentives toward production speed, capacity, and on-time delivery instead of shareholder profits[5]. This is a significant mindset shift for the defense industry, and it means boards may have to rethink decisions like stock repurchases, dividends, and where to allocate capital.
New Restrictions and Requirements Under the EO
Immediate Ban on Buybacks/Dividends: Effective immediately, any defense contractor officially determined to be “underperforming” is prohibited from paying dividends or buying back its stock until the performance issues are fixed[6][7]. The White House’s message was blunt: companies “are not permitted in any way, shape, or form” to reward shareholders while failing to deliver superior products on time and on budget[6]. This is an unprecedented move – essentially a government-mandated pause on shareholder payouts for designated firms. How this ban will be enforced in practice is still unclear (absent specific contract clauses or regulations, it may rely on voluntary compliance or pressure[8]), but large defense primes are on notice that continued buybacks in the face of late programs could invite swift repercussions.
15-Day Remediation Window: The EO sets up a rapid timeline for addressing deficiencies. Once the Secretary identifies a contractor as underperforming, the company will receive an official notice describing the issues[9]. From that point, a 15-day negotiation period begins in which the contractor can engage with DoD and even submit a board-approved remediation plan to cure the problems[10][11]. This is a very compressed window – just over two weeks – for companies to develop and propose fixes, potentially involving major operational changes or investments. The short fuse raises the stakes for contractor readiness, meaning compliance, legal, and project teams need to have data and action plans at their fingertips[12]. If the issue isn’t resolved within those 15 days (or if the proposed plan is deemed insufficient by the government), the next step is enforcement.
Enforcement Tools – DPA, Contract Remedies, and More: The EO authorizes aggressive measures if a contractor fails to remediate. The Secretary of War/Defense “may initiate immediate actions” to secure remedies, using “any available” mechanisms[13]. This includes leveraging voluntary agreements (presumably to alter behavior), invoking the Defense Production Act (DPA) authorities, and using standard FAR/DFARS contract enforcement tools[13]. In practice, contractors could face termination for default, payment withholds, negative performance ratings, or even suspension/debarment under existing procurement rules[14]. The EO explicitly references the DPA’s civil and criminal penalties as well[15], a sign that the administration is willing to get tough – the DPA even carries potential fines and jail time for willful noncompliance, though such extreme actions are rarely used[16]. At minimum, contractors should expect the government to be far more willing to use harsh remedies than before, given that the EO “explicitly encourag[es] their use” to compel expanded capacity and prioritized schedules[17].
Importantly, when weighing enforcement, the Secretary is instructed to consider the contractor’s financial condition and the viability of the programs at stake[18]. This suggests some balancing of punishment with practicality – e.g. not bankrupting a key supplier or killing a needed weapons program. There’s also a hint of carrot: the EO mentions considering “mutual benefits” of future growth opportunities coupled with contractor investments[18]. In effect, the government might say: work with us, invest in fixing the issues, and you’ll continue to get business – otherwise, we’ll come down hard. One thing notably absent in the EO language is any explicit acknowledgement that sometimes government actions (e.g. changing requirements or funding delays) contribute to contractor underperformance. However, existing contracting law still applies, so if the fault truly lies with the government, a contractor could defend itself (for instance, a termination for default could be converted to a no-fault termination for convenience)[19].
Foreign Military Sales Impact: Another potent enforcement avenue is in the arena of international sales. The EO allows that if a contractor is flagged as underperforming, the U.S. government may cease support for that company’s Foreign Military Sales (FMS) or Direct Commercial Sales abroad[20][21]. For defense companies that rely on selling to allied nations (either via U.S.-brokered FMS cases or direct deals), losing U.S. advocacy or approvals could be a major blow. This threat essentially uses access to lucrative foreign markets as leverage to ensure contractors focus on U.S. needs first. Given that the global defense export market is huge (hundreds of billions of dollars)[22], contractors have strong incentive to avoid any “underperforming” label that might jeopardize their overseas deals.
