What to Know About the Department of Defense’s Review of 8(a) and Small Business Awards
•February 2, 2026
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Why It Matters
This review reflects heightened DoD scrutiny of how taxpayer dollars are spent on small‑business set‑aside contracts, impacting billions of dollars in federal procurement. Contractors who fail to demonstrate compliance risk contract termination, while those prepared can safeguard critical work and maintain access to lucrative defense contracts.
What to Know About the Department of Defense’s Review of 8(a) and Small Business Awards
The Department of Defense (DoD) issued a memorandum on January 16, 2026 to announce a two‑stage review of small business set‑aside and 8(a) contract awards over $20 million for possible terminations for convenience. This review is occurring quickly, and contractors should be prepared to understand what DoD is investigating and respond quickly to agency requests.
The DoD, which had $18 billion in contracts to 8(a) program participants and more than $80 billion to small businesses in FY 2024 (“almost ten times the 8(a) contracting spend of any other agency”) identified several bases for the review. First, certain small business and 8(a) awards may not be essential to support the warfighter asserting that “the DoW has no room in its budget for DEI (diversity, equity and inclusion) and other wasteful contracts that do not advance our core mission of creating a lethal fighting force.” Second, large businesses may be inappropriately performing set-aside contracts through excessive pass-through arrangements. Third, the government may be paying above market rates for these set-aside contracts.
An Overview of the DoD’s Review
In stage one, the DoD tasked its components to identify responsive contracts and assess whether each award is “mission critical.” Contracts for work that is deemed non‑essential are slated for potential termination for convenience. Components were required to complete this stage by January 31, 2026.
In stage two, the DoD will validate compliance with limitations on subcontracting and determine whether contractors’ pricing is at or below market rates. Agencies are required to finish this second step and report their findings to the Department of Government Efficiency (DOGE) by February 28, 2026.
Based on the memorandum, it is unclear how DoD agencies will conduct their review or what will occur after the information is reported to DOGE. Similar to DOGE’s review of contracts in 2025, agencies may lean heavily on artificial intelligence (AI) to review contracts and related data in a short time frame.
The Scope of the Review
Agencies are instructed to confirm responsive contractors’ compliance with limitations on subcontracting through examining records such as invoices, payment ledgers, staffing logs, Contracting Officer’s Representative (COR) reports, and deliverables. Agencies must also confirm that performance is at or below market rates through consulting pricing reports, Defense Contract Audit Agency (DCAA) audit reports, and other information requested from prime contractors if necessary. Evidence of improper subcontracting or “excessive pass‑through charges” will be referred to Inspectors General and potentially the Department of Justice.
Tips for Contractors
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Assemble responsive documentation in advance. Gather invoices, labor hour reports, payment records, COR logs, staffing confirmations, technical reports, and key deliverables that show your personnel are performing the substantive work in accordance with the limits prescribed by Federal Acquisition Regulation (FAR) 52.219-14 and 13 CFR § 125.6.
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Proactively validate compliance. Reconcile subcontracting percentages against FAR 52.219-14 across all covered contracts over $20 million and prepare clear calculations and supporting documentation.
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Substantiate market‑rate pricing. Compile rate build‑ups, competition data, catalog/market surveys, and any DCAA/Defense Contract Management Agency audit support to demonstrate that pricing is in line with the market.
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Monitor and respond to agency requests quickly. Contractors should designate a point of contact to lead any responses to the government and ensure accurate, consistent submissions that mitigate risk.
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Reach out to your Small Business Administration representatives and outside counsel for guidance if you are contacted by an agency.
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Plan for termination scenarios. If the agency discusses terminating your contract for convenience, contact outside counsel to assist in preserving your rights with a settlement proposal.
Although the review signals heightened scrutiny of pass‑throughs and pricing, well‑prepared contractors that document compliance and articulate mission value will be best positioned to navigate the review and protect awards that advance critical national defense objectives.
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