On January 16, 2026, Secretary Hegseth announced in a video posted on X that the DOW would undertake an audit of all 8(a) sole-source awards over $20 Million to redirect defense spending to programs that enhance lethality while curbing fraud, waste, and abuse. Since that announcement, a DOW memorandum was made public revealing the scope is broader than anticipated. Rather than just 8(a) sole-source awards, DOW is auditing any active 8(a) sole-source contract, 8(a) set-aside contract, or small business set-aside contract over $20 Million. As discussed in PilieroMazza’s client alert about DOW’s spotlight on compliance with the limitations on subcontracting, broadening the scope of this audit to all small business set-asides is a major change and underscores Secretary Hegseth’s statements about eliminating “pass-throughs.” In this blog, PilieroMazza discusses what we know so far about how the audit is unfolding and steps you can take now to better position your company if your audited contract is threatened with termination.
DOW’s Three-Step Audit
The audit is unfolding in real time, and concrete details about DOW’s implementation plans remain scarce. Here is what we know so far:
- Identification: DOW was tasked with internally identifying the following awards over $20 Million: sole-source awards to 8(a) firms, set-aside awards to 8(a) firms, and set-aside awards (specifically identified by set-aside type) to small businesses. It appears that only active contracts are subject to this review.
- Review: Contracts identified under the first step will undergo two reviews by higher level reviewers (i.e., an assistant secretary, senior executive service civil servant, or military official equivalent):
a. First, DOW will determine whether these contracts are necessary for the mission (i.e., warfighting) and consistent with DOW’s May 27, 2025, memo on government efficiency (i.e., DOW DOGE). Contracts that do not pass muster are supposed to be terminated for convenience where possible.b. Second, by February 28, 2026, DOW will review all “current contract performance data to confirm that each contractor is complying with applicable limitations on subcontracting.” Click here for our recent client alert that goes in-depth on this aspect of DOW’s audit and best practices to remain compliant with the limitations on subcontracting.
- Results: By February 28, 2026, the DOW DOGE team and Undersecretary of War will receive a report of all contracts identified during the audit to include the following details:
a. a list of all contracts that were terminated for convenience;b. a list of 8(a) sole-source awards that were notterminated for convenience or identified for future termination, so that DOW DOGE can determine “whether there are any other providers that offer comparable services for better value;”
c. a list of all contracts found to have exceeded the “50% limitation on subcontracting” with an estimate of “the amount paid by the Government for contract performance to subcontractors that are not similarly situated;”
d. a list of all contracts above the market rate that DOW cannot immediately terminate, with a plan to terminate “within 90 days while still maintaining necessary services;” and
e. an updated budget for FY2027, reflecting “a substantive reduction in contract spending, within the audited contracts, due to elimination of pass-through abuse and improper subcontracting practice.”
In addition to the results landing on the desks of DOW DOGE, the audit is likely to result in investigations and enforcement actions. DOW’s memo states that “evidence of improper subcontracting, such as evidence of excessive pass-through charges” should be sent to the IG and SBA for review, as well as DOJ where necessary. The memo also states that there will be referrals to DOJ “where deemed necessary by such offices.”
Preparing for Potential Termination for Convenience
If your contract is terminated for convenience during DOW’s audit or identified for future termination, the steps you take in the first few days matter. Take the following steps to protect your interests and ensure you receive the compensation to which you are entitled:
- Review the Termination Notice Carefully. Confirm whether the termination is partial or complete, and whether it’s truly for convenience (as opposed to default, which has different consequences and is addressed in the following section of this blog). Understand what work is to cease and when.
- Reserve Your Rights in Writing. Consider issuing a reservation of rights letter to your CO (Contracting Officer) to reserve your right to challenge the underlying termination decision.
- Preserve Records and Immediately Cease Work. Stop all terminated work as instructed and safeguard all records—including costs incurred, inventory, labor hours, subcontracts, and any correspondence.
- If Applicable, Notify Subcontractors Promptly. Flow down the termination notice and ensure that your subcontractors stop work and preserve documentation for potential settlement costs.
- Submit a Timely Termination for Convenience Settlement Proposal (TSP). The nature of the TSP and your entitlement to recovery may vary depending on the type of contract and termination clause cited in your notice (i.e., for commercial item contracts, you may recover the percentage of completion plus reasonable costs related to the termination). You are entitled to seek the recovery of costs associated with the termination—including consulting and legal fees—for the preparation of your TSP.
- Negotiate in Good Faith but be Prepared to Dispute. If you reach an impasse in TSP negotiations, you may need to convert the settlement proposal to a claim under the Contract Disputes Act (CDA).
Preparing for Potential Termination for Default
If your contract is terminated for default as a result of DOW’s audit, your first step should be to request a CO’s final decision (COFD) and engage counsel to prepare to challenge unsupported allegations.
Termination notices and COFDs are often sparse, so be prepared to ask the Contracting Officer for the specific basis for termination, a report of the audit findings with respect to your contract(s), and DOW’s supporting documents used in the audit and termination decision. Your legal counsel may recommend further requests based on your specific situation, but this information, at a minimum, is essential for evaluating next steps.
While DOW responds to your request for further information, it behooves you to anticipate their argument and start papering your own file with all documents you have related to your company’s size and socioeconomic eligibility, subcontracting plans, actual performance, cost and pricing data, and proposal representations, among anything else that might be relevant to your termination.
Assessing Broader Exposure
As stated above, DOW’s audit may trigger DOW IG referrals, SBA OIG referrals, DOJ referrals, size protests, suspension and debarment inquiries, and False Claims Act scrutiny, among other risky scenarios. Early legal guidance can help mitigate these risks, so if you have any concerns that your company may have exposure beyond a contract termination, you should contact counsel immediately.
Should you have any questions or concerns about DOW’s audit, DOW’s Acquisition Overhaul, terminations, claims, or anything else discussed in this blog, please contact Lauren Brier, Josie Farinelli, or another member of PilieroMazza’s REAs, Claims, and Appeals or Government Contracts practice groups.
