Third Quarter 2026 Government Contracts Policy and Regulatory Review

At a Glance

• The FY2027 appropriations continuing resolution (CR), signed on September 2, 2026, bars the Office of Management and Budget (OMB) from issuing or finalizing its proposed “Regulation for Federal Financial Assistance” through December 11, 2026.
• The Federal Acquisition Regulation (FAR) Council published its second batch of four “Revolutionary FAR Overhaul” proposed rules on September 18, 2026, covering an additional 16 FAR parts.
• The Small Business Administration (SBA) made a number of significant regulatory and policy changes, including finalizing its rule to eliminate the 8(a) rebuttable presumption of social disadvantage, proposing a major overhaul of size standards, rescinding its voluntary notice-and-comment policy, and removing disparate impact provisions from its Title VI regulations.
• The Office of Federal Contract Compliance Programs (OFCCP) formally rescinded the Executive Order 11246 implementing regulations and revised its Section 503 and Vietnam Era Veterans’ Readjustment Assistance Act (VEVRAA) regulations, including eliminating disability self-identification and the 7% utilization goal.
• The Department of Defense (DoD) continued its DFARS overhaul and now requires new specialty metals clauses in existing contracts, while the US Court of Appeals for the District of Columbia upheld DoD’s Federal Acquisition Supply Chain Security Act (FASCSA) designation of Anthropic.

Federal agencies and Congress continued to reshape the procurement and financial assistance landscape throughout the third quarter of 2026. This alert summarizes several of the most significant developments and their impact on federal contractors, grant recipients, subrecipients, and pass-through entities, including changes to eligibility standards, affirmative action and civil rights obligations, supply chain risk, and the use of artificial intelligence in federal contracts.

FAR Overhaul Implementation

The FAR Council released the second wave of proposed rules to support its “Revolutionary FAR Overhaul” (RFO) on September 18, 2026. The release includes four more proposed rules (FAR Cases 2026-003, FAR Case 2026-006, FAR Case 2026-010, and FAR Case 2026-011), which together impact 16 additional FAR parts and their corresponding provisions in FAR Part 52.

The formal rulemaking phase of the RFO is organized into twelve FAR cases. With this release, eight have now been proposed and four remain. The FAR parts addressed in this batch govern how agencies choose acquisition vehicles, how commercial items are bought, and how proposals are handled. The changes below are likely to have the most immediate effect on contractors.

RFO Part 8: Required Sources and the End of the “Best-in-Class” Mandate

The Part 8 revisions build on the administration’s preference for commercial solutions under Executive Order 14271, “Ensuring Commercial, Cost-Effective Solutions in Federal Contracts” (Apr. 15, 2025). Where the mandatory sources cannot meet an agency’s needs, the agency should procure to the greatest extent possible commercial products and services, including items that can be modified to fit.

The proposed changes to FAR Part 8 also modify the order in which agencies look at existing contracts. First, if the Office of Federal Procurement Policy (OFPP) has designated a contract or blanket purchase agreement (BPA) as “required use” and it can meet the agency’s commercial need, the agency must use it. The senior procurement executive can grant an exception only if that vehicle’s terms, scope, or performance period do not work for the agency. Second, if no required-use vehicle fits, “best-in-class” contracts and BPAs become an option to consider rather than a mandate. Third, before creating a new contract, the agency would be required to consider other governmentwide vehicles, such as the Federal Supply Schedule and governmentwide acquisition contracts.

For contractors, this proposed tiered approach means that holding a required-use designation from OFPP will become more valuable in winning agency business. In contrast, holding a best-in-class contract will carry less weight than it does today.

RFO Part 12: Commercial Acquisitions

The proposed rule revises FAR Part 12 to state plainly that commercial acquisitions above the micro-purchase threshold, including orders under blanket purchase agreements (BPAs), must be set aside for small businesses whenever the “Rule of Two” is met (i.e., when the agency has a reasonable expectation that two or more responsible small businesses will submit competitive offers at a fair market price). A contracting officer who decides not to set aside such an acquisition would have to document the reasons for doing so.

