Since taking office, President Trump has issued numerous Executive Orders (EOs) that have left many questioning the status of an array of federal government programs. EO 14173 (Ending Illegal Discrimination and Restoring Merit-Based Opportunity) is one of them, creating concern that federal set-aside and subcontractor preference programs, which seek to level the playing field for varying classes of small businesses, may come under attack by the Administration and become the subject of judicial scrutiny.
Small business set-asides are contracts that are specifically designated by the government for award only to small businesses to help them compete for federal contracts. In addition to being based only on the size of a business (a “concern,” in Small Business Administration (SBA) speak), set-asides can be designated for award to small businesses that qualify under other socioeconomic programs, including the 8(a) business development, HUBZone, Women-Owned Small Business Federal Contract, and service-disabled veteran-owned small business programs. Small businesses also benefit from the small business subcontracting program, which mandates federal prime contractors to use good-faith efforts to subcontract a certain amount of the work called for by the contract to these types of small businesses.
Importantly, federal set-asides and the small business subcontracting program are statutorily derived programs created by the Small Business Act and can only be eliminated by Congress or, if they are found to be unconstitutional, a federal court. As it currently stands, EO 14173 does not directly eliminate these federal set-aside and subcontractor preference programs. However, the same litigation upon which the Administration bases EO 14173 could logically apply to bar discrimination in federal government contracting and subcontracting that favors women and minorities, if not all the socioeconomic groups protected by the Small Business Act. Indeed, the Congressional Research Service recently issued a report noting that EO 14173 eliminated women and minority groups from the protective jurisdiction of the Office of Federal Contract Compliance Programs, which further indicates not only the Administration’s drive to end all forms of “illegal” discrimination but also Congress’s apparent willingness to allow these changes to occur.
Challenges and Changes to Federal Set-Aside Programs
In 2023, the Eastern District of Tennessee in Ultima Services Corp. v. U.S. Department of Agriculture enjoined the SBA “from using the rebuttable presumption of social disadvantage in administering” the 8(a) program. According to this court, the SBA could not “presume” that individuals were socially disadvantaged as a result of their membership in one of the identified groups. This case had sweeping implications, such as the SBA temporarily suspending the initiation of new applications into the 8(a) program and suspending the final evaluation of pending applications that relied on the “rebuttable presumption.” As a result of this decision, the SBA ultimately updated its process and system for new 8(a) program applicants.
In the same vein, the Department of Transportation’s (DOT) disadvantaged business enterprise (DBE) program intends to reduce discrimination and help disadvantaged businesses equally compete for government contracts. In September 2024, the Eastern District of Kentucky in Mid-American Milling Co. LLC v. United States DOT enjoined the DOT from mandating the use of race- and gender-based rebuttable presumptions for DOT contracts impacted by DBE goals upon which the plaintiffs bid. In this case, the court found that the plaintiff was likely to prevail on its argument that the program’s race and gender classifications were in violation of the Equal Protection Clause.
This decision came at the heels of a federal judge striking down a federally sponsored racial preference for minority groups that were seeking to access capital for government contracts in March 2024. In Nuziard v. Minority Business Development Agency, the plaintiffs (nonminority business owners) challenged a preference provided by the Minority Business Development Agency (a bureau of the Department of Commerce) to “socially or economically disadvantaged individual[s].” In that case, the court found that the preference violated the Equal Protection Clause. Notably, all these decisions (including Ultima) follow the Supreme Court’s decision in Students for Fair Admissions Inc. v. President & Fellows of Harvard College and are a clear attempt to invalidate race-based presumptions in federally funded programs.
More recently, the SBA reset the small-disadvantaged business goals for 2025 and lowered agency expectations to 5% across all agencies. This is in stark contrast to the SBA’s same goals for 2024. For example, in 2024, the SBA’s small-disadvantaged business goal was 60.5% and the Office of Personnel Management’s goal was 36%. In 2025, each agency’s goal is only 5%.
There is also a possibility that with all the uncertainty (and occasional misinformation) surrounding EO 14173, contracting officers may terminate SBA set-aside contracts, or void the small business subcontracting plan contract requirements, based on their incorrect belief that EO 14173 prohibits in all respects the use of such contracts. Despite such termination being improper, some federal contractors may not challenge the decision of the contracting officer based on their own uncertainty, misinformation, or fear of reprisal.
Implications/Opportunities for Large Federal Contractors
Again, while federal set-asides and the small business subcontracting program have not been directly eliminated by the Administration or found discriminatory in court, it may only be a matter of time before they are. That might entirely end these set-aside programs or limit them to only certain special classes, such as veterans, Native Americans (via tribal treaties and separate statutory bases), and individuals with disabilities. Likewise, the small business subcontracting program obligations may be altered radically or eliminated entirely.
For large businesses, in the short term, that might of course lead to more prime contracting opportunities with federal agencies. Likewise, large businesses might start considering acquisitions or other activities that would bring in-house the assets – including experienced personnel, intellectual property, and physical assets (real and personal property) – that are currently owned by successful small businesses.
For small businesses, it has long been understood that being 100% reliant on the federal government as a customer is a substantial risk for any business. With these changes looming, those risks are multiplying, and the wise small business owner might look toward diversifying revenue or partnering with larger businesses in new and creative ways.
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Alston & Bird's multidisciplinary Executive Order, Action & Proclamation Task Force advises clients on the business and legal implications of President Trump's Executive Orders.
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