The first year of the second Trump administration marked the latest round of U.S. defense acquisition reform. This has become an increasingly frequent habit of the U.S. defense leadership, which never seems fully satisfied with successive iterations of statutory change.
The concern itself is legitimate. Despite having the world’s largest defense budget and developing the most advanced and complex weapon systems, the U.S. defense acquisition enterprise appears to be in a deep and persistent crisis. Following two decades of strategic focus away from great power competition, this crisis became evident as China began to leapfrog key capabilities, producing growing numbers of highly capable fifth-generation fighters, destroyers, submarines, and even aircraft carriers.
Previous reform efforts shared a common assumption: that excessive regulation imposed unnecessary oversight and administrative burdens, lengthening delivery schedules and discouraging cost efficiency in development. The current reform agenda reflects a more fundamental - and more distributionally consequential - diagnosis. It targets two core pillars of the acquisition system, market accessand managerial discretion; in particular, related to transitioning prototypes to development and manufacturing.
On the market side, the 2025–2026 reforms addressed longstanding complaints that Federal Acquisition Regulation (FAR) requirements imposed prohibitive entry barriers for new firms. A prominent example is the mandatory application of Cost Accounting Standards (CAS) in cost-plus contracts. Such contracts are widely viewed as structurally inefficient, as they regulate profits as a percentage of costs, thereby creating a financial incentive to tolerate - or even expand - higher cost structures. The FY 2026 National Defense Authorization Act (NDAA) established a presumption that all contracts should be treated as “commercial” unless explicitly justified otherwise. This expanded the use of Commercial Solutions Openings (CSOs), a solicitation mechanism exempt from most FAR-based requirements that enables the use of Other Transaction (OT) agreements and fixed-price contracts. Previously limited to innovative prototypes from non-traditional suppliers, CSOs can now be extended into follow-on production, while non-traditional suppliers and commercial subcontractors are exempted from CAS and related contract clauses.
On the managerial side, another longstanding grievance concerned the fragmented distribution of authority within the acquisition system, particularly regarding requirements approval through the Joint Capabilities Integration and Development System (JCIDS). This explains why Executive Order 14265, followed by OSD memos and the FY 2026 NDAA, overhauled JCIDS and limited Joint Staff involvement from requirement validation to a narrower set of genuinely joint operational problems. More consequentially, the reforms replaced the Program Executive Officer structure with Portfolio Acquisition Executives (PAEs). These new PAEs consolidate multiple related technology programs and are granted expanded authority to make trade-offs among requirements, cost, and schedule. Crucially, they are empowered to reallocate funding across programs, providing greater budgetary flexibility to accommodate technological evolution - an essential feature for what is, at its core, an innovation-driven enterprise.
Taken together, these changes are not distributionally neutral. They are fitted to accommodate firms emerging from the venture-capital-backed defense technology ecosystem labeled “New Defense”. The barrier faced by these firms is not primarily one of size, administrative capacity, or familiarity with bureaucracy. Rather, it stems from a mismatch between traditional acquisition rules and venture-capital business models. Unlike legacy primes - typically publicly traded firms - or smaller suppliers reliant on commercial bank lending, New Defense firms depend on private equity financing that assumes high technological risk in exchange for the prospect of faster and higher returns than those allowed by FAR contracts.
Equally important, this business model requires prioritizing defense-off-the-shelf solutions. If those solutions do not fully meet existing requirements, the model depends on acquisition officials having sufficient authority to adjust requirements to fit the product - rather than forcing the product to conform to rigid, pre-defined specifications. This explains why commercial sourcing and fixed-price contracting “needed” to be paired with the creation of empowered PAEs.
However, changing regulatory frameworks alone cannot alter the underlying economics of defense acquisition. Technological uncertainty and budgetary risk are inherent features of weapons system acquisition, as are sole-source production environments characterized by significant economies of scale. Also, the high sunk costs involved - economic and political - will transform fixed-price contracts into cost-sharing, if overruns occur.
This is why decades of analysis by experienced practitioners suggest there is no universal solution applicable to all programs, since the underlying source of risk varies fundamentally with the nature of the technology being acquired. Therefore, optimal acquisition strategies must still be determined on a case-by-case basis. For systems with unit costs exceeding USD 30 million - such as the Collaborative Combat Aircraft - the notion of “off-the-shelf” procurement that accepts elevated operational risk on the assumption of mass production appears implausible. Such systems cannot realistically be treated as highly attritable, and therefore require a more rigorous and sustained risk-reduction phase. That said, the possibility remains that unqualified systems could be imposed on the Services by industry and political leadership alike.
Even if the reforms are well-suited to accelerating the acquisition of rapidly developed, highly attritable technologies - such as drones - and may lower barriers to entry in a highly consolidated defense sector, they do little to resolve the longstanding stalemate in traditional domains. Surface combatants, submarines, and fighter aircraft continue to suffer from long development cycles, quasi-monopolistic supplier structures, and thinned supply chains. Therefore, awarding multi-billion-dollar development contracts for systems that have not been fully de-risked may help to create new prime contractors, but it is far from clear that it will contribute to the US’s challenges with peer competitors.
As we have argued elsewhere, the current reform framework is best suited to unmanned systems, space capabilities, and AI-enabled platforms. These are precisely the domains in which the most vocal proponents of reform - such as Palantir, Anduril and ShieldAI - specialize. It also explains why figures like Elon Musk have argued for replacing traditional crewed fighters, such as the F-35, with drones. Given the rigidity of topline defense budgets, the optimal strategy for new entrants is to create fiscal space by displacing legacy programs with long development timelines and enabling acquisition authorities to reallocate resources accordingly.
This suggests that the reform agenda is driven at least in part by political-economy considerations. Recent signals from the U.S. administration - including threats to curtail stock buybacks as punishment for delivery delays by traditional prime contractors- reinforce the impression that the goal is not merely efficacy, but segmenting the defense industrial base rather than strengthening it as a whole.
Finally, it is worth noting that U.S. defense spending has fallen from Cold War levels of around 6 –7 percent of GDP to roughly 3.4 percent. Once defense inflation is considered, it is logical to assume that an armament buildup consistent with peer-power deterrence would involve a significant increment in real terms. At the time of writing, President Trump has proposed raising defense spending to USD 1.5 trillion - approximately 5 percent of GDP. If this results in sustained increases in procurement quantities and more competition for legacy systems, it may prove to be more consequential than any regulatory reform.
