2026 Changes in Procurement Policies Leave Defense Contractors Dealing with Government Symptoms of “Multiple Personality Disorders”

In reference to the now outdated terminology “Multiple Personality Disorders” (now “DID” or Dissociative Identity Disorder), my focus is on two Government actions, the 2026 NDAA (National Defense Authorization Act) and the very recent EO (Executive Order), “Prioritizing the Warfighter in Defense Contracting.” Before getting into the substance of this blog, just to note that one can only hope that the proposed/legislated changes to improve the efficiencies and effectiveness of the procurement process (for the Department of War and more broadly the US Government) will actually succeed and not be just one more set of idealized and unfulfilled political promises.

Although I am referring to the two recent actions related to contracting with the Department of War (previously the Department of Defense), and discussing the contradictions within and across these actions, one can’t help but observe the symptoms of “multiple personalities” in terms of the inconsistent use of “War” versus “Defense” (DOW vs DOD). Although the US DOW website lists numerous executive and senior positions identified with the “DOW,” it retains many vestiges of DOD, including Defense Contract Management Agency, Defense Contract Audit Agency, Defense Finance and Accounting Agency and Defense Logistics Agency, to name a few. Even more inconsistent, the NDAA has been retained instead of changing it to the NWAA (perhaps the National War Authorization Act might be a bit disconcerting to say the least, and bordering on the comical). The recent EO associates “warfighting” with the now outdated “Defense” contracting. Certainly, there are a number of internal inconsistencies, but they are less significant to DOW/DOD contractors than the “multiple personalities” embodied in recent regulatory changes.

The 2026 NDAA does provide some potential relief to Government contractors in terms of lessening the burden of Cost Accounting Standards (CAS). Section 1806 significantly increases dollar thresholds for CAS applicability (contracts will be exempt if valued below $35 million, and full CAS applicability increased to $100 million). The members of the CAS Board will also change (effective January 2028) to specifically exclude DCAA from membership while also emphasizing that other members should have substantial experience in GAAP (linked to ongoing efforts to potentially limit CAS and defer to Generally Accepted Accounting Principles, as if DCAA will block such attempts). The regulations applicable to cost accounting practice changes will exclude firm-fixed price contracts from cost impacts and allow contractors to offset multiple (single year) changes into one net cost impact proposal. Although the subject of continuing disputes, the current Government position is that multiple concurrent changes in cost accounting practices can only be aggregated if each change causes a cost increase- an administrative nightmare given that the only way to prove this is to separately measure each change. Coincidentally, these changes implicate DOW’s attempts (or implications) to resecure DOD’s original position of having CAS authority (now residing with OFPP, Office of Federal Procurement Policy). This is not all bad, because the CAS Board has a history of delayed or dormant actions to address industry concerns that standards were outdated and at least partially unnecessary if certain cost accounting standards were displaced by GAAP.

Section 1804 of the 2026 NDAA also raises the contract value for TINA (now “Truthful Cost or Pricing Data”) applicability from $2.5 million to $10 million. Although it is a change for the better for contractors, this change is more symbolic, having little real benefit because it only impacts those pricing actions in the $2.5 to $10 million range, and DCAA has been doing relatively few TINA compliance audits and virtually none for contracts below $10 million. As a practical matter, this is a contract compliance requirement void of any real enforcement.

Although the 2026 NDAA will provide some regulatory relief to existing Government contractors, it is inconsequential when contrasted with Section 1826’s regulatory relief (exemptions) for “NDCs” (Nontraditional Defense Contractors, including all small businesses). Perhaps unintended or simply ignored, traditional defense contractors will be at a competitive disadvantage if/when competing with NDCs, the latter being exempt from FAR Part 31 cost principles, the requirements to submit certified cost or pricing data (i.e., TINA), multiple DFARS Business System Clauses and DFARS 215-407, Special Cost or Pricing areas. These changes clearly display the Government’s multiple personality disorder in contracting, as these exemptions will apply only to defense (war?) contracts, leaving contracts with civilian agencies subject to these regulations, considered by many a roadblock to entry into Government contracting. If the Government wants to maximize competition, why exempt only defense contracts? And at least one other unanswered question: what happens when an NDC receives a cost-type defense/war contract and the contracting parties have to define billable/reimbursable costs? The likely answer is the solution used in OTAs (Other Transaction Agreements), which is an “agreement-specific” clause that states that the OTA recipient “may” use the FAR Part 31 cost principles to determine billable/reimbursable costs and (unstated), if the recipient wants to get paid, it “will” use these cost principles. Which raises a follow-up question: if OTAs are in large part designed to invite/encourage NDCs to join the fun and dive into contracts with the Government, why do we need Section 1826?

