DoD's New Two-Stage Review Process for Small Business Set-Asides: What Contractors Need to Know for 2026

Understanding the New DoD Two-Stage Review Process

On January 16, 2026, the Department of Defense issued a memorandum that fundamentally changes how small business set-aside and 8(a) contract awards will be evaluated. This new two-stage review process introduces heightened scrutiny for high-value contracts and signals the DoD's commitment to ensuring the integrity of small business contracting programs.

For contractors pursuing DoD opportunities, this policy shift means preparing for longer award timelines, more thorough documentation requirements, and increased scrutiny of eligibility and performance capabilities. Understanding these changes now will position your business to navigate the new landscape successfully.

Which Contracts Are Subject to Review?

The two-stage review process applies to specific categories of contract awards that meet certain threshold criteria. According to the memorandum, DoD agencies must identify and submit for review:

• 8(a) sole source awards exceeding $20 million: Any sole source contract awarded to an 8(a) program participant above this threshold requires review
• Small business set-aside awards over $20 million: Competitive set-aside contracts reserved for small businesses that exceed the dollar threshold
• All small business socioeconomic categories: This includes not just 8(a) firms, but also HUBZone, Service-Disabled Veteran-Owned (SDVOSB), and Women-Owned Small Business (WOSB) set-asides

The $20 million threshold is significant—it targets high-value contracts where the risk of improper awards carries substantial financial implications. This expansion beyond the previously announced focus on 8(a) sole source awards demonstrates the DoD's broader commitment to small business program integrity across all socioeconomic categories.

What the Two-Stage Review Process Entails

The new review process introduces two distinct evaluation stages before contract award:

Stage One: Agency-Level Review

The first stage occurs at the contracting agency level, where acquisition teams must conduct an enhanced review of:

Eligibility verification: Confirming that the proposed awardee meets all small business size standards, ownership requirements, and program-specific criteria (such as 8(a) certification status, veteran ownership documentation, or HUBZone principal office location)

Capability assessment: Evaluating whether the small business has the technical capability, past performance, and financial capacity to successfully execute a contract of this size and complexity

Acquisition strategy justification: Documenting why the set-aside approach was selected and whether it represents the best value for the government

At this stage, contracting officers must compile comprehensive documentation supporting their award decision, including detailed analysis of the awardee's qualifications and the competitive landscape.

Stage Two: Higher-Level Department Review

Contracts that pass the initial agency review must then be submitted to higher-level DoD officials for secondary evaluation. This stage involves:

Cross-functional review teams: Multiple stakeholders, potentially including legal counsel, small business specialists, and senior acquisition officials, examine the proposed award

Policy compliance verification: Ensuring the award aligns with broader DoD small business goals and federal acquisition regulations

Risk assessment: Evaluating potential performance risks, past performance issues, or red flags that could jeopardize contract success

Only after clearing both stages can the contracting officer proceed with the formal award.

Timeline Implications and Award Delays

The most immediate impact contractors will experience is extended timelines from proposal submission to contract award. While specific timeframes haven't been officially published, industry experts anticipate:

• Additional 30-60 days for Stage One review: Agency-level teams will need extra time to compile comprehensive eligibility and capability documentation
• Additional 15-45 days for Stage Two review: Higher-level reviews depend on reviewer availability and workload, creating potential bottlenecks
• Potential for multiple review cycles: If reviewers identify deficiencies or request additional information, the process could extend further

For planning purposes, small businesses should add at least 45-90 days to their expected award timelines for contracts over $20 million. This has significant implications for:

• Cash flow management: Businesses may need to maintain operations longer without new contract revenue
• Teaming arrangements: Partners may need to extend teaming agreement validity periods
• Workforce planning: Hiring and retention strategies may require adjustment to account for delayed start dates

Preparing for Increased Scrutiny: Actionable Steps

Successful contractors will proactively prepare for this heightened scrutiny rather than waiting until proposal submission. Here are specific actions to take now:

Strengthen Your Eligibility Documentation

Ensure your small business certifications and registrations are current, accurate, and thoroughly documented:

• Review SAM.gov registrations: Verify all information is current, including NAICS codes, socioeconomic certifications, and business size representations
• Maintain certification currency: Check expiration dates for 8(a), HUBZone, WOSB, or SDVOSB certifications and renew well before deadlines
• Organize supporting documentation: Compile ownership documents, organizational charts, financial statements, and other eligibility proof in readily accessible formats
• Conduct self-audits: Review your business structure, ownership percentages, and control arrangements to identify and address potential eligibility questions

Build a Stronger Capability Story

For contracts over $20 million, reviewers will scrutinize whether your business can realistically perform the work:

