Extracted from Law360
Since taking office, President Donald Trump has issued numerous executive orders that have left many questioning the status of an array of federal government programs. Executive Order No. 14173 on illegal discrimination and merit-based opportunity, signed Jan. 21, is one of them.
It has caused 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 U.S. Small Business Administration 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 that federal prime contractors use good-faith efforts to subcontract a certain amount of the work called for in the contract to these types of small businesses.
Importantly, federal set-aside awards 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, the executive order does not directly eliminate these federal set-aside and subcontractor preference programs.
However, the same litigation upon which the administration based the order — the U.S. Supreme Court's 2023 decision in Students for Fair Admissions v. President and Fellows of Harvard College, and its companion case, which held that the subject universities' use of race in admissions violated the Fourteenth Amendment's equal protection clause — 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 the executive order eliminated women and minority groups from the protective jurisdiction of the Office of Federal Contract Compliance Programs. This is further indication of not only the administration's drive to end all forms of so-called illegal discrimination, but also of Congress' apparent willingness to allow these changes to occur.
Challenges and Changes to Federal Set-Aside Programs
In 2023, the U.S. District Court for 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 the 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. The SBA also suspended the final evaluation of pending applications that relied on the now rebuttable presumption.
As a result of the Ultima Services decision, the SBA ultimately updated its process and system for new 8(a) program applicants.
In the same vein, the U.S. Department of Transportation's disadvantaged business enterprise, or DBE, program is intended to reduce discrimination and help disadvantaged businesses equally compete for government contracts.
In September 2024, the U.S. District Court for the Eastern District of Kentucky, in Mid-America Milling Co. LLC v. Department of Transportation, enjoined the DOT from mandating the use of race-based and gender-based rebuttable presumptions for DOT contracts affected by the DBE goals upon which the plaintiffs bid.
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 on the heels of a federal judge's March 2024 decision striking down a federally sponsored racial preference for minority groups that were seeking to access capital for government contract.
In Nuziard v. Minority Business Development Agency, nonminority business owners challenged a preference provided by the Minority Business Development Agency, a bureau of the U.S. Department of Commerce, to "socially or economically disadvantaged individual[s]."
The U.S. District Court for the Northern District of Texas found that the preference violated the equal protection clause. Notably, all of these decisions — including Ultima — follow the Supreme Court's decision in Students for Fair Admissions v. Harvard and are a clear attempt to invalidate race-based presumptions in federally funded programs.
In January, the SBA reset the small-disadvantaged business goals for 2025, and lowered agency expectations across all agencies, to 5%. 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 this executive order, contracting officers may terminate SBA set-aside contracts or void the small business subcontracting-plan contract requirements, based on their incorrect belief that the order prohibits in all respects the use of such contracts.
Despite that such terminations are improper, some federal contractors may not challenge a contracting officer's decision because of misinformation, or their own uncertainty or fear of reprisal.
Opportunities for Large Federal Contractors
Again, while federal set-aside programs and the small business subcontracting program have not been eliminated by the administration or found to be 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 to bring assets in-house — including experienced personnel, intellectual property, and real and personal property — 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. With these changes looming, the risk is multiplying.
Wise small business owners might look toward diversifying revenue or partnering with larger businesses in new and creative ways.
https://www.sba.gov/federal-contracting/contracting-guide/types-contracts
https://www.sba.gov/federal-contracting/contracting-assistance-programs/8a-business-development-program
https://www.sba.gov/federal-contracting/contracting-assistance-programs/hubzone-program
https://www.sba.gov/federal-contracting/contracting-assistance-programs/women-owned-small-business-federal-contract-program
https://www.sba.gov/federal-contracting/contracting-assistance-programs/veteran-contracting-assistance-programs#id-service-disabled-veteran-owned-small-business-program
https://scholar.google.com/scholar_case?case=4466418406589722704&q=Ultima+Services+Corp.+v.+U.S.+Department+of+Agriculture&hl=en&scisbd=2&as_sdt=80006&as_vis=1
https://www.sba.gov/sites/default/files/2023-09/Ultima Guidance to Agencies - 8.18 Final - 508.pdf
https://www.insidegovernmentcontracts.com/wp-content/uploads/sites/49/2024/10/0.pdf
https://caselaw.findlaw.com/court/us-dis-cry-n-d-tec-for-wor-div/115913234.html
https://www.supremecourt.gov/opinions/22pdf/20-1199_hgdj.pdf