DoD ESOP Pilot Program

Statute

Elizabeth Warren introduced S.2402, "To establish a pilot program to incentivize employee ownership in defense contracting," in the 117th Congress on July 20, 2021, "for herself and Mr. Tillis" (Thom Tillis); it was read twice and referred to the Senate Armed Services Committee.¹ The introduced text defined a qualified business as an S corporation "for which 100 percent of the outstanding stock is held through an employee stock ownership plan" and capped subcontracting at 25 percent of the amount paid under the contract.¹ The Senate committee's version of the fiscal year 2022 defense authorization bill, S.2792, carried the provision as section 843, and the committee report (S. Rept. 117-39, page 211) described it as a "5-year pilot program that allows for the use of noncompetitive procedures for follow-on contracts to qualified businesses wholly owned by an Employee Stock Ownership Plan (ESOP)." The report cites a June 18, 2020 Government Accountability Office study, "Defense Contracting: DOD Contracts with Companies Having Employee Stock Ownership Plans" (GAO-20-514R), for the finding "there are no readily available data to determine what percent of an entity is owned by an ESOP."²

The provision was enacted as section 874 of the National Defense Authorization Act for Fiscal Year 2022 (Pub. L. 117-81, signed December 27, 2021; 10 U.S.C. 3204 note). It allows the Department of Defense to procure a follow-on contract "through procedures other than competitive procedures" where the products or services are "the same as or substantially similar to" those procured under a prior contract held by a qualified business, if that business's performance on the prior contract "was rated as satisfactory (or the equivalent) or better." Each qualified business "may have a single opportunity for award of a sole-source follow-on contract" unless a senior contracting official approves a waiver; the Secretary of Defense is to establish procedures for businesses to certify that "not more than 50 percent of the amount paid under the contract will be expended on subcontracts"; and the Comptroller General is to receive information on each contract awarded.³ Corey Rosen of the National Center for Employee Ownership wrote on January 3, 2022 that the act "contains the first-ever government contracting program to specifically encourage ESOPs" and that "The impetus for the bill came from the Employee-Owned Contractors Roundtable (ECR)."⁴

Section 872 of the National Defense Authorization Act for Fiscal Year 2024 (Pub. L. 118-31) amended section 874. It inserted "and prescribe regulations" into the authority to establish the pilot, inserted "or for" after "procured by" so that a prior contract awarded for the Defense Department by another agency counts, replaced "A qualified" with "Each contract held by a qualified" in the one-follow-on limit, allowed subcontracting above 50 percent to other qualified ESOP businesses and, for products, for "materials not available from another qualified business wholly-owned through an Employee Stock Ownership Plan," and replaced "five years after" with "eight years after" in the sunset.⁵ In the third-quarter 2023 lobbying report for the Roundtable, Venn Strategies described its issue as "Improvement of ESOP related sole source procurement policies that were originally passed in the FY2022 National Defense Authorization Act" and wrote "Language was included in the House NDAA H.R.2670 and Senate NDAA S.2226."⁶ In a podcast published by Highlight Technologies on October 21, 2023, Matt Pearce of Venn Strategies said that "ECR led the effort to get improvement language in both the House Armed Services NDA package and the Senate" (the transcript continues "arm services NDA package"), and described a request that arose in implementation: "we heard back from the General Services Administration, GSA, that these contracts were only for, uh, or Section 874 authority could only be used for GSA, or DOD contracts, not DOD contracts that are offered through GSA vehicles," which the Roundtable called "a GSA fix."⁷

A later bill, the Federal Improvement in Technology Procurement Act introduced by Senators Gary Peters and Ted Cruz, would extend the pilot to all federal agencies; Rosen wrote on April 12, 2024 that "One of the bill's sections extends the DoD pilot program to all federal agencies."⁸ The Roundtable's lobbyist reported in 2026 the issue "Provision for sole source procurement for follow on contracts to all federal agencies for businesses wholly owned through an employee stock ownership plan."⁶

