chevron-down Created with Sketch Beta.
August 23, 2023 Feature

Small Business Set-Asides: When Does “May” Mean “Shall?”—The Rule of Two and Others

Ken Dodds

Federal small business procurement policies promote competition, provide opportunity for entrepreneurs, and bolster the industrial base for defense and national security purposes. Indefinite-delivery indefinite-quantity (IDIQ) contracts provide the government the ability to acquire an indefinite quantity of supplies or services (within limits) over a fixed period by placing task orders for services or delivery orders for supplies. The Federal Acquisition Streamlining Act of 1994 codified task or delivery order contracts with a preference for multiple awards and a requirement to provide awardees a “fair opportunity” to compete for orders. But in making small business awards, the government is generally guided by the “Rule of Two”—a principle that compels the government to limit competition to small businesses if there is a reasonable expectation of two or more competitive offers from small business concerns (SBCs) capable of performing. When considering the interaction between the small business Rule of Two and orders under multiple award contracts (MACs), distinctions must be made between the application of the Rule of Two to orders below the simplified acquisition threshold (currently $250,000) and orders above this threshold, as well as orders issued under the GSA Multiple Award Schedule (Schedule) or other MACs. Further, in 2010 Congress attempted to address the priority given to small business set-aside orders, so it is important to consider information that triggered congressional action in determining when set-asides “may” or “shall” be used. Congress’s use of the term “may” with respect to HUBZone set-asides in the same 2010 legislation addressing order set-asides strongly indicates that Congress intended for agencies to have the discretion to set aside orders, not that the Rule of Two would be mandatory across all purchases. Finally, the regulatory language and history indicate SBA and the Federal Acquisition Regulation (FAR) Council did not believe the Rule of Two was mandatory with respect to orders. This article explores the mandatory nature of small business set-aside orders, adding clarity on when orders “may” or “shall” be set aside.

The Rule of Two

In 1978, Congress created the statutory Rule of Two, requiring that small purchases be reserved exclusively for SBCs if the contracting officer concludes that two or more SBCs will be able to provide competitive offers. Currently, the statutory Rule of Two provides that each “contract” valued below the simplified acquisition threshold “shall” be reserved for SBCs unless the contracting officer is unable to obtain competitive offers from two or more capable SBCs. But the Rule of Two as applied to contracts valued above the simplified acquisition threshold is regulatory, not statutory, essentially providing that the contracting officer shall set aside any “acquisition” if there is a reasonable expectation that offers will be obtained from at least two responsible SBCs and award can be made at fair market price. How the Rule of Two applied to orders was a subject of litigation and debate leading up to 2010, when Congress attempted to address the issue through the Small Business Jobs Act of 2010, which added 15 U.S.C. § 644(r), and continues to be subject to litigation and debate. As noted, the general Rule of Two with respect to small businesses is regulatory above the simplified acquisition threshold not to be confused with the statutory requirement that the Department of Veterans Affairs “shall” award contracts to concerns owned by veterans or service-disabled veterans if the Rule of Two is met.

GSA Schedule Orders Prior to the Enactment of 15 U.S.C. § 644(r) in 2010

In 1984 the Competition in Contracting Act provided explicit statutory authority for the GSA Multiple Award Schedule program. Initially, the FAR instructed agencies to give preference to small businesses if two or more items at the same delivered price could meet the agency’s needs. But in 1995, the FAR Council exempted agencies from considering small business set-asides when ordering under the Schedule. In 2003, the FAR instructed agencies to consider including small businesses when conducting evaluations and before placing an order. And in 2004 the FAR Council created a specific section addressing small businesses, providing that although the mandatory preference programs of FAR Part 19, Small Business Programs, did not apply, agencies could still receive small business credit for awards and should consider small businesses for competition, giving preference for small business awards that meet the agency’s needs, provided the products can be delivered at the same price. Consequently, the Government Accountability Office (GAO) denied protests arguing that the Rule of Two applied when agencies used the GSA Schedule. However, GAO denied a protest challenging a Schedule competition that required firms to certify their size in connection with an order competition that was limited to small businesses.16 Further, the Small Business Administration (SBA) Office of Hearings and Appeals (OHA) found that a company had to be small at the time of offer for a Schedule order that was set aside for small business.

Non-Schedule MACs Prior to the Enactment of 15 U.S.C. § 644(r) in 2010

As discussed previously, the Federal Acquisition Streamlining Act of 1994 codified task or delivery order contracts with a preference for multiple awards and a requirement to provide awardees a “fair opportunity” to compete for orders. GAO sustained protests that the Rule of Two applied when an agency tried to order under non-Schedule MACs but denied an agency’s request to modify a recommendation and allow the agency to set aside an order under a MAC that the protester did not have.

2007 Advisory Panel and 2010 Task Force Recommendations Prior to the Enactment of 15 U.S.C. § 644(r)

In a 2007 Report to Congress, the Acquisition Advisory Panel (Panel) reported that “[t]he set aside requirements of FAR Part 19 generally apply before task or delivery order contracts are solicited and awarded, not when an order competition is conducted or the order is placed.” According to the Panel, setting orders aside for small businesses could violate the fair opportunity requirements applicable to MACs. Further, section 803 of the National Defense Authorization Act of 2002 required the Department of Defense to provide notice to all MAC contractors and consider all responses. Explicit authority to set aside orders did not exist, so the Panel recommended “that contracting agencies be given explicit discretion to limit competition for orders to SBCs.”

