Set aside contracts

What Are Set Aside Contracts?

Set aside contracts are a form of public procurement in which government agencies restrict competition for certain contracts to specific categories of businesses, primarily small businesses. This strategy falls under the broader financial category of Public Procurement, aiming to level the playing field and provide targeted opportunities for smaller firms to participate in Government Spending. The objective of set aside contracts is to foster economic growth, enhance Supplier Diversity, and ensure that a "fair proportion" of federal contract dollars are awarded to small businesses⁶⁰.

These contracts are typically managed by agencies like the Small Business Administration (SBA) in the United States, which sets size standards and oversees various programs. Contracting officials use set aside contracts to help their agencies meet specific small business contracting goals⁵⁹.

History and Origin

The concept of set aside contracts has roots in efforts to promote fairness and diversity in federal contracting, though its modern form largely emerged after the mid-20th century. The Small Business Act, passed in 1953, established the SBA with a mission to assist small businesses, including driving more government contracts their way⁵⁷, ⁵⁸. This foundational legislation laid the groundwork for policies that would actively encourage small business participation.

In 1977, Congress approved a law that explicitly allowed the federal government, under the SBA's purview, to set aside a percentage of contracts for which only small businesses could compete⁵⁵, ⁵⁶. This marked a significant shift towards formalizing these programs. Subsequent legislation and regulations, such as those within the Federal Acquisition Regulation (FAR) Part 19, further defined and expanded the scope of set aside contracts, including provisions for various socio-economic categories like women-owned, veteran-owned, and historically underutilized business zone (HUBZone) businesses⁵³, ⁵⁴.

Key Takeaways

• Set aside contracts are government procurement opportunities exclusively reserved for small businesses or specific disadvantaged business categories.⁵¹, ⁵²
• They aim to level the competitive playing field, promote economic growth, and ensure supplier diversity in federal contracting.⁵⁰
• The Small Business Administration (SBA) and the Federal Acquisition Regulation (FAR) govern eligibility and implementation.⁴⁸, ⁴⁹
• There are competitive set-asides (requiring at least two eligible businesses) and sole-source set-asides (for unique situations with one eligible business).⁴⁶, ⁴⁷
• Businesses must meet specific size standards and often program-specific criteria to qualify for set aside contracts.⁴⁴, ⁴⁵

Interpreting the Set Aside Contracts

Understanding set aside contracts involves recognizing their role as a strategic tool within the broader Procurement Process to achieve socio-economic goals. For government agencies, identifying an opportunity for a set aside contract means assessing if the requirement can reasonably be fulfilled by small businesses, particularly if at least two small businesses are expected to submit competitive offers—often referred to as the "Rule of Two."

⁴¹, ⁴², ⁴³For businesses, interpreting whether a contract is a set aside means evaluating their size and socio-economic status against the specific criteria for that contract. Eligibility often depends on the North American Industry Classification System (NAICS) codes and the corresponding size standards set by the SBA for that industry. ³⁹, ⁴⁰Successful engagement requires careful attention to Regulatory Compliance to ensure the business qualifies and maintains its status.

Hypothetical Example

Imagine the U.S. Department of Agriculture (USDA) needs a new system for digital record-keeping in its regional offices. The estimated value of the contract is $200,000, and market research indicates that several small, qualified IT companies could perform the work.

1. Agency Decision: A Contracting Officer at the USDA, recognizing the contract value falls within the range typically reserved for small businesses and that the "Rule of Two" is met, decides to issue a total small business set aside for the digital record-keeping system.
2. Solicitation: The USDA publishes the solicitation, explicitly stating it's a small business set aside, and includes the relevant NAICS code for IT services.
3. Business Response: "AgriTech Solutions," a small IT firm specializing in government systems, reviews its eligibility based on its employee count and revenue. It confirms it meets the SBA's size standard for the specified NAICS code.
4. Competition: Only other certified small businesses like AgriTech Solutions can submit bids. This reduces the pool of competitors compared to a full and open competition.
5. Award: AgriTech Solutions submits a competitive proposal and, after evaluation, wins the contract. This set aside contract provides AgriTech Solutions with a significant opportunity for Business Development and experience in federal contracting.

