Government Set-Aside Rules: Complete Guide
The federal government is required by law to award at least 23% of prime contract dollars to small businesses. Set-aside rules are the mechanism that makes this happen — they restrict competition on certain contracts to small businesses and disadvantaged groups.
Understanding set-aside rules is essential whether you are a small business looking to leverage your status or a large business navigating subcontracting requirements.
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The Rule of Two (FAR 19.502-2)
The Rule of Two is the cornerstone of the federal small business set-aside program. It requires a contracting officer to set aside an acquisition exclusively for small businesses when there is a “reasonable expectation” that at least two responsible small businesses will submit offers at fair market prices.
For acquisitions at or below the simplified acquisition threshold ($250,000), the Rule of Two is mandatory. If the contracting officer has a reasonable expectation that two small businesses can perform, the acquisition must be set aside. Above the SAT, the Rule of Two is still applied but the contracting officer has more discretion.
The “reasonable expectation” standard does not require certainty. The contracting officer can base this determination on market research, prior procurement history, SAM.gov searches, Sources Sought responses, and industry knowledge. If the market research shows at least two capable small businesses, the set-aside should be made.
When a set-aside is made and fewer than two acceptable offers are received, the contracting officer may withdraw the set-aside and resolicit on an unrestricted basis. However, simply receiving fewer than two offers does not automatically justify withdrawing the set-aside — the contracting officer must document why the determination has changed.
Total vs. Partial Set-Aside
A total set-aside restricts the entire acquisition to small businesses (or a specific socioeconomic category). Only small businesses may submit offers, and the award must go to a small business. This is the most common type of set-aside.
A partial set-aside divides the acquisition into two parts: one portion is set aside for small businesses, and the remainder is competed on an unrestricted (full and open) basis. Partial set-asides are used when the total quantity is too large for small businesses to handle, but small businesses can handle a meaningful portion.
FAR 19.502-3 governs partial set-asides. The contracting officer must determine the appropriate portion for the set-aside based on the capabilities of the small business market. Small businesses may also compete for the unrestricted portion — a partial set-aside does not exclude small businesses from the open portion.
Partial set-asides are underutilized. Many agencies default to either a total set-aside or full and open competition, missing opportunities to give small businesses a portion of larger acquisitions. If you are a small business and see a large unrestricted solicitation, consider recommending a partial set-aside to the contracting officer during market research.
Order of Precedence for Set-Asides
When a contracting officer determines that a set-aside is appropriate, they must consider the available programs in a specific order of precedence. This hierarchy reflects Congressional priorities and ensures that the most disadvantaged groups receive first consideration:
8(a) Business Development Program
Sole-source or competitive set-aside for SBA-certified 8(a) firms. The 8(a) program has the highest precedence and the broadest sole-source authority.
HUBZone Program
Set-aside for firms certified as located in Historically Underutilized Business Zones. HUBZone firms receive a 10% price evaluation preference in unrestricted competitions.
SDVOSB Program
Set-aside for Service-Disabled Veteran-Owned Small Businesses. Self-certification was replaced by SBA verification as of January 2024 (Veterans Small Business Enhancement Act).
WOSB / EDWOSB Program
Set-aside for Women-Owned Small Businesses or Economically Disadvantaged WOSBs. Limited to NAICS codes where women are underrepresented or substantially underrepresented.
Small Business Set-Aside
General set-aside for any small business meeting the applicable size standard. Used when none of the socioeconomic programs above can meet the Rule of Two.
In practice, the order of precedence is a guideline, not an absolute requirement. Contracting officers have discretion to use a lower-priority program if it better serves the acquisition needs. However, they must document the rationale for skipping a higher-priority program.
Sole-Source Thresholds by Program
SBA must approve. Available for 8(a) participants in their program term. Agencies can direct-award to specific 8(a) firms.
Contracting officer determines that award can be made at a fair and reasonable price. No SBA approval required.
Only for NAICS codes where WOSBs are underrepresented. EDWOSB sole-source available in both underrepresented and substantially underrepresented NAICS codes.
Requires HUBZone certification through SBA. HUBZone firms also receive a 10% price evaluation preference in full and open competitions.
Note: Thresholds are adjusted periodically. These figures reflect current FAR values. Sole-source awards above these thresholds require standard justification and approval (J&A) procedures under FAR Part 6.