The proposal also limits what requirements agencies can include in a commercial solicitation. Provisions outside of FAR Part 12 may be included only if they are “explicitly prescribed for commercial products and/or commercial services.” That gives offerors firmer ground to object when a commercial solicitation includes cost-type or government-unique requirements.

Agencies would, however, maintain some flexibility and discretion. Procurement officials could waive or modify clauses that are not required by statute when those clauses conflict with customary commercial practice. Doing so would require approval from the head of the contracting activity, or from the senior procurement executive for a class of acquisitions, and any modified clause would have to be clearly identified.

RFO Part 15: Late Proposals

Under RFO Part 15, contracting officers would gain greater flexibility for considering proposals even after offerors have missed a solicitation deadline. If a contracting officer receives a late proposal, the contracting officer could accept it after deciding that doing so is in the government’s best interest and will not unduly delay the award.

This would replace the current, fact-specific exceptions. For example, the current rules allow acceptance when the late proposal is the only one received, or when an electronic submission can be shown to have reached the government’s systems by a set time the working day before the deadline. The proposed rule would create a simplified standard for offerors and more discretion for contracting officers. Even so, offerors should not treat the new standard as a safety net. Whether a late proposal is accepted depends on the contracting officer’s judgment, not on a firm rule. Because acceptance would rest on a discretionary “best interest” determination, late-proposal decisions may prove fertile ground for bid protests.

RFO Part 16: Consumption-Based Solutions

Under the proposed revisions to FAR Part 16, software-as-a-service, data analytics, cybersecurity monitoring, telecommunications, and artificial intelligence (AI) services providers that already bill by usage could find it easier to offer their standard commercial pricing to the government, without restructuring such pricing structures into time-and-materials or cost-type arrangements.

The proposed Part 16 revisions implement Section 1825 of the FY 2026 National Defense Authorization Act (NDAA). The revisions would define “consumption-based solution” and confirm that contracting officers may buy supplies and services that are metered and billed by actual use as fixed-price units. Purchases structured this way would be treated as firm-fixed-price contracts. According to the proposed rule, the change is intended to support consumption-based contracting, an already “common commercial practice” for a variety of supplies and services, such as cloud computing capacity.

RFO Part 17: Option to Extend

The proposed rules would rename FAR 52.217-8, “Option to Extend Services,” to “Option to Extend.” It would make the clause available for ordering periods under task-order and delivery-order contracts for any requirement, not only for services. Because the current prescription is limited to services, agencies that wanted similar flexibility for supply contracts have often had to obtain a deviation or write an agency-specific clause. The proposed rule would still prevent the clause from being used to push back the end date of a standalone supply contract.

Status Update: OMB Federal Grants Proposed Rule

The Office of Management and Budget’s (OMB’s) sweeping May 29, 2026, proposal to overhaul the federal grant regulations, which was detailed in our Second Quarter review and our earlier detailed client alert, is now temporarily on hold.

Section 157 of H.R. 6500, the Continuing Appropriations and Extensions Act of 2027, prohibits OMB from issuing or finalizing this proposal or any “substantially similar rule” through December 11, 2026. President Trump signed the continuing resolution on September 2, 2026. Accordingly, federal award recipients will not see OMB’s grants overhaul take effect in the near term. For at least the next few months, the current Uniform Guidance remains the governing framework. Recipients should not assume the proposal is gone, however, because the continuing resolution only delayed its implementation rather than nullifying it.

OMB’s options remain open after December 11, 2026. Unless Congress extends the restriction, OMB could finalize the rule as proposed, issue a revised version, reopen parts of it, or set a new schedule. The continuing resolution does not affect the executive orders on grantmaking, and agencies can still advance administration priorities through existing authority, funding notices, and award-specific terms. For example, on August 24, 2026, the Department of Education issued its own notice of proposed rulemaking to amend the Education Department General Administrative Regulations “to include technical updates from the Office of Management and Budget’s Uniform Administrative Requirements,” which included significant changes such as adding a “termination for convenience” provision into all Department of Education discretionary grant awards.

Federal grant recipients, subrecipients, pass-through entities, and auditors should remain aware of subsequent developments related to OMB’s proposed rulemaking and any congressional actions to further pause the rulemaking from going forward. If implemented, the proposed rule would necessarily have a profound impact on the government grants process.

