Small Business Set-Asides

The federal government is required by law to award a percentage of its contract dollars to small businesses. The Small Business Administration (SBA) sets annual goals and administers several programs that help small businesses compete for government contracts. In fiscal year 2023, the government awarded 28.4% of eligible contract dollars to small businesses, exceeding the statutory goal of 23%.

The 23% Goal

The Small Business Act establishes a government-wide goal of awarding at least 23% of all prime contract dollars to small businesses. This goal is broken into subcategories for specific groups:

• Small Disadvantaged Business (SDB): 5% goal. Includes businesses owned by socially and economically disadvantaged individuals.
• Women-Owned Small Business (WOSB): 5% goal. For businesses at least 51% owned and controlled by women.
• Service-Disabled Veteran-Owned Small Business (SDVOSB): 3% goal. For businesses owned by veterans with service-connected disabilities.
• HUBZone Small Business: 3% goal. For businesses located in Historically Underutilized Business Zones designated by the SBA.

How Set-Asides Work

A set-aside restricts competition for a contract to small businesses in a specific category. Before setting aside a contract, the contracting officer must determine that there is a reasonable expectation that at least two qualified small businesses will submit offers at fair market prices. This is called the Rule of Two.

Set-asides can be total (only small businesses may compete) or partial (a portion is reserved for small businesses). For acquisitions between $15,000 and $350,000 (the micro-purchase and simplified acquisition thresholds, raised from $10,000/$250,000 effective October 1, 2025 under FAR Case 2024-001), the FAR requires automatic total set-aside for small businesses unless the contracting officer determines there is not a reasonable expectation of adequate competition.

SBA Size Standards

To qualify as small, a business must meet the SBA size standard for its primary NAICS code. Size standards vary by industry and are based on either average annual revenue or number of employees. For example, a manufacturing firm may qualify as small with up to 500 employees, while a retail business may need annual revenue below $8 million. The SBA publishes a complete table of size standards organized by NAICS code.

The 8(a) Business Development Program

The 8(a) program is a nine-year business development program for small businesses owned by socially and economically disadvantaged individuals. Participants receive mentoring, technical assistance, and access to sole-source contracts up to $4.5 million for goods and services or $7 million for manufacturing. The program is one of the most effective pathways for small businesses to build federal contracting experience.

Mentor-Protege Programs

Both the SBA and the Department of Defense operate mentor-protege programs that pair experienced contractors with small businesses. Mentors provide technical assistance, joint venture opportunities, and subcontracting work. The SBA All Small Mentor-Protege Program allows small businesses from any socioeconomic category to form joint ventures that can compete for set-aside contracts as small businesses.

Getting Started

Small businesses interested in federal contracting should first register in SAM.gov, determine their NAICS codes, and check whether they qualify for any set-aside programs. The SBA offers free counseling through Small Business Development Centers (SBDCs) and Procurement Technical Assistance Centers (PTACs) in every state.

Federal small-business contracting goals and recent performance

Each fiscal year the Small Business Administration publishes a "Small Business Procurement Scorecard" that grades the federal government against the statutory goals set in 15 U.S.C. 644(g). The headline goal is the 23% small-business contracting target, but several sub-goals exist for specific socioeconomic categories. Knowing the headline numbers helps small businesses size which programs are likely to have active demand from agencies in any given year:

Goals per 15 U.S.C. 644(g). Recent performance approximated from SBA Small Business Procurement Scorecard (sba.gov/document/support-small-business-procurement-scorecard). Govt-wide actuals vary year to year.

Worked example: pursuing an SBA 8(a) set-aside

Consider a five-person IT services firm headquartered in a major metro and certified in the SBA 8(a) Business Development Program. The firm registers in SAM.gov under NAICS 541512 (Computer Systems Design Services). Its target market is Department of Defense IT modernization projects valued between $350,000 and $4.5 million, the size range where 8(a) sole-source awards are still permitted without competition (non- manufacturing sole-source ceiling; the manufacturing ceiling is $7 million). Throughout the fiscal year the firm responds to roughly thirty Sources Sought notices (early-stage market research postings) to surface itself to contracting officers, then converts a small share of those into actual proposals. Two end-of-year sole-source 8(a) awards (typical of agencies trying to hit small-business targets in Q4) anchor the firm's revenue. This conversion pattern, many touches, few wins, concentrated in Q4, is the predictable rhythm of an 8(a) firm's pipeline.

Why small-business set-aside dollars cluster in specific NAICS codes

Across the federal government, small-business set-aside dollars cluster heavily in a handful of NAICS codes, particularly IT services (541512), management consulting (541611), facilities support (561210), and engineering services (541330). The clustering reflects two structural factors. First, these NAICS codes have SBA size standards (revenue-based caps) that allow firms with hundreds of employees and tens of millions in revenue to still qualify as "small," which gives agencies a deep pool of capable small-business primes to choose from. Second, the work in these categories is decomposable into discrete task orders that fit naturally within small-business contract ceilings. Manufacturing NAICS codes, by contrast, have employee-count size standards that exclude even mid-sized firms and the work typically requires capital equipment beyond small-business reach, which is why manufacturing set-asides are rarer despite the size of overall federal manufacturing procurement.

How sole-source 8(a) awards work in practice

One of the most consequential features of the SBA 8(a) Business Development Program is the ability of agencies to award sole-source contracts to certified 8(a) firms up to specific dollar thresholds without going through competitive procurement. The threshold is currently $4.5 million for most goods and services, with a higher threshold ($7 million) for manufacturing. This sole-source pathway exists because Congress determined that the administrative cost of competitive procurement at smaller dollar values often consumes a meaningful fraction of the contract value itself, a competitive procurement with three bidders may cost the agency $50,000 to $150,000 in contracting-officer time and evaluation panels for a $400,000 contract. Sole-source 8(a) awards compress that cycle to weeks, which is why agencies use them heavily in Q4 when they are racing against fiscal year-end to commit unobligated funds.

Why HUBZone status is harder to maintain than to acquire

Of the major SBA socioeconomic programs, the HUBZone (Historically Underutilized Business Zone) certification has the most demanding maintenance requirements. A certified firm must maintain at least 35 percent of its workforce living in a designated HUBZone area on an ongoing basis, and the geographic boundaries of HUBZone areas are recalculated periodically based on Census data. Firms often achieve initial certification, win contracts, then lose their HUBZone status when the underlying Census tract designations shift or their workforce composition evolves. This volatility partly explains why HUBZone is the only major small-business category that consistently underperforms its statutory goal: the pool of certified firms in any given year is smaller than the number that hold certifications at some point during a multi-year cycle.