We have talked a good deal about the Small Business Rule of Two (not to be confused with the separate VA rule of two for veteran-owned businesses) over the years. The (very) general gist of the rule is this: If the procurement is above the simplified acquisition threshold, the agency must set it aside for small businesses if two or more small businesses can perform the work at fair prices. If the agency has a reasonable expectation that two or more SDVOSB/VOSBs, EDWOSBs/WOSBs, 8(a) participants, or HUBZone participants can perform work under a procurement, the agency must consider setting aside the procurement for that particular category (i.e., if it believes two or more 8(a) participants can perform the work, it can set aside the procurement for 8(a) participants). However, it appears there remains a good deal of confusion about what the Rule of Two requires, as opposed to what it simply permits. In a recent GAO protest, a contractor learned this the hard way, and today, we’ll explore that decision.
Prior to issuing the solicitation in question, the Defense Counterintelligence and Security Agency (DCSA) issued a request for information (RFI) to find out what sort of businesses are interested in performing background investigation support services. DCSA then issued the solicitation on March 18, 2025, with a tiered evaluation approach that provided an evaluation preference for SDVOSBs. Essentially, this meant while non-SDVOSBs could bid, SDVOSBs were preferred. However, not long thereafter, DCSA did away with this approach, making the solicitation a simple small business set aside with no evaluation preference for SDVOSBs. In response to a question about why DCSA changed its approach, DCSA explained that, quite simply, it didn’t have a reasonable expectation that two or more SDVOSBs would submit proposals, although it did expect that two or more small businesses would submit proposals.
Protection Strategies Etc. International LLC (PSEI), an SDVOSB, protested the terms of the solicitation on several grounds. One of its arguments was that DCSA had violated the Rule of Two by both failing to set aside the solicitation for SDVOSBs and for removing the evaluation preference for SDVOSBs. PSEI asserted that, in addition to itself, there were at least two other SDVOSBs that were more than capable of performing the work in question. As such, PSEI argued that the removal of the tiered evaluation preference violated DFARS 215.203-70.
DCSA moved to dismiss PSEI’s protest with regards to its Rule of Two argument that the procurement should have been set aside for SDVOSBs. DCSA argued that while it was permitted to set aside procurements for SDVOSBs, it was not required to. GAO agreed. FAR 19.502-2 requires that an agency set aside a procurement over the simplified acquisition threshold for small businesses when there is 1) the reasonable expectation that two or more small businesses can perform the work and 2) award will be made at fair market prices. However, at the same time, FAR 19.203 states that if the procurement is above the simplified acquisition threshold, the agency must “first consider an acquisition for the small business socioeconomic contracting programs (i.e., 8(a), HUBZone, SDVOSB, or WOSB programs) before considering a small business set-aside[.]” The emphasized language there is key. As GAO observed: “While both the FAR and SBA regulations require agencies to consider setting aside a procurement for certain subcategories of small businesses before setting aside for all small businesses, neither the FAR nor SBA regulations ultimately require agencies to do so, even if an agency finds that there are two or more responsible firms from a certain subcategory likely to submit fair market offers.”
As for PSEI’s argument that DCSA violated DFARS 215.203-70 by removing the tiered evaluation preference for SDVOSBs, GAO also agreed with dismissal. First, the record showed that only one SDVOSB deemed capable of performance had responded to the RFI, and, regardless, DFARS 215.203-70 doesn’t mandate preference for SDVOSBs. It states in relevant part: “Consideration shall be given to the tiers of small businesses (e.g., 8(a), HUBZone small business, service-disabled veteran-owned small business, small business) before evaluating offers from other than small business concerns.” In other words, it requires a preference for types of small businesses as opposed to large businesses. It doesn’t require preference for SDVOSBs over small businesses.
Quite simply, while DCSA could have chosen to favor SDVOSBs if it wished, it was not required to, and it had the discretion to remove such a preference where reasonable. In fact, as only one capable SDVOSB responded to the RFI, there’s a fair argument to be made that setting the procurement aside for SDVOSBs or to prefer SDVOSBs would have been unreasonable, as in order for an agency to set aside a procurement for a particular socioeconomic category, it has to find that there are sufficient firms capable of performing the work in question.
The small business Rule of Two, then, can (generally, there are exceptions and it also depends on the size of the procurement) be looked at as follows: If sufficient businesses in a certain socioeconomic category can perform the work, the agency may (but is not required to) set aside the contract for that category. If one or no businesses in a certain socioeconomic category can perform the work, the agency should not set the contract aside for that category.
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