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Escalating enforcement posture
On January 16, 2026, the Secretary of War (SoW), Pete Hegseth, stated on X (@SecWar) that he would take a “sledgehammer” approach to addressing “fraud, waste, and abuse” in the Small Business Administration’s (SBA) 8(a) Business Development Program. He signaled aggressive enforcement, including potential contract terminations across the defense industrial base and heightened scrutiny of sole-source and set-aside awards. The announcement aligns with broader enforcement trends, including the SBA's December 5, 2025 audit requiring all 4,300 8(a) participants to submit three years of financial and contracting records. On January 28, 2026, the SBA suspended 1,091 firms – approximately 25% of program participants – for failing to comply.
SoW Hegseth alleged that some 8(a) awardees perform little or no meaningful work, instead collecting fees while diverting performance to large businesses. Citing prior investigations, he noted that the Department of Justice has identified approximately $500 million in 8(a) fraud. He further stated that the Pentagon awards roughly $100 million per day in sole source contracts and ordered line-by-line reviews of all 8(a) sole-source awards exceeding $20 million, with plans to expand reviews to smaller contracts. Emphasizing that the Department of War accounts for substantially more 8(a) spending than other agencies, SoW Hegseth outlined a two-stage objective: eliminate contracts that do not enhance “lethality” and eradicate pass-through arrangements to ensure genuine small business performance.
How contractors should prepare for heightened enforcement risk
For purposes of compliance and risk assessment, we understand that contracts that would enhance lethality include those that directly or indirectly increase the government’s capacity to employ fatal force. This category generally encompasses contracts for the development, acquisition, modernization, or sustainment of weapons systems, as well as contracts for intelligence, surveillance, targeting, command and control, training, or operational support that materially improve the effectiveness, precision, speed, or persistence of military force. By contrast, contracts that do not enhance lethality are those that lack a sufficient nexus to the application of lethal force and instead support non-combat or administrative functions, such as health care services, facilities maintenance, disaster response, education, general information technology, or other civilian or support activities. While such non-lethal contracts may contribute to overall governmental capacity or readiness, they may not meaningfully alter the government’s ability to deploy or intensify lethal force and are therefore treated differently for legal and policy analysis purposes.
Recent mass suspensions underscore the intensity and immediacy of current oversight. Contractors facing potential scrutiny or termination should act quickly to assess risk and preserve recovery rights. As an initial matter, firms should identify and analyze all applicable contract clauses, including whether the contract is commercial or non-commercial, and the applicability of termination for convenience, stop-work, suspension of work, and changes provisions. Contractors should promptly secure and document termination inventory, segregate costs associated with terminated versus continuing work, and request clear disposition instructions from the contracting officer to avoid disputes over allowability or allocability.
In parallel, contractors should develop a comprehensive settlement strategy that accounts for incurred and allowable costs, profit on work performed, reasonable continuing expenses, termination and settlement costs, and any equitable adjustments arising from scope reductions or disrupted performance. Care should be taken to document assumptions, preserve supporting records, and coordinate closely with subcontractors to obtain timely settlement proposals and manage downstream exposure. Any negotiated settlement should expressly reserve unresolved issues to avoid unintended waivers of rights or claims. Where settlement discussions reach an impasse, contractors should consider submitting a properly certified claim to preserve appeal rights and statutory interest under the Contract Disputes Act, and position contractors for further negotiation or litigation.
What this means for 8(a) participants, their partners, and the broader contracting ecosystem
8(a) participants – particularly those operating through joint ventures and supporting non-lethal defense requirements – should anticipate heightened, contract-by-contract scrutiny of actual performance, staffing levels, and managerial control. Agencies will closely examine whether 8(a) firms are meaningfully performing the work, exercising real management authority, and complying with workshare and affiliation rules. Contractors should maintain meticulous, contemporaneous documentation of financial records, labor deployment, subcontracting arrangements, and workshare allocations – not only to withstand SBA and other agency audits, but also to substantiate payment requests, equitable adjustments, or termination recovery claims.
A surge in termination for convenience actions would have cascading effects across the defense contracting supply chain, impacting subcontractors, teaming partners, joint ventures, suppliers, lenders, and sureties. While intensified enforcement may reduce the relative advantages historically associated with 8(a) participation, other small business preference programs – such as HUBZone, WOSB, and traditional small business set-asides – remain available and unaffected. Subcontractors and partners should carefully review the provisions in their agreements, as scope reductions and work suspensions can significantly alter downstream economics, risk allocation, and the overall viability of joint-venture and teaming arrangements.
Our team is closely tracking these developments and is available to support contractors in assessing risk and responding to, or preparing for, these audits and potential investigations.
Client Alert 2026-24
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