Small Business Set-Asides: How Do They Work?

Updated on May 27, 2020
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Many small business owners are rightfully curious about the concept of small business set-asides. How do they work and how you can get in on the action? Here’s a closer look.

Every year, the federal government buys some $500 billion worth of goods and services from the private sector. Does a small business stand a chance of winning any of those contracts? Yes, thanks to the U.S. Small Business Administration

The SBA works with federal agencies to help ensure that at least 23% of all prime government contracts are awarded to (“set aside” for) small businesses. This is one way that small businesses can compete with Amazon and the other giants of commerce. 

Here’s how small business set-asides work, and how your small business can qualify for and obtain one.

How Small Business Set-Asides Work

There are two main types of small business set-asides: competitive set-aside contracts, and sole-source set-aside contracts.

For competitive contracts, two or more businesses can submit a bit to take on the job. Generally (though not always), this happens automatically when the contract is under $150,000. Some of these contracts are only open to those who participate in SBA contracting assistance programs.

Sole-source contracts are awarded without a bidding process when only a single business can fulfill the contract requirements. These contracts are publicly posted, and potential vendors can still bid on them, assuming the business participates in the relevant contracting assistance programs.

In addition to the government-wide 23% set-aside goal, there are different goals for certain subsets of small businesses:

  • Small disadvantaged businesses (8a program) — 5%
  • Women-Owned Small Businesses (WOSB) — 5%
  • Service-Disabled Veteran-Owned Businesses — 3%
  • Businesses in HUBZones (historically underutilized business zones) — 3%

These groups are also typically given special consideration when applying for SBA loans.

Not all set-asides are for prime contracts (those directly with a government agency). There are also small business set-asides for subcontracts resulting from a prime contract. For example, if an automotive manufacturer gets a prime contract to build Army jeeps, they could subcontract with a small manufacturer to supply some of the parts. 

Adding to the complexity, each federal agency sets its own specific set-aside goals with the SBA every year. For example, for the fiscal year of 2017, the Department of Defense had a goal of awarding 22% of prime contracts and 34% of subcontracts to small businesses. The Department of Energy had a goal to award 10.2% of prime contracts and 40% of subcontracts to small businesses.

How Can You Find Small Business Set-Asides?

  • Make sure you meet the SBA size standards. To be eligible for set-asides, your business can’t exceed the maximum size standard for the specific set-aside. Size standards depend on your industry, as specified by the North American Industry Classification System (NAICS) codes, and may be determined by the number of employees or annual gross revenues. 
  • Get a D-U-N-S number. If you don’t already have one, get a D-U-N-S number from Dun & Bradstreet. This is a free identification number you must have to do business with the federal government.

  • Register with the System of Award ManagementSAM is a database of companies that do business with or want to do business with the federal government. Registering is free. Government agencies and government contractors use it to search for companies interested in contracting opportunities. But don’t wait for them to find you—instead, take the initiative. Once registered in SAM, you can search for relevant set-asides.

How Can You Win Small Business Set-Asides?

  • Prove you can do it. Government agencies want to be confident you’ll deliver before they will take a chance on you. Show that you have completed similar work, on a similar scale, on time and within budget in the past, and have a track record of satisfied customers. Some contract solicitations require you submit your Open Ratings, Inc. Past Performance Evaluation. This is an independent audit of your customer references that gives you a rating. So, even if a bid doesn’t require it, sharing your rating can be good for marketing.
  • Price it right. To win a bid, you need to show that your business offers the government agency the best value. Since agencies often choose the lowest bidder, when you’re first trying to get set-asides, you may want to set your price lower than you normally would to increase your chances of landing the contract. Be sure, however, you don’t bid so low you lose money on the work.
  • Get help. Navigating the world of government contracting can be challenging due to all the rules and regulations. Fortunately, there are plenty of places to get help. The SBA offers a wide variety of resources for small businesses interested in set-asides, including Procurement Center Representatives to help business owners understand the federal contracting process and free online classes that teach the basics of government procurement.

Any qualifying small business has the opportunity to win a set-aside contract. Doing so can open the door to future opportunities, and can be used as an excellent marketing tool for other jobs as well. If you’re interested in a small business set-aside from the SBA, the pay-off could very well be worth the effort.

Rieva Lesonsky
Contributing Writer at Fundera

Rieva Lesonsky

Rieva Lesonsky is a contributing writer for Fundera. 

Rieva has over 30 years of experience covering, consulting and speaking to small businesses owners and entrepreneurs. She covers small business trends, employment, and leadership advice for the Fundera Ledger. She’s the CEO of GrowBiz Media, a media company specializing in small business and entrepreneurship. Before GrowBiz Media, Rieva was the editorial director at Entrepreneur Magazine. 

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