Significant Updates Affecting Small Businesses

SBA Removes the 8(a) Rebuttable Presumption of Social Disadvantage

Following the June 11, 2026, proposed rule, SBA published a final rule that took effect on September 10, 2026, eliminating the 8(a) Business Development Program’s rebuttable presumption of social disadvantage for individually owned firms. We discussed this rule in depth in our detailed client alert and Second Quarter review. At a high level, under the new standard which appears in the revised 13 CFR 124.103(c), an applicant must show three things:

1. Group-level discrimination. At some point in the applicant’s lifetime, a governmental or private entity discriminated against, or was biased against, an identifiable racial, ethnic, or cultural group the applicant belongs to (or favored a group the applicant does not belong to).
2. Personal harm. That conduct materially harmed the applicant.
3. Self-certification. The applicant certifies both group membership at the time of the conduct and the resulting harm.

The rule is not limited to race. SBA confirmed that bias based on sex or disability also qualifies. The rule codifies a shift that began after the 2023 decision in Ultima Services Corp. v. U.S. Department of Agriculture, in which the US District Court for the Eastern District of Tennessee held that the race-based presumption violated the equal protection component of the Fifth Amendment, and that continued with SBA’s January 2026 policy guidance.

SBA Attempts to Overhaul Size Standards

SBA also has proposed to change the competitive landscape for many small businesses in its August 20, 2026, proposal to overhaul its size standards. We analyzed the proposed rule in greater detail in a previous client alert. The impact of this proposal will vary across the industry. Companies that are now too large to compete for set-asides in their industries could become eligible. Firms that have been small for years may find themselves submitting offers against much larger competitors.

The shift results from several key changes, including consolidation of NAICS levels from approximately 1,000 industry specific standards to 338, a shift to employee-based standards for industries where SBA has discretion, and an increase to size standards that remain based on receipts.

SBA projects that the small business population would grow from roughly 6.34 million to 6.45 million firms, and more procurements would likely be set aside under the Rule of Two. Although simpler code assignments could mean fewer NAICS disputes, current small businesses could possibly face more crowded set-aside competitions. Mid-sized firms could also merge and still remain small.

SBA Ends Voluntary Notice-and-Commenting Rulemaking Procedure

Effective August 31, 2026, SBA repealed 13 CFR § 101.108, which committed SBA to using notice and comment rulemaking even for rules on “public property, loans, grants, benefits, or contracts,” which the Administrative Procedure Act (APA) exempts at 5 U.S.C. § 553(a)(2).

SBA repealed the provision without seeking comment on the repeal itself. It cited Executive Order 14219 and a goal of “acting more nimbly in response to changing circumstances.” SBA says it may still request comment on a case-by-case basis. The Department of Labor (DOL) and the Department of Health and Human Services (HHS) have taken similar steps, and the Department of Agriculture did so in 2013.

The biggest open question is how SBA will treat its contracting programs going forward. Rules for the 8(a), HUBZone, Women-Owned Small Business (WOSB), Service-Disabled Veteran-Owned Small Business (SDVOSB), and mentor-protégé programs, and the size standards, mostly set eligibility criteria rather than awarding contracts or benefits directly. It is therefore uncertain whether SBA will treat them as exempt.

Businesses that want to comment on future SBA rules still have some options, such as watching the Office of Information and Regulatory Affairs (OIRA) review docket and working to schedule meetings with the OIRA.

SBA Removes Disparate Impact and Affirmative Action Provisions from its Title VI Provisions

On September 29, 2026, SBA amended 13 CFR Part 112, its Title VI regulation for federally assisted programs, effective immediately and without prior notice and comment. The amendments remove disparate impact liability and race-conscious affirmative action requirements. The change also deletes the disparate impact language extending the employment-discrimination prohibition to practices that merely “tend” to have a discriminatory effect. SBA’s rationale rests on the view that Title VI prohibits only intentional discrimination. The SBA claims its previous regulations were inconsistent with the Supreme Court’s decision in Students for Fair Admissions, Inc. v. President & Fellows of Harvard College, and Executive Order 14281, which is aimed at eliminating disparate impact liability.  

