SBA’s “Rule of Two” often requires federal agencies to set aside an acquisition for small businesses whenever there is reasonable expectation that offers will be obtained from at least two small businesses that are competitive in terms of fair market prices, quality, and delivery. 

On Friday, SBA issued a Proposed Rule that would extend the reach of the Rule of Two by applying it to orders issued under many multiple-award contracts.  As such, under SBA’s proposal, agencies would be required to set aside an order under a multiple-award contract when there is a reasonable expectation of obtaining competitive offers from two or more small business contract holders, unless an exception – including an exception for Federal Supply Schedule (FSS) contracts – applies.

SBA believes that this rule, if adopted, would: (1) align multiple-award contract purchases with the Small Business Act’s requirement that a fair proportion of the total purchases and contracts for goods and services be awarded to small businesses; (2) resolve confusion created by contradictory interpretations of the Rule of Two; and (3) increase contracting opportunities for small businesses, particularly small disadvantaged businesses (SDBs).  

More details are below. 

The Rule of Two is set forth in the SBA regulations (13 C.F.R. § 125.2(f)) and at FAR 19.502–2, and, as noted above, generally requires a procuring agency to set aside an acquisition for small businesses if the agency expects to receive at least two offers from small businesses that are competitive in terms of fair market prices, quality, and delivery.  The rule is meant to implement Congress’s direction to “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.”  15 U.S.C. § 644(a)(1)(C).

The FAR provides that orders under multiple-award contracts may be set aside for small businesses on a discretionary basis.  See FAR 16.505(b)(2)(i)(F) (stating that “contracting officers may, at their discretion, set aside orders” for small businesses) (emphasis added); see also 15 U.S.C. § 644(r) (directing the establishment of guidance which would permit federal agencies to set aside parts of multiple-award contracts for small businesses “at their discretion”).  In recent years, however, we have seen conflicting interpretations regarding when the Rule of Two must be applied in such circumstances.  In Tolliver Group, the Court of Federal Claims ruled that “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” – i.e., before an agency can choose to meet its needs by issuing an order against an existing multiple-award contract.  GAO took a different tack in its subsequent decision in ITility, LCC, and maintained its longstanding interpretation that in 15 U.S.C. § 644(r), Congress intended to distinguish between a procuring agency’s mandatory set-aside obligations when first establishing a contract, and its discretion with respect to setting aside task or delivery orders under existing multiple-award contracts.

Under the Proposed Rule, agencies could elect in the first instance to leverage existing multiple-award contracts but would have to apply the Rule of Two at the task or delivery order level, thus eliminating the set-aside discretion identified by GAO in ITility.  Although not required, agencies would be permitted to amend existing ordering procedures to provide for order-level set-asides.

There are also notable exceptions to the proposed expanded Rule of Two, however.  Specifically, the Proposed Rule exempts (1) orders placed under FSS contracts; (2) scenarios in which an exception to the fair opportunity requirement applies, for example, if only one contractor is capable of fulfilling the order at the level of quality required because the services or property ordered are unique or highly specialized; and (3) when an agency-specific exception applies.  Agency-specific exceptions are likely to be rare, however, as they must (1) be developed in consultation with both the agency small business director and SBA; (2) be made available to the public before use; and (3) have an appropriate mechanism to ensure responsible use.

Key Takeaways

  • If adopted, we are likely to see increased set-aside opportunities for small businesses.  SBA asserted in the Proposed Rule that applying the Rule of Two to multiple-award contracts could add up to $6 billion per year in new small business contract spending.  SBA also speculated that this expansion of the Rule of Two would help to enable agencies to achieve the Biden Administration’s stated goal of awarding 15 percent of federal contract spending to SDBs in FY25. 
  • While the Proposed Rule is a product of interagency negotiation between SBA, the FAR Council, and other agencies, if adopted, there nevertheless will be some delay before the changes are incorporated into the FAR – a process that itself will require a formal rulemaking procedure.  It also remains unclear whether applying the Rule of Two at the task or delivery order basis ultimately will impact the discretionary set-asides permitted for multiple-award contracts that were themselves set-aside for small businesses.  FAR 19.504 already permits agencies to set-aside task or delivery orders under such contracts for particular small business socioeconomic concerns, but it remains to be seen whether the FAR Council will require application of the Rule of Two in such instances.
  • Comments on the Proposed Rule are due December 24, 2024, and industry stakeholders should note this opportunity to share their perspectives with SBA.  In the interim, we will continue to monitor this area, and we remain available to clients who may have questions or are interested in submitting a public comment for SBA’s consideration.
Photo of Scott A. Freling Scott A. Freling

Scott is sought after for his regulatory expertise and his ability to apply that knowledge to the transactional environment. Scott has deep experience leading classified and unclassified due diligence reviews of government contractors, negotiating transaction documents, and assisting with integration and other post-closing…

