Alert
01.30.26
(This is the second of two alerts examining this issue.)
In Part 1 of this client alert, we briefed the substance of President Trump’s January 7, 2025, Executive Order (EO) titled “Prioritizing the Warfighter in Defense Contracting” and provided preliminary observations. As we detailed, the EO gives broad discretion to the U.S. Secretary of War to designate underperforming contractors and directs the Secretary, within 30 days of the EO’s issuance and on an ongoing basis thereafter, to notify defense contractors of such designations. The 30-day deadline for the Secretary to designate underperforming contracts is February 6, 2026. Contractors receiving a notice of underperformance on February 6 will only have until Saturday, February 21 to submit to the Secretary a remediation plan that has the approval of their Board of Directors. While the EO directs the Secretary to allow fifteen days for contractors to submit a Board-approved remediation plan, the EO also allows the Secretary to initiate immediate action if the contractor and Secretary reach an impasse during the 15-day negotiation window. Part 1 of this Client Alert advised defense contractors to identify issues related to delivery, quality, schedule and cost of their existing defense contracts. This second part expounds upon how organizations can best prepare to react to underperformance notices from the Secretary.
First, we recommend that contractors determine which of their contracts may be subject to the EO. While the EO does not define “critical weapons, supplies, and equipment” contracts, contractors should consider searching requests for proposals and statements of work applicable to their prime contracts for words or phrases such as “critical,” “major weapons system,” “munitions,” “contingency operation,” “industrial base,” etc. Contracts containing some or many of these words would be more likely to fall within the ambit of the EO.
Second, we recommend that contractors develop a sound understanding of the delivery requirements and delivery status under these contracts. Contractors that are behind schedule on these types of contracts should be prepared to receive an underperformance notice from the Secretary on February 6 or shortly thereafter. If a contractor identifies applicable prime contracts that are behind schedule, we recommend that they immediately undertake an assessment of the underlying causes. Any company partially or mostly at fault, should develop and proactively present a remediation plan to its government customer. Such plans must have the support of the contractor’s senior executive management. Where there is contractor fault, the contractor should prepare to offer consideration or an in-kind concession.
Conversely, an assessment might reveal that the government customer shares in some or a large portion of the fault for the late delivery status. If this is the case, the contractor should consider submitting excusable delay notices in accordance with Federal Acquisition Regulation (FAR) 52.249-14. Further, the contractor should consider whether the customer has changed or delayed the contract in a manner that might warrant additional compensation under the applicable Changes clause (i.e., FAR 52.243-1). We recommend that contractors memorialize the facts that substantiate compensable changes for submission to the Contracting Officer. Excusable delay notices, Changes claims and internal documentation that substantiates the contractor’s position can also be used in remediation plans and discussions with DoW during the 15-day negotiation window.
As we detailed in Part 1, the EO directs the Secretary to ensure contracts and contract renewals executed after March 8, 2026, contain a new clause aligned with the EO. Contractors subject to the new clause must have executive incentive compensation plans that reward on time deliveries and investments in production capacity rather than achievement of short-term financial metrics. If the DoW determines, during or after the 15-day review period, that a contractor does not sufficiently prioritize, invest in or establish acceptable production rates, contractor compensation and executive incentive plans will be scrutinized. Therefore, some consideration should be given to determining whether the company’s current incentive packages best position the company to succeed under this emerging regulatory environment. In making that determination, weigh the costs of changing incentive metrics to defense contract performance against the risk that the Secretary might freeze executive base salaries.
Our Pillsbury team stands ready to assist your company in evaluating and executing remedial measures.