How the SBA’s Expansion of the Rule of Two Could Empower Subcontractors and Enhance Prime Contractors’ Capabilities

The Small Business Administration (SBA) is considering an expansion of the Rule of Two, a regulation under the Federal Acquisition Regulation (FAR) 19.502-2. Currently, this rule requires federal agencies to set aside contracts for small businesses if there is a reasonable expectation of receiving offers from at least two qualified small businesses at fair market prices. The proposed change would extend this requirement to orders placed under multiple-award contracts (MACs). While this primarily affects prime contractors, subcontractors stand to benefit greatly, and prime contractors can leverage this expansion to enhance their competitiveness and delivery capabilities.

Understanding the Rule of Two and Its Expansion

Under the current regulation, the Rule of Two ensures small businesses have exclusive opportunities to compete for federal contracts. If at least two small businesses are likely to submit competitive offers, the agency must set aside the contract for small businesses.

The SBA’s proposed expansion would require orders under multiple-award contracts (MACs) — large contracts with multiple vendors — to follow the same Rule of Two requirements. This shift could open significant opportunities for small businesses to secure orders that were previously beyond reach.

How This Benefits Subcontractors

For subcontractors, the proposed Rule of Two expansion creates ripple effects that enhance opportunities to participate in federal contracting. Here’s how:

1. Increased Demand for Subcontractors:
   As prime contractors seek to win more set-aside orders under the expanded Rule of Two, they will need to meet small business subcontracting requirements outlined in their contracts. This means greater reliance on qualified small business subcontractors to fulfill specific components of federal projects.

2. Pathway to Prime Contracting:
   Small business subcontractors can leverage their experience working under prime contractors to position themselves as prime vendors for set-aside orders. The expanded opportunities under MACs mean subcontractors could transition to primes with smaller, more manageable orders.

3. Strengthened Partnerships:
   Subcontractors will become valuable assets for large businesses looking to meet small business utilization goals and strengthen their proposals to win federal orders.

How Prime Contractors Can Leverage Subcontractors

While prime contractors might initially view the expanded Rule of Two as a challenge, it offers an opportunity to enhance their capabilities and competitiveness by partnering with small businesses:

1. Enhancing Bid Competitiveness:
   By forming strategic partnerships with small business subcontractors, prime contractors can demonstrate compliance with small business participation goals, a key factor for federal awards.

2. Expanding Delivery Capacity:
   Small business subcontractors often bring specialized expertise, agility, and niche capabilities that allow prime contractors to deliver projects more efficiently and cost-effectively.

3. Mitigating Risks:
   Prime contractors can mitigate risks by distributing portions of the work to subcontractors, particularly small businesses with proven performance in specific areas.

4. Meeting Small Business Goals:
   The federal government emphasizes small business participation in contracts. Prime contractors who exceed small business subcontracting goals are often viewed favorably in future evaluations and procurements.

Regulation and Policy Framework

The regulation in focus is FAR 19.502-2, which governs small business set-asides under federal contracting. The SBA’s proposed expansion would modify how this rule applies to orders under MACs, making it mandatory for agencies to consider small businesses when issuing task or delivery orders. This change aligns with the federal government’s broader goals of increasing small business participation in federal procurement.

Additionally, FAR 52.219-9 mandates that large businesses awarded contracts exceeding $750,000 must submit small business subcontracting plans. The expanded Rule of Two would create new incentives for prime contractors to actively engage small business subcontractors to remain competitive.

Impact Summary

The expansion of the Rule of Two will benefit both small businesses and prime contractors:

• For Subcontractors: New opportunities to secure work, build experience, and potentially transition to prime contractors.

• For Prime Contractors: Enhanced competitiveness through strategic subcontracting, improved delivery capacity, and alignment with federal small business participation goals.

This expanded framework fosters a more inclusive and dynamic federal contracting landscape, where small businesses play an integral role in achieving project success.

Conclusion

The SBA’s proposed expansion of the Rule of Two under FAR 19.502-2 has far-reaching implications. For small business subcontractors, it represents a pathway to growth and increased opportunities within federal procurement. For prime contractors, it is a chance to enhance their competitiveness and delivery capabilities by forming stronger partnerships with small businesses. Together, these changes can drive innovation, efficiency, and success in the federal contracting space.

Staying informed and proactive in building small business relationships will be key for all stakeholders navigating this evolving landscape.