On January 25, 2024, the White House Office of Management and Budget issued a memo, Increasing Small Business Participation on Multiple-Award Contracts, calling for executive agencies to apply the FAR’s Rule of Two to task and delivery orders competed under multiple-award contracts. Contractors should take note that this change has the potential to significantly increase the number of small business set-asides, and in turn, it could mean millions more dollars in contract opportunities for small businesses. In this blog, we examine changes to the Rule of Two and explore the potential impacts for contractors.

The Rule of Two

The Rule of Two requires agencies to reserve contracts for small businesses whenever a reasonable expectation exists that at least two responsible small businesses are available to submit proposals, with reasonable prices, worthy of the Agency’s time in evaluating. Codified at FAR 19.502-2, it states:

  1. Before setting aside an acquisition under this paragraph, refer to 19.203(b). Each acquisition of supplies or services that has an anticipated dollar value above the micro-purchase threshold, but not over the simplified acquisition threshold, shall be set aside for small business unless the contracting officer determines there is not a reasonable expectation of obtaining offers from two or more responsible small business concerns that are competitive in terms of fair market prices, quality, and delivery. If the contracting officer receives only one acceptable offer from a responsible small business concern in response to a set-aside, the contracting officer should make an award to that firm. If the contracting officer receives no acceptable offers from responsible small business concerns, the set-aside shall be withdrawn and the requirement, if still valid, shall be re-solicited on an unrestricted basis. The small business set-aside does not preclude the award of a contract as described in 19.203.
  2. Before setting aside an acquisition under this paragraph, refer to 19.203(c). The contracting officer shall set aside any acquisition over the simplified acquisition threshold for small business participation when there is a reasonable expectation that-
    1. Offers will be obtained from at least two responsible small business concerns; and
    2. Award will be made at fair market prices. Total small business set-asides shall not be made unless such a reasonable expectation exists (see 19.502-3 for partial set-asides). Although past acquisition history and market research of an item or similar items are always important, these are not the only factors to be considered in determining whether a reasonable expectation exists. In making research and development small business set-asides, there must also be a reasonable expectation of obtaining from small businesses the best scientific and technological sources consistent with the demands of the proposed acquisition for the best mix of cost, performances, and schedules.

The crux of the Rule of Two is whether its application is deemed as required or optional by Agencies. GAO has previously sustained protests finding that Agencies may, but are not required to, comply with the Rule of Two with regard to multiple award contract opportunities. In Edmond Scientific Company, B-410179, B-410179.2 (Nov. 12, 2014), GAO stated as much. Rather than find the Rule of Two was required, as previous case law indicated, GAO found in this case that the Small Business Jobs Act granted discretion to Agencies and Agencies would not be required to apply the Rule of Two for task and delivery orders on multiple award contracts. In the past, the Rule of Two has largely been treated as optional. Not for lack of trying, Congress, the NDAA 2024 and the Court of Federal Claims have all made strides to read Agency discretion out of the statute to increase small business opportunities. This memo could represent the final stride in this effort.

The Changes

This memo is a milestone in requiring the application of the Rule of Two. This memo directs agencies to apply the Rule of Two on task and delivery orders, effectively increasing small business participation under multiple award contracts. In doing this, OMB is attempting to overcome the precedent set by GAO and support Biden Administration initiatives supporting small business contract opportunities.  

In the event an Agency does not use an order-level set-aside, the Contracting Officer must document the reasoning for not setting the contract aside for small businesses. The required documentation is no small request. Agencies are required to show the market research efforts, rationale for the contract vehicle selected, share findings from the Agency small business specialist, and share research regarding how the Agency examined small businesses not on multiple award contracts. In effect, the Office of Management and Budget is ensuring Agencies no longer view the Rule of Two as optional for task and delivery orders.

Although small businesses are certainly eager for this change to be implemented, this memo does not mean the Rule of Two applies to orders immediately. Rather, the memo states: “SBA and the agency members of the FAR Council have each begun developing proposed regulatory amendments to address these actions.” Meaning that although progress has begun, it will take time before these proposed amendments are crafted, let alone implemented.  In the interim, it’s possible the SBA and FAR Council could issue interim rules pending the adoption of a final rule on this topic.

It’s worth noting that this guidance regarding the Rule of Two may be in conflict with the Fair Opportunity Clause of FAR 16. This clause provides that the Contracting Officer provide each awardee a fair opportunity to be considered for each award exceeding the micro-purchase threshold issued under delivery and task orders. By requiring Agencies to apply the Rule of Two, this procedure may influence the Contracting Officer’s obligation to fairly consider all awardees for an opportunity.

The Takeaways 

Increased opportunities for small businesses. By requiring Agencies apply the Rule of Two, inevitably more contract opportunities for small businesses will present themselves and, as such, more dollars will be awarded to small businesses under multiple award contracts. This is good news for small business contractors competing for task and delivery orders.

Commitment to small business contractors. This memo illustrates a commitment to maximizing orders to small businesses. By removing Agency discretion over whether to apply the Rule of Two, the federal government is acting on the commitment to small businesses considered in Executive Order 14091, Further Advancing Racial Equity and Support for Underserved Communities Through the Federal Government. This Executive Order aims to award at least 15 percent of federal contract spending on small businesses by Fiscal Year 2025. This change in the treatment of the Rule of Two is a good example of the Government’s steps toward this goal.

Looking to the future.  This week, at the National 8(a) Small Business Conference SBA announced that they have major plans for new proposed rules this year, including addressing the Rule of Two more broadly.  While this is merely a memo from OMB, once SBA promulgates its new rule, which hopefully will come out as a proposed rule in 2024, it will truly make a difference for small businesses because then agencies will be required to follow the law – not merely a policy memo. So while this OMB Memo is a great step forward, the regulatory changes coming in the future will be where the rubber meets the road.  As soon as SBA issues its proposed rule we will let all our clients know and give our thoughts and comments – so stay tuned!

If you have questions about how this change impacts your business or other government contracts-related matters, please contact Cy Alba or Annie Hudgins, the authors of this blog, or another member of PilieroMazza’s Government Contracts team.