It Takes Two: SBA Proposes Applying “Rule of Two” to Multiple-Award Contracts

SBA's "Rule of Two" often requires federal agencies to set aside an acquisition for small businesses whenever there is reasonable expectation that offers will be obtained from at least two small businesses that are competitive in terms of fair market prices, quality, and delivery.

On Friday, SBA issued a Proposed Rule that would extend the reach of the Rule of Two by applying it to orders issued under many multiple-award contracts. As such, under SBA's proposal, agencies would be required to set aside an order under a multiple-award contract when there is a reasonable expectation of obtaining competitive offers from two or more small business contract holders, unless an exception - including an exception for Federal Supply Schedule (FSS) contracts - applies.

SBA believes that this rule, if adopted, would: (1) align multiple-award contract purchases with the Small Business Act's requirement that a fair proportion of the total purchases and contracts for goods and services be awarded to small businesses; (2) resolve confusion created by contradictory interpretations of the Rule of Two; and (3) increase contracting opportunities for small businesses, particularly small disadvantaged businesses (SDBs).

More details are below.

The Rule of Two is set forth in the SBA regulations (13 C.F.R. § 125.2(f)) and at FAR 19.502-2, and, as noted above, generally requires a procuring agency to set aside an acquisition for small businesses if the agency expects to receive at least two offers from small businesses that are competitive in terms of fair market prices, quality, and delivery. The rule is meant to implement Congress's direction to "assur[e] that a fair proportion of the total purchases and contracts for goods and services of the Government in each industry category . . . are awarded to small business concerns." 15 U.S.C. § 644(a)(1)(C).

The FAR provides that orders under multiple-award contracts may be set aside for small businesses on a discretionary basis. See FAR 16.505(b)(2)(i)(F) (stating that "contracting officers may, at their discretion, set aside orders" for small businesses) (emphasis added); see also 15 U.S.C. § 644(r) (directing the establishment of guidance which would permit federal agencies to set aside parts of multiple-award contracts for small businesses "at their discretion"). In recent years, however, we have seen conflicting interpretations regarding when the Rule of Two must be applied in such circumstances. In Tolliver Group, the Court of Federal Claims ruled that "an agency must apply the Rule of Two before an agency can even identify the possible universe of procurement vehicles which may be utilized for a particular scope of work" - i.e., before an agency can choose to meet its needs by issuing an order against an existing multiple-award contract. GAO took a different tack in its subsequent decision in ITility, LCC, and maintained its longstanding interpretation that in 15 U.S.C. § 644(r), Congress intended to distinguish between a procuring agency's mandatory set-aside obligations when first establishing a contract, and its discretion with respect to setting aside task or delivery orders under existing multiple-award contracts.

Under the Proposed Rule, agencies could elect in the first instance to leverage existing multiple-award contracts but would have to apply the Rule of Two at the task or delivery order level, thus eliminating the set-aside discretion identified by GAO in ITility. Although not required, agencies would be permitted to amend existing ordering procedures to provide for order-level set-asides.

There are also notable exceptions to the proposed expanded Rule of Two, however. Specifically, the Proposed Rule exempts (1) orders placed under FSS contracts; (2) scenarios in which an exception to the fair opportunity requirement applies, for example, if only one contractor is capable of fulfilling the order at the level of quality required because the services or property ordered are unique or highly specialized; and (3) when an agency-specific exception applies. Agency-specific exceptions are likely to be rare, however, as they must (1) be developed in consultation with both the agency small business director and SBA; (2) be made available to the public before use; and (3) have an appropriate mechanism to ensure responsible use.

Key Takeaways

• If adopted, we are likely to see increased set-aside opportunities for small businesses. SBA asserted in the Proposed Rule that applying the Rule of Two to multiple-award contracts could add up to $6 billion per year in new small business contract spending. SBA also speculated that this expansion of the Rule of Two would help to enable agencies to achieve the Biden Administration's stated goal of awarding 15 percent of federal contract spending to SDBs in FY25.

• While the Proposed Rule is a product of interagency negotiation between SBA, the FAR Council, and other agencies, if adopted, there nevertheless will be some delay before the changes are incorporated into the FAR - a process that itself will require a formal rulemaking procedure. It also remains unclear whether applying the Rule of Two at the task or delivery order basis ultimately will impact the discretionary set-asides permitted for multiple-award contracts that were themselves set-aside for small businesses. FAR 19.504 already permits agencies to set-aside task or delivery orders under such contracts for particular small business socioeconomic concerns, but it remains to be seen whether the FAR Council will require application of the Rule of Two in such instances.

• Comments on the Proposed Rule are due December 24, 2024, and industry stakeholders should note this opportunity to share their perspectives with SBA. In the interim, we will continue to monitor this area, and we remain available to clients who may have questions or are interested in submitting a public comment for SBA's consideration.