The Rule of Two

By Grace Mahan

Government contracts law and procedure includes a number of rules intended to facilitate or require the awarding of contracts to small businesses through set-asides. One such rule is the “Rule of Two,” which mandates that a contract officer (CO) set aside any acquisition over $150,000 for small business participation when there is a reasonable expectation that (1) offers can been obtained from at least two responsible small business concerns and (2) the award will be made at fair market prices. By setting forth these two factors, the Rule of Two seeks to help small businesses compete for and win federal contracts. In recognition of this public policy goal, the U.S. Court of Federal Claims (COFC) has given deference to agency findings that the factors of the Rule of Two have been satisfied.

For example, in Sigmatech Inc. v United States, the COFC held that a CO is not required to determine whether two or more small business concerns are capable of performing a contract at issue. In this case, Sigmatech, a potential bidder affected by a small business set-aside, protested on the grounds that the CO overseeing the contract made an arbitrary and capricious decision to set aside the solicitation for small business. To support this contention, Sigmatech argued that the CO had been unreasonable in determining that the eight small business bidders that it considered were capable of performing the requirements of the solicitation.

Rejecting Sigmatech’s arguments, the court made clear that the Federal Acquisition Regulation does not require COs to make capacity determinations when evaluating the Rule of Two. By contrast, the court referenced its December 29, 2017, Memorandum Opinion and Final Order in asserting that the Rule of Two does not require a CO to find that any two specific small businesses are able to complete a contract. Rather, a CO must “reasonably expect” that two responsible small businesses will submit offers. In this regard, the merits of the individual bids are not dispositive.

The court thus found that the CO in question had not been arbitrary or capricious in issuing a Request for Information and generating a Market Research Report, which created a reasonable expectation that offers were obtained from at least two responsible small business concerns, regardless of the two companies’ actual capacity to perform the requirements of the solicitation. In coming to this conclusion, the COFC upheld a broad construction of the Rule of Two and gave deference to an agency determination regarding the appropriateness of a small-business set-aside.

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Posted in Government Contracts.