Scott is sought after for his regulatory expertise and his ability to apply that knowledge to the transactional environment. Scott has deep experience leading classified and unclassified due diligence reviews of government contractors, negotiating transaction documents, and assisting with integration and other post-closing activities. He has been the lead government contracts lawyer in dozens of M&A deals, with a combined value of more than $76 billion. This has included Advent’s acquisition of Maxar Technologies for $6.4 billion, Aptiv’s acquisition of Wind River for $3.5 billion, Veritas Capital’s sale of Alion Science and Technology to Huntington Ingalls for $1.65 billion, and Peraton’s acquisition of Perspecta for $7.1 billion.

Scott also represents contractors at all stages of the procurement process and in their dealings with federal, state, and local government customers. He handles a wide range of government contracts matters, including compliance counseling, claims, disputes, audits, and investigations. In addition, Scott counsels clients on risk mitigation strategies, including obtaining SAFETY Act liability protection for anti-terrorism technologies.

Scott has been recognized by Law360 as a MVP in government contracts. He is a past co-chair of the Mergers and Acquisitions Committee of the ABA’s Public Contract Law Section.

Photo of Peter Terenzio Peter Terenzio

Peter Terenzio routinely advises clients regarding the multiple regulatory regimes that apply to federal contractors. His practice also extends outside of traditional government procurement contracts to include federal grants and Other Transaction Authority (OTA) research, prototype, and production agreements.

Among other things, Peter…

Peter Terenzio routinely advises clients regarding the multiple regulatory regimes that apply to federal contractors. His practice also extends outside of traditional government procurement contracts to include federal grants and Other Transaction Authority (OTA) research, prototype, and production agreements.

Among other things, Peter regularly helps clients with the constantly evolving domestic-preference requirements promulgated pursuant to various federal laws, including, for example, the Buy American Act (BAA) and Trade Agreements Act (TAA), but also including more recently the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA). He also has particular experience with helping clients navigate the complicated prevailing wage rules imposed by the Davis Bacon Act (DBA) and Service Contact Act (SCA). Peter has used this regulatory knowledge to help clients negotiate the specifics of their contracts, grants, and OTA agreements.

Peter also has significant experience with the disputes that may arise during the execution of government prime contracts. He knows how to work closely with the client’s subject matter experts to prepare and submit detailed requests for equitable adjustment (REAs) in order to secure much-needed price or schedule relief. Where necessary, he has assisted clients with converting their REAs into certified claims, and when disputes cannot be resolved at the Contracting Officer level, he has helped clients vindicate their contractual rights in litigation before the Boards of Contract Appeals.

Photo of Brooke Stanley Brooke Stanley

Brooke Stanley helps companies of all sizes navigate the complex issues that arise from doing business with federal, state, and local governments. She routinely advises on a broad range of issues, including compliance with procurement and financial assistance regulations, contract negotiation and formation…

Brooke Stanley helps companies of all sizes navigate the complex issues that arise from doing business with federal, state, and local governments. She routinely advises on a broad range of issues, including compliance with procurement and financial assistance regulations, contract negotiation and formation, organizational conflicts of interest, flow-down requirements, equitable adjustments, claims and disputes, and small business issues. Brooke leverages her prior experience soliciting, negotiating, and administering government contracts for the United States Navy in crafting creative yet practical solutions for clients.

Brooke regularly assists clients in negotiating both procurement contracts and non-traditional agreements, such as other transaction agreements and cooperative research and development agreements. She has particular expertise assisting clients in protecting their intellectual property and confidential or proprietary information when negotiating with the government, including with respect to intellectual property rights and Freedom of Information Act issues.

In addition, Brooke frequently advises both government contractors and private equity firms in transactional matters, from preparing for sale or purchase to due diligence, negotiating transaction documents, and navigating pre- and post-closing activities. Her expertise in nuanced government contracting compliance issues helps clients understand, mitigate and manage material risks in such transactions.

Prior to entering private practice, Brooke clerked for the Honorable Susan G. Braden of the United States Court of Federal Claims.

Photo of Jocelyn Walcott Jocelyn Walcott

Jocelyn A.K. Walcott is an associate in the firm’s Washington, DC office. Her practice focuses on government contracts and government investigations.

Before joining the firm, Jocelyn clerked for the Honorable Loretta Copeland Biggs and the Honorable Joi Elizabeth Peake of the Middle District…

Jocelyn A.K. Walcott is an associate in the firm’s Washington, DC office. Her practice focuses on government contracts and government investigations.

Before joining the firm, Jocelyn clerked for the Honorable Loretta Copeland Biggs and the Honorable Joi Elizabeth Peake of the Middle District of North Carolina.