Nearly four years after the Court of Federal Claims issued its landmark Tolliver decision regarding the use of the small business “rule of two” for all contracting actions, including nearly all task order-type contracts, the Small Business Administration took the first step to establish this. set in the regulations.
The SBA’s proposed rule, published Oct. 25, would mandate agencies to consider whether there are at least two qualified small businesses able to bid on a task or delivery order before issuing the procurement, and if there is, they will have to set it aside. While there are some exceptions to this proposed rule, including not applying the “rule of two” to the scheduling of contracts run by the General Services Administration, federal procurement experts say the change will bring about a dramatic change in the contracting business of small.
These former federal procurement leaders disagree on whether the SBA proposal as written today would benefit or hurt small businesses over the long term.
“This is potentially a seismic rule. It would completely change the face of multiple award contracts (MAC) overnight and I think not in a good way,” said Larry Allen, president of Allen Federal Partners and a federal procurement expert. “The purpose of the rule is maybe positive to help small businesses, but I can’t help but think that this is a proposed rule that is essentially a cure in search of a problem.”
John Shoraka, co-founder and managing director of GovContractPros, a consulting services firm specializing in federal procurement and a former associate administrator of Government Contracting and Business Development at the SBA, offered the opposite view.
“Given the proliferation of government-wide acquisition contracts (GWAC) and contract consolidation, there has long been a concern about how multiple award contracts are impacting small businesses. So it helps small businesses and encourages more to set aside,” he said. “The prices going to small businesses are going up, but the number of small business contractors is going down. This is partly a reaction to that. What measures can we implement to reverse that trend? I think we should probably look at the trajectory of all these GWACs and the ability of small business to participate in that market. Is it really beneficial for small business participation? Should we be looking at this approach?”
The rise of MACs driving change
The SBA is accepting comments on the proposed rule until Dec. 24, and many experts expect many small firms and other interested parties to provide comments.
Concerns about shrinking the small business industrial base as well as increasing the use of GWACs and MACs are driving mixed opinions about the proposal.
In its proposed rule, the SBA says the agencies are missing out on providing up to $6.1 billion more to small firms if they had implemented the two rule for MAC and GWAC.
“The rule of two is the cornerstone of the federal government’s support for small business prime contracting. In fiscal year (FY) 2023, set-aside awards accounted for 65% of contracting dollars awarded to small businesses, the highest percentage since data became available in 2010. These set-aside dollars pushed spending on government with small business prime contractors to $178 billion in 2023, or 28.4%,” the SBA wrote in its proposal. “This proposed rule would clarify the applicability of rule two to multiaward contracts by directing that an agency set aside an order under a multiaward contract for small business contractholders when the contracting officer determines that there is an expectation reasonable to receive bids from two or more small business contract holders under a multiple award contract that are competitive in terms of market prices, quality and delivery.”
The SBA proposal implements an Office of Federal Procurement Policy memo from January that tells agencies to apply the rule of two in MAC and document any decisions when that approach doesn’t work.
The SBA’s decision to expand use of the two rule comes despite a record year for awards and total dollars. In fiscal year 2023, the SBA says agencies awarded an all-time high of 28.4% of all eligible federal contract dollars to small businesses for a total of $178.6 billion, which was an increase of $15.7 billion from 2022.
At the same time, data for 2023 from HigherGov, a market intelligence firm, shows that the use of multiple price contracts continued to grow. The company says nearly 55.8% of all awards went through a contract vehicle with the General Services Administration’s OASIS and NASA’s SEWP V seeing record awards of $13.4 billion and $10.5 billion, respectively.
And add to all this data the fact that the Biden administration is concerned about the shrinking industrial base of small business. OFPP’s supplier base dashboard shows 8,342 new small businesses operating in the federal market in 2023, up from 7,579 new entrants in 2022.
But at the same time, the SBA said in 2022 that agencies since 2010 have seen a drop of about 40% in the number of small businesses receiving prime contract awards. Over the same time period, the number of small companies doing business with the federal government for the first time has dropped by about 60%—and over the past 15 years, new entrants have dropped by about 80%.
The ‘rule of two’ may cause more protests
Roger Waldron, president of the Government Procurement Coalition, said it’s unclear whether this rule change will solve many of the challenges small businesses face.
“We support small businesses and want them to grow and succeed by reducing barriers to market, but this proposed rule raises many unanswered questions about the impact of the overall system,” said Waldron, who hosts. Off the shelf on the Federal News Network. “Will the proposed rule lead to more litigation related to orders that have not been set aside and induce the contracting officer to set aside orders when he would not otherwise, just to avoid conflicts, increase risks to agencies, taxpayers and contractors? The statutory authority for granting setting aside orders uses the word ‘may’, clearly indicating discretion, which in my view was a deliberate and conscious decision to protect these decisions from litigation. Agencies may decide not to seek multiple award contracts involving large and small businesses, and instead select separate and discrete separate and complete and open multiple contracts for the same supplies or services. Because if there are small businesses in your contract, as an agency you have decided that they can perform the entire scope of work, then when will the order not be left?”
Allen also questioned whether this proposal would lead to more jobs for small businesses.
He said it is unclear how the rule of two would affect both small business subcontractors and small firms that currently maintain existing GWAC and MAC-only small businesses such as Polaris or VETS 2.
“If you look beyond prime contractors, there are contracts with significant subcontracting requirements, about 50% of all work has to be subcontracted to small businesses. So what types of small businesses are you trying to help?” Allen said. “The universe of businesses that can be prime or are you going to simultaneously hurt small businesses that can’t or aren’t prime by limiting subcontracting opportunities? It looks like the SBA should be asked if they are trying to rob Peter to pay Paul? If we want to be pro-small business, let’s not pick winners and losers through procurement regulations.”
The analysis should be done at the beginning of the planning
Additionally, Allen said small and large businesses that invested hundreds of thousands of dollars or more to acquire GWACs and MACs like OASIS+ or Alliant 2 or small business Polaris could become much less attractive to federal contracting officers. Allen said it’s unclear whether the rule would dilute the value of those contracts.
Shoraka, however, disagreed with this hypothesis. He said the SBA proposal emphasizes more strongly the need to implement the rule of two, which contracting officers already must do.
“A challenge when I was in the government was that we would argue before choosing a vehicle, you have to do the analysis of the rule of two. You can’t go to the vehicle and say there are no small businesses and not leave them aside. So you have to apply the rule of two analyzes and then choose the right vehicle, as opposed to gaming the system and avoiding the set-aside claim,” he said. “As a small business attorney, I would certainly like the rule of the two analyses. To me, this is an even stronger codification of Tolliver’s decision.”
Nicole Pottroff, a partner with the law firm of Koprince McCall Pottroff, said that while the SBA is on firm footing by law in extending the two-person rule to MACs, she expects the agency to receive a lot of positive and negative feedback.
“I think a little more definition of what an agency should do where there is no exception to the rule would be helpful. If they can’t apply the rule of two, it’s very unclear now about documenting and giving that to the SBA,” she said. “If the SBA gets a lot of feedback, this can be a powerful way to negotiate something in the middle. For now, it is not difficult for contracting officers to justify not using the rule of two. It will be interesting to see how it all develops.”
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