SBA and GSA, OFPP not seeing eye-to-eye on ‘rule of two’ application

A major dispute is brewing in the small business community. Just four months after the Supreme Court’s June 16 unanimous decision on the Kingdomware case, the Small Business Administration is taking a stand on the “rule of two” that is stressing out industry and agencies alike.

As a quick reminder, the nation’s highest court ruled in the Kingdomware case that the Veterans Affairs Department must continue to apply the “rule of two” for veteran-owned small businesses even if the agency surpassed its annual prime contracting goal. The “rule of two” states if an agency can find two or more qualified small businesses during market research of a contract under the Simplified Acquisition Threshold — between $3,000 and $150,000 — it must set aside the solicitation.

Now the Small Business Administration is expanding that Supreme Court ruling to apply to all task and delivery orders under SAT if the request for proposals comes under the General Services Administration’s schedules.

SBA issued a memo on Oct. 20 that was not widely known about until recently, telling its Procurement Center Representatives (PCRs) that the Kingdomware decision should apply to like statutes because task or delivery orders under multiple-award contracts are considered contracts.

Advertisement

“We’ve always argued that the language around 15J [of the Small Business Act] where contracts are defined as order and should follow the same procedures as contract in respect to rule of two and set-asides,” said John Shoraka, SBA’s associate administrator for Government Contracting and Business Development, in an interview with Federal News Radio. “When the Kingdomware decision came out, it is true they were looking at only VA, but the language is similar to 15J and the rule of two. If the Supreme Court unanimously decides that an order is a contract under the VA act then we believe we can say an order is contract under the Small Business Act, and anything under $150,000 should follow the rule of two. We’ve always argued that was our opinion, and the Supreme Court validated that argument and made it clear that we were right.”

VA began implementing the court’s ruling soon after the decision, applying it only to its own contracting efforts.

Unfortunately, SBA’s interpretation of the court’s decision isn’t held by everyone.

Industry experts, GSA and the Office of Federal Procurement Policy aren’t yet onboard with the SBA memo.

Christoph Mlinarchik, a government contracts expert and owner of Christoph LLC, a consulting firm, said SBA’s ruling doesn’t mesh with existing policy or statutes.

“When Congress lays down the law, it’s the end of the story, because statutes trump agency regulations and memos. Congress settled this question years ago. In the Small Business Jobs Act of 2010, Congress established that at the ordering level for multiple-award contracts, agencies have discretion to set aside orders and the ‘rule of two’ is not mandatory,” Mlinarchik said in an email to Federal News Radio. “Congress revised the statute for this specific reason at 15 U.S.C. §644(r). The Federal Acquisition Regulation (FAR) was also revised to implement the statute. The statute and FAR are unmistakably clear and agencies have followed this rule for years — small business set-asides are discretionary, not mandatory, for orders against multiple-award contracts like GSA schedules.”

Shoraka said the SBA briefed GSA, OFPP and the federal Office of Small and Disadvantaged Utilization (OSDBU) before issuing the memo, but GSA and OFPP didn’t sign on to the interpretation right away.

“There is a difference of opinion. GSA argues this was specifically around the Veterans Benefits, Health Care, and Information Technology Act of 2006 and that there needs to be more discussion on how this is implemented,” he said. “We felt pretty strongly this ruling strengthened our argument.”

He added it wasn’t that OFPP and GSA totally disagreed, but weren’t ready to sign off on the interpretation either.

Other industry experts say SBA is stretching its interpretation and causing confusion in the marketplace.

Mlinarchik said he would recommend agencies continue to follow the existing laws, including the discretionary nature of set-aside orders.

“Agency contracting officers were granted this discretion for a reason: Their mandate is to perform market research and exercise sound business judgment on behalf of taxpayers who foot the bill and American citizens who derive the benefits,” he said.

Shoraka said if GSA schedules were held to the “rule of two” requirement, it would add another $756 million to the small business totals, raising it to about $91 billion in fiscal 2015 — a 0.21 percent increase.

The debate around the “rule of two” isn’t new. OFPP and SBA tried to address the challenge in 2012, sending a memo to agencies telling them to take specific steps to increase contracting with small businesses.

But SBA’s interpretation is a major policy shift. It’s reversing long-held notions that task and delivery orders were not “contracts” under the FAR and legal definitions. Shoraka said with the Supreme Court’s unanimous decision and support from Capitol Hill, SBA believed it was on solid ground.

Federal contracting experts predicted the Kingdomware decision would send ripples through the market similar to the 2008 Delex decision where the Government Accountability Office found that the “rule of two” must apply to task and delivery orders under all multiple award contracts.

How big of an initial ripple now depends on whether GSA and OFPP agree with SBA and move to change the FAR, or push back against the interpretation. That would end up leaving a final judgment in the hands of GAO or the court system.

Return to the Reporter’s Notebook