America’s greatest national security advantage is the breadth and vitality of its free-market economy. The Pentagon should be drawing on all of it: established manufacturers, commercial technology companies, a rebuilt middle tier, and disruptive entrepreneurs competing to deliver better weapons faster and more affordably. For more than 50 years, Washington has instead maintained accounting and procurement rules that divide American industry into two camps: companies organized around government compliance requirements and companies that avoid them.
Recently, I warned that the Pentagon’s August 18 supplier-transparency memo could become the most damaging defense acquisition policy in 50 years. I stand by that criticism. Government-unique demands for actual costs segmented by contract, profit benchmarks, and unprecedented access to contractor financial systems threaten to extend the Pentagon’s control of its captive suppliers across the commercial economy. This will drive away the companies and private investment that the Pentagon urgently needs.
But in a recent turn of events, a September 14 memo—“Fostering One Strong Industrial Base,” signed by Deputy Secretary Steve Feinberg—cauterizes the wound created by the first memo to a degree. It prevents applying the Cost Accounting Standards (CAS) to nontraditional and commercial contractors and potentially offers a path forward for traditional contractors to emerge from the morass of government regulation. This could be a significant step toward repairing the divide between defense and the vibrant commercial economy.
Admiral Hyman Rickover’s career captures how that chasm was created. The now-mythical innovator helped deliver the Nautilus submarine in less than seven years after the approval of the naval nuclear reactor program. Then this transformational hero turned into a bean-counting apparatchik once it was decided the navy no longer needed to innovate or for industry to compete for new solutions.
Rickover’s transition to chief cost bureaucrat came about because he confronted a real problem when producing submarines at scale. The government depended on a number of sole-source suppliers whenever it limited competition after an initial award. His solution to keep prices low was to demand uniform cost-accounting data as a means to cap profits, measured as a percentage of government-approved costs. His late-1960s campaign and congressional testimony helped produce CAS in 1970, but things didn’t work out as planned. CAS welcomed in an era of heavy oversight and regulation and ever-spiraling costs within an ever-dwindling defense industrial base.
Rickover’s diagnosis may have been fit for a public shipyard or government-bound contractors trained to build to spec. His cure just didn’t fit the real American economy. When a sole-source prime performs government-unique work, receives reimbursement for its costs, and functions as an extension of the state, the Rickover cost-based oversight approach may perhaps be the only lever to rely on. The mistake was making that arrangement the precondition for the rest of American industry to ever support national defense.
Companies answered rationally to these incentives. Defense incumbents absorbed the regime and specialized in compliance with byzantine rules. Mixed firms isolated covered work or built separate accounting machinery. Meanwhile, commercial firms capped their government exposure, sought exemptions, refused clauses, or walked away. CAS helped split the industrial base in two by making the boundary between defense and commercial too expensive to cross.
We have been trying to repair this divide ever since. I arrived on Capitol Hill in 1994, the year the Federal Acquisition Streamlining Act first exempted commercial items from CAS. This effort, while positive, ultimately proved inadequate. Congress protected a category of products from overregulation when it should have allowed commercial companies to solve military problems without having to remake themselves.
In 2015, to do just that, I returned to Congress to create a Pentagon version of the CAS-avoiding Other Transactions model that NASA used to launch SpaceX. Ten years later, as a result of that legislation, dozens of new SpaceXs are knocking on the door, but the Pentagon leadership, wedded to the old cost-based mindset, is still not ready to let them in.
The Feinberg memos need to be evaluated based on this history. The August 18 memo has not been rescinded and, because it is based on the old Rickover cost and pricing model, will continue to do harm and send mixed signals to industry until it is. The September 14 memo does walk back some, but not all, of the first memo’s nonsense. That is an improvement. Unfortunately, that progress could be undermined by the implementation of the first memo’s provisions to still demand cost and pricing data, grant the government unprecedented access to company computer systems, and arbitrarily limit profits.
The Pentagon needs to choose. It should emulate the innovative 1950s Rickover and exorcise the ghost of the 1960s one. That means repealing the first Feinberg memo in its entirety.
Facts Only
* America’s greatest national security advantage is the breadth and vitality of its free-market economy.
* The Pentagon should draw on established manufacturers, commercial technology companies, a rebuilt middle tier, and disruptive entrepreneurs.
* Washington has maintained accounting and procurement rules that divide American industry into two camps: those organized around government compliance requirements and those that avoid them.
