Introduction
The United States is on the precipice of major acquisition reform. Both
the White House and Congress appear poised to drastically change the way
that the Department of Defense purchases weapons.
In January 2025, the Trump administration
issued an
executive order (EO) titled “Unleashing Prosperity Through
Deregulation.” According to the White House, the order established
administration policy to be “prudent and financially responsible in the
expenditure of funds and to alleviate unnecessary regulatory
burdens placed on the American people.” A few months later, the White
House
cited the
policy in connection to a pair of executive orders focused on drastic deregulation of the weapon acquisition process.
In the first acquisition-related EO, the president
directed the
Secretary of Defense to submit a plan to overhaul the acquisition
system within 60 days. He ordered the secretary to privilege rapid
acquisition pathways and to consider cancellation of any major defense
acquisition programs more than 15% behind schedule or
over budget, as compared to current Acquisition Program Baselines. The
Secretary must also review “functional support roles” to eliminate
“unnecessary tasks” in the weapon acquisition process.
“Restoring Common Sense to Federal Procurement” is a complementary EO in which the president
directed the
Federal Acquisition Regulatory (FAR) Council to eliminate any
provisions in the FAR not explicitly required by statute within 180
days. The president likewise called for the eradication of any
provisions that do not “support simplicity and usability, strengthen
the efficacy of the procurement system, or protect economic or national
security interests.” From the administration’s perspective,
deregulation will provide the acquisition system with the speed and
flexibility required to
revitalize the
defense industrial base and strengthen U.S. military edge.
President Trump’s EOs have been well received by
contractors and
policy
practitioners alike, who
claim that onerous regulations are a barrier to entry for newcomers to
the industry. However, sudden and sweeping deregulation of the weapons
acquisition system is likely to reduce
competition in the arms industry – which is already far from a free
market. The president’s EOs will change the way the government purchases
goods and services to an extent
not
seen since the 1990s,
when the Clinton administration spearheaded the acquisition reform
movement. Since then, lawmakers have continued to gut the weapon
acquisition system while contractors have
substantially
increased cash paid to their shareholders at the expense of maintaining and building industrial capacity.
Essential Context
Prior to the 1990s, there were much more
stringent regulations for weapons acquisition. The United States was in
the throes of the Cold War, and military contractors were in high
demand. Due to their tendency to over-promise,
over-charge, and under-deliver, military contractors earned themselves
the nickname “tin men” – a pejorative
originally reserved for
pyramid schemers selling aluminum siding in the 1950s. In 1962,
Congress passed the Truth in Negotiations Act (TINA), enhancing pricing
disclosure among military contractors. For those with no competitors,
TINA
required cost
or pricing data from contractors to assess the price reasonableness of military contracts.
When the Cold War ended, the Clinton
administration cut military spending and facilitated the consolidation
of the industry. At the infamous “last supper,” Deputy Defense Secretary
William Perry
convened industry
executives and told them to merge or go out of business. Acquisition
reform followed. During the Clinton administration, Democrats
deregulated the acquisition process,
protecting the
profits of newly formed defense giants. Today’s calls for acquisition reform closely resemble those of the 1990s.
1990s Reforms
Much like the Trump administration, Clinton officials argued that “removing
red tape” would increase
efficiency in the weapons acquisition process, enabling the United
States to remain on the technological “cutting edge” even as Pentagon
spending decreased. In reality, the defense
industrial base continued to
deteriorate in accordance with broader deindustrialization in the
United States, as well as a greater focus on exporting U.S. arms – the
parts for which were increasingly manufactured overseas. Meanwhile,
military contractors gained greater flexibility to
set prices on military contracts.
The Clinton administration created an
acquisition environment more permissive of legal overcharging, in large
part by significantly weakening TINA. When lawmakers passed the Federal
Acquisition Streamlining Act (FASA) of 1994,
they increased the
threshold at which contractors are required to provide the government cost information from $100,000 to $500,000. By 2018, they
increased the
mandatory disclosure threshold to $2 million – where it remains today.
Lawmakers also hollowed out the
definition of “commercial” products and services, formerly referred to
as commercial items. This is important because contractors selling
“commercial” products and services are not required
to provide the government-certified cost or pricing data – which the
Federal Acquisition Regulation
defines as
accurate, complete, and current cost data. Without this information, the Department of Defense is unable to
ensure that
it is paying fair prices. Yet under FASA, any product or service considered by the Pentagon to be “of
a type” similar to an item sold commercially is designated as commercial – even if the item has never been sold to the public.