Still, recipients of SBA financial assistance should continue monitoring their workforce and program data. SBA has eliminated disparate impact liability under its Title VI regulations, but it also has said that this change “does not preclude the use of data on disparate outcomes to help prove intentional discrimination.” In other words, statistics that once supported disparate impact claims can still serve as evidence in intentional discrimination claims, which remain fully enforceable. The Departments of Justice, Interior, Transportation, Agriculture, and Labor have taken the same position in their own rescissions. 

SBA and Department of Defense Join Forces to Channel Capital to Small Defense Suppliers

On October 12, 2026, the SBA and DoD signed a Memorandum of Agreement (MOA) to help small businesses in the defense industrial base obtain financing. The MOA builds on the Smaller War Plants Commission (SWPC), which the two agencies launched in August 2026. The SWPC maintains a dedicated web page that gives contractors direct links to get started, including links to business capital and other federal resources for growing defense-related operations.

The MOA pairs DoD's Economic Defense Unit (EDU) with SBA's Office of Investment and Innovation and Office of Capital Access. The process works in two parts:

• Debt financing. Through its Business Operators for National Defense efforts, EDU will identify defense-critical small businesses that need capital and refer loan candidates to SBA. SBA will then use its existing 7(a) and 504 lender networks to connect eligible firms with SBA-backed loans.
• Equity investment. EDU may make DoD-funded redeemable preferred-equity investments in small and mid-sized companies that create, expand, or restore capacity critical to national security. Covered areas include munitions, platforms, essential materials, and the mining and development of strategic and critical minerals. SBA will handle due diligence, underwriting, deal structuring, documentation, and portfolio monitoring. EDU keeps final decision-making authority over each investment.

To keep the program accountable, the agencies will issue joint investment guidance, review the portfolio every quarter, and report each year on investment performance and exits.

Small manufacturers, suppliers, and technology firms in the defense supply chain now have a coordinated federal route to both loans and equity capital. Companies working in munitions, microelectronics, shipbuilding components, or critical minerals should consider positioning themselves for EDU referrals. The SWPC page is a practical place to start.

Updates on recent OFCCP Rules: Affirmative Action Obligations

On August 21, 2026, OFCCP finalized three rules implementing Executive Order (EO) 14173, issued January 21, 2025: Rescission of EO 11246 Implementing Regulations (effective Oct. 26, 2026); Modifications to Section 503 Regulations (41 CFR 60-741) (effective Sept. 21, 2026); and Modifications to VEVRAA Regulations (41 CFR 60-300) (effective Sept. 21, 2026).

The first rule formally repeals the regulations implementing EO 11246. The other two remove references to EO 11246 from the Section 503 and VEVRAA regulations.

The repeal removes a large body of regulations. It eliminates 41 CFR Parts 60-1, 60-2, 60-3, 60-4, 60-20, 60-40, 60-50, and 60-999, along with the EO 11246-related portions of Part 60-30. Among the provisions that disappear are the sex discrimination guidelines, the religion and national origin guidelines, and the anti-retaliation rule for pay transparency. The Uniform Guidelines on Employee Selection Procedures are also removed to the extent they were codified in OFCCP’s regulations, although other agencies may still apply them.

The veterans and disability rules also change in other ways. To match the FAR Council’s October 2025 inflation adjustment, the Section 503 coverage threshold rises from $15,000 to $20,000, and the VEVRAA threshold rises from $150,000 to $200,000. Both rules move OFCCP’s enforcement procedures into each program’s own regulations. The rule removes 41 CFR § 60-741.45, eliminating the 7% utilization goal and related obligations to conduct utilization analyses and implement action-oriented programs. Apart from these technical changes, VEVRAA works as it did before. Covered contractors must still maintain an AAP, invite applicants to identify as protected veterans, and track data on veteran applicants and hires.

Because the three rules do not take effect on the same date, contractors should note each one and review their compliance programs before they apply. None of the rules change contractors’ equal opportunity, nondiscrimination, or other employment law obligations under Title VII, the ADA, or any other law.

Congress Advances Federal Framework for Earned Wage Access Services

On June 18, 2026, Rep. Bryan Steil (R – WI) introduced H.R. 9330, the Earned Wage Access Consumer Protection Act, which would set uniform federal requirements for Earned Wage Access (EWA) providers, build in protections for the employees who use these services, and clarify how federal consumer finance law treats EWA products. The House Financial Services Committee approved it 29–22 on June 30.