New Requirements in Future Contracts: Looking beyond immediate punishments, the EO also mandates a structural change going forward. Within 60 days, DoD must ensure all new contracts and contract renewals include clauses that: (1) ban stock buybacks and dividends during any period of underperformance or non-compliance; and (2) tie executive incentive compensation to performance metrics like on-time delivery and increased production, rather than short-term financial targets[23][24]. In addition, future contracts must allow the government to cap a contractor’s executive base salaries (at current levels, with inflation-only increases) if the contractor is found underperforming[25]. These provisions will effectively write the new expectations into every defense contract. A company bidding on DoD work will have to accept that if it falls behind or doesn’t invest enough, it could not only face contract termination but also be legally bound not to pay dividends and could have its leadership pay frozen. Moreover, by requiring incentive pay to be linked to contract performance, the government ensures that corporate leaders feel direct financial pain for schedule slips or output shortfalls[26].
Note: These contract clauses are expected to be very broad. The EO says they should apply to “any future defense contract,” not just major weapons programs[27]. That implies even mid-sized and lower-tier suppliers might see these terms in their contracts soon. Contractors will have little choice but to accept them – the government can unilaterally impose new standard clauses, and refusing them would mean forfeiting contract opportunities[28][29]. In sum, the rules of the game for doing business with DoD are changing rapidly: profitability measures that were routine (like buybacks) are about to be off-limits during any performance trouble, and accountability for results is being hardwired into contracts via executive pay.
SEC Safe Harbor at Risk: As a final prong, the EO enlists the Securities and Exchange Commission to consider amending Rule 10b-18, which currently provides a safe harbor for stock buybacks. The idea is to exclude designated underperforming defense contractors from that safe harbor, making it easier to challenge their buybacks as market manipulation[30][31]. While dropping out of the safe harbor wouldn’t automatically make buybacks illegal, it would remove a layer of legal protection and could deter brokers from facilitating repurchases[32][33]. This move underscores that the administration is attacking the issue from multiple angles – not just through contracting regulations, but through financial regulatory policy as well[34].
Impact on Prime Contractors vs. Subcontractors
Prime Contractors (Large Defense Firms): The major defense primes are the clear initial targets of this EO. Top Pentagon suppliers building critical weapons systems – many of which have seen cost growth or schedule delays in recent years – are likely to come under review first[35]. These companies (think big aircraft, ship, vehicle, or missile manufacturers) also tend to be those that issue dividends and stock buybacks, making them squarely subject to the EO’s criteria[6][36]. The impact for primes will be significant: boards and executives will need to rethink capital decisions like share repurchases if any program is slipping behind. In fact, Treasury officials have openly criticized big defense firms as being “five to seven years behind” on deliveries and suggested these new restrictions should stay in place “for two to three years or as long as it takes” to work down backlogs[37]. There is a real culture shift underway, pushing these firms to prove they’re reinvesting in production capacity and prioritizing government work over Wall Street gains[38][39].
Primes will also feel pressure to align their internal incentives with the EO’s mandates. We may see companies voluntarily restructuring executive bonus plans to emphasize on-time performance, even before the contract clauses formally hit[26]. Diversified defense companies (those with substantial commercial businesses) might find this especially intrusive – activities like executive pay and dividend policy, traditionally boardroom decisions, are now subject to government scrutiny[40]. Some commercial tech or manufacturing firms that only do some defense work might even think twice about bidding on defense contracts if it means accepting these new controls on their corporate behavior[41][42]. In the worst case, if a prime contractor is officially labeled underperforming, it faces not just public stigma but immediate tangible hits: inability to pay shareholders, possible contract terminations, and loss of future business (domestic and international). The net result is that prime contractors must embed a new mindset of compliance and proactivity – meeting contract obligations isn’t enough; they must demonstrate they are all in on supporting the defense mission with their resources and focus.