The alternative to cost-based military
contracting is “price-based” acquisition. One of the biggest proponents
of price-based acquisition in the 1990s was Jacques Gansler, President
Clinton’s former Under Secretary of Defense
for Acquisition and Technology. In his 1995 book “Defense
Conversion,” Gansler – by
then an arms industry executive – proposed that the government “use
commercial terms and conditions in government contracts.” He argued that
cost-based contracting ensures that money
is “legitimately spent, which is very different from being cost
effective.” Further, he
believed that
cost-based contracting was intrusive to commercial firms, which the
Pentagon needed to keep pace with evolving security threats.
Risks of Further Deregulation
In a recent op-ed, Stan Soloway –
Clinton’s former Deputy Under Secretary of Defense for Acquisition
Reform, who reported directly to Gansler –
argued that
if done right, Trump’s acquisition reform efforts offer “the potential
for real transformation.” He encouraged decision makers to expand on the
reforms made during his tenure at the Pentagon in the 1990s, when he
worked on both FASA and the Federal Acquisition
Reform Act (FARA). However, these reforms failed to achieve the Clinton
administration’s primary goal: to increase efficiency in the weapon
acquisition process.
By 2012, the Department of Defense
proposed that Congress narrow the definition of “commercial” items.
According to the Federal News Network, the Pentagon argued that industry
had long
abused the
reforms that “streamlined” the weapons acquisition process in the
1990s. Industry leaders opposed the department’s proposal to narrow the
commercial definition on the grounds that it would prevent companies
from working with the Pentagon, purportedly hurting
competition and impeding the department’s ability to rapidly integrate
new technologies. The proposal went nowhere.
In 2022, the Pentagon released a study
revealing that
military contractors increased cash paid to shareholders by 73% from
the periods 2000-2009 to 2010-2019 while decreasing spending on capital
investment and research and development. Accordingly, the Defense
Department
challenged contractors’
claims that profits are insufficient to finance investments in
industrial capacity. Still, the Pentagon maintains that acquisition
reform will help build military-industrial capacity.
Silicon Valley technology firms like Palantir have
criticized traditional
prime contractors not only for underinvesting in their businesses but
also for relying on the government to reimburse capital investment and
internal research and development. However, nontraditional tech firms
and prime contractors agree on the need to “streamline”
how the Pentagon buys weapons. They both stand to substantially benefit
financially from an overhaul of the acquisition system.
Indeed, further deregulation of the weapon acquisition process would
grant contractors significantly more leeway to overcharge the government
on military contracts. By exempting more contractors from requirements
to provide the Pentagon with certified cost
or pricing data, policymakers would undermine the Pentagon’s ability to
negotiate fair prices. Without the means to conduct proper cost
analysis on contractors’ proposed prices, the Pentagon will inevitably
grant contract awards well beyond fair and reasonable
prices.
The Legislative Landscape
President Trump’s executive orders closely align with the “Fostering
Reform and Government Efficiency in Defense” (FoRGED) Act, introduced by
Senate Armed Services Committee (SASC) Chair Roger Wicker in December
2024. The FoRGED Act is incredibly broad-reaching,
repealing large swaths of the Federal Acquisition Regulation while
encouraging greater use of rapid acquisition pathways that do not
require contractors to provide certified cost or pricing data. The
sections below outline a few of the bill’s most impactful
sections, should lawmakers enact them through the standalone bill or
through the National Defense Authorization Act.
Sections 303-305
Sections 303,
304,
and 305 of
the FoRGED Act would eliminate the mandatory disclosure threshold for
nontraditional contractors while significantly expanding contractor
costs reimbursable by the government. Indeed, lawmakers would exempt
nontraditional contractors from
requirements for
certified cost or pricing data – even if a contract exceeds the
mandatory disclosure threshold of $2 million, already too high a
threshold to require certified cost or pricing data.
Nontraditional contractors wouldn’t have to comply with
contract cost principles and procedures,
either. These outline the costs for which the government will reimburse
contractors, known as “allowable costs.” According to these principles,
allowable costs are
reasonable, allocable to the relevant contract, aligned with the terms
of the contract, and consistent with Cost Accounting Standards or
Generally Accepted Accounting Principles. By exempting nontraditional
contractors from cost principles and procedures,
lawmakers would enable them to claim that any of their costs are
allowable and reimbursable by the government.
