If the Pentagon Wants More Speed and Scale, It Should Be a Better Customer

In a speech on November 7, 2025, Secretary of War Pete Hegseth announced new measures to accelerate the fielding of new technology and advanced capabilities—complementing plans announced in August 2025 to transform the military requirements process. Among the many important structural and policy changes he outlined, one stood out: forthcoming guidance on how the Pentagon intends to provide “stable, clear, and consistent demand signals for industry to invest and scale production of lethal capabilities.” Persistent uncertainty in long-term defense spending levels, fluctuations in demand, and perennial priority shifts have long deterred business partners from making early capital commitments. At the heart of this challenge is trust—the Pentagon should want to instill in industry partners that it will ultimately buy what it says it will. If industry does not have confidence that the military will stick to its budget plans, it will hesitate to make the capital expenditures (capex) and private investments desired by Pentagon leaders. In short, the Pentagon needs to be a better customer.

Companies spend a lot of time trying to understand and forecast demand for their products and services before making investments by looking at historical trends, market conditions, and other indicators—essentially, companies make educated guesses on what customers want to reduce investment risk. Because no one can predict the future, market demand forecasts can be wrong and much-hyped new products can flop—think the Apple Lisa, Microsoft Zune, and Amazon Fire Phone. But defense companies essentially have only one main customer—the Pentagon—so an equivalent mistake can be fatal. In the past, to buy down that risk, the government picked up the bill for research and new product development. The Pentagon wants to change that and shift more upfront costs onto the private sector. But for defense companies to justify spending capex to build more production lines or self-fund new product development, they need to trust that the Pentagon will stick to its plans for buying more military kit, and see that such plans are backed up by money.

But an honest assessment of trends in U.S. defense spending does not necessarily encourage greater capital expenditures on product development and manufacturing capacity. While U.S. officials stress the need to invest more in defense, long-term defense spending levels have not shown sustained, dramatic growth. Rather, they have failed to even keep pace with inflation, resulting in real budget decline. Between fiscal year 2014 and FY 2025, U.S. defense funding fluctuated, peaking in FY 2024, when including Ukraine security assistance funding. The reconciliation bill passed in July 2025 included a $156 billion one-time boost in military funding between FY 2025 and FY 2029. Yet future growth in U.S. defense spending remains uncertain. Though the Trump administration advertised a trillion-dollar defense budget, to get to that number, it plans to use $119 billion from the reconciliation bill for defense purposes in FY 2026, asking Congress for $892.6 billion in its FY 2026 defense budget request. While outside the control of the Pentagon, repeated delays in passage of full-year appropriations and use of continuing resolutions add yet another element of uncertainty to defense spending.

Asking industry to pay upfront creates risk because the Pentagon has a habit of saying it wants something one day and deciding it doesn’t the next. For example, in 2024, after having spent over $2 billion on development and signaling in budget documents it planned to spend an additional $5 billion more over the next five years, the Army canceled the Future Attack Reconnaissance Aircraft program. Additionally, though the Space Force had outlined five-year plans for the Protected Tactical SATCOM-Resilient program, an initiative to provide jam-resistant satellite communications, including $273 million for the program in the FY 2026 budget request, the program was canceled in July 2025. Had companies paid for the research and development costs, trusting the Pentagon to follow through on its stated plans, they would have been left with gaping holes in their balance sheets.

Fluctuations in procurement rates create yet another risk if companies are asked to expand production lines on their own dime. As noted in a 2024 Pentagon report, “inconsistent or unpredictable and short-term demand stifles industry’s ability to react, invest, plan, reduce cost, and improve delivery timelines.” Take, for example, U.S. buying patterns for Terminal High Altitude Area Defense (THAAD) missile interceptors, which peaked at 110 in FY 2019 and sank to 11 in FY 2024. The U.S. military wants to buy 37 in FY 2026. Building an assembly line to accommodate peak procurement means it sits mostly idle—not something a company would normally want to do with its capital.

Industry may perceive other risk indicators that could hold back private investment. Government contracts typically include a clause for “termination for convenience of the government,” allowing officials to cancel a contract for any reason. The current Trump administration has canceled contracts big and small—mainly programs and grants deemed “wasteful spending"—for policy reasons. A future administration could take this trend further, and cancel contracts for munitions, fighter aircraft, or submarines. Relatedly, how can a company quantify the risk that politically-tinged defense initiatives—the most prominent being Golden Dome—could be at risk of immediate cancellation should the winds shift? Can a government contract signal any certainty beyond, at most, four years? Certain contracts, such as for missile interceptors and cruise missiles, may be deemed safer, but there is risk across the board.

There is ultimately no way to reduce business risk to zero—nor should that be the desired outcome. Projects will get cancelled, and some should. Budgets and demand will fluctuate to match the strategic environment. But if the Pentagon wants the private sector to invest more capital upfront, it will need to find new ways to optimize risk sharing and help industry better understand and forecast demand. For one, the Pentagon, working with Congress, should consider longer-term, multi-year contracts for certain systems that have termination and liability clauses. That way, if the government changes its mind, at least it shares the cost of that decision with its industry partners. Rather than simply paying for research and development itself, the Pentagon can also evolve and expand the use of novel financing tools, such as loans through the Office of Strategic Capital, to support companies developing products and technologies it wants to buy. Finally, the Pentagon simply needs to be better about outlining and sticking to its plans and insulating contracts from shifts in political winds—otherwise, companies will not have the confidence to make upfront investments. Budget trends and a penchant to suddenly cancel programs create risk that the private sector, particularly public companies, whose leaders have fiduciary duties to act in the best interest of their shareholders, cannot ignore.

With its new guidance, the Pentagon is signaling it wants greater industrial capacity, agility, and speed to meet military requirements. In the face of new threats from China and Russia, these are all necessary goals. But dollars-and-cents business dynamics will ultimately shape investor and corporate decisionmaking around capital expenditures and product development—business leaders will need to know the military will stick to its expansive plans to see the long-term benefits for their companies. As American economist Milton Friedman said, “The most important single central fact about a free market is that no exchange takes place unless both parties benefit.” For industry partners to see the benefits of the administration’s proposed reforms, there will need to be more trust in sustained increases for defense budgets, and trust that the military actually buys what it says it wants.

Clayton Swope is the deputy director of the Aerospace Security Project and a senior fellow in the Defense and Security Department at the Center for Strategic and International Studies (CSIS) in Washington, DC. Kari A. Bingen is the director of the Aerospace Security Project and a senior fellow in the Defense and Security Department at CSIS.