What Is the Rule of Two Small Business in Government Contracting?

For any contracting opportunity above the simplified acquisition threshold, there is still a desire to give small businesses a chance to win the contract without having to compete against “other than” small businesses. This is where the Rule of Two small businesses comes into play.

Market research is an integral part of the federal acquisition system for myriad reasons, but determining whether and how many small businesses exist in a given market is a direct result of the Rule of Two. If the contracting professional determines that more than two small businesses are represented in the market, they can make a determination that qualifies the rule of two, and the resulting solicitation could be set aside for the small business community.

In the Defense acquisition, this research is documented in the DD 2579 Form, and a recommendation that follows whenever two or more small businesses are identified that can complete the work at a fair and reasonable price. In civilian agencies, this determination is usually part of the acquisition plan or market research document, but the purpose is the same: honoring the rule of two to maximize business opportunities for the small business community.

For most agencies, the Rule of Two is strongly encouraged, but in the Department of Veterans Affairs, it’s actually codified into law. The result of a landmark Supreme Court ruling, if a VA contracting professional conducts market research and finds that two or more veteran owned small businesses can perform the work at a fair and reasonable price, then the resulting solicitation is legally required to be set-aside for veteran owned or service-disabled veteran- owned small businesses.

How Do Set Aside Programs Impact

• Government Market Research

When contracting and program professionals conduct market research, they are either trying to learn about the overall market (strategic market research) or identify companies to determine their fitness for a potential contract award (tactical market research). In the course of strategic market research, as it relates to small businesses, the contracting professional usually needs to understand how many small or socioeconomic concerns exist within a particular market.

This is because they know the Rule of 2 will impact their eventual field of competition, and they will likely have to recommend an acquisition strategy in a form like the DD2579 or their acquisition plan. This can sometimes be at odds with the desires of a program office, who may hold a bias against small and socioeconomically disadvantaged businesses in favor of large businesses with impressive office space and long standing performance records in the government marketplace.

However, per the federal acquisition regulation at FAR, if there is a reasonable expectation that two or more responsible small businesses are capable of doing the work at a fair and reasonable price, it should be set aside for the small business community (with priority given to any of the four socioeconomic programs cited above). This particular guidance can create tension between program officials, small business representatives, and you, the

contracting professional.

For any number of reasons, agency officials may have a strong opinion about whether or not to defer to the rule of two. You will not be able to control these matters, but what you can control is how you document your market research so that at the very least, you won’t have to exert much energy defending your position. In the next section, we’ll talk about how to make a rule of two determination and document the proof in an effective manner.

How to Make a Rule of Two Decision Easy & Efficiently

Some would say the easiest way to make a rule of two determination is to issue a request for information, have businesses identify their size status and answer a few questions about capabilities, then analyze the results to determine whether two or more small businesses exist.

That doesn’t sound so easy to me (I’ve done it) and it certainly isn’t easy for the companies responding to the RFI. Even a simple response like this creates a buzz in a small business, taking people away from billable work and creating expectations and hopes for future opportunities. Nothing against RFIs, which are a useful mechanism for government market research, but there’s an even easier way to accomplish this same outcome and it doesn’t require a two week waiting period and time and effort from companies wishing to respond.