Subcontractors (Suppliers and Sub-Tiers): While the EO’s enforcement is directed at companies holding defense contracts with the government, subcontractors – especially mid-tier suppliers who feed into prime contracts – will feel the ripple effects. In many major programs, delays or bottlenecks at the subtier supplier level have a domino effect on the prime’s schedule. Now that primes face potential penalties for “insufficient production speed” and lack of capacity, they will almost certainly push those expectations down the supply chain. Industry experts predict “intensified oversight of delivery schedules, bottleneck mitigation, and capacity expansion plans across programs and sub-tier supply chains.”[43] In practice, this means prime contractors are likely to scrutinize their subs more closely on production output and may demand assurances that subcontractors are investing in enough tooling, labor, and inventory to meet surge requirements.
Subcontractors – many of which are small or specialized businesses – should be prepared for this heightened attention. Primes might flow down new contract clauses or informal mandates to mirror the EO’s intent. For example, a prime could require a critical component supplier to promptly report any delays or capacity shortfalls, or even include penalties for failure to deliver on time. While the government might not directly label a subcontractor as “underperforming” (since the sub isn’t in privity with the government), the prime can effectively pass along the consequences. If a subcontractor becomes the weak link on a defense program, the prime contractor under the gun might replace that sub, push for a sub’s management changes, or at minimum exclude them from future opportunities. In short, subcontractor performance issues can now threaten not just one contract, but the sub’s broader relationship with primes in a more urgent way.
Another consideration is that some mid-tier contractors are both subcontractors on big programs and direct contractors on smaller federal contracts. Those companies are not immune from the EO’s reach. It’s not yet clear whether the administration will exclude small businesses or non-traditional defense firms from the harshest measures – guidance is still pending on how terms like “large contractor” or thresholds for underperformance will be applied[35]. For now, no contractor can assume they’re too small to be noticed. Even if you’re a niche supplier, if you hold a prime contract for a “critical supply” and you’re significantly behind while, say, paying hefty executive bonuses, you could technically fall under the EO’s criteria. At the very least, subcontractors should recognize that their prime partners will be expecting them to uphold the same ethos of prioritizing the mission over short-term profit. This might involve uncomfortable conversations about, for example, a supplier’s use of its profits – are you expanding your factory output or just enjoying higher margins? Forward-thinking subs may want to proactively demonstrate what steps they’re taking to boost capacity and meet delivery schedules, to give primes (and the government) confidence that they won’t be a cause of underperformance.
What Contractors and Subs Should Do Now (Advisory Tips)
Both prime contractors and key subcontractors should take immediate action to prepare for this new regime. Here are some steps and considerations to navigate the changes:
- Conduct a Performance Self-Review: Contractors should assess all current defense programs for signs of underperformance or risk. Identify any contracts that are behind schedule, over budget, or facing production bottlenecks. Determine the root causes – if it’s something you can fix (add more staff, expedite materials, invest in equipment), develop a corrective plan now. If the issues are due to government factors, be ready to document that. The goal is to be forewarned; you don’t want the Secretary of War to surprise you with a notice. If you do suspect you might be on the underperformers list, consider voluntarily preparing a remediation plan and even informally communicating your improvement efforts to the agency to stave off official action[44].
- Review Capital Allocation and Policies: Company leadership and boards need to re-evaluate decisions on stock buybacks, dividends, and executive pay in light of this EO. Continuing business-as-usual could be dangerous if you have any lingering performance issues. For primes, it may be wise to pause or limit shareholder payouts and redirect that capital to factory expansion, workforce hiring, or other capacity boosts – not only will this reduce your risk profile in the Secretary’s eyes, it also provides a strong defense that you are prioritizing investment. Likewise, scrutinize your executive incentive plans: are they overly tied to quarterly earnings or share price? If so, start shifting them toward metrics like on-time deliveries, contract milestones, and customer satisfaction. The EO explicitly indicates future contracts will require this alignment[45], so getting ahead of it will make compliance easier and demonstrate good faith. Some contractors are even integrating their SEC compliance teams with operations to ensure public filings and investor communications reflect an emphasis on meeting defense needs[46]. Remember that any appearance of putting Wall Street over the warfighter could trigger scrutiny under the new rules.