* A memo from August 18th regarding supplier-transparency was criticized as potentially the most damaging defense acquisition policy in 50 years.
* Government-unique demands for actual costs, profit benchmarks, and access to contractor financial systems threaten to extend Pentagon control over the commercial economy.
* A September 14th memo signed by Deputy Secretary Steve Feinberg sought to cauterize the first memo's impact.
* The September 14th memo prevents applying Cost Accounting Standards (CAS) to nontraditional and commercial contractors.
* Admiral Hyman Rickover advocated for uniform cost-accounting data to cap profits as a means of limiting competition, leading to CAS in 1970.
* CAS created a division by making the boundary between defense and commercial too expensive to cross.
* The Federal Acquisition Streamlining Act exempted commercial items from CAS in 1994.
* In 2015, the author returned to Congress to create a Pentagon version of the CAS-avoiding Other Transactions model used by NASA to launch SpaceX.
Executive Summary
The author argues that the free-market economy, encompassing established manufacturers and commercial technology companies, represents America’s greatest national security advantage, which the Pentagon should leverage to procure weapons more affordably and quickly. The author criticizes government accounting and procurement rules for over fifty years for dividing American industry into camps based on compliance or avoidance of regulations. A recent supplier-transparency memo from August 18th was criticized as potentially damaging, as it imposes government demands on actual costs and contractor finances, threatening to extend Pentagon control over the commercial economy. However, a subsequent September 14th memo, signed by Deputy Secretary Feinberg, attempted to mitigate this by preventing the application of Cost Accounting Standards (CAS) to nontraditional contractors and offering a path for traditional contractors to emerge from regulation.
The author traces the origins of this industrial divide through the career of Admiral Hyman Rickover, who sought to impose cost-based oversight via Cost Accounting Standards (CAS) in the 1970s, aiming to cap profits by measuring them against government costs. This system, designed for a government-bound industrial base, failed to fit the real American economy, causing defense incumbents to specialize in compliance while commercial firms sought exemptions or exited the system. The author suggests that current efforts to repair this divide have been inadequate; despite legislative attempts like the Federal Acquisition Streamlining Act and efforts to create alternatives, the Pentagon leadership remains committed to an outdated cost-based mindset, resisting innovation exemplified by entities like SpaceX.
The core tension lies between maintaining government control over defense procurement and fostering competition within the broader commercial sector. The author concludes that the Pentagon must choose between adhering to the older, restrictive framework or adopting an innovative approach that allows commercial entities to solve military problems without undergoing burdensome regulatory transformation.
Full Take
The narrative pivots on the historical conflict between regulating an industrial base for accountability (as seen in Rickover’s CAS model) and unleashing commercial dynamism (the free market). The perceived failure stems from applying a rigid, state-centric cost-based paradigm—developed in a context where sole-source suppliers acted as extensions of the state—to a sprawling, dynamic commercial ecosystem. The analysis suggests that attempts to impose this historical structure onto modern commercial entities only serve to solidify existing industrial segregation rather than fostering innovation.
The progression from the August 18th memo to the September 14th memo illustrates an internal negotiation within the policy framework: one attempt to assert control via cost transparency and another attempt to create a pathway for commercial inclusion. The ultimate tension remains whether these procedural maneuvers will result in integration or further segmentation. The underlying pattern is a resistance by established structures—represented by the Pentagon leadership wedded to the "old cost-based mindset"—to embrace change that would dismantle the division created by previous regulatory arrangements, especially when it involves allowing entrepreneurial entities like SpaceX access.
The challenge for policymakers is recognizing that attempts to manage risk through regulation can inadvertently entrench historical power dynamics. The proposed solution—emulating the innovator of the 1950s rather than the bureaucrat of the 1960s—suggests a fundamental shift in epistemology: moving from systems defined by mandated accounting rules to systems defined by competitive outcomes. This requires acknowledging that the 'solution' is less about fine-tuning regulations and more about redefining the relationship between government needs and market capabilities.
Bridge Questions: If the goal is to ensure commercial entities can solve military problems efficiently, what specific metrics of success should replace or augment cost accounting standards? How can legislative efforts be structured to incentivize sector-spanning innovation rather than segmenting industrial compliance? What historical precedents exist where imposing strict cost controls inadvertently stifled necessary technological leaps in defense contracting?
Sentinel — Human
This text functions as a persuasive argument utilizing historical parallels to critique current defense procurement policies, demonstrating sophisticated narrative structuring typical of human analytical writing.