Small Business Set-Aside

How It Works

The Small Business Act of 1953 (15 U.S.C. 644) requires the federal government to direct a "fair proportion" of contracts to small businesses, backed by a government-wide statutory goal of 23% of prime contract dollars. The Small Business Administration (SBA) sets size standards by NAICS code (by revenue or employee count), and agencies must set aside contracts between $10,000 and $250,000 (the Simplified Acquisition Threshold) exclusively for small business under the FAR 19.502-2 "Rule of Two" whenever at least two small firms can compete at fair market prices. Above $250,000, agencies may still set aside contracts discretionarily. Specific subcategory set-asides include: (1) 8(a) Business Development for socially and economically disadvantaged businesses, 9-year program, 5% government-wide goal; (2) HUBZone for firms in Historically Underutilized Business Zones, 3% goal; (3) Women-Owned Small Business (WOSB) and Economically Disadvantaged WOSB (EDWOSB), 5% goal; (4) Service-Disabled Veteran-Owned Small Business (SDVOSB), 3% goal. In FY2023 the government awarded approximately $178 billion, or roughly 28%, of eligible prime contract dollars to small businesses, exceeding the 23% statutory goal for the eleventh consecutive year. The SBA's annual Scorecard grades each federal agency on its small business performance using an A-F letter scale. Fraud in set-aside eligibility (firms misrepresenting size, ownership, or veteran status) is a frequent subject of DOJ False Claims Act settlements and SBA debarments, with dozens of prosecutions each year and settlements ranging from hundreds of thousands to over $100 million for egregious "pass-through" schemes where a small firm fronts for a large contractor. Subcontracting goals are separately tracked: prime contractors with contracts over $750,000 must submit Individual Subcontracting Plans showing how they will meet subcontracting percentage goals, and agencies score primes on small-business subcontracting performance as part of past-performance evaluations.

Related Terms

• Competitive Bidding (Full and Open Competition), The standard procurement process where the government publicly solicits proposals from multiple vendors and selects the best offer based on price, quality, and capability.
• Federal Contract, A legally binding agreement between the U.S. government and a private company to provide goods or services, from fighter jets to IT consulting.
• NAICS Code, The North American Industry Classification System code, a 6-digit number that classifies a business by the type of economic activity it performs, used to determine small business size standards.
• Small Business Administration (SBA), The federal agency that sets small business size standards, manages small business contracting programs, and provides loans and counseling to help small businesses grow.
• Set-Aside Programs (8(a), WOSB, HUBZone, SDVOSB), Targeted small business contracting preferences for socioeconomically disadvantaged, women-owned, HUBZone, and service-disabled veteran-owned firms, each with a government-wide prime contract goal.