Small businesses have long been a centerpiece of federal contracting. By law (the “rule of two”), agencies must set aside contracts for small firms whenever at least two qualified small businesses can compete for the work[1]. This mandates programs like 8(a), HUBZone, SDVOSB, WOSB, etc., giving small vendors critical access to Defense Department business. But recent policy shifts have put those programs under unprecedented scrutiny. In January 2026 DoD Secretary Pete Hegseth announced an agency‑wide “line-by-line” review of every small‑business sole-source and set-aside contract above $20 million[2]. DoD’s stated goal is to trim contracts that don’t “help win wars” and root out suspicious “pass-through” deals where large firms allegedly take most of the work[2]. In practice, the audit has two phases: DoD components first list all covered contracts and terminate any deemed non‑essential to the mission, then check each award’s limitations-on-subcontracting (LOS) compliance before the end of Feb. 2026[3]. Any evidence of “improper subcontracting” or excessive pass-through fees must be sent to DoD/SBA inspectors general and even the Justice Department[4]. In short, the review could terminate some contracts and transform contract‑performance issues into fraud investigations under the False Claims Act[4].
Impact of DoD Contract Enforcement on Small Business Federal Contractors
DoD still needs small firms, but the new enforcement focus raises risks for legitimate contractors. The LOS rules are strict: for example, an 8(a) or other small‐business prime must do at least 50% of the work on a services contract (75% for trades, 85% for general construction)[5]. Violating that (even unintentionally) can both violate contract terms and jeopardize a company’s small‑business status. DoD’s crackdown also emphasizes “mission alignment”: if a set-aside contract isn’t viewed as directly supporting national defense goals, it could be terminated for convenience. That means a small company could unexpectedly lose a major contract – a potentially crippling outcome for a small supplier.
Meanwhile, industry analysts warn that sweeping audits might inadvertently undermine the programs meant to help small firms. By early 2026, federal agencies across the board had launched 8(a) and set-aside reviews. For example, the SBA sent a data call to 4,300 8(a) firms (asking for years of financial records) and by January 2026 had suspended over 1,000 companies for failing to comply[6]. Similarly, Congress and other agencies (Treasury, GSA, Homeland Security) are reviewing preference-based contracts from recent years[7][8]. In this climate, many small contractors report harder bidding conditions. One consultant notes that solo-source 8(a) approvals plunged – only 65 new 8(a) firms were accepted in 2025 versus 500+ in 2024[9][10]. Industry veterans worry this slowdown will shrink the defense industrial base over time. As one former SBA official observes, questions about fraud are legitimate, but the current approach is “causing some chaos” and may stymie genuine small-business opportunities[11][12]. In short, small contractors face a tough balancing act: authorities are actively seeking out fraud and abuse, but auditors must also avoid undercutting the intentional policy to grow small-business participation[5][12].
Key Trends and Recent Actions
- High-Value Contract Reviews (DoD): In mid-Jan 2026, Sec. Hegseth announced a DoD-wide review of all set-asides and sole-source awards over $20 million[2]. This includes every small-business category (traditional, HUBZone, SDVOSB, WOSB, 8(a), etc.)[13]. The goal is to terminate non-mission-critical contracts and refer any LOS violations (“beltway bandit” schemes) to enforcement agencies[2][4].
- SBA 8(a) Audit: Since summer 2025, the SBA has aggressively audited its 8(a) program. A key flashpoint was an Aug 2025 DOJ settlement revealing $550 million in fraud by some 8(a) participants in USAID contracts[14]. In response, the SBA ordered a full‑scale audit of 8(a) sole-source awards[15]. That effort culminated in a Dec 2025 notice to 4,300 firms for detailed records, and in Jan 2026 the agency suspended about 1,000 firms who missed the deadline[6]. (Suspended 8(a) firms cannot win new awards while appeals are pending[16].) The SBA also issued new guidance to run the 8(a) program on a race-neutral basis, removing earlier presumptions about “social disadvantage”[17].
- Other Agency Scrutiny: The Treasury Department launched audits of all “preference-based” awards across its agencies (about $9 billion) to hunt similar pass-throughs[18]. Congress (Sen. Joni Ernst) asked 24 agencies to pause sole-source 8(a) awards and report on contract compliance from FY2020 onward[19]. In short, multiple government bodies are now scrutinizing set-aside contracts for improper subcontracting or inflated fees.
