The U.S. Department of Defense (DOD) on May 27, 2025, issued a memorandum implementing Executive Order (EO) 14222. As our team previously summarized, EO 14222 implemented the Department of Government Efficiency's (DOGE) "cost efficiency initiative" that seeks to transform federal spending on contracts, grants and loans by mandating that federal agencies implement new mechanisms for recording, justifying and approving agency payments; conduct comprehensive reviews of contracts, grants, contracting policies, procedures and personnel; and issue new guidance on signing or modifying contracts.
Below is a summary of key takeaways from the DOD memorandum. Understanding the implications is crucial for government contractors, as it introduces new guidelines and restrictions that could significantly impact contracting opportunities and processes.
Key Points of the DOD Memorandum
- Shift to In-House Expertise. The DOD is prioritizing the use of in-house capabilities over external contracts. This means that before any new information technology (IT) consulting or management services contracts as well as advisory and assistance services contracts are executed, a justification must be provided that the work cannot be performed by existing DOD personnel or acquired from a direct service provider.
- Review of Existing IT Consulting and Management Services Contracts or Task Orders and Advisory and Assistance Services Contracts. The DOD announced it is reviewing these awards for "viability and alternatives" in accordance with guidance in the memorandum. This signals the DOD's intent to potentially issue more termination notices for existing IT consulting and management services contracts and task orders, as well as advisory and assistance services contracts.
- Approval Requirements. New contracts for IT consulting, management services and advisory services require prior approval from the Deputy Secretary of Defense. This includes a cost-benefit analysis and evidence that alternatives have been evaluated.
- Exclusions and Thresholds. The DOD is
excluding the following awards from its new approval requirements.
- Contracts in direct support to defense weapon system programs and directly associated program sustainment activities, or any contract or task order with a total value, including options, under $10 million, are excluded from these requirements.
- Contracts for systems engineering and technical assistance, in support of systems architecture, systems engineering, acquisition program management and sustainment services when in support of major defense acquisition programs, or any contract or task order with a total value, including options, under $1 million, are excluded.
- Splitting contracts to stay under these threshold limits is expressly prohibited.
- Monitoring and Compliance. The Under Secretary of Defense for Acquisition and Sustainment will monitor compliance, and noncompliant contracts may be terminated. The DOD intends to engage in quarterly reviews to ensure adherence to the new guidelines.
- Optimizing Workforce Utilization. The DOD aims to maximize the use of civilian employees for broad functions, using contractors only when necessary. A workforce sufficiency analysis is required to justify the use of contractors, including a cost comparison and productivity review. According to the memorandum, "Contractor employees should be used to augment such roles only when a workforce sufficiency analysis demonstrates that: ( 1) the role is determined to be not inherently governmental ... ; and (2) no existing employees within the organization or any DoD support unit have the capacity or skills to fulfill the requirement; and (3) the organization cannot address the gap through hiring, training, technology, or other resourcing of the current workforce; and ( 4) better rates cannot be achieved by consolidating contracts, including with GSA ... ."
- Consolidation of Procurement Efforts. The memorandum encourages the use of U.S. General Services Administration (GSA) procurement vehicles for nondefense-specific acquisitions to achieve financial efficiency.
Potential Implications for Government Contractors
Government contractors should be aware of the significant changes introduced by DOD's memorandum, which aims to further enhance efficiency and reduce costs within the agency. As a result, contractors must navigate a more competitive and challenging landscape, where demonstrating value and compliance with new guidelines is crucial for securing and maintaining contracts.
- Anticipate Potential Terminations for Convenience. Contractors should prepare for potential terminations for convenience of existing IT consulting and management services contracts and task orders, as well as advisory and assistance services contracts. The DOD is reviewing current contracts to ensure alignment with the administration's new efficiency goals and may be subject to termination. It is essential that contractors maintain thorough and up-to-date records of all project-related expenses, deliverables and progress in anticipation of the need to substantiate settlement proposals or claims. Our team previously summarized key steps if a termination for convenience is received and presented a webinar explaining the process as well.
- Increased Scrutiny. Expect heightened scrutiny and justification requirements for new contracts, particularly in IT consulting and management services and advisory and assistance services.
- Potential Reduction in Opportunities. With a focus on in-sourcing and leveraging existing DOD capabilities, there would appear to be fewer opportunities for external contractors, especially for roles that can be filled internally. However, it's uncertain whether DOD employees with the unique skill sets required remain at a level to provide the in-sourced support the DOD memorandum may require.
- Need for Strategic Alignment. Align offerings with DOD's strategic priorities and demonstrate clear value and cost-effectiveness to secure contracts.
- Compliance and Adaptation. Staying compliant with the new guidelines is crucial. Contractors may need to adapt their strategies to meet the DOD's efficiency and cost-saving goals.
Recommendations for Government Contractors
The DOD's memorandum represents a significant shift in the agency's approach to contracting, emphasizing efficiency and in-house capabilities. Government contractors must navigate these changes carefully, ensuring compliance and demonstrating value to remain competitive in this evolving landscape.
Contractors should be proactive and prepare justifications that can be quickly provided to the government customer or contracting agency if needed.
As noted above, the memorandum directs that a workforce sufficiency analysis "accompany any contract submission which would increase contractor FTE for roles which employ both DoD civilian employees and contractor employees."
Contractors should highlight the unique skills and education of their employees to permit the DOD to make a rational comparison of the skills required with the skills available in the DOD, as well as the private sector. Contractors with existing DOD contracts should provide this type of information to their current contracting officers to assist the DOD with its efficiency justification for retaining private sector employees.
These changes underscore the importance for contractors to remain agile and responsive to the evolving requirements of the DOD, ensuring they can continue to provide valuable services in this new environment. Please reach out to the authors for further information or assistance in navigating the DOD's procurement landscape.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
