On January 16, 2026, U.S. Secretary of War Pete Hegseth announced that the Department of War (DOW) will conduct a line-by-line review of all 8(a) and small business set-aside contracts valued over $20 million. The initiative expands beyond just sole-source 8(a) awards to include competitive set-aside contracts above that threshold as well.
The goal, according to the announcement, is to ensure that these contracts:
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Are critical to mission needs (with a focus on warfighting capabilities), and
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Comply with subcontracting and performance requirements — particularly that the small business prime is performing substantive work and not acting as a “pass-through” to larger firms.
Officials have characterized the action as part of broader efforts to reduce waste, fraud, and “improper subcontracting,” where a small business collects fees and outsources most of the work to larger firms.
Scope of the Review:
According to the memorandum:
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Phase 1: DOW components must identify all covered contracts by January 31, 2026 and assess whether each is “necessary for mission” and critical to warfighting priorities.
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Phase 2: By February 28, 2026, officials must complete a detailed subcontracting compliance audit to confirm that prime contractors are performing the substantive work at or below market rates.
The review may result in contract terminations for convenience or referrals for potential fraud investigations if contracts are found not to meet requirements.
Why This Matters:
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Expanded Oversight: This action broadens scrutiny of high-value SBA 8(a) and small business awards beyond existing SBA and Treasury audits.
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Compliance Pressure: Contractors holding large set-aside awards now face urgent compliance demands to demonstrate adherence to subcontracting limitations, performance expectations, and fair pricing.
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Market Impact: Affected contracts that are deemed non-critical could be terminated, with potential implications on partner teams and subcontracting opportunities.
Practical Takeaways for Contractors:
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Review high-value contracts: Immediately assess set-aside and 8(a) contracts over $20M for subcontracting compliance and prime performance.
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Gather documentation: Compile staffing logs, invoices, COR records, deliverables, and pricing evidence to support compliance.
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Engage COs early: Begin proactive conversations with contracting officers and SBA business opportunity specialists to clarify expectations and address questions.
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Prepare for outcomes: Understand your rights and options in the event of a contract termination, including termination settlement proposals and possible protests under the Rule of Two.
Bottom line: The DOW’s review marks a significant escalation in federal oversight of high-value small business and 8(a) contracts. Contractors must act quickly to ensure contracts meet mission alignment and regulatory compliance otherwise they may face terminations or deeper investigations.
Source: SECWAR MEMORANDUM