SBA’s recently proposed rule seeks to officially broaden the reach of its “Rule of Two”–a government contracting requirement fundamental to supporting our nation’s small business infrastructure, policies, and goals. I emphasize “officially” because, even though this is technically a proposed change to SBA’s rules, it is really more of a “regulatory implementation” of judicial law than anything (don’t worry, we will go into more detail on this point later). Specially, SBA’s proposed rule would require the Rule of Two’s application to task orders and delivery orders under most standard multiple award contracts (MAC). This Part I blog will briefly explain what the Rule of Two is and detail SBA’s proposed update to it. But keep your eyes out for the soon-to-follow Part II blog on this topic. There, we will dig in deeper to the relevant history of (including the court case linked above), the sources and policies behind, and the potential implications for SBA’s proposed Rule of Two update.
To many, SBA’s proposed rule may not appear to give rise to the need for a lengthy history lesson nor some extensive analysis of the potential implications and impact. Certainly, what SBA is proposing here is not a novel idea. The question of whether the Rule of Two should be applied to MACs has actually been a hot topic for some time, and not just at SBA, also at the Government Accountability Office (GAO) and (as noted above)in our federal courts.
But rest assured, in the brief time since this proposed rule’s issuance, we at SmallGovCon have had the wheels turning. So again, we will be covering this in a two-part blog–both to ensure we are always promptly and thoroughly providing important regulatory updates to our readers, and in the interest of blog brevity (which we certainly value here too). So, this Part I will summarize the existing Rule of Two requirements and exactly what the SBA is proposing. And Part II will cover the relevant history at play here, along with a bigger picture analysis of the potential implications and impacts. If you simply cannot wait for Part II, understandable; in the meantime, please check out this article regarding the proposed Rule of Two update and some of the concerns already being raised in the industry–it even quotes yours truly.
The general small business Rule of Two is similarly codified at both FAR 19.502-2 and 13 C.F.R. § 125.2(f) (the SBA regulation proposed to change here). Both of these rules are divided into two sections based on the value of the contract.
In the FAR’s Rule of Two, section (a) requires the government to set aside for small business all contracts with an anticipated value between the micro-purchase threshold (MPT) and the simplified acquisition threshold (SAT)–currently, meaning $10,000-$250,000–“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.” Section (b), worded slightly differently, requires the government to set aside for small business all contracts with an anticipated value greater than the SAT–currently, meaning over $250,000–whenever the contracting officer has “a reasonable expectation that”: (1) “[o]ffers will be obtained from at least two responsible small business concerns”; and(2) the “[a]ward will be made at fair market prices.” For contracts above the SAT, it actually says, “[t]otal small business set-asides shall not be made unless such a reasonable expectation exists[.]”
But for SBA’s regulation implementing the Rule of Two, the division is a bit nonsensical. Section (1) covers contracts with an anticipated dollar value between the MPT and SAT and Section (2) covers those exceeding the SAT. But both sections require such contracts be set aside “for small business concerns when there is a reasonable expectation that offers will be obtained from at least two small business concerns that are competitive in terms of quality and delivery and award will be made at fair market prices.”
This current SBA rule does talk about setting aside MACs and orders under MACs. But it does not place any hard requirements on the government to apply the Rule of Two. It merely says that agencies can set such work aside at their discretion (either the MAC itself, orders thereunder, or all of the above), and solicitation’s can note that the contracting agencies reserve the right to apply the Rule of Two if appropriate. Thus, SBA’s new proposed rule does offer quite a significant change.
In its rule-making commentary, SBA summarizes its proposed Rule of Two changes as follows:
This proposed rule would apply the Rule of Two to multiple award contract task and delivery orders, with some exceptions. Under the Rule of Two, unless an exception applies, an agency must set aside the award for small businesses where there is a reasonable expectation of receiving offers from two or more small-business contract holders under the multiple award contract that are competitive in terms of price, quality, and delivery. Documentation requirements apply where the agency decides not to move forward with a set-aside order.
SBA explains the purpose of the proposed rule change, noting that it would “expand the use of the small-business Rule of Two in multiple-award contracting and make other regulatory revisions to encourage the use of small businesses when creating new multiple-award contracts.” The SBA commentary then covers several anticipated exceptions to the proposed rule, “such as orders under the Federal Supply Schedule, or where an exception to fair opportunity or an agency-specific exception applies.” It also covers the procedural requirements for MACs to which the Rule of Two applies but, for some reason, will not or cannot be used. In that regard, it says:
When an agency is unable to set aside an order over the micro-purchase threshold and an exception does not apply, the contracting officer must document their rationale and provide the documentation to the agency’s small business specialist or the Office of Small and Disadvantaged Business Utilization (OSDBU) or, for the Department of Defense, the Office of Small Business Programs (OSBP).
And it notes that such required documentation would be reviewed by an SBA procurement center representative, which “may submit recommendations to increase small business opportunities.” As we will discuss further in the Part II blog on this topic, this proposed rule change is not something SBA issued on a whim–it is the result and implementation of several different sources of government authority, including, but not limited to, agency memorandums, executive orders, federal court decisions, GAO decisions, etc. SBA’s proposed rule change is intended to both “advance[] equity in Federal procurement practices” and “create more contract opportunities for small businesses, particularly small disadvantaged businesses (SDBs).” But we also very much understand the ability for a rule change like this one to simultaneously negatively impact certain businesses (and even, potentially, certain agencies).
That said, if you have any feedback you’d like for SBA to consider in its rulemaking procedures–prior to issuing any final rule for this one–now is the time to reach out and be heard. SBA’s commentary states that any comments on the proposed rule “must be received on or before December 24, 2024.” It explains that those interested may submit their comments via: (1) the Federal eRulemaking Portal: https://www.regulations.gov, which contains the instructions for submitting comments; or (2) Mail (for paper, disk, or CD–ROM submissions), which should be addressed to: Donna Fudge, Lead Procurement Policy Analyst, Office of Policy Planning and Liaison, U.S. Small Business Administration, 409 Third Street SW, Washington, DC 20416.
SBA also provides instructions for commenters to please include in any submissions the agency name or Regulatory Information Number (RIN) for this rulemaking, which is RIN 3245–AH95, Docket Number SBA–2024–0002. SBA even offers an option to submit comments while still protecting any confidential information, stating:
If you wish to submit confidential business information (CBI) as defined in the User Notice at https://www.regulations.gov, please submit the comments to Donna Fudge and highlight the information
that you consider to be CBI and explain why you believe this information should be held confidential.
According to SBA, all comments received will be posted on https://www.regulations.gov for anyone wishing to review them. And finally, SBA invites anyone with questions or seeking more information on this rulemaking to reach out to Donna Fudge (information above) at donna.fudge@sba.gov, or by phone, at (202) 205–6363.
Again, keep your eyes open for Part II of this blog if you would like a deeper discussion of the history behind this proposed rule change and the potential implications it may have.
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