On January 16, 2026, Secretary of Defense Peter Hegseth issued a directive to all Department of Defense agencies and departments to review all small business sole source awards and set-aside awards above $20 million in contract value. That directive can be found here. The review intends to, according to Secretary Hegseth:

1. 1. “Identify any contracts that are inconsistent with the DoW’s warfighting priorities. The DoW has no room in its budget for DEI and other wasteful contracts that do not advance our core mission of creating a lethal fighting force.”; and
   2. “Ensure that every small business that received a sole source or set-aside contract is performing the work and not illegally passing through the contract to large businesses that are ineligible to receive the award. The purpose of DoW [DoD] small business spending is to build out the defense industrial base and support legitimate small businesses, not illegal pass-through schemes.”

The specific directives are to:

• • Identify contracts that meet any of the following criteria:
    • A sole source award to an 8(a) firm in an amount over $20 million;
    • A set-aside award to an 8(a) firm in an amount over $20 million; and
    • A set-aside award to a small business in an amount over $20 million (identifying the type of set-aside)

• • For each contract that meets any of these criteria, the “relevant Assistant Secretary, Senior Executive Service civil servant, or military equivalent shall review and determine whether these contracts are consistent with the Secretary of War’s May 27, 2025, memorandum. Implementation of Executive Order I4222 – Department of Government Efficiency Cost Efficiency Initiative.”
    • A copy of that memo is here. It directs the following:
      • Contracts or task orders for IT consulting or management services with integrators or consultants – defined as entities providing system IT integration, implementation, or advisory services (e.g., designing, deploying, or managing IT systems, or offering strategic or technical IT expertise) – are not permitted without first justifying that no element of the contracted effort can be:
        • accomplished by existing DoD agencies or personnel; or
        • acquired from the direct service provider, whereby the prime contractor is not an integrator or consultant
      • Contracts or task orders for consulting, advising, assisting, or any professional services performing similar functions, including but not limited to, services providing expert advice, recommendations, studies, analyses, or support for management, strategic planning, policy development, organizational assessments, technical expertise, or operational decision-making are not permitted if they can be performed using in-house DoD expertise and resources.
      • Contractor employees should be used to augment analytical research, administrative support, human resources, IT, training and education, compliance, and reporting, and should be used only when
        • the role is determined to be not inherently governmental, after consultation with counsel as appropriate; and
        • no existing employees within the organization or any DoD support unit have the capacity or skills to fulfill the requirement; and
        • the organization cannot address the gap through hiring, training, technology, or other resourcing of the current workforce; and
        • better rates cannot be achieved by consolidating contracts, including with General Services Administration (GSA) contracting mechanisms, when applicable.
    • Contracts that are not consistent with these principles, and/or are “not critical to the Department’s warfighting capabilities, including research and development, industrial base investments, and enabling products and services should be terminated for convenience to the maximum extent consistent with law to ensure adequate funding of DoW’s unfunded priorities.”

The deadline for the initial review and recommendation for termination of contracts is February 28, 2026.

In addition to this review of contracts for potential termination, the memorandum also directs that:

• • “Any evidence of improper subcontracting, such as evidence of excessive pass-through charges, should also be sent to the DoW Inspectors General and SBA for review and, where deemed necessary by such offices, for referral to the DOJ;” and
  • Contract pricing should be examined to determine if they are being performed “at or below market rates.”

At the completion of this review, the memo directs a report of the following:

1. A list of all identified sole source or set-aside contracts within the purview of this memorandum, separated by organization within the Component.
2. A list of all sole source or set-aside contracts terminated for convenience pursuant to this memorandum.
   1. For all sole source contracts that are neither terminated nor 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 sole source or set-aside contracts within the purview of this memorandum 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 contracts within the purview of this memorandum that are priced above market rate but that the Department cannot terminate immediately. This should include a plan to terminate the contract within 90 days while still maintaining necessary services.
5. An updated budget for FY 2027, accounting 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 the elimination of pass-through abuse and improper subcontracting practices

Given this memo and the ongoing SBA audit, ANCs should identify their contracts that may be subject to this review and determine whether any issues need to be addressed, including limitations on subcontracting. Moreover, it may also make sense to prepare information that can be used to demonstrate the value to the government posed by the contract in order to potentially avoid a termination for convenience.

This article summarizes aspects of the law and opinions that are solely those of the authors. This article does not constitute legal advice. For legal advice regarding your situation, you should contact an attorney.