Microsoft has secured a substantial contract with the U.S. Army, potentially worth up to $22 billion, to develop the Integrated Visual Augmentation System (IVAS), a combat-ready augmented reality headset.

Since winning the contract in 2019, Microsoft has faced significant challenges with the IVAS, particularly regarding reliability and ruggedness during initial testing phases.

Although the latest version, IVAS 1.2, shows improvements in reliability and display clarity, the Army has not increased its order volume.

The Army has set a clear requirement that the unit cost of the IVAS headsets must be significantly lower than the current projected price of $80,000.

Notably, about half of the total costs associated with the IVAS system are linked to the headset itself, with the remainder covering program management and support.

In response to pricing pressures, Microsoft is actively pursuing cost reduction strategies across various components, labor, and supply chains.

At the recent AUSA conference, Army acquisition chief Doug Bush acknowledged improvements in testing but stressed the necessity for an affordable unit cost to proceed to full production.

Field testing for the IVAS is slated to begin early next year, with critical tests scheduled between April and June 2025.

In a strategic move, the Army is contemplating launching a new competition called 'IVAS Next' later this year, which could lead to Microsoft being replaced as the prime contractor.

To bolster its position and enhance the IVAS's capabilities, Microsoft has partnered with defense startup Anduril, co-founded by Oculus co-founder Palmer Luckey, to integrate real-time threat detection features.