On January 7, 2026, President Trump signed an Executive Order on “Prioritizing the Warfighter in Defense Contracting,” marking a significant escalation in the Administration’s ongoing campaign to transform defense acquisition and hold contractors accountable for delivery performance. The Executive Order targets defense contractors that engage in stock buybacks or issue dividends while “underperforming” on government contracts, representing one of the most aggressive federal interventions into corporate financial decisions in recent memory. Coming on the heels of the April 2025 “Restoring Common Sense to Federal Procurement” Executive Order and the Department of War’s November 2025 Acquisition Transformation Strategy, this new Executive Order signals that the Administration views contractor performance and capital allocation decisions as inextricably linked to national security readiness and as under the President’s authority. Although this will almost certainly be challenged in court, defense contractors must understand the immediate and potentially far-reaching implications of this Executive Order and take steps to minimize their exposure to potential enforcement actions.

Key Takeaways

  1. Remediation and Potential Enforcement Action for Underperforming Contractors That Engage in Stock Buybacks and Dividends: The Executive Order directs the Secretary of War (“Secretary”) to identify “defense contractors for critical weapons, supplies, and equipment that are underperforming on their contracts, not investing their own capital into necessary production capacity, not sufficiently prioritizing United States Government contracts, or whose production speed is insufficient.” If, during the period of underperformance, the contractor has engaged in a stock buy-back or corporate distribution, the Order requires the Secretary to engage with the contractor to resolve the issue under very short timeframes (15 days for submission of a remediation plan and another 15 days for negotiation). If remediation fails, the Secretary can take immediate “enforcement action.” (See takeaway 4 for more on enforcement.) Given the wide discretion to the Secretary, vague standards to be applied, and abbreviated timeframes for resolution, defense contractors that have engaged in stock buybacks or corporate distributions should be prepared for the remediation and enforcement process.
  2. New Contract Provisions Seek to Prohibit Financial Returns to Shareholders of Underperforming and Non-Compliant Contractors: Within 60 days, the Executive Order tasks the Secretary with ensuring that all future contracts—including renewals with existing contractors—contain provisions prohibiting stock buybacks and corporate distributions during periods of “underperformance,” “non-compliance,” “insufficient prioritization,” “insufficient investment,” or “insufficient production speed.” The Order does not define any of these key terms, which will only increase uncertainty for contractors. This represents a dramatic increase in the government’s attempt to control internal business practices and will likely be challenged if implemented.
  3. Executive Compensation Structures Will be Scrutinized: The Executive Order mandates that future contracts stipulate that executive incentive compensation cannot be tied to “short-term financial metrics” such as free cash flow or earnings per share driven by stock buybacks. Instead, the Executive Order requires future defense contracts to stipulate that executive incentives will be linked to on-time delivery, increased production, and investments required to expand U.S. stockpiles and capabilities. Additionally, the Executive Order purports to provide the Secretary with authority to cap executive base salaries at current levels (with inflation adjustments) during periods of contract underperformance to allow the Secretary time to scrutinize whether incentive compensation is “directly, fairly, and tightly tied” to performance metrics. As above, we expect that attempts by the Executive Branch to control and limit the executive compensation of private companies to be challenged.
  4. Multiple Enforcement Mechanisms Available to the Government: The Order empowers the Secretary to pursue a range of “enforcement actions” against non-compliant contractors, including “remedies under the Defense Production Act,” which could include directing contractors to allocate resources for defense needs and seeking to require contractors to give precedence to defense contracts over commercial contracts. The Secretary could also rely on enforcement mechanisms within the Federal Acquisition Regulation and Defense Federal Acquisition Regulation Supplement, and could deny government advocacy by the State and Commerce Departments for international Foreign Military Sales or Direct Commercial Sales. The SEC Chairman is also directed to consider amending Rule 10b-18 to prohibit use of the stock buyback safe harbor for identified defense contractors. Contractors will only have a 15-day period following notification to submit a board-approved remediation plan, so must be prepared to move quickly to avoid enforcement actions.
  5. Effects of This Executive Order May Work Against the Larger Transformation Efforts: The Prioritizing the Warfighter Executive Order is the latest component of the Administration’s comprehensive defense acquisition reform effort, which includes the Revolutionary FAR Overhaul under O. 14275 and the Department of War’s Acquisition Transformation Strategy. Transformation efforts aim to achieve their objectives in part by bringing more contractors into the defense space, aligning purchases more closely with the commercial business practices of the most innovative and successful companies. This Executive Order provides enforcement teeth and added risks that may end up disincentivizing exactly these types of actors from entering the defense market or expanding their government contracting business.

The “Prioritizing the Warfighter in Defense Contracting” Executive Order’s most immediate impact will be felt by large defense contractors who are prime contractors on major system acquisitions, but the effects may not be limited to that group. Contractors will need to carefully evaluate the risk that they may be viewed as “underperforming” under the broad and vague standards in the Executive Order, and anticipate possible remediation measures should a remediation plan be required. Subcontractors will need to assess the flow down risk for their businesses as well. The Administration has signaled its willingness to intervene in corporate governance matters traditionally left to market forces. Defense contractors should also immediately prepare for new contract provisions in upcoming negotiations and renewals. The 60-day implementation timeline for new contract provisions, combined with the ongoing FAR overhaul and the Pentagon’s acquisition transformation initiatives (see previous Fluet writings here and here), means that significant changes to the contracting landscape will continue for the foreseeable future.

Fluet stands ready to assist defense contractors in navigating these complex new requirements and developing compliance, investigation, and corporate strategies that protect both shareholder value and ongoing and future government contracting opportunities.