T his report provides an overview of set-asides for small businesses, key legal requirements governing agencies' use of set-asides, and recent litigation regarding agencies' use (or non-use) of set-asides when conducting particular procurements. The term "set-aside" is commonly used to refer to a competition in which only small businesses may compete. However, this usage can obscure the fact that some set-asides involve small purchases that may be made by means of simplified acquisition procedures that entail less than "full and open competition," as well as by the sealed bidding or contracting by negotiation that is more commonly associated with set-asides of larger contracts. In order to better distinguish between these two categories of procurements, this report refers to the former as "purchases reserved for small businesses," and the latter as "competitive set-asides." In addition, some, but not all, of the statutory provisions pertaining to competitive set-asides also authorize agencies to award contracts without competition—by negotiating directly with a small business—when contracts cannot be set aside for small businesses (e.g., because offers cannot reasonably be expected from two or more small businesses), or when certain other conditions are met. Such awards are here referred to as "sole-source awards." Small business set-asides are of perennial interest to Congress because of their role in effectuating the long-standing declared policy of the Congress that the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprise, to insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government (including but not limited to contracts or subcontracts for maintenance, repair, and construction) be placed with small business enterprises, to insure that a fair proportion of the total sales of Government property be made to such enterprises, and to maintain and strengthen the overall economy of the Nation. In support of this policy, Congress has authorized agencies to conduct set-asides and make sole-source awards to small businesses, among other things. Specifically, with various provisions of the Small Business Act of 1958, as amended, Congress has permitted federal agencies to conduct competitive set-asides for small businesses, as well as for specific types of small businesses (i.e., small disadvantaged businesses (SDBs) participating in the "8(a) Program," Historically Underutilized Business Zone (HUBZone) small businesses, women-owned small businesses (WOSBs), and service-disabled veteran-owned small businesses (SDVOSBs)). The Small Business Act also authorizes federal agencies to make sole-source awards to 8(a) participants, HUBZone small businesses, SDVOSBs, and WOSBs in certain circumstances, as well as grant price evaluation adjustment preferences to HUBZone small businesses in unrestricted competitions. In addition, the Veterans Benefits, Health Care, and Information Technology Act of 2006, as amended, grants the Department of Veterans Affairs (VA) additional authority to conduct competitive set-asides for, and make sole-source awards to, SDVOSBs and other veteran-owned small businesses (VOSBs). Congress has also sought to promote its "declared policy" of assistance to small businesses by requiring the establishment of governmentwide and agency-specific goals for the percentage of federal contract and/or subcontract dollars awarded to small businesses each year. The President is statutorily required to establish governmentwide goals, which must call for at least 23% of federal contract dollars to be awarded to small businesses (including 5% of federal contract and subcontract dollars to WOSBs; 5% to SDBs; 3% to HUBZone small businesses; and 3% to SDVOSBs). Individual agencies, after "consultation" with the Small Business Administration (SBA), are also statutorily required to set agency-specific goals. These goals must represent, "for that agency, the maximum practicable opportunity" for small businesses to participate in the contracts awarded by the agency, and the "cumulative annual prime contract goals for all agencies [must] meet or exceed the annual Governmentwide prime contract goal established by the President." Set-asides for small businesses constitute one of the primary means by which agencies may meet their goals for contracting and subcontracting with small businesses. However, these goals are not quotas, and the set-aside programs do not serve or seek to ensure that 23% of all federal contract dollars, for example, is awarded to small businesses. The 112 th Congress enacted legislation that expands agencies' authority to conduct competitive set-asides for WOSBs, while the 113 th Congress enacted legislation that permits sole-source awards to such firms. Interest in the set-aside programs seems likely to continue in the 114 th Congress, in part, because a case currently pending before the Supreme Court involves small business set-asides. Specifically, on February 22, 2016, the Court is scheduled to hear oral arguments in