Major change could be coming to the public sector soon—the Small Business Administration (SBA) released a proposed rule recently that could greatly impact small businesses. The proposed rule would expand the “Rule of Two” to apply to orders under Multiple Award contracts. Comments on this proposed rule are due by December 24, 2024, so let’s talk about this rule, what it means, and how it can impact small business contractors.
The “Rule of Two” was first adopted in 1964 for the Department of the Navy. Essentially, the rule mandates agencies conduct market research before a procurement and if there is evidence that two or small businesses will be able to submit competitive offers, then the procurement opportunity must be set-aside. But why is the SBA looking to expand it after all these years? One of the reasons is the limitation the law reached, which we’ll talk about more below.
In 2020, the Court of Federal Claims (COFC) ruled in the Tolliver Grp. v. United States decision that an agency must apply the “Rule of Two” before an agency can even identify the possible universe of other procurement vehicles. In other words, it ruled that the “Rule of Two” applies to all contracting actions including most task order type contracts.
However, the Government Accountability Office (GAO) has continued to maintain that Congress intended to establish a clear distinction between an agency’s mandatory set aside obligations, and an agency’s discretion to setting aside task or delivery orders under a Multiple Award Contract. If the rule is viewed as “discretionary,” then an agency can avoid using set-asides even if there are multiple small businesses that meets their needs. This is where the newly proposed rule comes in.
Basing key parts from the landmark Tolliver Grp. v. United States case and the Office of Federal Procurement Policy on Increasing Small Business Participation in Multiple Award Contracts, the SBA created the newly proposed legislation to eliminate disagreements between the COFC and GAO with regards to the “Rule of Two.”
The proposed rule aims to expand the “Rule of Two” to all procurements including Multiple Award Contracts (with exceptions of course). So, if a Contracting Officer (CO) determines there is a reasonable expectation of receiving offers (that are competitive in price, quality, and delivery) from two or more small business contract holders under Multiple Award Contracts, then it needs to be set-aside.
If this proposed rule is implemented, it will apply to all new Multiple Award Contracts, orders placed under those contracts, and new orders on existing Multiple Award Contracts which allow for a set aside. The proposed rule would not affect existing task and delivery orders.
The exceptions to this new rule are:
If for some reason an agency is unable to set-aside an order over the Micro-Purchase Threshold (MPT), then the CO must provide supporting documentation to the agency's small business specialist or the Office of Small and Disadvantaged Business Utilization (OSDBU). For the Department of Defense, the CO must provide documentation to the Office of Small Business Programs (OSBP). A representative will view the documentation and provide recommendations to increase small business support.
We have seen a decline in small business prime contractors over the past few years, and this rule is one of the efforts to encourage small business participation. The SBA estimates this rule could increase small business contract spending by $6 billion a year. That’s a lot of extra money and opportunities for small businesses on Multiple Award Contracts. However, there are some acquisition leaders that fear the rule could harm small businesses in the long run because it’s such a big change in a small period of time.
Comments on the rule are accepted through December 24, 2024. If you want to stay updated on this rule and future regulation changes, check out our weekly blog and monthly government contract insights newsletter. If you have questions about becoming a government contractor, or are interested in gaining more opportunities through your current contract, one of our consultants can help guide you in the right direction.