During their meeting with Josh Smith yesterday, the Rockets told the free agent forward that they would make him a contract offer if their pursuit of Dwight Howard fell short, according to Marc J. Spears of Yahoo! Sports. Spears adds that Smith understood the team's position and wasn't offended by being a Plan B.
With just enough cap space to make Howard a maximum-salary offer, the Rockets will have plenty of room to pursue other free agents if they're unable to sign D12. Smith's maximum salary won't be as high as Howard's, and Smith is unlikely to receive max offers anyway, so Houston could potentially sign Smith and still have cap space to use on another player, should the team miss out on Howard.
There are also rumblings that the Rockets could explore acquiring Smith via a sign-and-trade even if they're able to sign Howard. Omer Asik and Jeremy Lin would be probable trade chips in that scenario, though Spears notes that Smith has yet to meet with the Hawks, so a sign-and-trade hasn't been discussed yet.