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On Friday (10/25/24), the Small Business Administration issued a proposed rule that would expand the application of the "rule of two" (for small business) to orders under multiple award contracts. The proposed rule is welcome news for small businesses, particularly as the rule of two has been subject to competing interpretations in protest tribunals. Comments on the proposed rule must be received on or before December 24, 2024.

Generally, the small business "rule of two" requires agencies to set aside contracts for small business where the agency expects at least two small business concerns will bid on the contract (with reasonable prices). As simple as it sounds, when and how the rule applies has been anything but clear. SBA's proposed rule would fix that.

As noted in SBA's prefatory comments, the changes would clarify the rule of two "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." In doing so, the proposed rule also provides certainty, as Government Accountability Office ("GAO") and Court of Federal Claims ("COFC") decisions have arrived at different conclusions on the rule's applicability.

In that regard, SBA's comments highlight that, in Tolliver Group, Inc., et al. v. U.S., 151 Fed. Cl. 70 (2020), COFC agreed with a protester 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.” Conversely, in Itility, LLC, B-419167, Dec. 23, 2020, 2020 CPD ¶ 412 (after Tolliver), SBA said that GAO maintained its longstanding interpretation that "Congress intended to clearly delineate a distinction between a procuring agency's mandatory set-aside obligations when establishing a contract, and an agency's discretion with respect to setting aside task or delivery orders under a multiple-award contracts."

Thus, unlike COFC, where the rule of two has been interpreted broadly, GAO has held that agencies are not required to follow the rule for orders. The proposed rule closes that gap and provides agencies (and industry) with much needed clarity and certainty. Notably, based on SBA's calculations, the proposed rule change "could add up to $6 billion per year in small business contract spending."

Takeaway

The proposed rule is great news for small business because, if implemented as proposed, it clarifies that agencies are required to apply the rule of two at the order level. And, as contract bundling and multiple award vehicles continue to proliferate, the proposed changes also will help to ensure that a fair share of contracts remain with small business.