The Small Business Act envisions that small businesses will be awarded a “fair proportion” of government contracts. To meet this goal, the FAR instructs agencies to set aside for small businesses acquisitions over $150,000 if there is a reasonable expectation that offers will be received from at least two responsible small businesses, at fair market prices.
While the Rule of Two is powerful, it does not extend to all procurement actions. A recent GAO case illustrates an important exception to the Rule of Two. In Walker Development & Trading Group—Reconsideration, B-411246.2 (Sept. 14, 2015), the GAO held that an agency need not conduct a Rule of Two analysis before exercising an option in accordance with the terms of an existing contract.
At issue in Walker was the VA’s announced intent to exercise a third option period to provide cardiac telemetry services at the VA Medical Center in Gainesville, Florida, under a contract with a one-base year and four-option year period. In an initial protest, Walker argued that the option should not have been exercised and that the requirement should have been set-aside under a new procurement. But because it was not raised before the deadline for receipt of initial proposals, the GAO dismissed Walker’s protest as untimely.
Requesting reconsideration of this denial, Walker argued the GAO failed to address the argument that the VA erred by not conducting a Rule of Two analysis before awarding this option. Walker’s argument relied on an earlier GAO decision, Major Contracting Services, Inc., B-410472 (Sept. 14, 2009). There, the GAO sustained a protest challenging the exercise of an option under FAR 52.217-8, which allows an agency to extend an expiring contract for up to six months. But this option was not within the contract’s contemplated period of performance, so its exercise went beyond the scope of the initial contract—it was, in essence, a new procurement conducted on a sole-source basis. Because the agency did not adequately justify its use of a sole-source procurement, as required by the FAR, the sole-source award was improper.
Unlike the option at issue in Major Contracting, the option in Walker was not outside the scope of the original contract. Instead, the VA simply sought to exercise an option year in accordance with the terms of an existing contract. The GAO held that “there is no merit in Walker’s argument” that the Major Contracting Services case means that an agency must conduct a Rule of Two analysis before exercising an ordinary option.
The GAO then examined FAR 17.207, which governs the exercise of options. Subsection (c) provides that a contracting officer may exercise an option only after determining that (1) funds exist; (2) the requirement covered by the option meets an existing Government need; (3) exercising the option is the most advantageous way to meet this need, price and other factors considered; (4) the option was appropriately synopsized; (5) the contractor is not listed in SAM’s Exclusions database; (6) the contractor’s past performance evaluations on other contracts have been considered; and (7) the contractor’s past performance on this contract has been acceptable. Subsection (d), for its part, allows the exercise of an option when it is priced better or offers more advantageous terms than would a new solicitation.
After summarizing the FAR’s requirements regarding the exercise of options, the GAO wrote “[n]othing in FAR 17.207 requires the contracting officer to conduct a ‘Rule of Two’ analysis prior to exercising a contracting option.” Walker did not cite any authority for the proposition, the GAO noted, “and we are aware of none.” The GAO denied Walker’s request for reconsideration.
The Rule of Two serves an important role in helping small businesses win their “fair proportion” of federal contracts. But as Walker Development & Trading Group shows, where an option year is exercised in accordance with the terms of an existing contract, and within the scope of that contract, the agency need not conduct a Rule of Two analysis before exercising the option.