In fairness to the 2026 NDAA, it does move in the direction of achieving the objectives set forth by the Secretary of War in his Memorandum dated November 7, 2025, “Transforming the Defense Acquisition System into the Warfighting Acquisition System to Accelerate Fielding or Urgently Needed Capabilities to Our Warriors.”   Without question, it (along with OTAs) provides some incentive for NDCs to consider becoming defense contractors, without the current regulations/constraints imposed on existing defense contractors. But then, “surprise, surprise,” we have the January 7, 2026 EO which unapologetically and with no supportable facts, states: “After years of misplaced priorities traditional defense contractors have been incentivized to prioritize investor returns over the Nation’s Warfighters” and “Although some contractors have made critical investments in increased production capacity and been responsive to our Nation’s vital interest, far more have not” (emphasis added). Further asserted by the EO, “while under-performing on existing contracts, [many large contractors] pursue newer, more lucrative contracts, stock buy-backs and excessive dividends to shareholders at the cost of production capacity, innovation and on-time delivery.” The EO assigns the Secretary of War the responsibility for identifying underperforming contracts, reviewing contractor remediation plans, and imposing draconian restrictions (on all future defense contracts), prohibiting contractor incentive compensation tied to investor returns (e.g., financial metrics, earnings per share, stock buybacks). Instead, incentive compensation will need to be linked to on-time delivery, increased production and all necessary facilitation of investments and operating improvements required to rapidly expand our United States stockpiles and capabilities. In other words, if you want to be or to remain a defense (war) contractor, the Department of War is going to dictate your incentive compensation and your payment of dividends, stock buybacks, etc.

Who wouldn’t want to be a defense contractor, either existing or joining through the 2026 NDAA Section 1826 exemptions for NDCs, noting that your incentive compensation plans and your Board of Directors’ actions to approve dividends and stock buy-backs are effectively subject to approval by the Secretary of War, who will also unilaterally determine if you are under-performing on your contracts? Where do I go to sign up?

Not only does the EO exhibit full-on multiple personality disorder in terms of its micro-managing and disincentivizing any business from voluntarily “joining the fun,” it (in combination with FAR 31.205-6(p)(4) which limits allowable compensation to $671,000) disingenuously imposes restrictions on contractor compensation while limiting the allowable contractor compensation to amounts which are significantly below any reasonable (i.e. bench-marked) compensation. In other words, we (the Government) aren’t allowing. However, a portion of an executive’s otherwise reasonable base and incentive compensation, but we still want to tell you how to manage that compensation. And with respect to the Secretary’s and the EO’s stated expectations for significantly increased capacity (to be positioned to rapidly expand stockpiles and capabilities), there is FAR 31.205-17, which states that idle (including excess) facilities are generally unallowable, with two stated exceptions (neither for being positioned to rapidly expand stockpiles and capabilities). Obviously, FAR 31.205-17 can be selectively eliminated from a contract. Still, a contractor using its own resources to significantly expand its production capabilities is assuming an enormous risk that those capabilities will never be utilized or directly reimbursed (lacking a war (we hope) or, much more likely, a political change in 2028 with completely different priorities).

One other observation, if one studies publicly available financial data on some of the “big” defense/war contractors, some pay dividends, while others don’t. In one case, the dividends were $13.35 per share or 2.8% (average share price of approximately $480). Is that an excessive amount (who knows, other than apparently the Secretary of War), but the implications of the EO are that a significant percentage of those funds should have been used to increase production capacity. Per the EO, the same applies to funds used for stock buybacks, which do increase the per share stock price. Still, the EO has no data, not even a single example, showing a correlation between any stock buy-back and “under-performing” on defense contracts.

And finally, the EO asserts that large defense contractors (or their stockholders) have gotten wealthy in large part attributable to the benefits of being a defense contractor. With that in mind, one might test this against published financial data, particularly that which displays financial results categorized by customer. Although it is only one point of reference, a corporation that produces and services both US Government (Defense) and commercial engines reported 2025 results (9 months ending September 30, 2025) with Defense sales/profit rates of $7.7B/3.5% with Commercial sales/profits of $23.8B/21.6%. During this time frame, the stock price increased dramatically, but it is absurd to assert that a significant portion of the corporation’s shareholder value is attributable to Defense contracts. During that time, the corporation also had stock buybacks of $1.84B (6,616,000 shares with 1,054,813,911 shares outstanding), which could be challenged by the Secretary of War as being excessive (based upon what?). The corporation’s incentive compensation is most likely linked to financial results (as are most), rather than to the attributes imposed by the January 7, 2026, EO. Even if 100% of this corporation’s sales to the US Government were ultimately deemed “commercial,” nothing in the EO would exempt the corporation from the intrusive reach of the EO. Exactly what’s the incentive to be or become a contractor for the Department of War/Defense unless one thinks that the US Government has a better handle on incentive compensation plans?

In spite of perhaps well-intended objectives, unless the Government can self-heal, eliminate in-fighting, eliminate intrusive Executive Orders   and avoid the unexpected (e.g. Government shutdowns), contracting with the US Government will likely never be what it could be, which is to say, it will never convince many NDCs to join or will it achieve maximum benefits to the warfighters.