DoD and SBA Ramp Up Scrutiny on Small Business Contracts

This review stems from a January 16, 2026, memorandum directing a department-wide look at all small business set-aside and 8(a) sole-source contracts over $20 million. The stated goals are to eliminate contracts not contributing to warfighting capabilities and to root out issues of fraud, excessive profiteering, and improper pass-throughs where prime contractors subcontract the majority of the work. The DoD's action aligns with broader executive branch concerns and precedes a secondary review phase, due by February 28, 2026, to audit compliance with subcontracting limitations. This heightened scrutiny follows a January 2026 SBA action that suspended over 1,000 firms from the 8(a) program for failing to provide required financial documentation. Some former officials have characterized these moves as a "concerted effort to undermine the 8(a) program." This crackdown occurs amidst a long-term trend of the DoD spending more money on fewer small businesses. While DoD contract obligations to small businesses hit $80.5 billion in fiscal year 2020, the actual number of small businesses receiving those contracts has been declining. A 2021 Government Accountability Office report noted the DoD had failed to develop a required implementation plan for its 2019 Small Business Strategy. Simultaneously, the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, crucial for tech-focused startups, have been in limbo. The programs' legal authority expired on September 30, 2025, meaning no new awards can be issued until Congress passes a reauthorization bill. Several bipartisan bills are pending, but no agreement has been reached as of early February 2026. This contracting squeeze coincides with the DoD's push to become an "AI-first" enterprise. A January 2026 memo outlined a strategy to accelerate AI dominance through seven "Pace-Setting Projects," expanding AI compute infrastructure, and giving 3 million personnel access to generative AI models. The Chief Digital and Artificial Intelligence Office (CDAO) is also using SBIR grants to fund generative AI development from new and emerging companies. The 8(a) Business Development program is designed to help small businesses owned by socially and economically disadvantaged individuals compete in the federal marketplace through a nine-year term of assistance, including access to sole-source contracts. In January 2026, the SBA clarified it administers the program in a race-neutral manner, not presuming social disadvantage based on race. The intense review schedule requires DoD acquisition offices to identify and assess hundreds of high-value contracts by January 31, 2026, and complete compliance audits by February 28, 2026. Contracts deemed nonessential to the DoD's warfighting mission may be terminated for convenience.