FAR Part 19: Small Business Programs
FAR Part 19 is the foundation of the federal government's commitment to small business participation in federal contracting. It establishes the policies, procedures, and programs that direct a significant share of federal procurement dollars to small businesses.
This guide covers every major component of FAR Part 19 — from the Rule of Two and set-aside procedures to subcontracting requirements, size determinations, and the nonmanufacturer rule. Whether you are a small business looking to win set-asides or a large business building a compliant subcontracting plan, this is your reference.
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Overview of Small Business Programs
The federal government has a statutory goal of awarding at least 23% of all prime contract dollars to small businesses. FAR Part 19 implements this mandate through a layered system of set-aside programs, each targeting specific categories of small businesses that have historically been underrepresented in federal procurement.
The Small Business Administration (SBA) oversees the certification and eligibility requirements for each program, while contracting officers at individual agencies are responsible for applying the set-aside rules during the acquisition process. The programs work together to create multiple pathways for small businesses to compete for and win federal contracts.
Small Business Set-Aside
Goal: 23% of prime contracts
Available to any business meeting the SBA size standard for the assigned NAICS code. The broadest and most commonly used set-aside category.
8(a) Business Development
Goal: 5% of prime contracts
For socially and economically disadvantaged small businesses. Nine-year program with sole-source and competitive set-aside authority.
HUBZone Program
Goal: 3% of prime contracts
For small businesses headquartered and employing workers in Historically Underutilized Business Zones. Includes a price evaluation preference.
SDVOSB Program
Goal: 3% of prime contracts
For businesses owned and controlled by service-disabled veterans. SBA now handles certification through the Veteran Small Business Certification program.
WOSB / EDWOSB Program
Goal: 5% of prime contracts
For women-owned small businesses and economically disadvantaged women-owned small businesses. Limited to industries where women are underrepresented.
Partial Set-Asides
Goal: Varies by acquisition
Contracting officers can set aside a portion of an acquisition for small business while reserving the remainder for full and open competition.
The Rule of Two and Set-Aside Procedures
The Rule of Two is the triggering mechanism for small business set-asides. Under FAR 19.502-2, a contracting officer must set aside an acquisition exclusively for small business participation when two conditions are met: (1) there is a reasonable expectation that at least two responsible small business concerns will submit offers, and (2) the award can be made at a fair market price.
For acquisitions at or below the simplified acquisition threshold ($250,000), there is a presumption that the Rule of Two is satisfied, and the acquisition should be set aside for small business unless the contracting officer determines that there is not a reasonable expectation of receiving fair market price offers from at least two small businesses.
Above the simplified acquisition threshold, the contracting officer conducts market research to determine whether set-aside conditions exist. This research may include reviewing the Dynamic Small Business Search (DSBS), examining prior procurement history, publishing Sources Sought notices, and consulting with the SBA Procurement Center Representative (PCR).
When a total set-aside is not appropriate because the Rule of Two cannot be satisfied for the entire requirement, contracting officers can use partial set-asides under FAR 19.502-3. This allows them to set aside a defined portion of the acquisition for small business while competing the remaining portion on a full and open basis. Partial set-asides are particularly useful for multiple-award contracts and large indefinite-delivery contracts.
The order of precedence for set-aside consideration follows a specific hierarchy. Contracting officers must first consider whether the acquisition can be set aside under the 8(a) program, then HUBZone, then SDVOSB, then WOSB/EDWOSB, and finally as a general small business set-aside. However, this order of precedence is applied with discretion, and contracting officers have flexibility to select the most appropriate set-aside type based on market conditions.
Subcontracting Requirements
FAR 19.7 establishes subcontracting plan requirements for contracts that exceed the simplified acquisition threshold when awarded to other-than-small businesses. These requirements ensure that even when a contract is not set aside for small business, small businesses still have the opportunity to participate as subcontractors.
Any contract exceeding $750,000 ($1.5 million for construction) awarded to other-than-small businesses must include a subcontracting plan with goals for subcontracting to each of the following categories:
- Small businesses (overall)
- Small disadvantaged businesses (SDB)
- Women-owned small businesses (WOSB)
- HUBZone small businesses
- Service-disabled veteran-owned small businesses (SDVOSB)
- Veteran-owned small businesses (VOSB)
The subcontracting plan must include specific dollar and percentage goals, a description of the principal types of supplies and services to be subcontracted, the method used to develop goals, and the name of the individual who will administer the plan. Plans are reviewed by the contracting officer and, in many cases, by the SBA Commercial Market Representative (CMR).
Contractors are required to submit Individual Subcontract Reports (ISR) and Summary Subcontract Reports (SSR) through the Electronic Subcontracting Reporting System (eSRS) to demonstrate compliance with their subcontracting plans. Failure to make a good faith effort to comply with a subcontracting plan can result in liquidated damages, assessed at the amount of the shortfall multiplied by the percentage goal not achieved.
The limitations on subcontracting rule (FAR 19.505) requires that small business set-aside prime contractors perform a minimum percentage of the work themselves. For services, at least 50% of the cost of personnel must be performed by the prime. For supplies, at least 50% of the cost of manufacturing must be performed by the prime (or the product must meet the nonmanufacturer rule). For construction, at least 15% of the cost must be performed by the prime with its own employees.
