You're overlooking the critical difference between the government-as-government and the government-as-purchaser. You have to play on Walmart's terms--which are draconian and exacting--to sell to Walmart. Why should the DOD be any different when it comes to stuff the DOD is buying or indirectly paying its contractors to buy?

Yeah, the DOD is such a huge purchaser that it can "ruin you" by blacklisting you if you don't play by its terms. The same is true about Walmart if you're a grocery supplier, Apple if you make electronics components, etc. Private companies absolutely exercise their power like that.