EWA plans allow employees to draw on pay they have already earned before payday. Although state legislatures and regulators have been developing their own EWA requirements, they do not always take the same approach, introducing uncertainty for employers. An employer with workers in several states, and the EWA vendor it partners with, may need to meet different requirements in each one. It is also unclear whether federal consumer financial laws apply to these products, and if so, how.

Federal contractors that offer EWA, or are thinking about doing so, should follow the bill’s progress and continue to track state developments. They should also be prepared to update vendor contracts and program terms if a federal standard is adopted.

Department of Defense Updates

DFARS Overhaul and New Specialty Materials Clause

The Department of Defense (DoD) has directed contracting officers to add DFARS 252.225-7961, Restriction on the Acquisition of Certain Magnets, Tantalum, and Tungsten (Class Deviation 2026-O0041, Revision 1), to existing contracts that contain DFARS 252.225-7052, and to remove the older clause. Contracting officers are told not to request consideration for these changes. DoD’s goal is to make sure it can still accept critical materials and end items that are already being manufactured or assembled and are scheduled for delivery after January 1, 2027.

The clause swap is part of a larger rewrite of the Defense Federal Acquisition Regulation Supplement (DFARS) that DoD started on December 18, 2025. The overhaul responds to Executive Order 14275 (Restoring Common Sense to Federal Procurement), Executive Order 14265 (Modernizing Defense Acquisitions and Spurring Innovation in the Defense Industrial Base), and DoD’s Acquisition Transformation Strategy. It follows the same two-step approach as the RFO. Class deviations implementing each revised DFARS part took effect February 1, 2026, and notice-and-comment rulemaking will follow to make the revisions permanent. DoD also adopted the RFO by class deviation as of that same February 1 date.

DoD’s attention to supply chains and pricing extends beyond the new clause. On October 1, 2026, DoD issued a memorandum reinforcing its policies and procedures for gaining cost visibility across its acquisition portfolio. Contractors should be ready for the clause modification and should confirm that their sourcing records support the supply-chain representations they make to DoD.

DoD’s Designation of Anthropic as a Supply-Chain Risk Upheld by the US Court of Appeals for the D.C. Circuit

On September 25, 2026, a divided D.C. Circuit panel held that DoD had sufficient support for concluding that keeping Anthropic’s Claude AI models in its information systems “presented a statutorily covered national-security risk” under the Federal Acquisition Supply Chain Security Act of 2018 (FASCSA).

The dispute began in February 2026, at which time DoD demanded that Anthropic replace its usage restrictions for Claude with a general policy allowing “all lawful use.” Anthropic objected to giving up two restrictions: one barring the use of Claude for lethal autonomous warfare and one barring its use for domestic mass surveillance. When Anthropic refused, the Secretary of Defense directed that the company be designated a supply chain risk.

Anthropic argued in court that it had not acted covertly, so its restrictions could not amount to “manipulating” the product. Because Anthropic could add restrictions each time it delivered an updated model, the panel found that DoD reasonably feared Claude might be prevented from performing functions the department considered contractually authorized. The panel also rejected Anthropic’s due process and First Amendment claims.

The litigation surrounding Anthropic’s role in contractor systems has continued in other fora. In August 2026, a federal district court in California ruled that DoD’s separate designation of Anthropic under 10 U.S.C. § 3252 was unconstitutional retaliation for the company’s public criticism. As of Monday, October 26, 2026, the Department of Justice filed a notice of appeal with the US Court of Appeals for the Ninth Circuit, challenging the district court’s ruling.

What’s Next?

The third quarter of 2026 brought several long-anticipated rules to final form while leaving other major initiatives unresolved. In the near term, contractors should evaluate the effect of SBA’s proposed size standards on their eligibility and competitive position, update affirmative action programs and applicant materials, and review standard certifications, flowdowns, and supply-chain representations.

For More Information

Faegre Drinker’s government contracts team will continue to monitor additional regulatory and legislative developments in the coming months. For further information, you may contact the authors.