If you’re a small business govcon company you’ve likely heard this little tidbit: “If two small businesses are interested in a bid, the government must set aside that contract for small businesses.”
So is this fact or fiction? Short answer: It’s FACT.
Sounds great, right? But not so fast. It’s a bit more complicated than that, so let’s break down what the “Rule of Two” really means and when it works in your favor.
What Is the Rule of Two?
The “Rule of Two” is a short-hand phrase for a policy within federal procurement, found in both the Federal Acquisition Regulation (FAR) and Title 13 of the Code of Federal Regulations (CFR). Essentially, it means that for contracts over the micro-purchase threshold (see FAR Subpart 2.101), a CO must reasonably believe that at least two credible small businesses will submit competitive offers in terms of price, quality, and delivery.
When Does the Rule of Two Apply?
Let’s look at when this comes into play.
1. Simplified Acquisitions
For contracts below the Simplified Acquisition Threshold (SAT), which is currently $250,000, the FAR (Subpart 19.502-2(a)) requires that the Contracting Officer set aside these opportunities for small businesses—unless there’s no reasonable expectation that two or more responsible small businesses can submit competitive bids.
2. Over the Simplified Acquisition Threshold
For contracts over $250,000, FAR Subpart 19.502-2(b) states that the Contracting Officer must set aside the opportunity for small businesses if they reasonably expect to receive offers from at least two responsible small business concerns at a fair market price.
3. Task or Delivery Orders on Multiple Award Contracts
According to a memo from the Office of Management and Budget (OMB), as well as the Department of Defense (DoD), for orders over the micro-purchase threshold, Contracting Officers should set them aside for small business contract holders—assuming there’s a reasonable expectation that two or more small businesses can compete on price, quality, and delivery.
4. Partial Set-Asides
If a total set-aside isn’t appropriate, the Contracting Officer can apply the Rule of Two to part of the contract. According to FAR 19.502-3(a), if a contract can be broken into smaller portions, and two or more small businesses can reasonably compete for those portions, they must be set aside for small businesses.
What Does the Contracting Officer Consider?
When applying the Rule of Two, a Contracting Officer will look at a few key factors to determine if the small businesses are credible and likely bidders.
- Are there at least two responsible small businesses?
The Contracting Officer will review procurement history and conduct market research, to include Sources Sought Notices and RFIs, to assess whether the work can be performed by small businesses. In doing so, the CO may look at the capabilities and past performance of the small business. They might also consider things such as domain knowledge, tech stack expertise and qualifications of potential key staff. - Will those businesses submit offers?
Past bids and market engagement, such as responses to RFIs (Request for Information) and SSNs, help the Contracting Officer determine if small businesses are likely to participate. The contracting officer might even arrange one-on-one market research meetings. Some RFIs and SSNs even have a question specifically at the bottom that says something along the lines of “how likely are you to submit a bid based off of the information provided”. This is especially common on Market Research as a Service (MRAS) requests conducted by the GSA for other agencies. - Can the offers be competitive on price, quality, and delivery?
If small businesses have bid on similar work in the past, the Contracting Officer might compare that pricing to current market conditions.
These questions highlight why responding to RFIs and SSNs is crucial when considering bidding on contracts at your target agency. Your response helps inform the Contracting Officer’s decision on setting aside the contract for small businesses.
Other factors, such as changes in the market or economic conditions, can affect the Rule of Two’s application. For instance, in the Department of Defense (DoD), if only one offer is received for a competitive solicitation, the Contracting Officer may need to extend the solicitation or gather more information to encourage additional competition.
The Bottom Line
The Rule of Two doesn’t always guarantee a small business set-aside, even when two small businesses seem qualified. The Contracting Officer weighs many factors, including industry knowledge, market competition, and the specifics of the acquisition. If you’re in the running for a government contract, it’s crucial to stay informed, respond to RFIs, and make sure your business is ready to compete when the Rule of Two is applied.