The SBA doubles down on the Rule of Two
A long-standing rule concerning small business preference is about to get a major expansion, courtesy of the Small Business Administration.
A long-standing rule concerning small business preference is about to get a major expansion, courtesy of the Small Business Administration. The rule, which applied to open market competitions, will, once the rule is finalized, also apply to multiple award contract vehicles. That’s a big change. Haynes Boone procurement attorney Dan Ramish joined the Federal Drive with Tom Temin to provide more details.
Interview transcript:
Tom Temin: And Dan, let’s begin with the rule of two as it applies now. Just give us a quick background on it.
Dan Ramish: Sure, Tom. So the Rule of Two requires federal agencies to set aside procurements for small businesses where there’s a reasonable expectation that at least two small businesses will be able to submit offers at fair market prices and otherwise competitive in terms of quality and delivery.
Tom Temin: And that goes back to the 1980s, right?
Dan Ramish: Actually, even earlier than that, the Navy introduced the rule back in the 60s. In fact, it was made government-wide when the law was introduced in 1984.
Tom Temin: OK. So it applies only to full and open competitions, that is to say, open market solicitations, but not to task orders, correct? And that’s what’s going to change?
Dan Ramish: This has been the subject of some litigation, Tom. So GAO and the Court of Federal Claims have differing interpretations of the Small Business Act and the implementing regulations in the FAR and the small business rules. This goes back to bid protests dating around 2020. So the Court of Federal Claims, one of the judges issued a decision in Tolliver Group that said that the Rule of Two actually applies to an acquisition before there’s even a decision on which procurement vehicle to apply. And so based on that interpretation of the Small Business Act and the implementing regulations of procurement vehicle, that’s a multiple-award contract would also be subject to the Rule of Two. GAO took a different view, in part in its decision in ITility, a bid protest issued shortly after the Tolliver decision. And GAO said that although it’s mandatory for agencies to apply the Rule of Two to stand-alone contract awards, that when it comes to orders issued under multiple award contracts, agencies have discretion whether to set aside orders for small businesses and so they weren’t required to do so.
Tom Temin: Right. And this really matters because of how much ordering is done as task orders as opposed to brand-new acquisitions under the many multiple award contracts out there, correct?
Dan Ramish: That’s a huge portion of government contracting overall, depending on which agency, 30 to 50% of procurement dollars flow through indefinite delivery vehicles. So it’s a huge part of government contracting.
Tom Temin: And many of these vehicles, if you look at, I don’t know, CIO-SP or NASA SEWP, there’s a bunch of them. GSA has a bunch. They have large and small companies mixed together under the whole vehicle, right?
Dan Ramish: That’s right. And part of the motivating factor here is that SBA has found that small business utilization on multiple award contracts really is lower. The Rule of Two has made a difference.
Tom Temin: All right. So this new rule then from SBA would precisely do what?
Dan Ramish: So if it goes into effect, the rule would require that agencies, when they’re placing an order under an existing IDIQ contract, it would be mandatory for the contracting officer to set aside an award of an order that’s over the micro-purchase threshold. If they determine there’s a reasonable expectation of two or more contract holders being able to meet the requirement.
Tom Temin: So it could go from over the micro all the way to unlimited size?
Dan Ramish: That’s right. Now, there are three exceptions to this expansion. One of them is Federal Supply Schedule contract orders are exempt, and that’s an existing exemption that will continue under the proposed rule. Also, if there’s an exception to the fair opportunity requirements for IDIQ contracts, if there’s only one responsible source or another sole source type circumstance or urgency, that could be a basis for not setting aside. Finally, agencies are also going to be able to establish their own specific exemptions. And SBA has in mind here that agencies might establish a process to address supply chain or national security risks so that they wouldn’t be bound to set aside orders for small businesses if there’s some bigger purpose for not doing so.
Tom Temin: We’re speaking with Dan Ramish. He’s a procurement attorney with Haynes Boone. And I can see where if there is a mixture of large and small companies that are on a specialized type of contract, say, for information technology. And the Rule of Two applies to task orders above the micro, which most of them are at that type of work, professional services that the large contractors would never get the task order simply because the people on the contract have already been preapproved for the type of work the contract vehicle specializes in and presuming they can match the price, then the big guys would never get a contract.
Dan Ramish: I think it’s fair to say, Tom, that this could have far reaching implications. It really depends on how an order is defined and how the requirement is drawn up.
Tom Temin: What about the subcontracting possibilities? Does it spill over into that, do you think?
Dan Ramish: This is really geared toward prime contracting and the Small Business Administration has characterized the Rule of Two as really the cornerstone of the federal government’s small business prime contracting program. So small business subcontracting is sort of a separate sphere that SBA is also very interested in.
Tom Temin: Sure. And they do have the ascent of the FAR Council on this in proceeding with this?
Dan Ramish: Well, so this rule is established under the small business rules. There would be a FAR Council rule-making taking place after the fact to implement the rules in the FAR.
Tom Temin: And what are you hearing from industry? What do your clients think about this because it does have large implications?
Dan Ramish: Well, as you can imagine, Tom, it varies depending on whether industry participants are small businesses or other than small businesses. And I think there’s some uncertainty as to how broad the ramifications will be. But it’s also worth noting the new documentation and coordination requirements imposed in the proposed rule. So SBA is introducing measures to try to encourage agencies to include more small businesses on multiple award contracts at the acquisition planning phase. So when an agency is planning a multiple award contract over the substantial bundling threshold, which is just a placeholder or threshold that varies by agency from two-and-a-half to six million, the agencies, if they’re not anticipating at least 30% of contract holders, will be small businesses. They’re going to be required to document in the acquisition plan their rationale if they aren’t setting aside or reserving small business participation. So that will also require market research and justification that’s reviewed by the agency small business specialist.
Tom Temin: Right. So what they’re proposing from SBA, like so many rules across government, does have some back doors, but they’re not exactly clear paths to get out from under the rule.
Dan Ramish: That’s right. So, of course, the intent in requiring justification, if there’s going to be less than 30% small business participation is for agencies to make sure that there will be at least 30% so they don’t have to do paperwork.
Tom Temin: Do you think this could, again, this is conjecture, but there are some vehicles devised. GSA devises them only for small business. Maybe that whole endeavor could go away.
Dan Ramish: Certainly, if there were a large increase in small business participation in multiple award contracting, it would maybe obviate the need for some specialty vehicles if small businesses are already included in the major procurement vehicles.
Tom Temin: And interestingly, in proposing the rule in their kind of general comments about the rule, the SBA notes that the government has exceeded the statutory small business contracting goal now for a couple of years. So it’s not like there’s some crisis in meeting small business contracting goals.
Dan Ramish: Well, of course, there’s always debate over how much gamesmanship there is in those figures tom. And SBA’s mission, of course, is expanding opportunities for small businesses. So they’re always looking for the next frontier. And this is the latest way they’re trying to do that.
Tom Temin: All right. And what’s the comment period?
Dan Ramish: So comments are open on the proposed rule through Dec. 24, 2024.
Tom Temin: All right. So get it done now, if you’re going to comment and don’t ruin your holiday season writing comments to a procurement rule unless that’s what you get your jollies out of.
Dan Ramish: Well, SBA has something in Santa’s sack this year for small businesses.
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Tom Temin
Tom Temin is host of the Federal Drive and has been providing insight on federal technology and management issues for more than 30 years.
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