The U.S. Office of Management and Budget (OMB) has issued a policy memorandum with a goal of promoting small business participation under multiple-award indefinite delivery/indefinite quantity contracts (MACs). One of the memorandum’s three areas of focus – and the focus of this article – is the “[a]ward of orders under new and existing agency and government-wide multiple-award contracts.” Although the memorandum’s policies will require notice-and-comment rulemaking to take effect, OMB is encouraging agencies to begin implementing them now. The policy garnering the most attention is a directive that contracting officers “should” conduct a Rule of Two analysis before competing task orders under MACs and “should” document any decision not to set aside such requirements for small business concerns. This would constitute a significant shift in the treatment of task orders.

The Rule of Two

One of the touchstones of federal small business contracting is the “Rule of Two,” codified at Federal Acquisition Regulation (FAR) 19.502-2. For acquisitions valued at more than the micro-purchase threshold, but no more than the simplified acquisition threshold, a contracting officer ordinarily must set the procurement aside for small business concerns “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.” FAR 19.502-2(a). For acquisitions valued at more than the simplified acquisition threshold, the contracting officer must set aside the procurement for small business concerns when there is a reasonable expectation that offers will be received from at least two responsible small business concerns, at fair market prices. FAR 19.502-2(b). The FAR makes clear that the Rule of Two and other FAR Part 19 preferences do not apply to orders under Federal Supply Schedule (FSS) contracts, although contracting officers have the discretion to set aside those orders for small business concerns, too. See FAR 8.405-5(a)(1).

But how (if at all) does the Rule of Two apply to acquisitions using MACs? For example, if an agency has a requirement, and it knows of four responsible small businesses that are willing and able to perform the requirement at fair market prices, may the agency issue an in-scope task order for that work under an existing MAC that has no small business contract-holders? What about an existing MAC with both large and small contract-holders: may the agency compete the task order among all the holders, without using a set-aside, even if there are two small business contract-holders willing and able to do the work?

Legal Disagreement

The Government Accountability Office (GAO) has noted that the Small Business Jobs Act of 2010 permits contracting agencies, “at their discretion” and “notwithstanding the fair opportunity requirements under” 10 U.S.C. § 3406(c), to set aside orders placed against multiple award contracts for small business concerns. See ITility, LLC, B-419167, Dec. 23, 2020, 2020 CPD ¶ 412 at 10-14. The GAO reasons that this discretionary language means an agency is not required to perform a Rule of Two analysis before selecting a MAC to fill a requirement, and (once a MAC is selected) is not required to set the order competition aside for small businesses even if the Rule of Two is satisfied under that contract or otherwise. Id. at 19.

Judge Solomson at the Court of Federal Claims and the Small Business Administration (SBA) have read the same statute and regulations very differently. In their analysis, FAR 19.502-2’s directive to set aside “any acquisition” that satisfies the Rule of Two necessarily includes acquisitions by task order – even when the overall MAC is not set aside. See Tolliver Grp., Inc. v. United States, 151 Fed. Cl. 70, 55 (2020). These authorities point to FAR 8.404(a)’s specific carve-out for FSS procurements as evidence that “where the FAR intends to make the Rule of Two entirely inapplicable to the selection of a particular procurement vehicle, the FAR knows how to do so.” Id. at 56. In their view, if the Rule of Two did not apply prior to selection of a MAC vehicle, the FAR would have said so. And, in their reading, the fact that the Small Business Jobs Act clarified agencies are permitted to set aside task orders under MACs did not make the Rule of Two optional before deciding what vehicle to use for the procurement. Thus, under Tolliver, if an agency has reason to expect two or more responsible small business concerns would submit proposals to fill specific requirements at fair market prices, the agency must set those requirements aside for small businesses, even if the agency has access to a MAC where there are no small business contract-holders or where set-asides otherwise would be discretionary. Broadly speaking, the Tolliver holding reflects the SBA’s own reading of the Small Business Jobs Act and the set-aside regulations with respect to MACs (in contrast to longstanding practice, which conforms more closely to the GAO’s position).

New OMB Memorandum

Enter the new OMB memorandum. The memorandum articulates a policy that, apart from certain stated exceptions, agencies “should” set aside an order for small business concerns if the Rule of Two is met. The memorandum appears to contemplate that the Rule of Two analysis should occur before an agency decides whether to meet its requirements using an existing MAC. The results of that analysis should then inform the decision of which MAC to use, or whether not to use a MAC at all.

The memorandum also provides that contracting officers “should” document any decision not to set aside an order, including in cases where a chosen MAC has no or only one small business contract-holder. This documentation is to include an explanation for why the agency decided to choose a particular MAC to fill the requirements, and what market research showed concerning availability of small businesses not on the chosen vehicle. The memorandum envisions that the SBA will receive copies of such documentation for acquisitions above a certain value.

The memorandum states that the SBA and FAR Council have begun drafting proposed regulatory amendments to implement the policies set forth in the memorandum. Although these policies will not go into effect until the regulatory amendments have gone through notice-and-comment rulemaking and have been duly promulgated, OMB “encourages early agency adoption of these management steps.”

Takeaways

1. For the time being, the memorandum’s policies lack the force of law, although OMB encourages agencies to begin implementing them voluntarily now. Until new regulations are promulgated, the GAO will likely not sustain a protest for a failure to employ the Rule of Two in connection with a task order procurement. And, in accordance with Tolliver, at least one judge on the Court of Federal Claims is likely to sustain a protest on this basis even without new regulations.

2. The SBA and the FAR Council will have to decide what to do with all the “shoulds” in the memorandum. Ordinarily, “should” means one is encouraged to do something but not strictly required to do so. This falls on middle ground somewhere between the Court’s Tolliver decision (mandating a Rule of Two analysis before choosing a MAC) and the GAO’s ITility decision (leaving set-aside decisions and the Rule of Two wholly to the procuring agency’s discretion if it chooses to use a MAC).

3. If the SBA and FAR Council decide that a Rule of Two analysis is required for all MACs across the federal government, it would constitute a significant shift in the previously discretionary regime. Large firms on mixed-size MACs will likely see significant decreases in expected opportunities, even on existing contracts.

4. None of the memorandum’s discussion of MACs applies to competitions under FSS contracts. Everyone appears to agree that agencies do not have to undertake a Rule of Two analysis before placing orders or competing Blanket Purchase Agreements under the FSS program.

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