In Part I of this two-part blog, we covered an SBA proposed rule that would require agencies to apply the Rule of Two to most standard multiple award contracts (MACs) and task and delivery orders thereunder. In that blog, we covered the Rule of Two generally and the basics of SBA’s proposed changes to it. Well, as promised, this Part II blog is going to dig in a bit deeper to this proposed rule, its driving policies, and its potential impacts. But a whole lot has changed in the federal government contracting landscape (even since Part I of this blog). So, I will also address the elephant in the room (as best I can) by providing information regarding the big questions, “will the proposed rule stand a chance–and will there even still be a Rule of Two–under the new administration?“
As a quick reminder, per SBA:
This proposed rule would clarify the applicability of the Rule of Two to multiple-award contracts by directing that an agency set aside an order under a multiple-award contract 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.
I previously noted that this proposed regulatory change is more akin to a proposed regulatory implementation of a prior Court of Federal Claims (COFC) decision on the issue. But if this one becomes a final rule, it could significantly impact the world of government contracting–especially considering the historically inconsistent decisions of the Federal Circuit Courts and Government Accountability Office (GAO) on the issue. We will briefly discuss some of those decisions here, along with some driving policies and potential implications for this proposed Rule of Two update. Finally, we will touch briefly on the current administration’s potential policy impacts on the Rule of Two.
A Bit of History and Relevant Litigation Leading to the Proposed Rule Change.
SBA’s proposed rule notes that the Rule of Two dates all the way back to 1964. It was first adopted by the Navy, after which, it slowly gained popularity amongst other federal agencies who began adopting and implementing the Rule of Two. In 1984, the Federal Acquisition Regulations (FAR) implemented the Rule of Two, making its application governmentwide.
In SBA’s own words, “[t]he Rule of Two is the cornerstone of the Federal Government’s support for small-business prime contracting[,]” and this proposed rule “is expected to create more contract opportunities for small businesses, particularly small disadvantaged businesses (SDBs).” SBA also explains the proposed rule is a result of “interagency negotiation among SBA, the FAR Council, and other agencies[,]” which was initiated for three reasons: (1) to implement Small Business Act’s requirement to award a fair proportion of government purchase and contract dollars for supplies and services to small business concerns; (2) to provide much needed clarity and certainty on how agencies must apply the Rule of Two to task and delivery orders under MACs; and (3) to advance “equity in Federal procurement practices.” Keep this third reason in mind, as we will discuss it more later.
While the first reason seems fairly self explanatory, there are a few cases we can discuss to shine some light on the second reason. One highly relevant decision (which we’ve referenced in both parts of this blog) was Tolliver Group, wherein the COFC held ‘‘an agency must apply the Rule of Two before an agency can even identify the possible universe of procurement vehicles which may be utilized for a particular scope of work.’’ While the decision did discuss the Rule of Two’s applicability to task and delivery orders as part of the Court’s lengthily analysis, it apparently was not done clearly enough to set a consistent standard with other administrative bodies. But subsequent to the Tolliver Group decision, GAO decided in Itility, LLC, B–419167, to maintain its longstanding interpretation that agencies should have discretion whether to set aside task and delivery orders under MACs.
In this regard, the proposed change to officially require the Rule of Two for task and delivery orders under MACs (with a few exceptions), would serve to remove any remaining confusion on the issue. And there are several other policies driving this proposed rule.
Driving Policies for the Proposed Rule Change.
In SBA’s own words, “[t]his proposed rule 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.” But what exactly is driving SBA’s policy and goals here?
Well for one, SBA says its proposed rule is actually an implementation the Office of Federal Procurement Policy’s (OFPP) recommendations set forth in its January 25, 2024, Memorandum, ‘‘Increasing Small Business Participation on Multiple-Award Contracts.” The OFPP Memorandum states the following regarding policy:
The [prior] President’s Management Agenda (PMA) calls on agencies to create a diverse and
resilient federal marketplace. As part of these efforts, agencies are working to leverage the
small business growth occurring in the nation’s supply chains that support agency missions,
reverse the significant decline of small business participation in the federal supplier base over the
last decade, and increase contracting opportunities for small business concerns owned and
controlled by socially and economically disadvantaged individuals (SDBs), as directed by
Executive Order 14091, Further Advancing Racial Equity and Support for Underserved
Communities Through the Federal Government.
Current Administration’s Potential Impacts to Proposed Rule (And Maybe, the Current Rule Too).
Now, before we get too much further, it is crucial to note that the OFPP Memorandum claims to rely (to some extent) on a February 2023 Executive Order issued by President Biden that–you may already know–was recently revoked by the new administration. Now this, in and of itself, does not mean that all of the policies in this OFPP Memorandum are null and void. Nor does it automatically reject SBA’s new proposed rule. But as we will discuss further below, it could be telling of potential impacts on or changes to the Rule of Two to come–including, of course, any proposed rule changes seeking to strengthen the Rule of Two or widen its applicability (yea, just like the one discussed in this blog).
One thing that could be promising is the fact that the OFPP Memorandum says its policies are not only based on the “President’s Management Agenda”; they are also driven by the Office of Management and Budget’s (OMB) “Better Contracting Initiative” (BCI). The BCI, it says, “Better Contracting Initiative (BCI)
established by the Office of Management and Budget (OMB) “calls on agencies to strengthen contract stewardship actions that help the Federal Government get better terms and prices by purchasing goods and services as an organized entity.”
But of course, we all will simply have to wait and see what the current administration’s recent Executive Orders’ actual impacts–if any–will be on the Rule of Two. It is possible the Rule of Two–or at least certain aspects or applications of it–may be considered to promote “Diversity, Equity, and Inclusion” (DEI). Further, the Rule of Two is not mandated by statute; it is actually classified as a regulatory implementation of Section 15(a)(1)(C) of the Small Business Act, 15 U.S.C. 644(a)(1)(C). And that section of the Small Business Act merely says SBA shall “assur[e] that a fair proportion of the total purchases and contracts for goods and services of the Government in each industry category . . . are awarded to small business concerns.”
In a nutshell, this means, if the Rule of Two is deemed a rule that advances DEI, there would be nothing stopping the current administration from making significant changes to it and/or its application–potentially making this new proposed change null and void. As of now, the Rule of Two is not addressed in any of the latest executive orders at all. But it would be wise for any federal contractor pursuing or planning to pursue any kind of small business set-asides to keep an eye out for any potential impacts on the Rule of Two (and don’t worry, we would certainly, promptly update you all, if so).
Questions about this post? Email us Need legal assistance for a federal government contracting matter, give us a call at 785-200-8919.
Looking for the latest government contracting legal news? Sign up for our free monthly newsletter, and follow us on LinkedIn, Twitter and Facebook.