Age-old small business contracting challenge rears its ugly head, again

For the third time in five years, another court decision is opening the door to major changes to multiple award contracts.

The Court of Federal Claims weighed in on the controversial “rule of two” requirement originally intended to help promote small business contracting, but now is causing concern and confusion for how agencies should apply it to multiple award contracts.

At the heart of the issue is a court ruling in favor of small businesses who protested what experts called a ridiculously poor choice by the Army to set-aside and award a contract to small firms, and then once it faced a protest, pull back the awards and re-release the task order under a multiple award contract where there were no small businesses.

Known as the Tolliver decision, the court said found that “the rule of two unambiguously applies to ‘any’ ‘acquisition,’ FAR 19.502-2, without any loophole for [multiple awards IDIQ] task orders.”

Todd Overman is a lawyer and chairman of the government practices group for Bass Berry and Sims.

Todd Overman, a lawyer and chairman of the government practices group for Bass Berry and Sims, wrote in a blog post this means even though the Army may have satisfied the rule of two requirements in respect to forming the multiple award contract, it still must meet the rule of two set-aside requirement as it started to do with its first solicitation.

“This is a big deal,” said Overman in an interview. “It does have the potential far reaching impact with regards the need to document the rule of two analysis.”

The debate over when the rule of two applies has been ongoing for more than two decades.

Industry experts say when the General Services Administration was setting up the schedule contracts in the 1990s, the debate over whether the rule of two would apply was strong.

The debate continued in the 2008 Delex ruling where the Government Accountability Office reinforced the rule of two, saying it does apply to any task or delivery orders.

Congress weighed in on the rule of two in the Small Business Jobs Act of 2010 where it tried to address the confusion by saying that at the ordering level for multiple-award contracts, agencies have discretion to set aside orders and the ‘rule of two’ is not mandatory.

Then in 2015 came the Kingdomware case that went all the way to the Supreme Court, which found the rule of two is required for all contracts let by the Department of Veterans Affairs under the Simplified Acquisition Threshold — between $3,000 and $150,000.

Three years later, GAO reinforced the Kingdomware decision as it dismissed a protest brought before the Customs and Border Protection directorate. But experts said at the time that agencies should be aware that there is a strong school of thought that task orders under the Simplified Acquisition Threshold must adhere to the rule of two, and that the Kingdomware decision, once and for all time, established that a task order is a contract.

Even with this long history, there still are some who say the rule of two should apply to all task order and delivery order contracts under the SAT, including GSA’s schedules.

Overman said the most recent Court of Federal Claims ruling doesn’t change the fact that the GSA schedules program is exempted by this requirement.

Defining discretion shouldn’t be that difficult

But that doesn’t stop some from worrying whether the court’s most recent ruling will mean some will press the case even further.

Christoph Mlinarchik, a government contracts expert and owner of a consulting firm, www.ChristophLLC.com, said the confusion over what “discretion” means likely will be at the heart of any ongoing disagreements.

“The Federal Acquisition Regulatory Council and the Small Business Administration regulations– when implementing the ‘discretion’ part of the Small Business Jobs Act of 2010– both used the same word, ‘discretion.’ We have a law and two different sets of regulation; all three use the word ‘discretion,’” he said in an email to Federal News Network. “Ask yourself one question: What does the word ‘discretion’ mean in plain English? One stray Court of Federal Claims case does not erase the Small Business Jobs Act of 2010, nor the FAR and SBA regulatory implementation thereof, which all use the word ‘discretion’ for small business set-asides under multiple-award contracts. The Tolliver case is a lot of sound and fury, but it signifies almost nothing.”

Mlinarchik added Congress granted broad leeway for contracting officers to use their “discretion” with respect to whether to set aside orders under multiple-award contracts.

“Wake me up when Congress changes the law about using ‘discretion,’ otherwise, I’m hitting the snooze button on Tolliver, which is a false alarm,” he said.

But Overman and other experts say the case does send a message to agencies and vendors alike.

“This case provides support for rule of two analysis and gives an interpretation of how applies in multiple award contracts,” Overman said. “Even though you may have utilized the authority without the rule of two, you still need rule of two analysis before placing an order under a MAC.”

Signs the decision will have an impact

An industry expert, who requested anonymity because they work with both large and small contractors, said it’s clear Tolliver is the same flavor as Kingdomware, but it could be considered more expansive since Kingdomware was only focused on service-disabled small firms and VA.

“I wouldn’t be surprised if people will try to use Tolliver as precedent. The question the government has to ask is if you take it to the logical conclusion, wouldn’t any contract with small and large businesses under an IDIQ have to follow the rule of two if you’ve decided the small firms were qualified?” the expert asked. “I think the judge is over reading it. But the decision does fundamentally raise the question about all IDIQs if you take it to the logical conclusion.”

The expert added the impact of the Tolliver case will not be felt for several months, but some signs to look out for are protests referring to the Court of Federal Claims decision, or if GAO starts citing that case in decisions.

“I think a lot of it will depend on when the Biden administration gets its procurement leadership in place and whether they take any position on it,” the expert said. “The court’s interpretation of discretion language almost makes the rule of two meaningless. If I understand the court’s point, they say rule of two applies to every contract, and then if you determine it doesn’t apply, you can still set it aside at the agency’s discretion.”

What is the answer to once and for all resolving the debate over the rule of two? Is it Congress? Is it the Office of Federal Procurement Policy?

The answer must come soon because the confusion over the requirement and debate around the regulation must end in a way that both supports agency needs and small business contractors in a consistent and fair way.

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