The Pentagon just moved to dismantle the accounting rules that keep commercial companies out of defense

Deputy Secretary of War Steve Feinberg signed a memorandum titled “Fostering One Strong Industrial Base” on September 15, 2026, with an implementation appendix setting deadlines for the department’s senior leaders. The department describes the regime it is dismantling in unusually plain terms: a wall built “from cost accounting rules, duplicative audits, and compliance obligations that attach to entire companies rather than the work procured,” built to control contractor costs, which instead “limited who competes and raised prices.”

The directed actions are specific. The department will propose to the Cost Accounting Standards Board that exemption become the default, with coverage confined to cost-based development contracts awarded without adequate competition. It will immediately use the higher cost-accounting thresholds enacted in the fiscal year 2026 National Defense Authorization Act. Any acquisition strategy that would bring a new business unit under full coverage now requires senior-level approval. Commercial product and service determinations must be made within 15 business days. Business-system criteria become commercial-aligned, with certification by an independent public accounting firm accepted in place of separate government review. Audits become risk-based. Other transactions and advance market commitments get expanded use.

Two further elements matter more than the accounting mechanics. The memorandum implements Executive Order 14402, which makes fixed-price contracts the default and cost-reimbursement the exception. And it directs a profit policy “under which negotiated margins reflect value delivered, risk carried, and private capital invested — not merely cost incurred.”

It also carries forward the department’s August 18, 2026 direction on supplier transparency, so that contracting officers can see through a prime contractor to its suppliers when needed, and connect those suppliers directly to Office of Strategic Capital loans, Industrial Base Analysis and Sustainment funds, and the department’s business operators. No new organisation or compliance framework is created, and implementing guidance may not add requirements beyond the memorandum and applicable law.

Share prices verified at the September 15, 2026 close: Northrop Grumman $531.25, 30.8% below its one-year high; L3Harris $249.66, 34.0% below; Lockheed Martin $533.46, 21.2% below; RTX $195.50, 13.3% below; General Dynamics $358.60, 9.4% below.

Opportunity

Read as procurement reform, this is one more memorandum in a genre that rarely produces much, and that is roughly how the defense trade press has treated it. What that reading misses is which barrier is being removed, and who it was protecting.

Cost Accounting Standards coverage, government audit of business systems, and government-unique compliance obligations attach to a company, not to a contract. A commercial manufacturer that wins a single defense award has historically had to rebuild its accounting function around rules nobody else in the economy uses, and keep it that way. That entry cost is the reason most of American manufacturing does not bid — and it is therefore the moat around the firms that have already paid it.

“Attach rules to contracts, not companies” removes the entry cost. “Rely first on the independent audits companies already pay for” removes the duplicate. Paying margin for “risk carried and private capital invested” rewrites the arithmetic that has for decades made a sole-source cost-plus program a low-risk annuity and a fixed-price program a hazard to be avoided.

Hypothesis: if this is implemented as written, the effect is not that defense budgets grow but that the share of them captured by incumbent primes falls, and the character of prime earnings changes — more fixed-price execution risk, more performers carried to production, less protected sole-source sustainment, and contracting officers looking straight past the prime at its suppliers and financing them directly. The sub-tier suppliers whose margins are currently set by primes sit on the other side of every one of those clauses. None of this appears in anyone’s model, because the mechanism is an accounting standard rather than a program.

How it could play out

The department proposes the Cost Accounting Standards exemption change and begins using the higher statutory thresholds immediately. Commercial determinations inside 15 business days make it practical for a company with no defense accounting apparatus to sell a product. More performers get carried to production, so program awards stop being winner-take-all. Fixed-price default moves execution risk onto contractors, widening the gap between those who can absorb it and those who cannot. Suppliers that previously reached the department only through a prime are seen directly and financed directly through Office of Strategic Capital loans. The prime contractor’s three historic functions — compliance apparatus, systems integration, and supply chain financier — are each unbundled by a different clause, and margin follows risk and capital to whoever is actually carrying them.

Questions worth asking

• Does the Cost Accounting Standards Board actually adopt the proposal? It is a statutory body outside the Department of War, the change has been resisted for decades, and without it most of this remains aspiration. This single question decides the idea.
• What share of each prime contractor’s revenue is sole-source cost-reimbursement sustainment work — the part most exposed to both open competition and fixed-price default? That ratio, not backlog, is the number that would reprice.
• Which commercial manufacturers have publicly refused defense work over compliance cost, and would they bid now? Contract manufacturers, machine shops, industrial electronics firms and automotive suppliers with spare capacity are the natural entrants.
• If contracting officers can see through primes to suppliers and lend to those suppliers directly, does the prime’s role as the supply chain’s financier disappear, and what is that function worth to the supplier that currently depends on it?
• Defense primes have already fallen a long way from their highs. Is that about program execution and margin misses, or has part of the structural story begun to be priced?
• Who sells the compliance? Government-contract accounting software, government-audit consulting and Cost Accounting Standards advisory are real businesses whose demand this memorandum is explicitly designed to shrink.

Where to look

• Lockheed Martin, Northrop Grumman, RTX, General Dynamics, L3Harris — the incumbents whose competitive position and margin structure the memorandum targets, and the place to test whether any of this is already in the price
• Boeing — the clearest existing case study in what fixed-price default does to a contractor that misjudges the risk it has taken
• tier-two and tier-three defense suppliers — the stated beneficiaries of supplier transparency and direct financing, and the least-covered part of the chain
• commercial manufacturers with defense-adjacent capability, for whom the entry cost is precisely what is being removed
• the Office of Strategic Capital and the Industrial Base Analysis and Sustainment program, as the channel through which money now reaches suppliers without passing through a prime

Thesis check

The document is primary, signed, dated and unusually explicit about what it is trying to break, and the mechanism it names — compliance cost functioning as an entry barrier — is real and has been documented for decades. The weakness is that a memorandum is not a rule: the central piece requires action by the Cost Accounting Standards Board, which sits outside the Department of War, and the defense acquisition system has absorbed and neutralised reform memoranda repeatedly, so implementation risk here is not a caveat at the end but the main question in the middle.

Sources

Department of War, Sep 15 2026 · Fostering One Strong Industrial Base, memorandum and appendix, Sep 15 2026 · Defence Industry Europe, Sep 2026