Subpart 19.5 - Small Business Total Set-Asides, Partial Set-Asides, and Reserves

Overview

Subpart 19.5 prescribes policies and procedures for the set-aside and reservation of federal acquisitions exclusively for small business participation. Its primary purpose is to ensure that small businesses receive a fair proportion of government contracts and to maintain the nation's industrial productive capacity, provided the government does not pay more than a fair market price.

Key Rules

• The "Rule of Two": The Contracting Officer (CO) must set aside acquisitions over the Simplified Acquisition Threshold (SAT) when there is a reasonable expectation that offers will be obtained from at least two responsible small business concerns and award will be made at fair market prices.
• Mandatory Set-Asides (MTP to SAT): Acquisitions valued between the Micro-Purchase Threshold (MTP) and the SAT are automatically reserved for small businesses unless the CO determines there is no reasonable expectation of receiving two or more competitive offers.
• Fair Market Price Limitation: A contract may not be awarded under a small business set-aside if the cost to the agency exceeds a fair market price.
• Order of Precedence: For orders above the SAT under multiple-award contracts, COs must consider socioeconomic programs (e.g., 8(a), HUBZone, SDVOSB, WOSB) before general small business set-asides.
• Limitations on Subcontracting: Small business prime contractors are restricted in how much work they can subcontract to "non-similarly situated entities":
  • Services and Supplies: Maximum 50% can be subcontracted.
  • General Construction: Maximum 85% can be subcontracted.
  • Special Trade Construction: Maximum 75% can be subcontracted.
• Nonmanufacturer Rule (NMR): A small business acting as a nonmanufacturer must provide an end item manufactured by a domestic small business unless the SBA has granted a class or individual waiver.
• Withdrawal of Set-Asides: A CO may withdraw a set-aside if it is deemed detrimental to the public interest (e.g., price is too high), but must provide written notice and justification to the SBA.

Responsibilities

• Contracting Officer (CO):
  • Reviews all acquisitions to determine if they can be set aside or reserved.
  • Determines NAICS codes and size standards for every solicitation.
  • Makes the final determination on set-asides and reserves (considering agency and SBA recommendations).
  • Provides justifications for rejecting SBA recommendations or withdrawing set-asides.
• Small Business Administration (SBA) Procurement Center Representative (PCR):
  • Reviews proposed acquisitions and makes recommendations for set-asides.
  • Appeals CO decisions to the Head of the Contracting Activity (HCA) or Agency Head if a recommendation is rejected.
• Agency Office of Small and Disadvantaged Business Utilization (OSDBU):
  • Consults with the CO and provides recommendations on set-aside feasibility.
• Agency Head:
  • Makes the final decision regarding SBA appeals of a CO's rejection of a set-aside recommendation.

Practical Implications

• Market Research Criticality: Because the "Rule of Two" drives mandatory set-asides, thorough market research is the most critical step for both the government and small businesses. If a small business can identify at least one other competitor, they can effectively lobby the CO for a set-aside.
• Multiple-Award Contract (MAC) Strategy: The subpart gives COs significant discretion to set aside individual orders under MACs (like GSA Schedules or GWACs). Small businesses should focus on winning spots on these vehicles, as the actual competition often happens at the order level through discretionary set-asides.
• Compliance Risks: The Limitations on Subcontracting (LOS) rules are a major compliance area. Contractors must ensure their "similarly situated" partners (subcontractors with the same small business status) are correctly identified to avoid violating the percentage thresholds.
• Insufficient Reasons: COs cannot avoid a set-aside simply because small businesses already have a "fair share" of the market or because the requirement is classified; the focus remains strictly on the "Rule of Two" and "Fair Market Price."