The U.S. Small Business Administration (SBA) has introduced a proposed rule aimed at transforming the way federal contracts are awarded to small businesses. This proposal, published on October 25, 2024, seeks to implement a key provision from the landmark Tolliver decision, mandating the application of the “Rule of Two” for task and delivery orders under multiple-award contracts (MACs). This shift has the potential to significantly enhance the share of federal contracts awarded to small businesses, expanding opportunities for small firms to participate in government contracts.
The Rule of Two stipulates that if there are at least two qualified small businesses capable of performing a contract, the contract should be set aside for small businesses. The proposed rule requires contracting agencies to apply this rule to task and delivery orders under multiple-award contracts, provided certain conditions are met, such as price competitiveness, quality, and delivery standards. This new measure will apply to orders above the micro-purchase threshold and seeks to encourage broader small business participation in federal contracting. However, some exemptions exist, including orders placed under the General Services Administration’s Federal Supply Schedule, or in instances where specific agency exceptions apply, such as supply chain risks or national security concerns.
The Drive Behind the Proposed Rule: Addressing Small Business Decline and Market Gaps
The introduction of this rule is influenced by concerns over a declining small business industrial base and increasing reliance on multiple-award contracts and government-wide acquisition contracts (GWACs). SBA’s analysis suggests that applying the Rule of Two to these contracts could close an existing gap, potentially increasing small business contracts by as much as $6.1 billion annually. The proposed rule supports the Biden administration’s goal of promoting equity and increasing spending with small disadvantaged businesses (SDBs) to meet the target of 15% of federal contract spending on SDBs by 2025.
Data from SBA shows that in fiscal year 2023, 28.4% of all eligible federal contract dollars were awarded to small businesses, representing an increase of $15.7 billion from 2022 and a record-setting year for small business awards. However, the number of small businesses entering the federal market has seen a significant decrease over the last decade, with new small business entrants falling by nearly 60% since 2010. This proposed rule aims to reverse that trend by creating a more level playing field for small businesses seeking government contracts.
Ensuring Compliance and Transparency
The SBA proposal also includes detailed documentation requirements for instances where an agency opts not to set aside a contract under the Rule of Two. Agencies must provide market research documentation and coordinate with small business specialists within the agency. For orders issued under MACs with fewer than two small business contract holders, agencies will need to justify their rationale, with exceptions available for contracts under the Federal Supply Schedule and other specified exemptions.
This proposal follows a memorandum issued by the Office of Federal Procurement Policy in January 2024, which directed agencies to document instances when they choose not to set aside a contract under the Rule of Two. This change is designed to resolve inconsistencies in the application of the Rule of Two, following conflicting interpretations by the Court of Federal Claims and the Government Accountability Office (GAO) on the rule’s applicability to MACs.
Public Engagement and Future Outlook
The SBA is accepting public comments on this proposed rule until December 24, 2024, inviting input from small businesses and other stakeholders. Once finalized, this rule could substantially increase small business participation in federal contracting, strengthening the competitive landscape and potentially enhancing the resilience of the federal supply chain by diversifying its base of suppliers.
Click here to read the SBA’s Proposed Rule.
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