Business Contracts with the Federal Government: FAR Basics for Small Businesses

The federal government is the largest single purchaser of goods and services in the United States, spending hundreds of billions of dollars annually on everything from information technology and professional services to construction, manufacturing, and scientific research. For small businesses, federal contracting offers a significant and relatively stable revenue source — but it comes with a regulatory framework unlike any private commercial relationship. The Federal Acquisition Regulation (FAR), supplemented by agency-specific regulations, governs virtually every aspect of federal contracting and imposes compliance obligations that businesses accustomed to commercial contracts often find surprising.

Small Business Set-Aside Programs

Congress has established a policy goal of awarding at least 23% of all federal contract dollars to small businesses. To achieve this goal, federal agencies set aside a significant portion of their contracts exclusively for small business competition. A small business set-aside means that only small businesses — as defined by the Small Business Administration’s size standards for the relevant North American Industry Classification System (NAICS) code — can compete for the contract.

Beyond the general small business category, additional set-aside programs target specific categories of small businesses. The 8(a) Business Development Program targets small businesses owned and controlled by socially and economically disadvantaged individuals and allows sole-source awards (no competition required) up to specified dollar thresholds. The HUBZone program targets small businesses located in historically underutilized business zones. The Women-Owned Small Business (WOSB) program targets small businesses owned and controlled by women. The Service-Disabled Veteran-Owned Small Business (SDVOSB) program targets businesses owned by veterans with service-connected disabilities. Registration for each program requires certification through the SAM.gov system and, for some programs, through the SBA’s certification platform.

Registering in SAM.gov

The System for Award Management (SAM.gov) is the official federal database of entities doing business with the federal government. Any business seeking federal contracts must register in SAM.gov and maintain its registration (which must be renewed annually). SAM registration requires a DUNS number (replaced by the Unique Entity Identifier, or UEI), a CAGE code (assigned by the government), business information, and representations and certifications about the business’s status, size, ownership, and compliance with various legal requirements. Failure to maintain an active SAM registration will disqualify a business from receiving contract awards or payments.

The FAR: Key Requirements

The Federal Acquisition Regulation is a comprehensive set of rules — spanning thousands of pages — that governs the acquisition of goods and services by the federal government. FAR requirements that small businesses commonly encounter include: compliance with the Buy American Act (preferring American-made products), equal employment opportunity requirements (maintaining EEO policies and, for contracts above $10,000, submitting EEO reports), compliance with the Service Contract Act or the Davis-Bacon Act (which impose prevailing wage requirements on service contracts and construction contracts respectively), compliance with the Federal Acquisition Supply Chain Security Act (for certain information technology contracts), cybersecurity requirements for contractors handling controlled unclassified information (including NIST SP 800-171 compliance), and anti-kickback requirements prohibiting improper payments to government employees or other contractors.

Cost Accounting and Invoicing

Federal contracts are typically either fixed-price (the contractor is paid a fixed amount regardless of actual costs) or cost-reimbursement (the government reimburses allowable, allocable, and reasonable costs). Cost-reimbursement contracts require contractors to maintain adequate accounting systems that can identify and segregate costs by contract, and require compliance with the FAR’s cost principles, which define which costs the government will and will not reimburse. Time-and-materials contracts — common for professional services — require hourly rate documentation and careful tracking of labor hours and material costs. Invoicing under federal contracts follows specific procedures and timelines, and invoice errors can delay payment significantly.

Subcontracting and Teaming

Small businesses that lack the full capability to perform a large federal contract on their own can form teaming arrangements with other companies, including large businesses, to compete for contracts they could not pursue alone. FAR regulations govern the structure of teaming arrangements and, for set-aside contracts, impose limitations on the work that large business teammates can perform. The SBA’s limitations on subcontracting rules require that small business prime contractors perform a specified percentage of the work themselves (the exact percentage depending on the type of contract), rather than subcontracting the majority of a small business set-aside to large businesses.

Protests and Disputes

A losing competitor in a government procurement can file a bid protest — a formal challenge to the award decision — with the contracting agency, the Government Accountability Office (GAO), or the US Court of Federal Claims. GAO bid protests are the most commonly used mechanism and must be filed within 10 days of award (or within 10 days of when the protester knew or should have known the basis for protest). The GAO has 100 days to issue a decision. If the protest is sustained, the typical remedy is a re-evaluation of proposals or a new solicitation, not a direct award to the protestor. Disputes between contractors and the government over contract performance, termination, or claims are handled through the Contract Disputes Act process, involving submission of a certified claim to the contracting officer and, if denied, an appeal to the agency’s Board of Contract Appeals or the Court of Federal Claims.

The Bottom Line

Federal contracting is a significant opportunity for small businesses with the right products, services, and capabilities — but it is a fundamentally different environment from commercial contracting. The regulatory requirements, compliance obligations, cost accounting requirements, and dispute resolution processes all require specialized knowledge. Small businesses entering the federal market for the first time should seek guidance from the SBA’s free Small Business Development Centers (SBDCs) or Procurement Technical Assistance Centers (PTACs), which provide counseling and training on government contracting at no cost to small businesses.