Kingdomware Technologies, Inc. v. United States , a case in which a SDVOSB challenges the Department of Veterans Affairs' procurement of certain supplies and services through the Federal Supply Schedules, rather than through a set-aside for SDVOSBs or VOSBs. The report begins with an overview of the legal authorities governing set-asides and related contracting preferences for small businesses. Then, it turns to the legal issues, including (1) the implementation of the "Rule of Two," which permits or, in some cases, requires that agencies use set-asides when offers can reasonably be expected from at least two small businesses, and the award made at a fair price; (2) when agencies may be required to use set-asides for small businesses; (3) partial set-asides of contracts that cannot be totally set aside for small businesses; (4) set-asides under certain indefinite-delivery/indefinite-quantity (ID/IQ) contracts (i.e., contracts that call for the contractor to supply quantities of goods or services that are unknown at the time of contracting to the government upon the government's order); (5) priority of and among the set-aside programs; and (6) limitations on the use of small business set-asides. The Small Business Act of 1958, as amended, is the primary authority governing set-asides and related contracting preferences for small businesses. By its terms, or as implemented by SBA and the Federal Acquisition Regulatory Council (FAR Council), this act generally provides that "small purchases" are reserved for small businesses, and authorizes agencies to conduct competitive set-asides and, in some cases, grant other contracting preferences to small businesses. However, it is important to note that one of the primary regulations implementing, in part, the Small Business Act—the Federal Acquisition Regulation (FAR)—applies only to the acquisition of goods and services by executive branch agencies with appropriated funds. The FAR also excludes certain contracts (e.g., those performed overseas) from its requirements pertaining to small business contracting, as discussed below. The Small Business Act does not expressly contemplate such exclusions. However, agency regulations are generally entitled to deference so long as Congress has not directly spoken to the precise question at issue, and the agency's reasonable interpretation of the statute is consistent with the purposes of the statute. "[I]f the statute speaks clearly 'to the precise question at issue,'" the tribunal "must give effect to the unambiguously expressed intent of Congress," regardless of what the agency regulation provides. However, where "the statute is silent or ambiguous with respect to the specific issue," the tribunal "must sustain the [a]gency's interpretation if it is 'based on a permissible construction' of the Act." In addition, Congress has supplemented the provisions of the Small Business Act by enacting additional legislation requiring the Department of Veterans Affairs (VA) to set aside contracts for SDVOBs and other VOSBs in certain circumstances. Congress amended the Small Business Act in 1978 to address agencies' use of small businesses when making "small purchases." Specifically, the act provides that Each contract for the purchase of goods and services that has an anticipated value greater than [$3,500] but not greater than [$150,000] shall be reserved exclusively for small business concerns unless the contracting officer is unable to obtain offers from two or more small business concerns that are competitive with market prices and are competitive with regard to the quality and delivery of the goods or services being purchased. This provision uses "shall," which has been construed as indicating mandatory agency action (see infra " Requirements to Use Small Business Set-Asides "), and is generally taken to mean that agencies must award contracts valued at between $3,500 and $150,000 to small businesses, so long as the contracting officer is able to obtain offers from at least two small businesses that are competitive as to price and other terms. However, certain regulations implementing this provision of the Small Business Act effectively narrow its scope. First, Part 19 of the FAR, which addresses "small business programs," generally "applies only in the United States or its outlying areas," which means that certain small contracts awarded and/or performed overseas are not necessarily set-aside for small businesses. Similarly, Subpart 8.4 of the FAR, which governs the use of the Federal Supply Schedules, generally provides that Part 19 of the FAR "does not apply to BPAs [blanket purchase agreements] or orders placed against Federal Supply Schedule contracts." (The Schedules are commonly used in purchasing commercial goods and services of the sort that small businesses could potentially supply. ) In addition, the FAR authorizes agencies to solicit small purchases on an unrestricted basis if they receive "no acceptable offers from responsible small business concerns."