Certificate of Competency (COC)
The Certificate of Competency (COC) program, established under FAR 19.6, is a safety net for small businesses that are found to be the apparent low bidder or best-value offeror but are determined by the contracting officer to be non-responsible (lacking the capability, capacity, financial resources, or tenacity to perform the contract).
When a contracting officer determines that a small business concern is non-responsible, they must refer the matter to the SBA before rejecting the offer. The SBA Area Office then conducts an independent review of the small business's capabilities, including on-site evaluations, financial analysis, and interviews with company management.
If the SBA determines that the small business is capable of performing the contract, it issues a Certificate of Competency. The COC is binding on the contracting officer, who must then award the contract to the small business. The contracting officer can appeal only to the SBA Administrator.
The COC process is limited to small businesses and applies only to responsibility determinations, not to evaluations of technical merit, past performance scores, or other competitive factors. It is an important protection that prevents small businesses from being excluded from contract awards based on subjective assessments of their capability without independent review.
Small Business Size Determination
Size determination is the process by which the SBA evaluates whether a business qualifies as “small” for a specific procurement. The SBA establishes size standards for each NAICS code, and these standards vary significantly across industries. Some industries measure size by average annual receipts (typically over a 5-year period), while others use average number of employees (over 12 months).
For example, most professional services NAICS codes have a size standard of $16.5 million to $47 million in average annual receipts, while manufacturing NAICS codes may have size standards of 500 to 1,500 employees. Construction NAICS codes have size standards ranging from $19 million to $45 million in average annual receipts.
A business self-certifies its size at the time it submits its initial offer (including price) on a specific solicitation. This self-certification can be challenged through a size protest, which any interested party (including other offerors, the contracting officer, or the SBA) can file with the SBA Office of Hearings and Appeals (OHA).
Size determination considers affiliates under the SBA's affiliation rules (13 CFR 121.103). Businesses that are affiliated through ownership, management, previous relationships, or the newly organized concern rule may have their revenues and employees combined for size purposes. This is one of the most complex areas of small business regulation and a common source of size protests, particularly in joint venture and mentor-protege arrangements.
The recertification rule requires small businesses to recertify their size status in certain situations, including option exercise on multiple-award contracts, mergers and acquisitions, and novation agreements. Failure to recertify may result in the loss of small business status on the affected contract.
The Nonmanufacturer Rule
The nonmanufacturer rule (NMR), codified at FAR 19.505 and 13 CFR 121.406, addresses a specific challenge in supply contracts set aside for small businesses: what happens when a small business dealer or distributor wins a set-aside contract to supply products that it does not manufacture?
Under the NMR, a small business set-aside contractor that does not manufacture the products it supplies must provide products manufactured or produced by a small business concern. This prevents large manufacturers from effectively circumventing set-aside requirements by selling through small business intermediaries.
To qualify under the NMR, the small business nonmanufacturer must meet all of the following criteria:
- It must not exceed 500 employees
- It must be primarily engaged in the retail or wholesale trade and normally sell the type of item being supplied
- It must supply the end item of a small business manufacturer, processor, or producer made in the United States
- It must take ownership or possession of the item with its personnel, equipment, or facilities
The SBA can grant waivers to the NMR on a class or individual basis when it determines that no small business manufacturers or processors are available to supply the product. Class waivers apply to entire product categories (identified by Product Service Code or NAICS code), while individual waivers are granted on a contract-by-contract basis. The SBA maintains a list of current class waivers on its website.
Understanding the NMR is critical for small businesses competing for supply contracts. If you are a dealer or distributor, you need to verify that your supply chain includes small business manufacturers or that a waiver applies to your product category before self-certifying as small on a set-aside solicitation.
Frequently Asked Questions
What is the Rule of Two in government contracting?
The Rule of Two requires contracting officers to set aside acquisitions exclusively for small businesses when there is a reasonable expectation that at least two responsible small business concerns will submit offers and that the award can be made at a fair market price. This rule applies to acquisitions above the micro-purchase threshold and at or below the simplified acquisition threshold, as well as larger acquisitions when conditions are met.
What are the small business set-aside categories under FAR Part 19?
FAR Part 19 establishes several set-aside categories: total small business set-asides, partial set-asides, 8(a) Business Development Program set-asides, HUBZone set-asides, Service-Disabled Veteran-Owned Small Business (SDVOSB) set-asides, Women-Owned Small Business (WOSB) and Economically Disadvantaged WOSB set-asides. Each category has specific eligibility requirements and procedures defined by the SBA.
What is the nonmanufacturer rule?
The nonmanufacturer rule (FAR 19.505) requires that a small business set-aside contractor supplying products it did not manufacture must provide products manufactured by a small business concern, unless the SBA has granted a waiver. The rule prevents large manufacturers from using small business intermediaries to circumvent set-aside requirements. Waivers are granted when no small business manufacturers exist for a given product class.
How is small business size determined?
Small business size is determined based on the North American Industry Classification System (NAICS) code assigned to the solicitation. The SBA establishes size standards for each NAICS code, measured either by average annual receipts (typically over the last 5 years) or by number of employees (averaged over 12 months). Size is self-certified by the offeror, but can be protested and reviewed by the SBA Office of Hearings and Appeals.
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