Practical Applications

Set aside contracts are integral to federal Government Contracts and are applied across various sectors to achieve specific socio-economic objectives. The federal government aims to award a significant percentage of its overall contracting dollars to small businesses annually, with a current goal of 23% of prime contract dollars going to eligible small businesses.
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These contracts are applied in different forms:

• Total Set-Asides: Acquisitions expected to be above the micro-purchase threshold but not over the simplified acquisition threshold (typically $250,000) are automatically set aside for small businesses if at least two small businesses are expected to submit competitive offers.
  ³³, ³⁴, ³⁵* Partial Set-Asides: For larger contracts, a portion may be set aside for small businesses if the requirement can be divided into distinct parts.
  ³⁰, ³¹, ³²* Socio-Economic Set-Asides: Beyond general small business set aside contracts, specific programs target businesses owned by service-disabled veterans, women, or those located in historically underutilized business zones (HUBZone), as well as the 8(a) Business Development Program for socially and economically disadvantaged individuals.
  ²⁶, ²⁷, ²⁸, ²⁹
  Agencies like the U.S. Department of Justice (DOJ) actively participate in these programs, identifying planned procurements that qualifying small businesses can perform, either directly or through Subcontracting opportunities.

²⁴, ²⁵## Limitations and Criticisms

Despite their intended benefits, set aside contracts face several limitations and criticisms. One primary concern is the potential for fraud and abuse, where businesses might misrepresent their size or socio-economic status to qualify for contracts they are not genuinely eligible for. ²², ²³The Government Accountability Office (GAO) and others have noted issues with contractor oversight and reporting accuracy in small business contracts, highlighting the ongoing need for improved monitoring.
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Another point of contention has been the interpretation and application of the "Rule of Two," which requires a Contracting Officer to have a reasonable expectation of receiving at least two competitive offers from small businesses before setting aside a contract. ¹⁸, ¹⁹, ²⁰There have been debates regarding how consistently this rule is applied and whether it always results in fair market prices.
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Furthermore, some critics argue that while set-asides help certain businesses, they can also potentially limit the broader benefits of full and Competitive Bidding, and in some cases, may lead to higher costs for the government if competition is too restricted. ¹⁶There are also challenges related to Prime Contractor subcontracting limitations, where small businesses awarded set aside contracts must perform a minimum level of work themselves and not over-rely on non-similarly situated subcontractors.
¹³, ¹⁴, ¹⁵

Set Aside Contracts vs. Open Competition Contracts

Set aside contracts and Open Competition Contracts represent two distinct approaches within the realm of public procurement. The fundamental difference lies in the breadth of competition.

While set aside contracts aim to provide a more accessible pathway for certain businesses to engage with the Public Sector, open competition contracts prioritize efficiency and value by allowing any qualified entity to bid. Businesses often employ a Diversification Strategy that includes pursuing both types of opportunities.

FAQs

What is the primary goal of set aside contracts?

The primary goal of set aside contracts is to ensure that small businesses and certain socio-economic groups have a fair opportunity to compete for and win federal contracts. This helps promote economic growth, job creation, and diversity within the government's vendor base.

¹⁰, ¹¹, ¹²### How does a business qualify for a set aside contract?
To qualify for a set aside contract, a business must typically meet the Small Business Administration's (SBA) size standards for its industry and register in the System for Award Management (SAM). Additionally, for specific socio-economic set-asides, the business must certify its status (e.g., women-owned, veteran-owned, or 8(a) certified).

⁹### Are all government contracts set aside for small businesses?
No, not all government contracts are set aside for small businesses. While the federal government has a goal to award 23% of prime contract dollars to small businesses annually, many contracts remain open for full and open competition to all businesses. Set aside contracts are used when specific criteria, such as the "Rule of Two," are met.

⁶, ⁷, ⁸### What are the different types of set aside contracts?
The main types include competitive set-asides, where at least two small businesses are expected to bid, and sole-source set-asides, which are awarded without a competitive bidding process when only one small business can fulfill the requirement. There are also set-asides for specific socio-economic programs like 8(a) Business Development, HUBZone, Women-Owned Small Business, and Service-Disabled Veteran-Owned Small Business programs.

⁴, ⁵### Can a large business participate in a set aside contract?
A large business generally cannot be the prime contractor on a set aside contract, as these are reserved for small businesses. However, large businesses often participate as subcontractors to small businesses that have won set aside contracts, provided they comply with subcontracting limitations that ensure the small business performs a significant portion of the work.¹, ², ³