On January 20 and 21, 2025, President Trump signed two executive orders focused on Diversity, Equity, and Inclusion (DEI) programs: EO 14151, “Ending Radical and Wasteful Government DEI Programs and Preferencing” and EO 14173, “Ending Illegal Discrimination and Restoring Merit‐Based Opportunity” (the “EOs”). You can read more about the content of these EOs here. While the EOs have broad ranging impacts on federal contractors in a number of areas, this blog focuses on the potential impacts specific to small businesses generally and to large businesses via small business subcontracting.
At the outset, the EOs require “Each agency, department, or commission head” to “direct the deputy agency or department head to . . . recommend actions . . . to align agency or department programs, activities, policies, regulations, guidance, employment practices, enforcement activities, contracts (including set-asides), grants, consent orders, and litigating positions with the policy of equal dignity and respect identified in section 1 of this order. . . .” EO 14151 (emphasis added).
The EOs take this approach because, unlike many policies and programs that are the creature of EOs, regulations, and contract terms; the various federal set-aside programs are creatures of statute – most notably the Small Business Act of 1953. Importantly, although the Small Business Act created the small business preference categories most likely to be in the crosshairs of the EOs (women-owned small businesses and socially/economically disadvantaged small businesses), the EOs do not (and cannot legally) do away with those statutory preferences.
To remove these preferences (or other subcategories), or to eliminate small business subcontracting preferences altogether, Congress would have to amend the Small Business Act. Although the President currently controls both houses of Congress, it still may be a tough political task to eliminate a program responsible for $178.6 billion dollars (FY23) annually awarded to small businesses. Accordingly, at the moment, the various federal set-aside programs remain in place.
The Small Business Administration’s (“SBA”) “Day One” Memo
Although the Trump administration cannot unilaterally eliminate the federal set-aside programs, it certainly can reprioritize. On February 24, 2024, in what is being labeled “a new day at SBA,” newly installed SBA Administrator Kelly Loeffler outlined her top priorities for “rebuilding the SBA into an America First engine for free enterprise.”
The first six priorities are directed at supporting the President’s “America First agenda.” These are largely internal changes, which include the following:
- Transforming the SBA’s Office of International Trade into the Office of Manufacturing and Trade with the goal of “promoting economic independence, job creation, and fair trade practices to power the next blue‐collar boom.”
- Enforcing the President’s anti‐DEI (EO 14151), only‐two‐sexes (EO 14168), and less restrictive environmental controls (EO 14154) Executive Orders.
- Supporting the Department of Government Efficiency’s (“DOGE”) cost cutting efforts by, among other things, prioritizing the elimination of fraud and waste within the agency.
- Mandating SBA’s employees return to the office full‐time.
- Evaluating workforce reduction (e.g., assessing opportunities for workforce reductions).
- Cracking down on fraud across all SBA programs, including establishing “a Fraud Working Group” and a “Fraud Czar” ‘to identify, stop, and claw back criminally obtained funds….”
The next four priorities outlined in Loeffler’s memo are directed at eliminating waste and reducing fraud. These are more likely to have a more immediate impact on federal contractors. They include:
- Conducting an independent SBA‐wide financial audit in an effort to identify and counter delinquencies, defaults, and charge‐offs on SBA loan programs.
- Evaluating SBA’s lending programs to maintain the “zero‐subsidy status” of some of its programs, reviving its collection programs, and restoring its underwriting standards, among other actions.
- Banning illegal aliens from receiving SBA assistance.
- Restricting “hostile foreign nationals,” particularly those with ties to the Chinese Communist party, from receiving SBA assistance.
The final five priorities are identified as “Empowering Small Businesses” and likely will have the largest and most immediate impact on small businesses. They include:
- Establishing a “strike force” “to identify and eliminate burdensome regulations promulgated by all federal agencies….”
- Improving SBA’s customer service, technology and cybersecurity, to improve digital interfaces, response times, and customer satisfaction.
- Reducing the contractual goals for contracting with 8(a) companies – i.e., Small Disadvantaged Businesses – from the current 15% down to the statutory 5%. The rationale for this change is the concern that the higher goal had been “negatively impacting many veteran‐owned small businesses.”
- Changing the locations of SBA regional offices to remove them from “sanctuary cities” and relocate them to “to less costly, more accessible locations in communities that comply with federal immigration law.”
- Terminating SBA funded voter registration activities.
While most of the priorities above appear relatively straightforward, the shift away from 8(a) contracting (by reducing the contracting goals), is notable for a couple of reasons. First, the rationale suggests this administration is not interested in reducing preferences for veteran-owned small businesses, so those programs and goals very likely are safe. Second, this reprioritization suggests it is likely we may see a concurrent effort to reduce 8(a) small business subcontracting goals, which will have an impact on both small and large businesses, as discussed in more detail below.
Small Business Subcontracting Plans
Most large businesses contracting with the Federal Government are required to adopt subcontracting goals, make good faith efforts to achieve those goals, and to report to the Government the contractor’s success in meeting those goals. The goals cover subcontract spending on small businesses, minority owned small businesses, women owned small businesses, and more.
As noted above, the Federal Government’s small business subcontracting program is a preference program of the sort targeted by the EOs. Like the prime contract set-aside preference programs, however, most of the small business subcontracting requirements are established by statute. Thus, here again, it would take an act of Congress to eliminate certain preference categories, or the program altogether. Although we have little doubt Congress will take steps to align the law with the EOs, that has not happened yet. Accordingly, the subcontracting rules continue to apply. That is not to say the Government will expend any effort enforcing those rules. It would be unsurprising to see a directive to the SBA and other contracting agencies (most likely General Services Administration (“GSA”), Department of Defense (“DOD”), and National Aeronautics and Space Administration (“NASA”)) not to audit or enforce the Subcontracting Plan requirements. Still, large businesses should not ignore existing compliance obligations. Indeed, while the Government may not seek to enforce the rules, whistleblowers may. As such, noncompliance with the Subcontracting Plan requirements still presents a risk to large businesses.
Time will tell how the Trump administration’s priorities (including the 15 SBA priorities) will be implemented, and, thus, what impact they will have on small—and large—businesses. In the meantime, small business would be well advised to reassess compliance programs to ensure they are in sync with all current rules, regulations, and guidelines. Additionally, small businesses may want to take steps to prepare for an audit as we are likely to see an uptick in SBA audit activities. Likewise, large business would be well advised to do some advanced planning since (a) it is likely there will be a concurrent change in the SBA’s subcontracting programs and (b) the SBA’s new priorities likely will impact the pros and cons of partnership choices on federal opportunities.