- Tighten Subcontractor Management: Primes should immediately engage their critical subcontractors and suppliers to communicate these new expectations. If you’re a prime, map out your supply chain for each high-priority program – where are the potential chokepoints? Meet with those subs to discuss plans for surge production or problem resolution. It may be prudent to establish stricter reporting requirements for subs on production progress, and to have contingency plans (alternate sources or backup capacity) in case a sub falters. If you’re a subcontractor, be prepared for this outreach. Proactively share what you’re doing to ensure timely deliveries (e.g. “we’ve added a second shift” or “we’re qualifying a second supplier for raw materials”) so your prime knows you’re aligned. The key is collaboration over blame – the faster primes and subs can jointly solve issues, the less likely the government will need to step in. Given the 15-day clock on remediation[11], primes may not have time for a leisurely back-and-forth with a slow subcontractor. So everyone in the chain needs to be ready to respond quickly if a warning comes down.
- Plan for New Contract Clauses: All contractors (and many subs who work as lower-tier contractors) should anticipate new provisions in solicitations soon. Acquisition regulations will be updated to include the no-buyback and performance-pay clauses[28][23]. When bidding on future work, read the fine print – understand what you’re committing to. This could affect corporate strategy (for instance, if a contract is awarded and you hit an “underperformance” trigger, know that you’d have to freeze dividends; does your company accept that?). Adjust your proposal strategy accordingly: highlight in your proposals any investments or process improvements you’re making to ensure on-time, on-budget performance. In the source selection phase, agencies might favor contractors who demonstrate a culture of investing in delivery capability. If you can show that your team has adopted the spirit of the EO – e.g. by tying your project manager bonuses to meeting milestones – it could set you apart. In short, embrace the intent of the policy and make it a selling point that “our company is fully committed to prioritizing the mission; here’s the proof.”
- Monitor Regulatory Updates and Seek Guidance: This EO is new and evolving. The exact criteria, exemptions, and processes will likely be refined in the coming weeks through DoD guidance or interim FAR/DFARS rules. Contractors should stay tuned to official communications and perhaps seek legal counsel for interpretation as needed. Industry associations may also engage the government to get clarity (for example, on how “large contractor” is defined, or whether small businesses could get a pass[47]). If something is unclear, don’t hesitate to ask contracting officers or agency liaisons – better to have an open dialogue than be caught off guard. And if you believe a designation of underperformance is unfair, know your rights: you may negotiate and present evidence, and if necessary, pursue legal remedies (claims or appeals) as appropriate[48]. The EO doesn’t override your existing contract rights; it just adds a layer of administrative action. Being informed is your best defense.
How Procura Can Help Contractors and Subs
Adapting to these new demands while still growing your federal business can be challenging – this is where Procura can assist. Procura is an AI-powered federal contract analysis platform that helps contractors (especially small businesses and subcontractors) stay one step ahead in the procurement game. By automatically scanning SAM.gov for opportunities and reading full RFP packages, Procura can alert you to new solicitations containing the emerging clauses and requirements discussed above, so you’re never caught by surprise. It analyzes requirements and even scores the fit against your capabilities, allowing you to focus on bids that you can perform well – a critical advantage when underperformance is not an option[49][50]. With Procura’s intelligent summaries and insights, you can quickly identify contracts that match your strengths in on-time delivery and capacity, helping you avoid overextending into projects that might put you at risk[51][52].
In an era when federal customers are intensifying oversight, using Procura means you spend less time sifting through opportunities and more time fortifying your execution plan. The platform’s efficiency – reviewing hundreds of thousands of opportunities and reclaiming millions of hours for businesses like yours[53][54] – translates into you having more bandwidth to invest in compliance, production improvements, and team training to meet the EO’s expectations. Procura is also affordable for small teams[55], making cutting-edge contracting intelligence accessible to subcontractors who need to do more with less. In short, whether you’re a prime adapting to new rules or a sub looking to prove yourself, Procura can be your force multiplier. Focus on winning and performing – let Procura handle the finding and analyzing.
Meet with the Procura Team to See How We Can Help
Sources: Interviews and analysis from Federal News Network[56][57]; official White House Executive Order text[6][23]; legal insights from Latham & Watkins[39][58] and Sheppard Mullin[59][43].
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