DOD Contracting: Opportunities Exist to Improve Pilot Program for Employee-Owned Businesses
Fast Facts
DOD established a pilot program to award certain contracts, without competition, to companies organized as “employee stock ownership plans.” ESOPs provide people with direct ownership of the company they work for and other benefits.
DOD's guidance on the pilot didn't give contracting officers enough information to determine whether companies were eligible for the program. As a result, DOD awarded a contract to an ineligible company. DOD updated its guidance but didn't provide other details that the contracting officers might need.
We recommended that DOD update this guidance, among other things.
Highlights
What GAO Found
The Department of Defense (DOD) awarded eight contracts under its employee stock ownership plan (ESOP) pilot program. ESOPs are benefit plans in which company stock held by a trust is allocated to employees as a retirement benefit. DOD issued a memorandum in November 2022 outlining the parameters of the pilot, but did not provide contracting officials with adequate guidance, such as collecting robust data to determine a contractor's eligibility. GAO found evidence that DOD awarded a pilot program contract to an ineligible contractor. DOD issued updated guidance in December 2024 that included ways for contracting officers to determine a contractor's eligibility. However, the updated guidance did not provide other information on key aspects of the program that could better position contracting officers to properly implement the pilot program.
Furthermore, DOD's efforts to develop and implement the pilot program do not fully align with GAO's leading practices for pilot program design. These practices state that a pilot program should be designed to collect data for program officials to make well informed decisions.
DOD's ESOP Pilot Program Does Not Fully Align with GAO Leading Practices
DOD's efforts partially align with three of the leading practices:
- DOD officials stated that one of their priorities was to expand the defense industrial base but did not identify any measurable objectives.
- DOD described the type of data needed to assess the pilot program, but did not clearly articulate an assessment methodology.
- DOD received some feedback from contracting officers and contractors and intends to solicit additional input, but does not yet have a plan for doing so.
DOD's efforts do not align with the other two leading practices. First, DOD has not developed an evaluation plan. Second, DOD does not know the number of ESOP corporations that could benefit from the program—information needed to make a scalability determination. Without a well-designed pilot program that fully aligns with leading practices, DOD will not have data to identify program successes and challenges to inform future phases. But DOD still has an opportunity to make improvements, including implementing leading practices.
Why GAO Did This Study
Committees in Congress have stated that ESOP corporations can help DOD increase the number and range of companies it contracts with to foster innovation and broaden the defense industrial base. Congress authorized DOD to establish a pilot program to award follow-on contracts, on a noncompetitive basis, to contractors that are S corporations wholly owned by an ESOP. DOD awarded contracts valued collectively at over $450 million under the program, which expires in 2029.
The National Defense Authorization Act for Fiscal Year 2022 includes a provision for GAO to review DOD's ESOP pilot program activities. This report assesses the extent to which (1) DOD has effectively managed the ESOP pilot program, and (2) the program aligns with leading practices for pilot program design.
GAO reviewed relevant legislation, pilot program requirements, and contract documentation; interviewed DOD officials and contractor representatives; and compared DOD's pilot program plans and efforts against GAO leading practices for pilot program design.
Recommendations
GAO is making six recommendations to DOD, including that it provides additional guidance for contracting officials in implementing the ESOP pilot program, and ensures that the ESOP pilot program better aligns with the five leading practices for pilot program design. DOD concurred with all of GAO's recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Defense | The Secretary of Defense should ensure that the Under Secretary of Defense for Acquisition and Sustainment provides additional guidance to contracting officials on key program requirements to further reduce the risk of awarding a contract to ineligible contractors. (Recommendation 1) |
In March 2025, DOD's Defense Pricing, Contracting, and Acquisition Policy (DPCAP) issued revised guidance that provided detailed instructions through standardized forms and included a frequently asked questions (FAQ) document that provides clarifications on procedural requirements. The FAQ document is considered a living document and is periodically updated as information is gathered during the second phase of the pilot program. The FAQ document addressed circumstances of ineligibility for contractors including that a woman-owned business and other small business concerns, such as veteran-owned businesses that require direct ownership, are not eligible to participate.
