DoW’s Previously Announced 8(a) Audit Expanded to Include All Small Business Set-Aside Awards over $20 Million

As we previously reported, on January 16, 2026, the Department of War (DoW) announced an audit of 8(a) sole source awards over $20 million, joining the previously-announced audits by the Small Business Administration (SBA) and U.S. Treasury Department (discussed here and here).  A DoW memorandum also dated January 16, 2026 but only recently made public reveals that this audit is much broader in than originally announced.  Any active 8(a) sole source contract, 8(a) set-aside contract, or small business set-aside contract over $20 million is under scrutiny. 

Not only will DoW be assessing criticality and compliance with the limitations on subcontracting of all such contracts, DoW also will consider whether these contracts are “being performed at or below market rates.” 

The deadlines for gathering the relevant information, issuing terminations for convenience, and reporting results of this audit to DoW’s Department of Government Efficiency (DOGE) is extremely expedited.  Specifically, the list of “covered contracts” (i.e., those contracts subject to this review) must be compiled by January 31, 2026.  The results of the review are then owed to DoW’s DOGE by February 28, 2026. 

The bottom line for contractors is that DoW will likely pose questions to contractors performing “covered contracts.”  At a minimum, small business contractors performing a “covered contract” should be prepared to immediately respond to any outreach received from DoW regarding the topics under review. 

The stated focus remains squarely on weeding out waste, fraud, and abuse. The DoW memo explains that, because the “DoW has almost ten times the 8(a) contracting spend of any other agency,” DoW’s efforts “are going above and beyond any other agency [] to combat waste, fraud, and abuse.” The memo states that in Fiscal Year 2024, DoW awarded $18 billion in contracts to 8(a) Program participants and more than $80 billion to small businesses.

As described in DoW’s January 16 memo, the review will be conducted in the following fashion:

Step 1: Identification of Contracts Subject to Scrutiny

Each DoW component must identify by January 31, 2026, any contract that meets the following criteria (referred throughout this alert as the “covered contracts”):  

1. A sole source award to an 8(a) firm in an amount over $20 million.
2. A set-aside award to an 8(a) firm in an amount over $20 million.
3. A set-aside award to a small business in an amount over $20 million (identifying the type of set-aside).

Based on the memo, it appears that only active contracts meeting these criteria are to be identified for this review.

To be clear, the inclusion of any set-aside to a small business — regardless of the nature of the set-aside (i.e., whether it is service-disabled veteran-owned small business (SDVOSB), women-owned small business (WOSB), HUBZone, or merely a small business set-aside) — is a major escalation by DoW in the broader government’s stated focus on compliance with the limitations on subcontracting.

Step 2: Necessity Review (to Result in Immediate Terminations for Convenience)

The relevant assistant secretary, senior executive service civil servant, or military equivalent is then to review and determine whether these contracts are consistent with the secretary of war's May 27, 2025, memorandum on government efficiency, as well as whether the contracts are “necessary for mission.” Any such contract “that is not critical to the Department's warfighting capabilities” is to be terminated for convenience if possible.

Step 3: Limitations on Subcontracting Compliance Check – Including Market Rate Review

Upon completion of step two (i.e., the necessity review and “contract terminations”), the assistant secretaries, senior executive service civil servants, or military equivalents will then direct the relevant offices to complete a detailed secondary review “of current contract performance data to confirm that each contractor is complying with applicable limitations on subcontracting.” This review is to be completed by February 28, 2026.

The types of information that the memo indicates will be relevant include:

• Contractor invoice and payment records à in addition to invoices, reviewers are encouraged to consider labor hour reports and payment ledgers.
• Contracting officer’s representative logs/reports.
• Personnel confirmation à The memo calls on reviewers to “confirm the primary points of contract and personnel performing the substantive, specialized work required by the statement of work belong to the prime contractor.” This suggests that, in addition to the limitations on subcontracting, ostensible subcontractor concerns are also at issue as the current limitations on subcontracting use a straightforward calculation to determine compliance and are not concerned with which entity performs the “substantive, specialized work required by the statement of work.” That more subjective analysis is more relevant to the only procurement-specific SBA affiliation test, the ostensible subcontractor rule.
• Contract deliverables and technical reports à The memo calls on reviewers to “confirm the prime contractor, rather than a subcontractor, is providing the substantive, specialized work required by the statement of work.” This again suggests a focus on ostensible subcontractor concerns.

DoW’s January 16 memo states that “[a]s part of these reviews, the Assistant Secretaries, Senior Executive Service civil servants, or military equivalents should also confirm that the contracts identified are being performed at or below market rates.” This focus on rates being charged to the government is not part of a typical limitations on subcontracting compliance review, further reinforcing the idea that the government’s focus on “waste, fraud, and abuse” in the 8(a) Program — and now, per DoW, small business programs more generally — may stem from the idea that small business primes have been extracting profit above market rates.

While the memo instructs reviewers to “first utilize” reports in the government’s possession, such as “contract pricing reports and Defense Contract Audit Agency audit reports,” to the extent that reviewers have insufficient “information readily available” in such reports, contracting officers and contracting officer representatives are to “request additional information from prime contractors (e.g., staffing logs, payment records, and other relevant information).”

Step 4: Reporting Results  

All contractors performing on “covered contracts” should be aware of the varied audiences that may receive information about any alleged problems identified during the review.

First and foremost, referrals for further investigations and enforcement actions are expected to result. DoW’s January 16 memo expressly instructs that “[a]ny evidence of improper subcontracting, such as evidence of excessive pass-through charges” should be sent to the DoW Inspectors General and the SBA for review. The memo also states that there will be referral to the Department of Justice “where deemed necessary by such offices.”

Second, the stated audience, per DoW’s January 16 memo, is the DoW DOGE team and the under secretary of war (comptroller). Once these reviews are completed, each assistant secretary, senior executive service civil servant, or military equivalent must report to these offices with the following information:

1. A list of the “covered contracts.”
2. Of the “covered contracts,” indication of whether such contracts were terminated for convenience. For any 8(a) sole source awards not terminated for convenience or identified for future termination, “the results of an examination determining whether there are any other providers that offer comparable services for better value.”
3. A list of all “covered contracts” that exceed the “50% limitation on subcontracting.” “This should include an estimate of the percentage of the amount paid by the Government for contract performance to subcontractors that are not similarly situated.”
4. A list of all “covered contracts” “that are priced above market rate but that the Department cannot terminate immediately,” to include “a plan to terminate the contract within 90 days while still maintaining necessary services.”
5. An updated budget for FY 2027, which must account for “any action taken pursuant to this memorandum.” “The updated budgets should reflect a substantive reduction in contract spending, within the audited contracts, due to elimination of pass-through abuse and improper subcontracting practices.”

All reports are to be made to the DoW DOGE lead by no later than February 28, 2026.