Is the Small Business Rule of Two on the Chopping Block?

The government contracting community is swirling with rumors of a pending rewrite of the FAR--and if the rewrite looks like one goverment contracting expert thinks it might, the small business "rule of two" under FAR 19.502-2(b) could disappear.

The elimination of the rule of two would likely result in significantly fewer small business set-aside acquisitions. According to SBA's Small Business Data HUB, small business set-asides accounted for nearly $67 billion in prime contract spending in Fiscal Year 2023; more than 39% of contract awards to small businesses came via small business set-asides.

First things first: the rumored major rewrite of the FAR. According to government contracting expert Vern Edwards of the venerable WIFCON site, the Office of Management and Budget is currently "rewriting the FAR" and is "planning to move fast and complete the project in weeks, not months." Edwards continues:

They are not going to add anything. Instead, they are going to "line out" all text that is not required by statute. They may also line out text that is related to a statute but not essential to implementing the statute. Text based on executive orders will be lined out, since it is not based on statute. They are doing research into the sources of existing text. The prospective new text is being referred to as FAR 2.0.

Obviously, a potential rewrite of the FAR has about a zillion ramifications across almost every aspect of federal procurement. If "FAR 2.0" comes to pass, I'll undoubtedly write several articles about various aspects of the new regulatory scheme. But for now, let's focus on small business set-asides, because if FAR 2.0 looks like Edwards suggests it may, the small business rule of two could disappear, at least for acquisitions valued above the simplified acquisition threshold.

FAR 19.502-2 governs when an acquisition must be set aside for small businesses. The regulation contains two similar but distinct requirements.

First, with respect to acquisitions between the micro-purchase threshold (currently $10,000 for most acquisitions) and the simplified acquisition threshold (currently $250,000 for most acquisitions), FAR 19.502-2(a) says, in relevant part:

Each acquisition of supplies or services that has an anticipated dollar value above the micro-purchase threshold, but not over the simplified acquisition threshold, shall be set aside for small business unless the contracting officer determines there is not a reasonable expectation of obtaining offers from two or more responsible small business concerns that are competitive in terms of fair market prices, quality, and delivery.

Second, for acquisitions over the SAT, FAR 19.502-2(b) says, again in relevant part:

The contracting officer shall set aside any acquisition over the simplified acquisition threshold for small business participation when there is a reasonable expectation that- (1)Offers will be obtained from at least two responsible small business concerns; and (2)Award will be made at fair market prices. Total small business set-asides shall not be made unless such a reasonable expectation exists (see 19.502-3 for partial set-asides).

Let's return to Vern Edwards' statement that FAR 2.0 will eliminate "all text that is not required by statute." Assuming that's how FAR 2.0 proceeds, the question with respect to the small business rule of two becomes, "which parts of FAR 19.502-2 are required by statute?"

Between the micro-purchase and simplified acquisition thresholds, as implemented by FAR 19.502-2(a), the small business rule of two is mandated by statute. Specifically, 15 U.S.C. 644(j)(1) says:

Each contract for the purchase of goods and services that has an anticipated value greater than the micro-purchase threshold, but not greater than the simplified acquisition threshold shall be reserved exclusively for small business concerns unless the contracting officer is unable to obtain offers from two or more small business concerns that are competitive with market prices and are competitive with regard to the quality and delivery of the goods or services being purchased.

So far, so good. But what about the small business rule of two above the simplified acquistion threshold in FAR 19.502-2(b)? There's no statutory requirement.

Above the SAT, the small business rule of two in FAR 19.502-2(b) is the FAR Council's manner of implementing the broad policy, set forth in 15 U.S.C. 644(a)(1)(c) and 15 U.S.C. 631(a) that "a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government (including but not limited to contracts or subcontracts for maintenance, repair, and construction) be placed with small-business enterprises."

According to the Congressional Research Service, the small business rule of two has been effective since 1983. But the CRS states that, above the SAT, the rule of two "arguably" implements the statutory "fair proportion" policy. There is no statutory rule of two requirement above the SAT.

Perhaps I'm dating myself, but the small business rule of two has been in effect since I was in kindergarten. If FAR 2.0 proceeds as Vern Edwards suggests, however, the Reagan-era rule of two could disappear for acquisitions above the SAT. What would follow? Statutes require that a "fair proportion" of contracting dollars go to small businesses, but don't specify how that happens above the SAT. In other words, we'll just have to wait and see.

I'll keep you posted.

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Boring but important disclaimer: The information in this article is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.