On January 7, 2026, President Trump issued an Executive Order titled "Prioritizing the Warfighter in Defense Contracting," directing the Secretary of War to identify underperforming defense contractors and impose new financial-discipline requirements on them. The EO is one of the most significant structural changes to Pentagon-prime relationships in years. Coverage from Latham & Watkins, Wiley, and Morgan Lewis.
Who's an "underperforming" contractor
Per the EO, DoW is directed to identify primes exhibiting any of:
- Not investing their own capital into necessary production capacity
- Not sufficiently prioritizing U.S. government contracts
- Production speed insufficient for warfighting requirements
The threshold is deliberately flexible — DoW has discretion to designate primes as underperforming, subject to cure provisions.
What "underperforming" status triggers
- Stock buyback prohibition. Designated contractors cannot conduct stock buybacks until the performance issue is cured.
- Dividend issuance prohibition. Same restriction applies to dividends to shareholders.
- Executive compensation linkage. Future contracts must link executive compensation to performance metrics.
- Base salary caps. During periods of underperformance, contractors must cap executive base salaries.
The constitutional and practical questions
The EO raises real legal questions — federal contract conditions that restrict corporate capital-allocation decisions are novel. Expect litigation through 2026 testing:
- Whether the government can condition contract award on corporate-governance terms
- Whether "underperforming" designations are subject to administrative review
- Whether shareholder-rights doctrines limit DoW's enforcement reach
Who's actually at risk
Primes with public-market exposure to recent DoD program delays — notably Sentinel, LGM-35A (ICBM), B-21 capacity, and Columbia-class submarine production — face the most obvious designation risk. Northrop Grumman's Sentinel restructure is a visible example; the company's B-21 capacity expansion is partly a pre-emptive response to EO-style pressure.
What this means for subcontractors
- Primes under EO pressure will squeeze subcontractor margins harder in negotiations
- Expect faster payment cycles as primes optimize cash management under buyback restrictions
- Program-execution reliability becomes more valuable — primes want subs that deliver on time
- Watch for prime reorganizations shifting work to non-DoD business units to manage designation risk