Improving the DOD’s ESOP Pilot Program
In March 2025, the Government Accountability Office (GAO) published a detailed assessment of the Department of Defense's (DOD) Employee Stock Ownership Plan (ESOP) pilot program. Authored by Mona Sehgal, Director of Contracting and National Security Acquisitions at the GAO, the report highlights significant opportunities for enhancing the pilot, aimed at increasing innovation and broadening the defense industrial base through employee-owned businesses.
Initiated under the Fiscal Year 2022 National Defense Authorization Act (NDAA), the ESOP pilot program permits the DOD to award follow-on contracts noncompetitively to qualifying S corporations that are wholly employee-owned through an ESOP. The intent behind this initiative was to leverage the innovative potential and broaden DOD’s contracting base through businesses that share ownership with employees. As of the report’s publication, the DOD had awarded eight contracts totaling over $450 million.
However, the GAO found significant gaps in DOD's execution of this pilot program. Key among the findings was the absence of adequate guidance provided to contracting officers. Initial guidance from November 2022 lacked clear instructions on how contracting officers should validate contractor eligibility, resulting in varied and sometimes insufficient documentation, including one award to a contractor subsequently determined ineligible. While updated guidance issued in December 2024 improved documentation recommendations, it still failed to adequately clarify the characteristics of ESOP entities, particularly in relation to other socioeconomic statuses such as woman-owned or veteran-owned businesses.
Moreover, the pilot's design and implementation did not fully align with the GAO's established best practices for pilot programs. Specifically, the DOD partially met only three of the five essential criteria for effective pilot design. The DOD articulated broad goals, such as expanding the industrial base, but did not define measurable objectives or clearly outline a methodological approach for evaluating the pilot's effectiveness. Further, DOD lacked a structured evaluation plan or strategy to determine the pilot's scalability. This oversight risks leaving DOD without critical data to assess if the ESOP model can effectively support broader defense contracting goals.
The GAO also highlighted inadequate two-way stakeholder communication. Although feedback was solicited from contracting officers and industry participants, the responses collected were inconsistent and incomplete. Without comprehensive stakeholder engagement, the DOD risks overlooking important insights that could inform program improvements.
In response, the GAO provided six recommendations aimed at refining the program. These include the need for clearer guidance for contracting officers, the establishment of measurable program objectives, and the development of a robust evaluation plan. Additionally, the GAO emphasized the importance of determining the program's scalability and establishing ongoing, meaningful two-way communication with internal and external stakeholders.
DOD concurred with all recommendations, indicating its commitment to addressing these critical issues. With the pilot program set to continue through 2029, DOD has a timely opportunity to implement these improvements, ultimately shaping the pilot into a viable model for broader application.
This blog is a summary of the GAO's report (GAO-25-107531), authored by Mona Sehgal, and does not guarantee complete accuracy. It is intended for informational purposes only and does not constitute legal advice.
