On January 25, 2024, the Office of Management and Budget (OMB) issued a memo to Chief Acquisition Officers and Senior Procurement Executives that encourages procuring agencies to apply the small business rule of two to orders under multiple-award contracts (MACs). The rule of two provides that if the contracting officer reasonably believes that two or more small businesses can perform the work at a fair price, competition shall be limited to small business. The memo states that, if the procuring agency does not set aside an order, it should document the market research and mission considerations and provide that information to that agency’s small business specialist (SBS) and procurement center representative (PCR). The Federal Supply Schedule is exempt.

The issue of whether the small business rule of two “shall” apply to orders goes back to the codification of the MAC concept in the Federal Acquisition Streamlining Act of 1994. Initially, the consensus was that the rule of two applied at the contract level, considering the fair opportunity requirements that apply to MACs. Over the decades, there have been size protests, bid protests, reports to Congress, proposed and final regulations, as well as proposed and actual legislation, trying to settle once and for all whether the rule of two must be followed prior to placing an order or choosing a contract vehicle. The OMB memo, which is not a regulation and did not go through the traditional notice and comment procedures required by the Administrative Procedures Act, raises multiple operational and policy questions.

Is there an actual need for the policy? In fiscal year 2022, the Federal government awarded small businesses a record $162 billion, or 26.5%, of all contract dollars. [1] The Federal government has met or exceeded the statutory 23 percent small business goal for the last decade. Small businesses are doing even better under best-in-class MACs, receiving approximately 38% of the total dollars awarded. [2] Small businesses received 40% of the dollars awarded under the professional services OASIS MAC [3] and over 31% of the total dollars awarded on the information technology services CIO-SP3 MAC. [4]

Is this a cardinal change to the contract, such that large and medium-sized businesses should be entitled to adjust pricing to cover lost opportunity? These businesses competed for and priced these contracts based on an historic, expected level of competition and opportunity that will no longer exist.  This is especially significant for medium sized businesses that rely on MACs for procurement opportunities.

Will contract costs increase as a result of less competition? The scope of current MACs has essentially been expanded for small businesses as they no longer need to compete with large and medium-sized businesses for certain orders. Does the Federal government need to renegotiate lower contract prices from small businesses to account for this new, expanded set-aside within an existing MAC?

If small businesses are on a full and open MAC, presumably they can perform all orders under the scope of that contract. Under these circumstances, when will MAC orders not be set aside? Can an agency using a full and open MAC that includes small businesses ever successfully make a determination not to set aside an order? Simply put, the award of prime contracts to multiple small businesses under a full and open MAC is a determination that the small businesses can do the work.    Similarly, to the extent agencies have awarded side-by-side set-aside and full and open MACs (such as OASIS), will agencies ever use the full and open contract?

To what extent will the memo result in increased litigation and procurement delays arising from challenges to the contracting officer’s business judgment on the capabilities or fair market prices of small businesses? Similarly, SBA’s rules require size recertification on set-aside orders under full and open contracts. Are procuring agencies ready for the additional delays associated with size protests and appeals, which may end up in Federal Court if a party does not like the SBA’s size protest and appeal decision?

Does the memo implement congressional intent? In 2010, Congress attempted to address the issue and implement a recommendation from a 2007 Report to Congress by stating that agencies “may” set aside orders under MACs for small business. The courts and GAO are split on the interpretation of the 2010 statutory language, and Congress has not acted to further address the question.

Putting aside potential Administrative Law issues, is it fair or good public policy to impose such a momentous policy through a memo without the notice and comment that applies to traditional rulemaking? The memo likely will impact the majority of Federal contractors that employ millions of individuals around the country and world. Moreover, the very questions raised here are of a type that the regulatory notice and comment process, in part, is designed to address.

Streamlining regulations, reporting, and procurement processes will do more to attract new small entrants to participate in the Federal market. It is the regulatory and compliance burden that is driving small businesses from the market or preventing them from entering in the first place. These barriers to entry are simply too high and too costly for many small businesses.

For the benefit of government and industry, the agency may wish to consider pausing its implementation of the memo and engaging with all stakeholders to address the government’s goals and the memo’s impact.

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