• Document relevant past performance: Compile detailed case studies, customer references, and performance ratings from contracts of similar size, scope, and complexity
• Demonstrate financial capacity: Prepare financial statements, bonding capacity letters, and credit references that show you can manage a large contract
• Highlight workforce qualifications: Develop resumes, certification records, and security clearance documentation for key personnel
• Address capability gaps proactively: If you lack certain capabilities, establish and document teaming arrangements or subcontracting plans with qualified partners

Enhance Proposal Quality and Compliance

With increased scrutiny comes a higher bar for proposal quality:

• Invest in compliance reviews: Ensure proposals meticulously address every requirement in the solicitation
• Provide detailed capability evidence: Go beyond claiming you can perform—provide specific examples, methodologies, and proof points
• Anticipate reviewer questions: Include explanations for anything that might raise questions (recent business structure changes, limited past performance in certain areas, etc.)
• Document your small business status: Include clear explanations of how you meet size standards, especially if your revenue or employee count is close to threshold limits

Leverage Technology for Opportunity Intelligence

Given the extended timelines, identifying opportunities earlier in the procurement cycle becomes even more critical. Platforms like GovCon SkyNet can help you monitor upcoming DoD opportunities, track agency spending patterns, and identify contracts likely to exceed the $20 million review threshold—giving you more time to prepare competitive proposals.

Understanding the Policy Context

This two-stage review process doesn't exist in isolation. It's part of a broader federal initiative to improve efficiency, accountability, and performance in federal contracting. A review of FY 2024 spending identified approximately $120 billion in obligated funds that warranted closer scrutiny, prompting agencies across government to implement more rigorous oversight mechanisms.

For the small business contracting community, this represents both challenge and opportunity. While the process adds complexity, it also signals that properly qualified small businesses operating with integrity have strong government support. The review process aims to eliminate bad actors and ensure set-aside contracts go to legitimate small businesses capable of delivering results.

What This Means for Different Small Business Categories

8(a) Program Participants

8(a) firms face the most scrutiny, particularly for sole source awards. Beyond the two-stage review, expect:

• Enhanced examination of continued program eligibility
• Closer review of whether work matches the firm's primary NAICS code
• Increased scrutiny of actual versus nominal control by disadvantaged individuals

HUBZone Certified Businesses

HUBZone firms should prepare for verification of:

• Principal office location within certified HUBZone areas
• Employee residence requirements (35% of employees residing in HUBZones)
• Compliance with ongoing certification requirements

Service-Disabled Veteran-Owned Small Businesses

SDVOSB contractors should ensure:

• Veteran ownership and control documentation is current
• Service-disabled veteran maintains day-to-day management control
• VA certification (if applicable) remains valid

Women-Owned Small Businesses

WOSB and EDWOSB firms must verify:

• Women's ownership meets or exceeds 51% threshold
• Women control business management and daily operations
• SBA certification or self-certification documentation is complete

Mitigating Award Delay Risks

While you can't eliminate delays, you can minimize their business impact:

Diversify your pipeline: Don't rely solely on one or two large opportunities. Maintain a balanced mix of contract sizes and customer agencies.

Improve cash flow reserves: Build financial cushion to sustain operations during extended award timelines.

Communicate with partners: Keep teaming partners, subcontractors, and key employees informed about potential timeline changes.

Consider bridge contracts: For recompetes, negotiate short-term extensions or bridge contracts to maintain continuity if awards are delayed.

Maintain incumbent relationships: If you're the incumbent on a recompete, sustain strong customer relationships and performance during the transition period.

Looking Ahead: The Future of Small Business Contracting

The DoD's two-stage review process may be the beginning of broader changes across federal contracting. Other agencies may adopt similar review mechanisms for high-value small business awards. Additionally, the first quarter of 2026 has already seen material shifts in federal contracting policy, with continued enforcement-focused actions across the acquisition landscape.

Contractors who adapt quickly to this new environment—strengthening their eligibility documentation, building capability evidence, and preparing for longer award cycles—will be better positioned not just for DoD opportunities, but for the evolving federal marketplace more broadly.

Taking Action Today

The two-stage review process for small business set-asides over $20 million represents a significant shift in DoD acquisition procedures, but it shouldn't deter qualified small businesses from pursuing these valuable opportunities. Instead, view it as a catalyst to strengthen your business foundations, improve your competitive positioning, and demonstrate your capability to perform at scale.

Start by conducting a thorough self-assessment of your eligibility documentation, past performance records, and capability evidence. Identify gaps and address them now, before you're responding to a solicitation under deadline pressure. Tools like GovCon SkyNet can help you identify upcoming opportunities early, giving you maximum time to prepare compelling, compliant proposals that will withstand heightened scrutiny.

The contractors who thrive under this new process will be those who embrace higher standards, invest in proposal quality, and approach large set-aside opportunities with the professionalism and preparation they demand. By taking proactive steps today, you can position your business for success in the evolving landscape of DoD small business contracting.