Understanding the New Executive Order Targeting “Underperforming” Defense Contractors

In an Executive Order issued on January 7, 2026, entitled “Prioritizing the Warfighter in Defense Contracting,” President Trump announced a new effort to identify suppliers of critical weapons and equipment that are underperforming on their contracts and, simultaneously, engaged in stock buy-backs or corporate distributions. According to the President, this new effort will focus on defense contractors who are underachieving on their contracts, “not investing their own capital into necessary production,” “not prioritizing United States Government contracts,” and/or whose “production speed is insufficient.” These contractors, the President says, have “pursue[d] investor profits at the expense of warfighter capability and readiness,” and will no longer be allowed to “conduct stock buy-backs or issue dividends at the expense of accelerated procurement and increased production capacity.”

As an initial enforcement step, the order directs the Secretary of War to engage with identified contractors to resolve instances of underperformance, including through the submission of “a remediation plan” approved by the company’s board of directors. The order makes clear that the Secretary must first attempt to resolve deficiencies directly with the contractor before escalating enforcement. Then, if a contractor’s remediation plan is deemed insufficient, or if issues remain unresolved, the Secretary may use existing contractual and statutory authorities, such as contract enforcement mechanisms within the Federal Acquisition Regulations (FAR) and enforcement actions under the Defense Production Act, to compel improved performance, speed, and investment.

The order also directs the Secretary to insert provisions into “any future contract with any new or existing defense contractor” that will prohibit stock buy-backs and corporate distributions “during a period of underperformance, non-compliance with the contractor’s contract, insufficient prioritization of the contract, insufficient investment, or insufficient production speed as determined by the Secretary.” Of course, at this point, what constitutes “insufficient” prioritization of a defense contract, insufficient investment, or insufficient production speed is open to interpretation. These future contracts shall also provide that executive compensation may not be based on “short-term financial metrics” and instead must be tied to “on-time delivery” and “increased production.” The contracts shall also include a mechanism allowing the Secretary to cap an underperforming contractor’s executive base salaries until the Secretary ensures that such compensation is properly tied to these performance-based metrics.

What does this mean for small businesses? The EO is focused on “major defense contractors,” but under its plain terms, the new contract language prohibiting stock buy-backs and corporate distributions in certain circumstances must be included in all new defense contracts—including, presumably, those contracts with small businesses. While small contractors do not appear to be the intended target, they may be subject to the new clauses and expectations. More generally, from a subcontracting perspective, small businesses that can demonstrate strong performance, scalability, and alignment with warfighter needs may find themselves more attractive teaming partners as the DoW looks for faster, more accountable execution, at least in procurements for critical weapons, supplies, and equipment. This environment may give high-performing small firms a competitive edge with primes under new scrutiny from the Department of War. Now is a good time for contractors of all sizes to reassess delivery risk, production readiness, and how their internal incentives align with the Trump Administration’s new focus on increasing the timeliness and quality of certain key defense items.