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Production or Payouts? Congress Weighs Limits on Defense Contractors

Picture of Eric Zalcman

On January 7, President Trump signed an executive order declaring that “major defense contractors will no longer conduct stock buy-backs or issue dividends” at the expense of production. The order directed Defense Secretary Pete Hegseth to identify contractors that were underperforming, underinvesting in production capacity, or underprioritizing U.S. government contracts. Those firms would have 15 days to submit remediation plans, and the Pentagon could restrict their payouts, cap executive pay, or terminate contracts. Since then, the Pentagon has yet to publicly identify any such companies, and a bipartisan push to codify the order’s restrictions has stalled alongside the Senate’s annual defense bill. Still, the effort is kept alive by an unusual ideological coalition waiting to resume negotiations after the midterms.

According to lawmakers spearheading the legislation, the five largest defense contractors have spent more than twice as much on buybacks and dividends as they have invested in capital expenditures since 2020, a combined $100 billion. Supporters of the restrictions argue that money should go toward expanding production lines and replenishing weapons stockpiles, especially as the Pentagon presses industry to accelerate deliveries. Hoping to stave off government action, some primes reacted to the order by announcing plans to reverse this trend.

The National Defense Authorization Act (NDAA), the annual defense funding bill, has become the main vehicle for this legislative push. Typically, each chamber’s Armed Services Committee writes its own version of the legislation, which the full chamber then passes before the two versions are reconciled into a single, streamlined bill. The House passed its NDAA in July, and while the lower chamber dropped buyback language from its final version amid industry pushback, such legislation was considered and remains alive as standalone bills.

  • Deluzio Amendment: Reps. Chris Deluzio (D-PA) and John Garamendi (D-CA) sought to bar the Pentagon from dealing with companies that buy back their own stock while holding a government contract, with waivers at the Defense Secretary’s discretion. Deluzio argued that defense primes should not expect Congress to “put war profiteering ahead of investing public money in our actual defense.” The House Rules Committee blocked the amendment from consideration, so it was not included in the NDAA.
  • Prioritizing Warfighters in Defense Contracting Act: Rep. Tim Burchett (R-TN), Chairman of the Oversight Subcommittee on Delivering on Government Efficiency, proposes allowing the Pentagon to include terms in contracts worth $100 million or more prohibiting underperforming contractors from buying back stock, paying dividends, or raising executive compensation. The bill, whose introduction coincided with a roundtable led by Burchett on improving the efficiency of military contracts, has been referred to the House Armed Services Committee.

Since the House has neither voted on the issue nor included it in its defense package, any legislation in the short term will have to come from the upper chamber’s NDAA debate. Sens. Elizabeth Warren (D-MA), Josh Hawley (R-MO), and Mike Lee (R-UT) introduced the Prioritizing the Warfighter in Defense Contracting Act, a more thorough predecessor to Burchett’s bill, to codify the President’s executive order. Its key elements were adopted as Section 815 in the NDAA advanced by the Senate Armed Services Committee and now awaiting floor action:

  • Restrictions on large contractors: Prohibits the Department of Defense from entering into a contract with any large firm receiving more than $250 million a year in Pentagon revenue if it purchases its own stock, pays dividends, compensates executives more than $5 million per year, or ties their salary to short-term financial metrics.
  • Remediation for violators: Requires the Pentagon to establish a process for identifying violators and to renegotiate existing contracts for compliance. Contractors notified of a violation may submit a board-approved remediation plan within 15 days.
  • Waiver for performance: Allows the Defense Secretary to waive the restrictions for contractors that meet delivery, readiness, technical performance, and cost-data deadlines at least 80% of the time, subject to annual review and revocation.
  • Penalties: Authorizes the Pentagon to suspend contract payments, end progress payment eligibility, terminate contracts, claw back executive compensation, refer cases for debarment or prosecution, cease advocacy for foreign sales, and bar new contracts.
  • Reporting: Requires the Pentagon to publish an annual report listing covered contractors, waivers granted, and violations, and to send Congress quarterly reports on waiver requests.

Warren and Lee wrote to Secretary Hegseth in August, urging him to support codifying the order. The senators’ analysis found that the four largest contractors that paid shareholders in early 2025—Lockheed Martin, RTX, Northrop Grumman, and General Dynamics—had cut buybacks and dividends from $4.2 billion in the first quarter of 2025 to $2.7 billion in the first quarter of 2026 following the President’s action. However, they cited the fact that some contractors had increased payouts despite the order, while those that complied continued to grow, as evidence for their legislative push.

The provision has united a notable ideological coalition similar to the one pursuing AI regulation, with the progressive, anti-corporate Warren partnering with populist conservatives Lee and Hawley. Their provision has drawn equally disparate reactions from entities off the Hill:

  • More than 40 trade associations led by the U.S. Chamber of Commerce urged Senate leaders to strike Section 815. In their letter, they argued it would harm retirees and investors who rely on dividends and buybacks, bar partnerships and other pass-through entities from Pentagon work, and discourage commercial firms from entering the defense market. The group warned the provision would set “a troubling precedent for federal interference in corporate governance and capital allocation decisions.”
  • The tech and telecom sectors have also raised concerns that cloud providers and telecom contractors could be subject to the restrictions.
  • Seven major unions, on the other hand, called on Armed Services leaders this month to preserve Section 815 in the final bill. They were joined by a coalition of 21 groups lauding the provision as a means to ensure that taxpayer funds are spent on national security needs and used to “encourage contractors to directly invest in raising their workers’ compensation.”

The Senate Armed Services Committee advanced its NDAA in June, but the full Senate has yet to begin debate after Democrats blocked a procedural vote in July over the Iran war and the Pentagon’s budget topline. Both chambers are now out until after the midterms, further delaying Senate passage of its NDAA and reconciliation with the House version. If the upper chamber keeps the provision, Section 815 is set to enter negotiations in an informal conference between Armed Services leaders during a short and crowded lame-duck session.

Single-chamber provisions, however, are commonly dropped. Last year’s GAIN AI Act, which would have restricted AI chip sales to China, passed the Senate as part of the NDAA but was stripped from the final bill in the face of White House resistance. Whether Section 815 survives may depend less on the strength of its bipartisan coalition than on whether the administration is willing to defend a stricter version of its own executive order against industry pressure. If the election changes control of either chamber, negotiators could also push the NDAA into the next Congress, giving the provision’s backers a new opportunity to press their case.