|
| Department of Defense | The Secretary of Defense should ensure that the Under Secretary of Defense for Acquisition and Sustainment establishes well-defined, appropriate, clear, and measurable objectives for the ESOP pilot program. (Recommendation 2) |
DOD concurred with this recommendation. In April 2025, DOD's DPCAP issued an action memo that established well-defined, appropriate, clear and measurable objectives for the pilot program. Specifically, one objective is to increase the number of wholly-owned ESOP contractors participating in the program by five percent annually, with baseline measurements established from the beginning of Phase 2. Another objective is to increase by five annually the number of contractors in the program who have implemented a wholly-owned ESOP structure during the pilot duration, with baseline measurements established from the beginning of Phase 2.
|
| Department of Defense | The Secretary of Defense should ensure that the Under Secretary of Defense for Acquisition and Sustainment, after establishing clear and measurable objectives, clearly articulates a data collection and assessment methodology for its ESOP pilot program. (Recommendation 3) |
In April 2025, DOD's DPCAP issued an action memo that laid out a data collection and assessment methodology. A DPCAP official stated that they will have a multi-source data collection approach. They will rely on information obtained from application packages received from contractors and post-award questionnaire results. Application packages will collect information on the number of companies applying to the program and how many of those companies may have become wholly-owned ESOPs after the pilot program's start of Phase 2. However, according to a DPCAP official, there have not been any contract awards since the pilot program's start of Phase 2, so their office has not yet received post-award survey results. DPCAP officials added that the program has received a few applications for phase 2 of the pilot, and they anticipate the first contract award to be in the fall of 2025. Since DPCAP has recently just started collecting data, it is too early to tell if the data being collected will appropriately measure their stated objectives.
|
| Department of Defense | The Secretary of Defense should ensure that the Under Secretary of Defense for Acquisition and Sustainment, after establishing clear and measurable objectives, develops a plan to evaluate ESOP pilot program results. (Recommendation 4) |
In April 2025, DOD's DPCAP issued an action memo stating how DPCAP plans to evaluate the data collected as part of the pilot program. In July 2025, a DPCAP official stated they plan to review information from application packages and post-award surveys to determine if pilot program objectives are met. However, according to a DPCAP official, there have not been any contract awards since the start of Phase 2, so their office has not yet received post-award survey results. Without data from survey results , it is too early to know if the planned data assessment will appropriately measure DPCAP's stated objectives. A DPCAP official anticipated that they will receive the first Phase 2 post-award survey results in early Spring 2026.
|
| Department of Defense | The Secretary of Defense should ensure that the Under Secretary of Defense for Acquisition and Sustainment includes an assessment of scalability in the ESOP pilot program to inform decisions about whether and how to implement the program more broadly. (Recommendation 5) |
In June 2025, the Office of the Under Secretary of Defense for Acquisition and Sustainment sent a report to the House Armed Services Committee detailing DOD's DPCAP assessment of the current number of businesses eligible to participate in the pilot program and how successful the pilot program may be in encouraging more businesses in becoming wholly-owned ESOPs. A DPCAP official stated they will measure success of the program based on meeting the two measurable objectives of the program, which are to increase the number of wholly-owned ESOP contractors participating in the program by five percent annually, with baseline measurements established from the beginning of Phase 2, and to increase the number of contractors participating in the program who have implemented a wholly-owned ESOP structure during the pilot duration by five annually, with baseline measurements established from the beginning of Phase 2. Additionally, this official stated that they plan to continually assess the number of eligible participants and the two measurable objectives during the pilot program, currently scheduled to end in December 2029.
|
| Department of Defense | The Secretary of Defense should ensure that the Under Secretary of Defense for Acquisition and Sustainment incorporates appropriate, two-way communications with internal and external ESOP pilot program stakeholders, such as contracting officers and industry, about the design and operation of the pilot. (Recommendation 6) |
In April 2025, DPCAP issued an action memo outlining its plan to increase communication to stakeholders. For example, it has conducted quarterly meetings with policy chiefs, issued newsletters to contracting officers, and updated its "Frequently Asked Questions" web page which is available to both industry and internal DOD stakeholders, such as contracting officers. DPCAP has also held meetings with industry groups where DPCAP officials discussed the ESOP pilot program.
|