Key Takeaways

  • The definition of a small business for federal contracts is based on SBA size standards, which vary by industry and are tied to employee count or average annual receipts.
  • NAICS codes and SBA size standards are critical in determining eligibility for set aside contracts.
  • Businesses must be registered in SAM and meet criteria such as being independently owned and operated, and not dominant in their field.
  • Set aside contracts can be total or partial and include programs for disadvantaged, veteran-owned, women-owned, and HUBZone businesses.
  • The 8(a) Business Development Program, WOSB program, and others offer federal contract access and support services for eligible businesses.

Set aside contracts are contracts offered by the government agencies to contractors and businesses that have complied with a variety of complex requirements. 

What are Set Aside Contracts?

If you are a federal contractor, or if you are a business owner that is interested in pursuing federal contracts, it is recommended that you examine your certifications so that you can be certain you have complied with state and federal level regulations. By complying with these regulations, you will have the ability to:

  • Bid on government contracts.
  • Accept contracts where your bid was successful.
  • Access set-aside contracts.

Set aside contracts, as you might suspect from their name, are contracts that the federal government has set aside for businesses that have taken the effort to comply with contracting requirements. For instance, businesses that operate in disadvantaged locations, or businesses owned by minorities or women, are often able to accept these set aside contracts.

An official certification or award must be granted to a company registered with the System for Award Management (SAM) before the company can qualify for a set aside contract.

There is a certain type of set aside contract that is specifically reserved for small business. These are known as small business set asides. Small businesses have access to a great deal of work, as the government provides access to private sector contracts that total $500 billion annually. If you are a small business that is struggling to compete with larger companies or is having trouble breaking into your chosen industry, using small business set asides can be a great way to put your company on the path towards success.

If a purchase made by the federal government is expected to be between $2,500 and $100,000, and there are more than two businesses that can provide the service, it will be considered a small business set aside automatically. If a contract is valued at more than $500,000, there must be a subcontracting plan so that small businesses will have the ability to compete for the contract.

Twenty-three percent of all spending by federal agencies must go to small businesses. This set aside amount must include:

  • 3 percent for businesses owned by disabled veterans.
  • 5 percent for small businesses that are veteran-owned.
  • 5 percent each for HUBZone and 8(a) businesses.
  • 3 percent for businesses owned by women. 

How Size Standards Define Small Business Eligibility

To qualify for a small business set aside, your business must meet the Small Business Administration’s (SBA) size standards, which are based on either the number of employees or average annual revenue—depending on your industry. These standards are matched with your North American Industry Classification System (NAICS) code, which categorizes businesses by economic activity.

Size standards vary widely. For example:

  • A manufacturing firm may be considered a small business if it has 500 or fewer employees.
  • A service-based firm might qualify if its average annual receipts do not exceed $8 million over the past three years.

You can check your eligibility by:

  1. Identifying your NAICS code.
  2. Comparing your company’s stats to the SBA’s Size Standards Tool.
  3. Ensuring you are independently owned and operated, not dominant in your field, and organized for profit.

It’s important to note that affiliation with other entities may impact your size status. If your business controls or is controlled by another company, the SBA may aggregate employee or revenue totals to determine size.

Who is Eligible for Small Business Set Asides?

The government uses set aside contracts for almost every type of private sector work imaginable. The purpose of the Small Business Administration's 8(a) program to put small business owners in disadvantaged areas on equal footing to larger companies when it comes to bidding on government contracts.

If you want to be considered an 8(a) business, you will need to meet the following qualifications:

  1. Own a business and be disadvantaged, either economically or socially.
  2. Have owned and operated your business for two years or longer.
  3. Have a net worth that does not exceed $250,000.

The 8(a) program lasts for nine years and provides eligible businesses with training, counseling, and the ability to procure federal contracts.

If more than two small businesses are available to complete a contract, and the contract is valued at $100,000 or less, it will be set aside. Usually, the decision to set aside a contract will be made after a good deal of market research has been performed. Depending on the nature of the contract, it can be set aside partially or fully.

Businesses that have fewer than 500 employees, or whose revenue is under $5 million, is considered a small business by the SBA.

The goal of the government is to offer small businesses 23 percent of prime contracts. However, this percentage can be higher.

To help businesses owned by women compete, the Women-Owned Small Businesses Federal Contracting Program was established. This program strives to correct the inequality that women-owned businesses typically face and works to help these businesses competed in industries dominated by male business owners. Women-owned businesses that are economically disadvantaged can also qualify for this program. A business with a 51 percent female ownership, and whose day to day operations are handled by women, is eligible for this program. However, there is no process for a business to be certified for the program. Instead, businesses will self-certify.

How to Determine and Maintain Small Business Status

Small business status is not self-declared in a vacuum—it must be verifiable through government systems and compliant with SBA standards. Here's what’s involved:

  • SAM Registration: Your business must be registered in the System for Award Management (SAM.gov) and renew annually.
  • SBA Profile: You'll need an SBA profile to bid on set aside contracts. Ensure your profile reflects current NAICS codes and accurate business data.
  • Certifications: Programs like WOSB, VOSB, HUBZone, and 8(a) require documentation and, in some cases, third-party or SBA certification.
  • Ongoing Compliance: If your business grows, ensure continued compliance. The SBA periodically reviews size status, especially during protests or audits.

Staying proactive about eligibility can prevent disqualification from lucrative contracts. Make use of SBA's resources such as their Size Standards Table, dynamic small business search, and online training for federal contracting.

Benefits and Limitations of Set Aside Contracts

Set aside contracts help level the playing field, but they come with rules and limitations:

  • Full vs. Partial Set Asides: Contracts may be reserved entirely for small businesses or split so that only part of the work is reserved.
  • Contract Bundling: Large contracts combining multiple requirements can be harder for small businesses to win. The SBA monitors bundling to ensure small firms aren't unfairly excluded.
  • Mentor-Protégé Programs: These allow small businesses to team with larger firms to build capacity and gain experience on larger projects.

These tools help small businesses gain footholds in government contracting without being overwhelmed by large competitors.

Understanding Socioeconomic Programs and Contract Goals

The federal government sets specific contracting goals to include various small business groups. Agencies strive to award:

  • 23% of prime contract dollars to small businesses
  • 5% to women-owned small businesses (WOSB)
  • 5% to small disadvantaged businesses (SDB), including 8(a)
  • 3% to HUBZone firms
  • 3% to service-disabled veteran-owned small businesses (SDVOSB)

These goals are supported by government-wide initiatives, compliance reviews, and subcontracting plan requirements for large prime contractors. Participation in these programs can greatly increase a business’s competitiveness in federal markets.

Frequently Asked Questions

  1. What is the definition of small business for federal contracts?
    A small business is defined by the SBA based on its industry-specific size standard, which uses employee count or average annual receipts.
  2. How do I know if my business qualifies for set aside contracts?
    You must meet SBA size standards, register in SAM, and possibly certify under a specific socioeconomic program (e.g., WOSB, 8(a), HUBZone).
  3. What is a NAICS code and why is it important?
    The NAICS code classifies your business type and determines which SBA size standard applies to your industry.
  4. Can a small business partner with a larger firm to win contracts?
    Yes, through subcontracting or the SBA Mentor-Protégé Program, which fosters collaboration and capacity building.
  5. What happens if my business grows beyond the small size standard?
    You may lose eligibility for small business set asides but can continue pursuing contracts in the open market or as a subcontractor.

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