Will the defence boom change the way the industry contracts?

The global defence industry is booming, but will the impact be felt beyond order books and production lines?

The defence sector has historically seen relative stability in its contracting terms, with defence ministries largely in the driver’s seat. However, governments are currently under pressure to build capability quickly and are keenly aware of the need to gain access to cutting-edge technology. As these pressures intensify, it is worth considering whether they could also lead to changes in the way governments and their suppliers contract with each other.

A top-down contracting model

The defence sector is currently experiencing a global, historic boom, driven by conflicts in the Middle East and Ukraine, rising geopolitical tensions and sharply increasing military expenditure in many major markets. The Stockholm International Peace Research Institute (SIPRI) has reported that world military expenditure reached nearly $2.9 trillion in 2025, an increase of 2.9 per cent in real terms over 2024 and the 11th year of consecutive rises.¹

Contracting in the defence sector has traditionally been a case of the buyer (typically a government defence ministry) seeking largely to impose its standard terms – typically pursuant to a competitive tender – on manufacturers (prime contractors). Primes in turn seek to, or are sometimes explicitly required to, ‘flow down’ applicable terms and requirements to their subcontractors.² This ‘top down’ approach tends to lead to relative continuity in contracting terms in the defence sector. However, might the need for ‘speed to capability’ – getting new capabilities into operational use more quickly – and the current worldwide boom in the sector create pressures which begin to change the way that defence contracts are procured, structured and negotiated?

Can market conditions reshape contracting models?

It is interesting to look across to the energy and infrastructure sector as a precedent here. That sector has undergone extraordinary expansion over the last 80 years, and this has put pressure on established contracting models at various times. As a recent example in that sector, capacity constraints, supply-chain disruption and increasing project complexity have put traditional fixed-price risk-transfer models under pressure, encouraging greater use of collaborative structures such as early contractor involvement, partnering and open-book target-cost arrangements.³

Defence procurement has long used a range of pricing models, including fixed-price and cost-reimbursement arrangements, generally within established government contracting frameworks. However, there are indications that greater flexibility is emerging in how those frameworks are applied. One example is the reform of the UK's single-source defence contracting regime, under which alternative pricing methods were introduced in 2024 to provide greater flexibility and support faster and simpler pricing while maintaining the requirement for value for money and a ‘fair and reasonable’ price.⁴ This should not, however, be mistaken for a wholesale move away from traditional pricing models, which remain an important feature of defence procurement. 

What happens when defence needs cutting-edge commercial technology?

Another interesting angle to consider is whether some of the new entrants to the defence sector, particularly those companies which are producing dual-use technologies, may create pressure for change in traditional contracting terms. Defence authorities in several major markets are acutely aware that keeping pace with technological change requires access to innovation developed outside the traditional defence-industrial base (e.g. AI models, autonomy technologies, cybersecurity software, etc.). Indeed, there are already signs of segmentation at procurement level. The UK MOD's new procurement segmentation model includes a specific ‘Rapid Commercial Exploitation’ route for emerging technologies such as software, digital tools and uncrewed systems, while Japan announced a ‘fast-track procurement’ initiative in 2026 aimed at facilitating the rapid adoption of technologies developed by startups and other companies.⁵ However, that raises an important contracting question: if defence customers need access to cutting-edge technologies developed principally for commercial markets, what happens if the suppliers of these products (who sit outside of the defence ecosystem) are not willing to accept traditional defence contracting terms? Where a supplier's technology has valuable commercial applications outside defence, it may have little incentive to accept terms that could adversely affect its wider business and, in some circumstances, may simply decline to supply the defence customer.

One clear area in which this tension is already apparent is intellectual property (IP). Defence procurement regimes can give governments significant rights in contractor IP and technical data, creating a potential issue for non-traditional suppliers whose IP may underpin a much wider commercial business. That creates an obvious commercial tension: a supplier whose IP supports a substantial non-defence business may be reluctant to grant rights which it considers capable of prejudicing that wider business, potentially making participation in a defence procurement commercially unattractive. When the US Department of Defense released its IP Guidebook in 2025, the accompanying statements emphasised the need for “thoughtful management of IP” involving “collaboration with industry to employ modern business models”.⁶ However, the actual solutions to this issue have yet to emerge on an industry-wide basis.

Until such solutions do emerge (in IP and other contracting aspects), a broader question arises around bargaining power: which party will ultimately have greater influence over the contracting terms? The traditional assumption has largely been that suppliers wishing to participate in the defence market must adapt to the requirements of the defence customer. However, the growth of dual-use technology complicates that assumption and creates the possibility of a rebalancing of the traditional dynamic. Where access to cutting-edge dual-use technology is sufficiently important, defence customers may have to consider whether insisting on traditional contracting positions is worth the possibility of losing access to the technology altogether. The answer is unlikely to be uniform. Given governments’ own internal constraints (including reporting requirements), as well as national security requirements, they will inevitably continue to require certain contractual protections, and the wholesale disappearance of standard defence terms seems unlikely.

The more plausible outcome is therefore not the replacement of the traditional defence contracting model, but its segmentation. Traditional primes supplying bespoke military capability may remain largely within established government contracting structures. By contrast, suppliers of commercially developed dual-use technology may have both stronger negotiating alternatives and greater reason to resist terms developed for the traditional defence-industrial base. Governments may ultimately find that attracting the suppliers they want requires not only new procurement pathways, but also greater flexibility in contracting terms once those suppliers arrive at the negotiating table.

It would therefore be premature to predict a wholesale transformation in defence contracting. Standard government conditions are likely to remain deeply embedded in defence procurement. However, the conditions which may drive contractual innovation are increasingly visible: rapidly expanding demand, technological change, a focus on speed to capability, and the arrival of suppliers whose commercial leverage does not depend solely on access to the defence market.

The interesting question may therefore no longer be simply whether new entrants can adapt to the traditional defence contracting model. As competition for technology and pressure for countries to improve their defence capabilities intensifies, it may increasingly be whether the traditional defence contracting model can adapt to them.