Phase 1 under the November 8, 2022 memorandum

The Under Secretary of Defense for Acquisition and Sustainment implemented the pilot by a contract policy memorandum dated November 8, 2022, signed by John M. Tenaglia, Principal Director, Defense Pricing and Contracting. It states: "Use of the pilot program is authorized for not more than nine entities in accordance with the limitations set forth in the Paperwork Reduction Act of 1980 (44 U.S.C. chapter 35)"; "DPC, CP will accept submissions until April 28, 2023, or until it approves nine contracts for award under the pilot program"; "Only DoD Contracting Officers may submit an application to participate in the pilot program"; and "Any follow-on contracts awarded without providing for full and open competition under FAR 6.302-5 and this pilot authority shall be awarded no later than August 31, 2023." Each contract required approval of Defense Pricing and Contracting, Contract Policy, and a justification and approval citing FAR 6.302-5.⁹

In the October 2023 podcast Pearce said: "we work closely with the department of defense and the office of defense pricing and contracting in 2022 to get this program, uh, up and running. And in November of last year, uh, DPC authorized the use of nine. Slots for what we call the section 874 authority ... as of you know earlier this year April or May All nine slots were filled."⁷

Government Accountability Office report GAO-25-107531

The Government Accountability Office published "DOD Contracting: Opportunities Exist to Improve Pilot Program for Employee-Owned Businesses" (GAO-25-107531) on March 20, 2025, a review the 2022 act required. It states that the Defense Department "awarded eight contracts under its employee stock ownership plan (ESOP) pilot program" "valued collectively at over $450 million"; that "All eight contractors self-certified as wholly-owned ESOP corporations and indicated that they had operated as a wholly-owned ESOP from 4 to 26 years"; that "Six of the eight contracts were awarded to small businesses and two were awarded to large businesses"; and that the Federal Procurement Data System "did not include information for three of them." The report names no contractor. Its Table 3 lists five contracts by description: leadership coaching sessions within the "Defense Educational Activity" (Department of Defense Education Activity); technical and functional support services for Washington Headquarters Services; engineering, analysis, and test support for the Department of the Navy; software services to the Defense Health Agency "to transform existing infrastructure into modern software"; and acquisition and financial services to Space Systems Command. The table gives estimated contract values at the time of award, which include base and all option years: $570,000 for the coaching sessions, $6 million for the Washington Headquarters Services support, $29 million for the Navy support, $78 million for the Defense Health Agency software services and $131 million for the Space Systems Command services.¹⁰

The report adds that Defense Pricing and Contracting officials "approved the applications on a first-come, first-served basis to contractors that met pilot program criteria"; that "five of the eight contracting officers who participated in the pilot program were unaware of the program until a contractor or the office requiring the goods and services brought it to their attention"; that "GAO found evidence that DOD awarded a pilot program contract to an ineligible contractor"; and that officials "stated that DOD may award 16 contracts in the next phase but were not confident of this number."¹⁰

Rulemaking under DFARS Case 2024-D004

The Defense Acquisition Regulations System proposed a rule implementing the pilot on May 30, 2024¹⁰ and published the final rule in the Federal Register on October 10, 2024 (89 FR 82183, FR Doc. 2024-23226, Docket DARS-2024-0017, RIN 0750-AM01), amending 48 CFR parts 206, 212, 252 and 270 with an effective date of November 25, 2024. It adds DFARS 206.302-5(b), listing the pilot among the statutory exceptions to full and open competition, and DFARS subpart 270.1.¹¹¹² Responding to public comment, the Department wrote that "a contractor is not able to submit an application for participation in the pilot program" because applications are submitted by contracting officers; that neither section 872 nor 874 "waived the requirement for a J&A"; and that the Office of the Under Secretary of Defense (Acquisition and Sustainment) "implemented section 874 via a contract policy memorandum dated November 8, 2022, and limited participation in the pilot program to nine contractors." One commenter had cited "only eight businesses currently participating." The rule's regulatory flexibility analysis states "eight businesses are participating in the pilot, six of which are small entities," and that "DoD expects that the pilot program will grow to approximately 16 contractors per year, of which approximately 12 may be small entities."¹¹

Docket DARS-2024-0017 lists comments on the proposed rule from TMC Global Professional Services and BB&E (posted June 10 and June 13, 2024), from KEMRON Environmental Services, Inc. ("a small business and employee-owned company," posted July 30, 2024) and from the Employee-Owned Contractors Roundtable, received July 24, 2024 and posted July 30, 2024, whose cover statement says "Please find our comments attached along with the logos of the 23 ECR member companies."¹² BB&E's comment asked the Department to remove the "one-time" designation for follow-on contracts and "to set aside work for competition amongst only Employee-Owned companies."¹² Before the rulemaking, LTM Inc had sent the Defense Acquisition Regulations System an early input dated May 1, 2022 describing itself as "a private S corporation wholly-owned through an ESOP" that "has been since April, 2008" and recommending that "The ESOP Contractor should have discretion to select the contract for the sole source follow-on"; Tactical Engineering & Analysis filed an early input recommending that an individual task order under a multiple-award contract held by a qualified business count as a follow-on contract.¹³

