The rule of two requires that all contracts above the micro-purchase threshold be set-aside for small businesses, provided there is a reasonable expectation that two or more responsible small business concerns would submit offers at fair market prices and those offers are competitive in terms of quality and delivery. Under the recent overhaul of the Federal Acquisition Regulation (FAR), the rule of two was retained for contracts above the simplified acquisition threshold (SAT), in addition to the statutory requirement that the rule apply to contracts between the micro-purchase and simplified acquisition thresholds. Notably, the revised FAR part 19 removes the requirement for the government to consider socioeconomic set-asides before small-business set-asides. Furthermore, the revised FAR 19.104, which was previously located at FAR 19.502-2, clarifies that, while small business set-asides are required at the master contract level under the rule of two, set-asides are encouraged but not mandatory at the order level for multiple-award contracts. It is also within the contracting officer’s (CO) discretion to follow the rule of two for orders issued under the Federal Supply Schedule (FSS).
The Government Accountability Office (GAO) has recognized in its bid protest decisions that following the rule of two for orders issued under the FSS program is entirely at the procuring agency’s discretion, and thus a non-protestable issue due to the inapplicability of FAR part 19 procedures to FSS procurements. In B-42276.2, a decision dated September 15, 2025, the GAO issued a dismissal for failure to state a valid basis of protest when the protester challenged the agency’s decision not to follow the rule of two for an order issued under the FSS program. The Department of State issued the underlying request for quotations (RFQ) to support its refugee processing center office operations to holders of the General Services Administration’s (GSA) Multiple Award Schedule (MAS) IT schedule contract. After conducting market research and obtaining approvals from the Small Business Administration (SBA) and the State Department’s Office of Small and Disadvantaged Business Utilization (OSDBU), the agency decided to conduct the procurement on an unrestricted basis. Later, following the issuance of Executive Orders 14163 and 14169, the agency decided to amend the solicitation, reduce overall staffing by 55 percent, and designate one of the nine functional areas as inactive. Despite the reduced level of effort, the CO decided to maintain the RFQ’s unrestricted status, noting that the program still needed a business capable of scaling to a $30 million annual contract.
Following the submission of revised quotations from GSA MAS IT vendors, the agency made an award decision, which was timely protested. Among other arguments, the protester contended that it was unreasonable for the agency not to conduct additional market research and perform a new rule of two analysis even after the scope of the requirements had been significantly reduced. In support of its argument, the protester cited the Small Business Act, 15 U.S.C § 644(a), as implemented by FAR 19.502, which is relocated to FAR 19.104 under the FAR overhaul. In this regard, while the protester did not argue that the State Department was required to set-aside the procurement, it nevertheless maintained that the agency was required to follow FAR part 19 procedures because the incumbent effort was itself a small business set-aside and the State Department had chosen to perform a set-aside analysis as part of its initial procurement strategy. Stated another way, the protester argued that by engaging in the process of making a set-aside determination, including obtaining SBA and OSDBU approvals, the agency had waived its discretion to follow FAR part 19 procedures and was now subject to the rule of two and other small business regulations.
Meanwhile, the agency requested dismissal of the protester’s allegation, noting that FAR part 19 procedures and provisions did not apply to FSS procurements. The GAO agreed with the agency, noting that the small-business rules under FAR part 19, including the rule of two, are not mandatory but are entirely at the discretion of the procuring agency for orders issued under the FSS program. The GAO pointed to its previous decisions holding that agencies are not required to follow FAR part 19 procedures when issuing orders under the FSS program. Additionally, FAR subpart 8.4, under which the procurement was conducted, specifically provides that FAR part 19 is not applicable to orders placed under the FSS program. Here, since the procurement was conducted as an FSS acquisition, FAR part 19 procedures did not apply. Therefore, the agency was not required to set-aside the requirement or even conduct a rule of two analysis for a set-aside in the first place. Similarly, the agency’s amendment to the solicitation in response to the reduced level of effort was also governed by the procedures of the FSS program, which did not require the agency to conduct a rule of two analysis before issuing the solicitation amendment. Consequently, the protester had failed to state an adequate legal ground for protest, resulting in the dismissal of the protest.
As implemented by FAR part 19, the rule of two requires that contracts over the micro-purchase threshold be set-aside for small businesses if two or more small businesses are reasonably expected to submit competitive offers. The revised FAR part 19 retains the rule of two for contracts above the micro purchase threshold, but with the clarification that the rule does not apply to orders issued under multiple-award contracts and the FSS program. The overhauled FAR part 19 makes this clarification in the set-aside requirements by changing the term “acquisition” to “contract” at FAR 19.104-1(a), thereby excluding orders issued under multiple-award contracts and the FSS program from the application of the rule of two. As was the case in the decision described above, the GAO will dismiss any protests that challenge a procuring agency’s failure to follow the rule of two at the order level for a multiple-award contract or the FSS program. Ultimately, contractors should remember that, while the rule of two remains mandatory for contracts above the micro-purchase threshold, for orders issued under multiple-award contracts and the FSS program, its application is entirely at the procuring agency’s discretion and thus may not be protested.
This Federal Procurement Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.
