SBA Proposes to Require the Rule of Two for Most Task and Delivery Order Competitions

On October 25, 2024, the Small Business Administration (SBA) published a proposed rule to mandate a Rule of Two analysis for most task and delivery order competitions, except under Federal Supply Schedule (FSS) contracts.  The proposed rule implements a recommendation the Office of Federal Procurement Policy (OFPP) made earlier this year (which we covered in this article).  The SBA has invited public comments, which are due by December 24, 2024.

Background

For many years, the Rule of Two has required agencies to set aside acquisitions for small businesses based on whether two or more responsible small businesses were expected to submit offers at fair market prices. See FAR 19.502-2. For acquisitions valued between the micro-purchase threshold and the simplified acquisition threshold, there is a presumption of a set-aside, “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.” FAR 19.502(a). For acquisitions valued above the simplified acquisition threshold, the contracting officer must set aside a procurement if there is a “reasonable expectation” that offers will be obtained from at least two responsible small businesses at fair market prices. FAR 19.502(b).

It is essentially undisputed that the Rule of Two applies to most procurements for stand-alone contracts valued at more than micro-purchase threshold.  And it is essentially undisputed that the Rule of Two does not apply to FSS orders under FAR Subpart 8.4.  But, as task and delivery order procurements have proliferated under multiple-award Indefinite Delivery, Indefinite Quantity (IDIQ) contracts, controversy has arisen over whether the Rule of Two is mandatory for these task and delivery order procurements under FAR Subpart 16.5.  Following a statutory change in 2010, the Government Accountability Office’s position has been that the Rule of Two is not obligatory in such procurements, leaving full discretion to the contracting officer.  One judge of the Court of Federal Claims, by contrast, has held that the Rule of Two remains mandatory in most procurements outside the FSS, and should be applied even before an agency determines whether to use an existing IDIQ contract to procure requirements.  See Tolliver Grp. v. United States, 151 Fed. Cl. 70 (2020).

In response to the confusion, and to promote increased task and delivery order awards to small businesses, OFPP issued a policy memorandum earlier this year, stating that “agencies should set aside orders over the micro-purchase threshold (MPT) for small business contract holders when the contracting officer determines there is a reasonable expectation of obtaining offers from two or more small business contract holders under the multiple-award contract that are competitive in terms of market prices, quality, and delivery.”  The SBA’s new proposed rule seeks to codify that recommendation and make it mandatory.

If the new rule is adopted, we can expect both an increase in set aside activity on existing multiple award contracts and litigation about why task orders were not set aside.  In conjunction with SBA’s other pending proposed rules on mentor-protégé joint ventures and recertifications under multiple-award contracts, this rule is likely to create real headwinds for recently graduated small businesses and mid-size businesses that hold multiple-award contracts and expected to continue to win work on those contracts for the coming years.

Key Features of the Proposed Rule

1. Rule of Two Applicable at the Order Level: SBA proposes to make the Rule of Two mandatory for orders valued at more than the micro-purchase threshold, except when an order is placed under the FSS program, or an exception to fair opportunity applies, “or where agency procedures reflect an appropriate exception.” The Rule of Two analysis would be limited to holders of the multiple-award contract itself, with a set-aside ordinarily required if “the contracting officer determines there is a reasonable expectation of obtaining offers from two or more small business contract holders under the multiple-award contract that are competitive in terms of fair market price, quality, and delivery.” The rule would not dictate which multiple-award vehicle the agency chooses.
2. Documentation Requirements for Orders Competed Under Multiple-Award Contracts with Fewer Than Two Small Business Holders: “If the agency chooses to issue an order under a multiple award contract that has one or no small business contract holders, the agency must document the rationale for that decision, including the market research conducted by the agency, coordinate that documentation with the small business specialist, and ensure that the small business specialist has a reasonable opportunity to respond.” This documentation requirement falls short of requiring the application of the Rule of Two prior to choosing a particular multiple-award contract vehicle (which, according to Tolliver, the underlying statute requires).
3. Agencies May Develop Agency-Specific Exceptions: The proposed rule contemplates that agencies may develop agency-specific exceptions. SBA offered some possible examples: “to address supply chain and national security risks, to address goods or services that no small businesses provide and would not provide in the future, or to respond to a major disaster or emergency.” Such exceptions would be developed in consultation with agency small business officials and SBA, and must be published. We would expect notice-and-comment rulemaking for inclusion in agency FAR supplements to be the most appropriate way to create such exceptions.
4. New Documentation and Coordination at the IDIQ Level: At the IDIQ level, the new rule would add new documentation and coordination requirements when an agency plans to establish a multiple-award contract above a specified size without set-asides or reserves and the number of small business awardees is expected to be less than 30 percent of all awards. SBA hopes these new requirements will help small businesses constitute at least 30 percent of new multiple-award contract holders and make it easier to satisfy the Rule of Two under those contracts.
5. Engagement of Small Business Specialists in Order Set-Aside Decisions: The new rule would require agencies to provide their own small business specialists with documentation of their rationale for not setting aside orders valued at more than the micro-purchase threshold.