President Donald Trump took aim at defense contractors Wednesday, announcing new restrictions on executive pay and stock buybacks as part of the administration\u2019s push to speed procurement and revitalize the defense industrial base.\u00a0<\/p>\n
In an executive order issued late Wednesday, Trump said companies \u201care 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.\u201d<\/p>\n
The order directs Defense Secretary Pete Hegseth to identify defense contractors providing critical weapons, supplies and equipment that are \u201cunderperforming, 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,\u201d while simultaneously engaging in stock buybacks or corporate profit distributions.\u00a0<\/p>\n
Contractors identified under the review must be notified and given an opportunity to submit a remediation plan within 15 days to address performance issues.\u00a0<\/p>\n
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If disputes over underperformance issues cannot be resolved within 15 days or the remediation plan is deemed inadequate, the defense secretary \u201cmay 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.\u201d<\/p>\n
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 \u201cinsufficient production speed as determined by the secretary.\u201d<\/p>\n
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 \u2014 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.<\/p>\n
\u201cThe remedies of no stock buybacks and caps on executive compensation \u2014 that\u2019s not a remedy that the government already has available to it,\u201d Chvotkin told Federal News Network. \u201cIt\u2019s not so binary to say it\u2019s 100% of contractor\u2019s problem or zero of the contractor\u2019s problem, and that\u2019s where the hard work is going to come on each of these major programs \u2014 defining the specific parameters that the department is expecting.\u201d<\/p>\n
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 \u201cnot all cost overruns are created equal.\u201d<\/p>\n
\u201cThe [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 \u2026 There\u2019s 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,\u201d Soloway told Federal News Network.\u00a0<\/p>\n
Back in 2007, the Defense Science Board, for instance, examined three troubled programs \u2014 the Littoral Combat Ship, the presidential helicopter and the Army\u2019s Comanche helicopter \u2014 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.<\/p>\n
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\u201cAccountability 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\u2019t do anything to make the government more accountable,\u201d David Berteau, former president and CEO of the Professional Services Council and now president of David Berteau & Associates, told Federal News Network.<\/p>\n
\u201cThe disconnect of this EO is if the desired outcome is better contract performance, how can implementing this EO produce better results? That isn\u2019t 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,\u201d he added.<\/p>\n
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.<\/p>\n
Lockheed Martin\u2019s 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.<\/p>\n
\u201cWe 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,\u201d Berteau said.<\/p>\n
\u201cIt 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\u2019t seem to be about strengthening that partnership. It seems to be more about punishing one side of the equation,\u201d he added.<\/p>\n
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.<\/p>\n
\u201cAfter numerous years of failing to meet contractual obligations, under President Trump\u2019s 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,\u201d Chief Pentagon Spokesman Sean Parnell told Federal News Network in a statement.\u00a0<\/p>\n
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