- Industry Reaction: Many small-business leaders insist that the vast majority of set-aside contracts are legitimate and crucial for innovation. Norm Abdallah of Hui Huliau (an 8(a) tech firm) notes the 8(a) program helps new companies gain experience; he warns that audit-driven slowdowns could “leave a mark” on America’s manufacturing capacity[20]. Others point out that fraud isn’t unique to small-business programs – in fact, one industry expert argues “there is more fraud in non-small-business socio-economic programs” than in 8(a) or similar set-asides[12]. This debate suggests the risk of over-correction: enforcement must target true abuse without choking off the pipeline of new small suppliers.
Compliance Checklist for Contractors
Given the landscape, small contractors should stay vigilant about key requirements:
- Mission Justification: Keep documentation that clearly ties the contract’s work to DoD’s mission. If auditors question “necessity,” be ready to explain how the work improves readiness, support to warfighters, or other defense objectives[3].
- Subcontracting Limits: Track all subcontractor spend against FAR 52.219‑14 limits. Ensure the prime firm (or its independent disadvantaged owner) is doing the required percentage of work. Large departures from those percentages can trigger probes. Remember, current FAR rules require small primes to perform at least half of services contracts (and higher percentages for construction)[5].
- Truth in Bid Data: Make sure proposals, bid prices, and invoices reflect actual costs and market rates. Hegseth’s guidance explicitly instructs reviewers to check that contracts are “performed at or below market rates”[4]. Inflated charges or undisclosed relationships (like undisclosed consulting agreements) could lead to False Claims Act liability.
- Recordkeeping: Maintain clear records of who does what work. Gathering invoices, timesheets, organizational charts and emails can help respond to any DoD query about LOS compliance. As one legal advisory notes, contracting officers and the SBA conduct annual reviews of 8(a) firms’ financials and performance; if gaps appear, investigators could get involved[21].
- Mandatory Disclosures: FAR 52.203‑13 requires contractors to self-report any credible evidence of fraud or material noncompliance. If an audit or internal review uncovers a past problem (e.g. an overspend or off-books subcontracting), consult counsel about timely disclosure. Failure to do so can itself be a basis for debarment or FCA exposure[22].
By proactively auditing themselves and keeping compliance up-to-date, small businesses can reduce the chance of punitive enforcement. It’s also wise to diversify business development: don’t rely on a few large set-aside awards. Having multiple active contracts and a good track record strengthens a firm’s defense if any single contract comes under fire.
Looking Forward
The recent DoD actions make clear that contract enforcement is tightening across the board, especially for big-dollar small-business set-asides. But small businesses remain integral to the defense industrial base. DoD still needs the agility and innovation that small primes provide, especially in emerging tech and manufacturing niches. The challenge will be finding the right balance: rooting out real abuse while preserving the programs that help entrepreneurs break into defense contracting.
To succeed in this environment, many small contractors are turning to smarter tools. For example, Procura offers an AI-powered analytics platform that helps firms manage bid opportunities end-to-end. Procura continuously scans SAM.gov for new solicitations, reads entire RFPs (including SOWs and attachments), and scores each opportunity against a company’s capabilities[23][24]. Rather than digging through manuals, a contractor gets concise summaries, fit-scores, and alerts on requirements or red flags. This kind of technology lets a small business focus on submitting strong, compliant proposals instead of spending endless hours searching. By rapidly identifying contracts that truly match a company’s profile and government requirements, tools like Procura can help teams spend more time demonstrating mission relevance and value — and less time browsing a sea of opportunities. In short, with growing compliance demands, small contractors need to win business and work it carefully. Procura and similar platforms aim to give them that edge, saving thousands of hours on manual research while highlighting key terms and risks in complex solicitations[23][24].
Sources: Recent news and analysis from Federal News Network, legal advisories, and small-business publications track DoD’s audit and SBA’s 8(a) enforcement efforts[1][3][6][7]. These sources provide the facts and expert commentary summarized here. (Procura material is from its company site[23][24].)
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[1] [13] How far can DoD contract enforcement go without undercutting small‑business programs? | Federal News Network https://federalnewsnetwork.com/contracting/2026/02/how-far-can-dod-contract-enforcement-go-without-undercutting-small%e2%80%91business-programs/
[2] [3] [4] [5] DOW Announces Review of All Small Business Set-Aside Contracts Over $20 Million | Insights | Holland & Knight
https://www.hklaw.com/en/insights/publications/2026/01/dow-announces-agency-wide-review
[6] [8] [9] [16] [17] SBA suspends 1,000 8(a) firms for not submitting data | Federal News Network
[7] [14] [15] [18] [19] [22] DoW Announces Line-by-Line Review of Certain 8(a) Contracts Amid Government-wide Scrutiny of the 8(a) Program | Subject to Inquiry
[10] [11] [12] [20] [21] 8(a) program pushed further to the edge by DoD audit | Federal News Network
[23] [24] Procura Federal – AI-Powered Federal Contract Search & Analysis