SBA’s Proposed Rule Opens Up Work and Resolves Legal Uncertainty

Last month’s proposed rule from the Small Business Administration would require that federal agencies apply the “rule of two” to task and delivery order procurements under multiple-award contracts. This rule change is intended to boost opportunities for small businesses in various sectors that compete for orders to grow in federal contracting.

When the rule of two applies, agencies must set aside contracts for small businesses if at least two small businesses are expected to submit offers at fair market prices.

The rule of two has played a key part in the federal government’s efforts to support small businesses for many decades. It forces contracting officers to limit competition to only small businesses for many types of contracts. But in the last several years, the Court of Federal Claims and the Government Accountability Office have issued conflicting opinions on whether the rule of two must be applied specifically to orders or only to contracts.

The split emerged in 2020 after Judge Matthew Solomson on the COFC decided the rule of two must be applied when an agency conducts a task or delivery order procurement. The GAO confirmed its longstanding view that the rule of two is discretionary if an agency uses an order under a multiple-award contract.

The unsettled state of the law in this area has created confusion and uncertainty among not only contractors but also agencies, which increasingly rely on multiple-award contract vehicles to procure goods and services. If the rule of two is merely “discretionary,” as the GAO has decided, an agency can avoid using a set-aside order even if there are multiple small businesses that can meet the agency’s needs.

Early this year, the Office of Federal Procurement Policy issued guidance that agencies should apply the rule of two to orders. By expanding the rule of two’s application to orders, the Biden administration sought to increase small business participation on multiple-award contracts while the SBA prepared formal regulatory amendments.

The SBA’s recent proposed rule would essentially codify the change included in OFPP’s guidance, making it legally binding. Unless an exception applies, the proposed rule specifies that agencies must document their decision not to use a set-aside order and must coordinate that determination with the agency’s small business specialist.

The most notable exception to the proposed rule is for orders under Federal Supply Schedule contracts administered by the General Services Administration. Similar to OFPP’s guidance, the proposed rule exempts schedule orders from the rule of two mandate. This special treatment stems from the fact that small business set-asides are discretionary under the Federal Supply Schedule program’s unique statutory authority.

Under the proposed change, the rule of two requirement doesn’t apply if there is an exception to normal “fair opportunity” competition procedures that govern procurements under multiple-award contracts. An agency shouldn’t apply the rule of two if it’s authorized by regulation to limit competition for the order on the basis of a valid exception to competition—e.g., when there is only one responsible source.

The proposed rule also contemplates that agencies may adopt their own “agency-specific” exceptions to the rule of two. These exceptions would need to undergo a separate public rulemaking process and may be tailored to address issues such as supply chain and national security risks, goods or services that can’t be provided by small businesses, and procurements that respond to major disasters or emergencies.

If the proposed rule is finalized following the comment period end date of Dec. 24, small businesses could likely see a greater share of work on multiple-award contracts. The SBA projects that the expanded rule of two requirements could add up to $6 billion per year in spending on small business contracts.

Although the federal government achieved record levels of small business contract spending in fiscal year 2023, the total number of small business prime contractors has steadily declined for the last two decades. The proposed rule is part of a broader effort by the Biden administration to reverse this trend and increase the number of new entrants.

Small business government contractors stand to benefit from the SBA’s proposal to expand the rule of two’s application to orders.However, many large businesses could be concerned that the proposed rule will shrink their pipeline of future business opportunities.

It’s possible that opponents of the rule could challenge its legal validity under the Small Business Act and seek to block it from taking effect. If the proposed rule becomes final, contractors will have more options to challenge an agency’s failure to set aside an order for small businesses under the rule of two.

The COFC is presently the only bid protest forum that has applied the rule of two to orders. If the proposed rule takes effect, small businesses would have legal grounds to file a bid protest with the GAO to challenge an agency’s violation of the rule of two for a task or delivery order.

Given the potential impacts of the proposed rule, it’s likely to attract significant interest from broad swaths of the government contracting community.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Stephen L. Bacon is a shareholder with Rogers Joseph O’Donnell and is a member of the firm’s government contracts and construction practices.

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