On January 7, President Donald Trump issued an Executive Order titled “Prioritizing the Warfighter in Defense Contracting,” aimed at reshaping how certain defense contractors allocate capital. The goal is to push defense contractors to focus less on stock buybacks, dividends, and executive pay tied to short-term financial results, and more on delivering on time and investing in production capacity for critical defense programs.

The Order

The Order tells the Secretary of War (Secretary) to identify contractors working on key weapons, supplies, or equipment that the Department of War (Department) believes are falling short. That can include contractors that are behind schedule, not investing enough in capacity, not giving government work enough priority, or not producing fast enough, while also spending money on stock buybacks or other corporate payouts. If a contractor is flagged, the Department must notify the company and give it a chance to fix the issues, including by submitting a board-approved remediation plan on a fifteen-day timeline.

If the Department is not satisfied with the plan, or the issues are not resolved, the Order allows the Department to escalate quickly to “secure remedies for the Secretary that will expedite production, prioritize the United States military, and return the contractor to sufficient performance, investment, prioritization, and production, to the maximum extent permitted by law.” This can be achieved by using contract enforcement tools and, if needed, authorities under the Defense Production Act, Federal Acquisition Regulations, and the Defense Federal Acquisition Regulations Supplement. To the extent permitted by law, the Secretary will also consider the contractor’s financial condition, the economic viability of the affected programs, and the shared benefits that can result when sustained U.S. Government growth opportunities are paired with meaningful capital investment by the contractor.

The biggest practical impact is that the Order directs the Department to build these concepts into future contracts and renewals. This means new contract terms that restrict buybacks and corporate payouts during periods when the contractor is considered underperforming or does not meet other expectations. It also mandates that executive incentive compensation be tied to real performance outcomes, like on-time delivery, increased production, and investments that strengthen U.S. capabilities, rather than metrics like earnings per share or free cash flow that can be boosted through buybacks. The Order also allows the Secretary to cap executive base salaries at current levels, with inflation adjustments, while the Department reviews whether pay incentives are aligned with delivery and production goals.

The Order also signals possible ripple effects beyond contract clauses. It directs the Department to consider limiting government advocacy for certain contractors in export-related deals, including Foreign Military Sales and Direct Commercial Sales. It also asks the SEC Chair to consider changes to Rule 10b-18 that could remove the buy-back safe harbor for contractors identified under the Order, which could affect how publicly traded defense contractors approach stock repurchases.

Looking Ahead

For contractors, the key point is that much of the impact will depend on how the Department implements the Order in guidance and contract language. Companies should consider reviewing where they have schedule or capacity risk on critical programs, how their capital allocation decisions could be viewed in that context, and whether executive incentive plans rely heavily on short-term financial metrics instead of delivery and production performance.

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