Phase 2: revision memorandum and FAQ

The Revision 1 memorandum, signed by Tenaglia as Principal Director, Defense Pricing, Contracting, and Acquisition Policy, followed the final rule and states that "The authority to award contracts under this subpart expires on December 27, 2029." Its attached FAQ, "as of December 10, 2025," states: "The program will operate on a rolling basis, allowing applications to be submitted at any time"; "5. Is there a limit to the number of contracts awarded in Phase II of the ESOP program? No. There is no limit to the number of contracts that may be awarded through Phase II of the ESOP Pilot Program"; "Approval from DPCAP/CP must be obtained for each contract proposed for award under the ESOP Pilot Program"; "Only COs awarding contracts for or by the DoW may submit an application"; and, on prior contracts, "The predecessor contract can be awarded for DoW by a non-DoW agency, such as through an assisted or direct acquisition through General Services Administration (GSA)." Documents listed as proof of 100 percent ownership include a trust agreement, trustee certification, summary plan description, annual ESOP report and "Form 5500." Question 24 reads "Is there a pool of ESOP eligible companies?" and the answer is "Yes. Available to COs only upon request."¹⁴

Awards identified in public records

Defense Logistics Agency Aviation awarded SPRRA226C0009 to Radiance Technologies on April 10, 2026 for range improvement and modernization at the Reagan Test Site; its justification and approval states the authority as "DFARS 206.302-5(b), Employee Stock Ownership Plan (ESOP) pilot program, NDAA Provision 874, and amended NDAA Provision 872" and records an approval memorandum of December 23, 2025. The award is detailed on the Radiance page.¹⁵

The General Services Administration Federal Acquisition Service signed order 47QFSA26F0035 with Modern Technology Solutions on September 8, 2026, under the One Acquisition Solution for Integrated Services Plus (OASIS+) indefinite-delivery contract 47QRCA25DU655, with a period of performance beginning September 15, 2026. The federal procurement record gives the description: "MODERNIZATION & ENGINEERING SUPPORT (MES III) RESEARCH & DEVELOPMENT EFFORT FOR AIR NATIONAL GUARD RESERVE COMMAND TEST CENTER STATUTORY AUTHORITY: EMPLOYEE STOCK OWNERSHIP PLAN PILOT PROGRAM AUTHORIZED BY SEC 874 OF FY22 NDAA & SEC 872 OF FY24 NDAA." Obligated funds are $14,619,921.14 against a potential value of $152,786,536.43 through March 14, 2032; one offer was received; the funding office is listed as "162 FW AATC CORMIER."¹⁶

Lobbying for the pilot

The Roundtable's lobbying under the Lobbying Disclosure Act is detailed on its own page. Reports for the Roundtable by Venn Strategies from 2021 through the third quarter of 2022 refer to "Promoting ESOP related small business procurement policies as part of the FY2022 National Defense Authorization Act to provide incentives for 100% employee-owned businesses in federal contracting"; those from the fourth quarter of 2022 through the second quarter of 2023 to "Implementation of ESOP related small business procurement policies that were included in the FY2022 National Defense Authorization Act"; and those from the fourth quarter of 2023 through 2026 to "Improvement and expansion of ESOP policies that were passed in Sec. 874 of FY2022 NDAA."⁶ The Halcrow Group LLC registered on March 15, 2022 for the client "Venn Strategies on behalf of Employee-Owned Contractors Roundtable," listing Stephanie Halcrow with the covered position "Professional Staff Member, House Armed Services Committee"; its first quarterly report (filing b563879c-2230-4538-9732-84678cb989e8, posted April 14, 2022, $10,000) gives the issue "National Defense Authorization Act for FY 2022, Section 874."⁶

Radiance Technologies lobbying filings of 2019 by Maynard Nexsen name "provisions impacting employee owned companies" in the fiscal year 2020 defense authorization bills; the filings are detailed on the Radiance page.¹⁷