The Rule of Two and Orders

Updates and Opinions on Timely Topics Impacting the Government Contracting Industry from GovCon Expert Ken Dodds

The statutory rule of two provides each “contract” below the simplified acquisition threshold (SAT) shall be reserved for small business concerns (SBCs) unless the contracting officer is unable to obtain competitive offers from two or more capable SBCs.[1] The rule of two above the SAT is regulatory, not statutory, and essentially provides the contracting officer shall set aside any “acquisition” if there is a reasonable expectation that offers will be obtained from at least two responsible business concerns and award can be made at fair market price.[2] The FAR clearly exempts GSA Schedule ordering from the rule of two.[3] Apparently the part of the FAR applicable to ordering under non-Schedule multiple award contracts (MACs) is not as clear (at least for some).[4] ?

In a 2007 Report to Congress, the Acquisition Advisory Panel (Panel) reported that, “[t]he set aside requirements of FAR Part 19 generally apply before task or delivery order contracts are solicited and awarded, not when an order competition is conducted or the order is placed.”[5] According to the Panel setting orders aside for small business could violate the fair opportunity requirements and other statutory provisions applicable to MACs.[6] Explicit authority to set aside orders did not exist, so the Panel recommended, “that contracting agencies be given explicit discretion to limit competition for orders to SBCs.”[7]

A 2010 Presidential Interagency Task Force reported, “under current policies, set-aside considerations are made prior the award of a contract.”[8] The Task Force further stated, “there has been a general reluctance among acquisition policy officials to advocate for regulatory changes that might require the mandatory application of set-asides to orders in the same manner that law and regulation currently require for contracts.”[9] The Task Force recommended that OFPP lead an effort to determine when orders can or should be set aside for small business and pursue regulatory or statutory changes.[10]

Prior to 2010, GAO denied protests arguing that the rule of two applied when agencies used the GSA Schedule,[11] sustained protests that the rule of two applied when an agency tried to order under other MACs,[12] but denied an agency’s request to modify a recommendation and allow the agency to set aside an order under a MAC.[13] In 2010 Congress amended the Small Business Act via section 1331 of the Small Business Jobs Act, using language mirroring the Panel’s recommended language, to provide, “Federal agencies may, at their discretion…set aside orders placed against multiple award contracts for small business concerns.”[14]

In a 2011 interim rule implementing these authorities, the FAR Council stated, ”the FAR is silent on how to apply set-asides at the task-or-delivery order level.”[15]

In its proposed rule to implement section 1331, SBA stated, “[t]he proposed rule preserves the discretion that section 1331 vests in agencies to decide whether or not to use any of the enumerated set-aside and reserve tools.”[16] SBA stated, “[a]gencies have the discretion to forego using the section 1331 tools even if the rule of two could be met; they simply need to explain how their planned action is consistent with the best interests of the agency.”[17] SBA acknowledged GAO’s 2008 Delex decision which held the rule of two applied to orders, but nevertheless stated the only time that an agency must set aside an order for small business if the rule of two is met is when the agency inserted a clause in the contract stating that it would do so.[18]

SBA reiterated in the final rule that it was preserving the discretion section 1331 places in agencies, and an agency that preserves the right to set aside orders under a multiple-award contract is not required to do so even if the rule of two is met.”[19] Thus, SBA’s rules provide the contracting officer “must” set aside a multiple award contract if the requirements for a set-aside are met, but the contracting officer “in his or her discretion may” set aside an order for small business.[20]

In response to comments that the rule of two should be mandatory with respect to orders, the FAR Council stated in a 2020 final rule that, “Section 1331 of the Jobs Act (15 U.S.C. 644(r)) addresses order set-asides and makes the application of the ‘rule of two’ discretionary for orders placed under multiple-award contracts only.”[21] According to the FAR Council, “Congress was clear in section 1331 of the Jobs Act that under a multiple-award contract, agencies may, at their discretion…conduct a set-aside of orders under a multiple-award contract.”[22] Consequently, the FAR provision pertaining to orders under multiple-award contracts provides “contracting officers may, at their discretion, set aside orders placed under multiple-award contracts” for SBCs.[23] ???

In addressing order set-asides, Congress, SBA and the FAR Council would have used words like “shall” and “must” instead of words like “may” or “discretion” if they had intended for the rule two to apply to order decisions. There would not be separate sections of the FAR and SBA’s rules that apply to set-aside contracts and sections that apply to set-aside orders. GAO recognizes that regardless of how the rule of two could have been interpreted prior to 2010, section 1331 gave agencies the express authority to circumvent the rule of two as it applies to contracts by ordering under a MAC.[24] A Court of Federal Claims (COFC) Judge found otherwise.[25] Although COFC decisions are not binding on other COFC Judges, a steady stream of litigants will challenge procuring agencies’ exercise of their discretion with respect to order set-asides at COFC, until: (1) The Federal Circuit issues a decision, (2) SBA and the FAR Council issue regulations clarifying that the rule of two is, or is not, mandatory with respect to non-Schedule orders, or (3) Congress further clarifies that the rule of two is, or is not, mandatory with respect to non-Schedule orders. The threat of COFC litigation probably makes the rule of two mandatory with respect to non-Schedule orders for the time being, which is a good thing for small business.

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[1] 15 USC 644(j).

[2] FAR 19.502-2(b).?

[3] FAR 8.405-5.

[4] FAR 16.505(b)(2)(i)(F).

[5] Report of the Acquisition Advisory Panel to the Office of Federal Procurement Policy and the United States Congress, January 2007, p. 300.

[6] Id.

[7] Id. at 307.

[8] Report on Small Business Federal Contracting Opportunities, p. 8 (publicly available at https://www.sba.gov/ sites/ default/ files/ contracting_ task_ force_ report_ 0.pdf).

[9] Id.

[10] Id. at 9-10.

[11] Global Analytic Information Technology Services, Inc., B-297200.3, Mar. 21, 2006, 2006 CPD 53; Millennium Data Systems, Inc., B-292357.2, Mar. 12, 2004, 2004 CPD 48; Future Solutions, Inc., B-293194, Feb. 11, 2004, 2004 CPD 39; Information Ventures, Inc., B-291952, May 14, 2003, 2003 CPD 101.

[12] Delex Systems, Inc., B-400403, Oct. 8, 2008, 2008 CPD 181; LBM, Inc., B-290682, Sept. 18, 2002, 2002 CPD 157; N&N Travel & Tours, Inc.; BCM Travel & Tours; Manassas Travel, Inc.; Alamo Travel, Inc.; Ravenel Bros., Inc.; and Bay Area Travel, Inc., B- B- 285164.2, B- 285164.3, Aug. 31, 2000, 2000 CPD P 146.

[13] [13] Matter of: Department of the Army--Request for Modification of Recommendation, B-290682.2, Jan. 9, 2003, 2003 CPD 23.

[14] 15 USC 644(r); Public Law 111-240.

[15] 76 FR 68032, 68033.

[16] 77 FR 29130, 29132.

[17] Id.

[18] Id. at 29133, 29143.

[19] 78 FR 61113, 61116

[20] 13 CFR 125.2(e)(1)(i), 125.2(e)(6)(i).

[21] 85 FR 11746, 11748-9.

[22] Id. at 11749.

[23] FAR 19.504(a).

[24] ITility, LLC, B-419167, Dec. 23, 2020, 2020 CPD 412.

[25] Tolliver Grp., Inc. v. United States, 151 Fed. Cl. 70 (2020).