Where an agency buys manufactured goods, the FAR’s Rule of Two is satisfied when two or small business manufacturers of the end products exist. It is not enough, as GAO recently held, for two or more small business distributors of manufactured products to exist.

In Manus Medical, B-412331 (Jan. 21, 2016), GAO denied a protest claiming that the Department of Veterans Affairs erred by not setting aside the solicitation for service-disabled veteran-owned small businesses. The solicitation called for a contractor to “provide all labor, materials, transportation, equipment and supervision . . . to provide a Custom Sterile Procedure Pack program” for the VA’s Central Region medical facilities. “The packs,” the solicitation continued, “shall be available for distribution by the Medical Surgical Prime Vendor . . . or by direct purchase, at the discretion of the local facility.”

Manus—an SDVOSB—protested the VA’s decision to issue the solicitation on an unrestricted basis, claiming that at least two SDVOSBs expressed an interest in submitting offers under the solicitation. It did not assert, however, that either of these SDVOSBs actually manufactured the products sought; instead, it claimed that the SDVOSBs could perform the requirements based on “established distribution relationships with large manufacturers of the custom packs[.]”

At issue in this protest was the application of the small business nonmanufacturer rule, which applies to small business set-asides. GAO explained this rule, found in FAR 19.502-2(b) and (c), as follows:

An acquisition for the type of goods and services sought here, with an anticipated dollar value of more than $150,000, must be set aside for small business concerns if the agency determines there is a reasonable expectation that offers will be submitted by two or more small businesses that are offering products manufactured by small business concerns.

GAO then considered the “extensive market research” conducted by the VA. This research showed that though there were several small business distributors of custom sterile surgery packs, the products being distributed ultimately were manufactured by large businesses. Thus, the VA did not have a reasonable expectation that two or more small businesses (or SDVOSBs) offered products manufactured by small business concerns, so the Rule of Two did not apply.

GAO found this determination reasonable. In doing so, it rejected Manus’s claim that the VA was “obligated” to seek a waiver of the rule that requires products procured under a contract set-aside for small businesses to be manufactured by small businesses. According to GAO, the contracting officer has discretion to seek a waiver of this rule, but “this provision is discretionary,” and there was nothing improper about the VA’s decision not to see a nonmanufacturer rule waiver. Because the Rule of Two did not apply, and because the contracting officer was not obligated to seek a waiver, GAO held that the VA had not been required to issue the solicitation as a SDVOSB set-aside.

Applying the Rule of Two to small business procurements can be tricky. But as GAO held in Manus Medical, the Rule of Two’s application to contracts seeking manufactured items is satisfied only when two or more small business manufacturers of the end products exist and will submit offers.