On January 16, 2026, Secretary of Defense Pete Hegseth issued a directive ordering every Department of Defense agency and component to compile a list of all small-business sole-source and set-aside awards above $20 million in contract value, then conduct a line-by-line review of each. The list was due January 31; compliance verification reports were due February 28. Reporting from Holland & Knight and Crowell & Moring tracked the expansion of the audit's original 8(a)-only scope to all small-business set-asides.

What's actually being checked

Three things, per the memorandum:

  • Pass-through and fronting schemes. The directive specifically calls out "illegal pass-through schemes" — arrangements where a small firm holds the contract but a large firm performs most of the work, in violation of FAR limitations on subcontracting.
  • Limitations on subcontracting compliance. Small primes must self-perform a minimum percentage of contract work depending on contract type (50% for services, 50% for supplies, 15% for general construction).
  • Mission alignment. Per the memo, contracts must "have the effect of making DoD more lethal" — language that suggests scrutiny of services contracts seen as administrative or non-warfighter-adjacent.

What this means in practice

For legitimate small primes operating compliant arrangements, the review is a documentation exercise — but a serious one. Auditors will want time-stamped records that show the small prime was actually performing the percentage of work required. Standard ask-list:

  • Hours-by-FTE breakdowns for the past 12–24 months
  • Subcontractor task assignments and deliverable acceptance records
  • Cost share between prime and subs at the CLIN level
  • Evidence the small prime — not the sub — directs technical scope

If your firm cannot produce these in 30 days, that itself is a finding.

Where the risk really sits

Per Greenberg Traurig's analysis, the highest-risk arrangements are:

  1. Recently-graduated 8(a) firms still operating against pre-graduation arrangements
  2. Joint ventures where the JV partner does most of the work
  3. Small primes with subcontractor concentration above 50% on a single sub
  4. Award patterns showing repeat re-competitions to the same small prime in narrow specialties

What to do this week

  • If you hold any small-business set-aside contract above $20M: pull your subcontracting compliance records now, before you're asked.
  • Verify your limitation-on-subcontracting math at the contract level, not the firm level. The math has to work for each contract individually.
  • If you have any uncomfortable findings during your own review, retain government-contracts counsel before responding to a request for information.

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