Understanding the DoW’s Review of Certain Sole-Source and Set-Aside Contract Awards
Ward & Berry has been keeping a close eye on the Trump Administration’s Government-wide audit of the Small Business Administration’s (SBA) 8(a) Business Development Program, which has already led SBA to issue more than 1,000 suspension notices to 8(a) firms (see our prior blog posts on the audit here and here). Apart from SBA’s actions, another key prong of the administration’s overarching review is the Department of War’s (DOW) audit of its sole-source and set-aside contracts awarded to small businesses. When Secretary of War Pete Hegseth first announced the audit last month in a video posted on social media, he framed it as focusing on the 8(a) program, which he described as “swamp code words for DEI race-based contracting.” However, an accompanying DoW memorandum released a few days later revealed that DoW’s plans were much broader in scope than Secretary Hegseth’s initial announcement implied. Specifically, the Department plans to review all sole-source 8(a) awards, set-aside 8(a) awards, and set-aside small business awards in an amount greater than $20 million. In other words, DoW’s audit is apparently not limited to the 8(a) program.
The first step of the audit is for DoW to identify and terminate “[a]ny contract that is not critical to the Department’s warfighting capabilities,” which the memorandum describes as “research and development, industrial base investments, and enabling products and services.” Next, DoW plans to complete a “secondary review . . . to confirm that each contractor is complying with applicable limitations on subcontracting.” The memorandum directs DoW personnel to report “[a]ny evidence of improper subcontracting, such as evidence of excessive pass-through charges,” to the DoW Inspector General, SBA, and (where appropriate) the Department of Justice. It also directs DoW personnel to “confirm that the contracts identified are being performed at or below market rates.”
The memorandum’s reference to limitations on subcontracting should catch the attention of any contractor holding 8(a) sole-source, 8(a) set-aside, or small business set-aside prime contracts who also subcontracts a portion of the work to firms that are not small business concerns. Improper subcontracting on 8(a) awards seems to be a core focus of DoW’s audit. Indeed, in last month’s video announcement of the audit, Secretary Hegseth claimed that “in many, many instances,” 8(a) prime contractors “don’t even do work.” Instead, he asserted, they add a 10-50% markup before handing the contract off “to a giant consulting firm.”
As a reminder, under the applicable SBA regulation, 13 C.F.R. § 125.6, a small business prime generally may not subcontract more than 50% of the work on a contract to firms that are not similarly situated (the “50% rule”), and on nonmanufacturer supply contracts, the small business prime must provide the product of a domestic small-business manufacturer unless an SBA waiver applies (the “nonmanufacturer rule”). If they aren’t doing so already, small business primes working on contracts targeted by the DoW’s audit should act quickly to verify their compliance with the applicable SBA subcontracting limitations and collect documentation of their direct performance of the contract.
The auditors’ reports on identified contacts were due to the DoW’s DOGE unit on February 28, 2026. Time will tell if the Department’s audit leads to a cascade of suspensions, like the SBA’s own review did just a few weeks ago.