On January 16, 2026, Secretary Pete Hegseth issued a memorandum to senior Pentagon leadership, Combatant Commanders, Defense Agency Directors, and Field Activity Directors directing a comprehensive review of certain small business contract awards.
The memorandum instructs Department components to identify, by January 31, 2026, all awarded contracts that meet one or more of the following criteria:
- A sole source award to an 8(a) firm in excess of $20 million
- A set-aside award to an 8(a) firm in excess of $20 million
- A set-aside award to any small business in excess of $20 million, with identification of the applicable set-aside category
Contracts meeting these thresholds will be subject to additional review to determine whether they align with the Department’s current priorities and cost-efficiency objectives.
Connection to Prior Executive Guidance
The January 16 memorandum references Secretary Hegseth’s earlier directive dated May 27, 2025, titled Implementation of Executive Order 14222 – Department of Government Efficiency Cost Efficiency Initiative.
Under this guidance, contracts will be evaluated to determine whether they are considered critical to the Department’s warfighting capabilities, including but not limited to:
- Research and development efforts
- Industrial base investments
- Enabling products and mission-support services
Contracts determined not to meet these criteria may be recommended for termination for convenience, to the maximum extent permitted under applicable law.
What Contractors Should Know
While the memorandum does not automatically cancel or suspend existing awards, it signals heightened scrutiny of large-dollar small business contracts, particularly those awarded on a sole-source or set-aside basis.
Contractors with affected awards should be prepared for potential inquiries related to:
- Mission criticality and alignment with warfighting objectives
- Prime contractor performance versus subcontracted effort
- Cost efficiency and overall value to the Department
At this stage, additional implementing guidance is expected as Department components complete their internal reviews.
GCP Perspective
GovContractPros is closely monitoring developments related to this directive and its potential impact on small business contractors, including 8(a) Participants and other socio-economic program firms.
Clients with Department of War contracts approaching or exceeding the $20 million threshold should consider proactive internal reviews to assess performance, scope alignment, and compliance posture.
GCP remains available to assist clients in evaluating their contracts and preparing for potential follow-up or agency engagement as further guidance becomes available.