Take, for example, interest on borrowing. Historically, interest is
unallowable on
federal contracts because allowing interest expense to be recognized
would cause contractors to avoid using any of their own capital to
finance contracts, especially if the cost of financing is an allowable
cost. Access to free financing would eradicate any
reason for shareholders to invest equity capital into a company. If
implemented, Section 303 of the FoRGED Act would enable contractors to
claim reimbursement on interest – not to mention the other costs of
running a corporation, like those associated with
mergers and acquisitions.
Section 304 cements contractors’ ability to charge any price on military
contracts. Indeed, it effectively renders all products and services
provided by nontraditional contractors as “commercial.” This provision
will financially benefit Silicon Valley firms
vying for military contracts, as Section 305 broadens the definition of
a nontraditional contractor – in part by including companies that
achieve greater than 30% year-over-year revenue growth. Tech firms boast
much higher year-over-year revenue growth than
traditional military prime contractors like Lockheed Martin or Northrop
Grumman.
Ultimately, sections 303 through 305 could impede competition in
military contracting. The Pentagon would award far more contracts based
on prices proposed by contractors rather than any analysis of their
costs or profits – even for sole-source contractors,
which face zero competition. To make matters worse, contractors would
be able to claim reimbursement on a broad array of newly allowable
costs, even if they are entirely unrelated to government contract
performance or contrary to long-standing public policy.
Sections 310 and 314
Sections 310 and
314 further
undermine the Pentagon’s ability to negotiate fair deals on military contracts. Section 310
establishes a
default determination that all products and services acquired by the Department of Defense are commercial while Section 314
renders all
relevant laws and contract clauses enacted after 1994 inapplicable to
commercial contracts – unless the Defense Secretary provides a written
determination that it is in the Pentagon’s best interest to apply such a
provision to a military contract. So while
a contracting officer at the Pentagon may have negotiated a contract
clause requiring some level of transparency from companies with
commercial contracts, that clause would be unenforceable under the
FoRGED Act.
Further, Section 314 would exempt what
are known as “commercial off-the-shelf” (COTS) products from relevant
defense-unique provisions of the law. Confusingly, “commercial
off-the-shelf items are not the same as “commercial” products and
services. Indeed, the Defense Department’s own website
states that
‘the definition of COTS items is much narrower than ‘commercial.’”
According to the Federal Acquisition Regulation,
commercial-off-the-shelf items must be customarily used by the general
public, sold in substantial quantities in the commercial marketplace,
and offered to the government without modification. If “commercial”
products and services were truly subject to price competition in the
public marketplace, there would be no need to distinguish them from
commercial-off-the-shelf items.
Conclusion
It is impossible to eliminate cost overruns and schedule delays
overnight, even with drastic legal, regulatory, or policy changes. The
military industrial base has constraints – its workforce not least among
them. There is no guarantee that gutting the regulatory
infrastructure for government contracting will enable the United States
to deliver weapons to the U.S. military more quickly. What history
reveals, however, is that deregulation will almost inevitably increase
taxpayers’ burden by further legalizing overcharging
and impeding price competition.
President Trump’s EOs and the FoRGED Act would decimate the Pentagon’s
bargaining power with military contractors. They eliminate large
sections of the FAR with little regard to the broader impacts.
Not only that, but a sweeping approach to reforming the acquisition
process will only validate industry’s tendency to privilege its
shareholders over almost any investments in their businesses. Former
Secretary of the Navy Carlos Del Toro criticized military
contractors for this inclination throughout his tenure at the Pentagon.
In response to a request for comment from the Stimson Center, he said,
“At times, acquisition reform efforts can undercut regulations that also
drive competition. Carelessly bypassing requirements in the FAR can
sometimes leave the Pentagon open to unintended consequences that
undermine competition in contracting.”
Both lawmakers and the Pentagon must heed his warning. Certified cost or
pricing data is essential to make the Pentagon a better negotiator on
military contract prices, and sweeping acquisition reform is not a
silver bullet to build or maintain industrial capacity.
On the contrary, it risks further empowering industry giants to
overcharge the government and distribute excess profits to shareholders.