Rule of Two

The Rule of Two is a longstanding policy in Federal procurement that aims to maximize opportunities for small businesses. This blog post will explore the Rule of Two, highlighting its benefits and potential drawbacks, based on information from the sources provided.

What is the Rule of Two?

The Rule of Two, codified in both the Small Business Act and the Federal Acquisition Regulation (FAR), mandates that federal agencies must set aside contract awards for small businesses if there is a "reasonable expectation" of receiving offers from at least two or more responsible small business concerns that are competitive in terms of:

• Price
• Quality
• Delivery

Benefits of the Rule of Two

The Rule of Two is a cornerstone of Federal support for small businesses in government contracting. Since its government-wide application in 1984, the Rule of Two has significantly contributed to increasing the Federal Government's spending with small businesses. It is the foundation for small business participation as prime contractors. The benefits of this rule include:

• Increased opportunities for small businesses: The Rule of Two creates a level playing field for small businesses to compete for government contracts. It has resulted in a significant increase in federal contracting dollars awarded to small businesses.
• Support for small disadvantaged businesses: The Rule of Two is expected to create more contract opportunities for small businesses, particularly small disadvantaged businesses (SDBs), helping the government achieve its goal of awarding 15% of federal contract spending to SDBs.
• Economic growth and job creation: By supporting small businesses, the Rule of Two contributes to economic growth and job creation.
• Innovation: Small businesses are often at the forefront of innovation. The Rule of Two encourages small businesses to participate in government contracting, which can lead to the development of new and innovative technologies.
• Equity in Federal procurement: The Rule of Two is a key tool for promoting equity in federal procurement practices, ensuring that small businesses have a fair chance to compete for government contracts.

Potential Drawbacks of the Rule of Two

While the Rule of Two offers significant benefits, there are potential drawbacks that need to be considered:

• Limited competition: In some cases, setting aside contracts for small businesses may limit competition from larger businesses, potentially leading to higher prices or reduced quality.
• Administrative burden: Implementing the Rule of Two can create an administrative burden for both agencies and small businesses. Agencies need to conduct market research to determine whether the rule applies, and small businesses need to demonstrate their capabilities to meet the requirements of the contract.
• Potential for abuse: There is a potential for abuse of the Rule of Two. For instance, some businesses may misrepresent their size or capabilities to qualify for set-aside contracts.
• Impact on large businesses: Expanding the Rule of Two could shrink opportunities for large businesses.

Recent Developments & Proposed Expansion

In recent years, there has been some confusion regarding the application of the Rule of Two to task and delivery orders under multiple-award contracts (MACs). Conflicting decisions from the Court of Federal Claims and the Government Accountability Office (GAO) have created uncertainty.

To address this ambiguity, the Small Business Administration (SBA) has proposed a rule that would clarify the application of the Rule of Two to MACs. The proposed rule would require agencies to set aside orders under MACs for small business contract holders when the Rule of Two is satisfied. This expansion aims to:

• Increase opportunities for small businesses on MACs: The proposed rule seeks to expand small business participation in MACs.
• Resolve legal uncertainty: The rule intends to clarify the application of the Rule of Two to MACs.
• Promote transparency and accountability: Agencies would be required to document their decisions not to set aside an order for small businesses and coordinate that determination with their small business specialist.

Conclusion

The Rule of Two is a crucial policy for promoting small business participation in government contracting. While some potential drawbacks exist, the benefits, including increased opportunities for small businesses, support for economic growth and innovation, and promotion of equity, outweigh the concerns. The proposed expansion of the rule to MACs aims to further enhance these benefits and provide greater clarity for both agencies and small businesses. The impact of this proposed rule, once finalized, will be significant for the government contracting landscape.