The annual defense policy bill is not yet over the finish line, but the arms industry already seems to have won it big.
The final conference version of the fiscal year 2026 National Defense Authorization Act (NDAA) would codify a total overhaul of the weapons acquisition process. The bill includes several key provisions to eradicate what mechanisms remain for policymakers to control military contract prices, securing windfall future profits for military contractors.
According to the House Armed Services Committee, the NDAA focuses the acquisition system on “quickly equipping warfighters with needed capabilities in the most cost-effective manner practicable.” But the bill effectively decimates what tools remain for the Pentagon to conduct any meaningful cost or price analysis on military contracts.
Imagine renovating a house. There are only 10 contractors available to you in total, but they rely on your business. Are you paying whatever they charge you, no questions asked?
It’s a crude example, but one that demonstrates the ultimate impact of lawmakers gutting the acquisition system through the NDAA. Section 1804 would exempt any company with a contract under $10 million from providing the Pentagon with accurate, complete, and current cost information — critical data for the department to ensure it isn’t wildly overpaying military contractors, particularly in a sole-source environment. Section 1826 would likewise exempt “non-traditional” contractors (read: Silicon Valley) from certified cost and pricing data requirements.
In an asinine attempt to cut proverbial red tape, Section 1806 effectively eradicates the Cost Accounting Standards — accounting principles that ensure military contractors only charge the Pentagon for their Pentagon work. Without them, the department will be unable to discern whether contractors are charging taxpayers for commercial business activities completely unrelated to military contracts.
Perhaps most scandalous is Section 803, which would establish a pilot program “to evaluate the feasibility, risks, and benefits” of reimbursing arms manufacturers for their interest payments. Seemingly innocuous, this provision reflects a fundamental shift in military contracting. For over 85 years, the government has maintained that interest is the cost of doing business. It is the financial responsibility of the contractor, or an “unallowable” cost. If the government reimbursed contractors for interest payments, there would be no incentive for contractors to invest equity capital in their businesses. Borrowing would be free!
The Department of Defense has also repeatedly affirmed its position that interest payments are unallowable. Last month, Defense Secretary Pete Hegseth opposed a proposal to skip the pilot program altogether and permanently render interest payments reimbursable. In 2022, the Pentagon said that making interest an allowable cost would increase contract prices for the government while increasing net profits for contractors. That study mysteriously disappeared from the Pentagon’s website after I posted a screenshot of it on X, but it is still available in an online archive.
So why would the government even consider changing its tune on the allowability of interest? The generous view is that covering the cost of borrowing would boost profits, possibly incentivizing contractors to invest in the expansion of military industrial capacity — which so many in Washington promote — in part due to industrial capacity constraints made abundantly clear throughout Russia’s war in Ukraine. Another good-faith explanation for the government to explore such a drastic policy change — and the assumption of considerable financial risk — is that reimbursing interest payments could, in theory, encourage smaller firms to work with the Pentagon.
Prime contractors can afford to take on a lot of debt. Smaller firms don’t have the same operating cash to finance interest payments, so they typically rely on equity capital. Still, military contractors of all sizes receive generous financing compared to commercial industries. The government, for example, covers the depreciation costs of capital assets (like machinery) on all government contracts — contributing to an enviable return on assets, with military contractors significantly outperforming the commercial sector.
The arms industry likewise outpaces commercial counterparts in several key financial metrics, including total shareholder returns and return on equity. Moreover, the traditional unallowability of interest payments is offset by the so-called Weighted Guidelines for determining profit or fee on contracts. It is a poorly kept secret that the unallowability of interest is implicitly baked into these guidelines, at least partially compensating contractors for borrowing costs.
Financing aside, there’s little evidence to suggest that contractors would expand their production capacity with increased profits. On the contrary, the Pentagon itself reported in the aforementioned study that despite increased profits, military contractors increased cash paid to shareholders by 73% in the first decade of this century — at the direct expense of investments in facilities, equipment, or machinery. So while the pilot program may be a relative loss for military contractors — who wanted a permanent policy of allowable interest expenses, as Bloomberg reported — it is still a monumental policy win for the arms industry.
Whether or not taxpayers ultimately foot the bill for contractors’ interest expenses is ultimately up to appropriators — who will have to set aside money for that purpose. In all, however, the acquisition overhaul cemented in the NDAA will vastly increase taxpayer risk to price gouging by the arms industry.