The Non-Manufacturer Rule
The non-manufacturer rule (NMR) addresses a common scenario in small business set-asides: what happens when a small business resells products it does not manufacture? Without the NMR, large manufacturers could use small business resellers as pass-throughs to capture set-aside contracts.
Under FAR 19.505, a small business that is not the manufacturer of the product it offers can qualify for a set-aside if it meets four conditions:
- It provides the end item of a small business manufacturer
- It is primarily engaged in retail or wholesale trade and normally provides the product
- It takes ownership or rental of the product
- It will supply the product of a domestic small business manufacturer or processor
If no small business manufacturer exists for a particular product, SBA can issue a class waiver or individual waiver of the NMR. Class waivers exist for many product categories where small business manufacturers are rare (such as certain IT hardware, vehicles, and industrial equipment). When a waiver is in place, the small business reseller can supply products from any manufacturer, including large businesses.
Subcontracting Limitations
FAR 52.219-14, “Limitations on Subcontracting,” prevents small businesses from serving as pass-throughs that win set-aside contracts and then subcontract most of the work to large businesses. The clause requires the small business prime to perform a minimum percentage of the work itself.
Services
50%
At least 50% of the cost of contract performance incurred for personnel must be expended for the prime contractor's own employees.
Supplies / Manufacturing
50%
At least 50% of the cost of manufacturing the supplies (not including materials) must be performed by the prime contractor.
General Construction
15%
At least 15% of the cost of the contract (not including materials) must be performed by the prime contractor's own employees.
Specialty Trade Construction
25%
At least 25% of the cost of the contract (not including materials) must be performed by the prime contractor's own employees.
Violation of subcontracting limitations can result in contract termination, referral to the SBA Inspector General, and potential suspension or debarment. The small business must also report similarly situated subcontractor performance, which can count toward the prime's percentage under certain conditions.
Related resources
Explore set-aside opportunities by category on our Set-Asides page or learn more about small business programs in our Small Business Contracting Guide.
Frequently Asked Questions
What is the Rule of Two in government contracting?
The Rule of Two (FAR 19.502-2) requires contracting officers to set aside acquisitions exclusively for small businesses when there is a reasonable expectation that at least two responsible small businesses will submit offers at fair market prices. This applies to acquisitions above the micro-purchase threshold ($10,000) and at or below the simplified acquisition threshold ($250,000), where set-aside is mandatory. Above the SAT, it is discretionary but still guided by the Rule of Two.
What is the order of precedence for set-asides?
When a contracting officer determines a set-aside is appropriate, they must consider programs in a specific order: (1) 8(a) sole source or competitive, (2) HUBZone sole source or competitive with a HUBZone price evaluation preference, (3) SDVOSB sole source or competitive, (4) WOSB/EDWOSB sole source or competitive, (5) small business set-aside. The contracting officer considers each program in order and uses the first program where the Rule of Two is met.
What is the non-manufacturer rule?
The non-manufacturer rule (FAR 19.505) allows a small business that does not manufacture the product it is selling to qualify as a small business for a set-aside, provided: (1) it supplies the product of a small business manufacturer, (2) it is primarily engaged in retail or wholesale trade, (3) it takes ownership or control of the product, and (4) it normally provides the product to the general public. If no small business manufacturer exists, the contractor can apply for a waiver from SBA.
What are the subcontracting limitations for set-asides?
Under FAR 52.219-14, small businesses that win set-aside contracts must perform a certain percentage of the work themselves: at least 50% of the cost of manufacturing for supplies, at least 50% of the cost of personnel for services, at least 15% for general construction, and at least 25% for specialty trade construction. These limitations prevent large businesses from using small business fronts to capture set-aside work.
Can set-asides be used on IDIQ task orders?
Yes. FAR 19.502-4(c) requires that task orders on multiple-award contracts be set aside for small businesses when the contracting officer determines there are two or more small business contract holders that can perform the work at fair market prices. This applies even when the underlying IDIQ contract is unrestricted. Agencies must review each task order for small business set-aside potential.
Find Set-Aside Opportunities on Bureauify
Filter contracts by set-aside type — 8(a), SDVOSB, WOSB, HUBZone, or small business. Track which agencies have the highest set-aside volumes in your NAICS codes and build a pipeline of qualified opportunities.