Taxpayers fund factories Pentagon says contractors should build

By Brett Rowland
The Center Square

The Pentagon is asking Congress to approve a new model that expects defense contractors to fund their own factory expansions, while simultaneously handing out $191 million in taxpayer-funded grants to expand those same factories.

Since December 2024, the Pentagon has made nine investments totaling $191 million in the solid rocket motor industrial base through the Defense Production Act’s Title III authority, using grants and co-investments to boost production of missiles and rocket motors the military says are in short supply.

Those investments – awarded to companies including Anduril Industries, General Dynamics Ordnance and Tactical Systems, and Materials Resources LLC – cover everything from rocket nozzles and case insulation to ignition and safety systems for solid rocket motors.

The Pentagon expanded that approach in January with a $1 billion direct equity investment in L3Harris Technologies’ missile business – a deal that closed in April – to accelerate solid rocket motor production for systems including Patriot, THAAD, Tomahawk and Standard Missile programs. The investment will convert to common equity upon an initial public offering of the Missile Solutions business. L3Harris filed a draft registration statement with the Securities and Exchange Commission on April 29, moving the offering closer to completion.

“I can’t emphasize enough the requirement for speed,” Pentagon acquisitions chief Michael Duffey said at the time, adding that the department “is done writing checks to industry for capacity expansion with no promise of the return.”

Even as Duffey made that declaration, the Pentagon was pursuing a separate track – multi-year procurement contracts lasting up to seven years for critical munitions – under which contractors must fund their own capital expenditures and face financial penalties if they fail to meet agreed-upon production ramp rates.

“We’re making them put skin in the game,” Pentagon budget chief Jules “Jay” Hurst said at an April 21 budget briefing. “We’re giving them a multi-year order, and we expect them to meet the ramp rates that they agree to, and if they don’t, there’ll be penalties for them.”

The Pentagon has not publicly detailed how it determines which contractors receive direct government investment and which are expected to fund expansions themselves, a distinction that could shape how billions of dollars flow through the defense industrial base in the years ahead.

Hegseth told lawmakers on May 12 that the new approach is already working, saying the department has helped stimulate more than 250 private investment deals in 39 states worth more than $50 billion in private capital, a figure The Center Square could not independently verify.

“American companies are investing in America with their own capital – a historic demonstration of American manufacturing and defense revitalization; all with their money, not Uncle Sam’s,” Hegseth said.

The Department of War did not respond to questions from The Center Square about how it determines which contractors receive government co-investment and which are required to fund their own expansions, or whether it intends to phase out co-investment as the new procurement model matures.

The spending debate comes as the Pentagon faces mounting pressure to prove it can manage money at any scale.

The Department of War has failed every department-wide audit since Congress mandated them in 2018, and the Government Accountability Office found in its 23rd annual weapon systems assessment, published June 2025, that major defense programs now take nearly 12 years on average to deliver even an initial capability to troops, up 18 months from the prior year.

Combined costs across 30 major programs increased by $49.3 billion, the GAO found, with the Air Force’s Sentinel ICBM program alone accounting for $36 billion of that growth.

Despite those findings, the president’s fiscal year 2027 budget asks Congress to approve a 42% increase in military spending.

“One of the major challenges of this budget is to be able to obligate dollars in a timely manner, because it’s such a large increase,” Hurst said.

Congress’s own watchdog says the Pentagon continues to struggle to deliver weapons programs on time and within budget.

“DOD plans to invest nearly $2.4 trillion to develop and acquire its costliest weapon programs,” the GAO report noted, “but it continues to struggle with delivering timely and effective solutions to the warfighter.”

Sen. Mitch McConnell, R-Ky., chairman of the Senate Appropriations Subcommittee on Defense, questioned the budget’s reliance on $350 billion in reconciliation funding, warning that “regular order appropriations are the right way to meet the scale and scope of the requirements of our military.”

Sen. Jack Reed, D-R.I., the ranking member of the Senate Armed Services Committee, questioned whether the Pentagon was capable of managing the scale of investment being requested.

“The U.S. Department of Defense doesn’t lack funding, but it currently lacks responsible civilian leadership and management,” Reed said in a statement responding to the budget request.

The concern is practical: if the reconciliation funding fails to pass, manufacturers could lose the long-term certainty the Pentagon says is necessary to justify private factory expansion.

The defense industry’s largest trade association says uncertainty remains a challenge. The National Defense Industrial Association’s Vital Signs 2026 report found that 63% of private-sector respondents identified budget instability as their top challenge, while nearly half cited unclear demand signals.

“A robust defense industrial base is among the most powerful tools we have to deter conflict and protect our national security,” said David Norquist, NDIA president and CEO.

Anduril Industries illustrates the contradiction. The California defense company received $58 million in taxpayer co-investment to expand solid rocket motor production while simultaneously winning a prime contractor role on the Air Force’s next-generation Collaborative Combat Aircraft program, even as the Pentagon argues defense firms should increasingly finance their own factory expansions.