A 2010 Presidential Interagency Task Force reported, “[u]nder current policies, set-aside considerations are made prior to the award of a contract.” The Task Force further stated, “there has been a general reluctance among acquisition policy officials to advocate for regulatory changes that might require the mandatory application of set-asides to orders in the same manner that law and regulation currently require for contracts.” The Task Force recommended that the Office of Federal Procurement Policy lead an effort to determine when orders can or should be set aside for small businesses and pursue regulatory or statutory changes.

The Small Business Jobs Act of 2010: Updating 15 U.S.C. § 644(r) by Amending Section 15(r) of the Small Business Act

In 2010, Congress amended section 15 of the Small Business Act via section 1331 of the Small Business Jobs Act of 2010 (codified at 15 U.S.C. § 644(r)), using language recommended by the Panel: “Federal agencies may, at their discretion … set aside orders placed against multiple award contracts for small business concerns.” In the committee report for the Senate Bill underlying section 1331, the committee explained the “general set-aside requirements have been interpreted not to apply to multiple-award contracts.”

In a 2011 interim rule implementing these authorities, the FAR Council stated that “the FAR is silent on how to apply set-asides at the task-or-delivery order level.”

In its proposed rule to implement section 1331, the SBA—not the FAR Council—stated, “[t]he proposed rule preserves the discretion that section 1331 vests in agencies to decide whether or not to use any of the enumerated set-aside and reserve tools.” SBA stated, “[a]gencies have the discretion to forego [sic] using the section 1331 tools even if the rule of two could be met; they simply need to explain how their planned action is consistent with the best interests of the agency.” SBA acknowledged a 2008 GAO decision, which held the Rule of Two applied to orders, but nevertheless stated the only time that an agency must set aside an order for small business is if the Rule of Two is met and the agency inserted a clause in the contract stating that it would set the award aside.

SBA reiterated in the final rule that it was preserving the discretion section 1331 placed in agencies, and that an agency that preserves the right to set aside orders under a multiple-award contract is not required to do so even if the Rule of Two is met. Thus, the SBA rules provide the contracting officer “must” set aside an order under a MAC if the requirements for a set-aside are met, but the contracting officer “in his or her discretion may” set aside an order for small business.

In response to comments that the Rule of Two should be mandatory with respect to orders, the FAR Council stated in its 2020 final rule that “Section 1331 of the Jobs Act (15 U.S.C. 644(r)) addresses order set-asides and makes the application of the ‘rule of two’ discretionary for orders placed under multiple-award contracts only.” According to the FAR Council, “Congress was clear in section 1331 of the Jobs Act that under a multiple-award contract, agencies may, at their discretion … conduct a set-aside of orders under a multiple-award contract.” Consequently, the FAR provision pertaining to orders under multiple-award contracts provides “contracting officers may, at their discretion, set aside orders placed under multiple-award contracts” for SBCs.

HUBZone Set-Asides

Aside from SBC set-asides, the history of the HUBZone program and HUBZone set-asides is instructive. In 1997 Congress created the Historically Underutilized Business Zone (HUBZone) program to create jobs and promote investment in distressed communities. Initially, the law provided that “notwithstanding any provision of law,” a contract “shall” be awarded on the basis of competition among HUBZone SBCs if the contracting officer had a reasonable expectation of receiving at least two offers from HUBZone SBCs and award could be made at fair market prices. SBA did not interpret this law as providing HUBZone set-asides with priority over other set-asides, primarily because of its concern of the impact to the 8(a) Business Development program. In 2006, the U.S. Court of Appeals for the 9th Circuit found that “[t]he statutory language of the Section 8(a) program is materially different from that of the HUBZone program.” Agencies may, in their “discretion,” offer requirements to SBA for award through the 8(a) program, whereas in contrast the HUBZone program “commands in unequivocal terms” that a HUBZone set-aside occur if the criteria are met. In 2004 and 2008, GAO also interpreted the HUBZone statutory language as requiring a HUBZone set-aside if the HUBZone Rule of Two was met, providing priority over small business and other socioeconomic set-aside programs. In a 2009 bid protest, Mission Critical, GAO again held that the HUBZone program had a mandatory priority over other small business socioeconomic programs and sustained a protest where the agency did not conduct a HUBZone Rule of Two analysis prior to making a sole source award under the 8(a) business development program. COFC agreed with GAO’s Mission Critical decision, finding that “shall” meant that the HUBZone set-aside provision was mandatory when the HUBZone Rule of Two was met. And in a 2010 bid protest decision, DGR Associates, GAO sustained a protest where the agency set the solicitation aside for 8(a) competition without first conducting a HUBZone Rule of Two analysis. GAO recognized that the executive branch took a contrary position and signaled that it would decide future protests in an expedited manner absent a contrary decision from the Federal Circuit.The Court of Federal Claims agreed with GAO’s DGR Associates decision, finding that the word “shall” as used in the statute is generally mandatory and the word “may” implied discretion.

In the same act that provided agencies “may, at their discretion” set aside orders for SBCs, Congress changed the statutory HUBZone set-aside language from “shall” to “may.” In implementing a final rule establishing parity among the socioeconomic programs, SBA explained that “[t]he new statutory language explains that a contracting opportunity ‘may’ be awarded as a HUBZone set-aside if the HUBZone ‘rule of two’ is met. Consequently, the HUBZone provisions do not unambiguously direct contracting officers to reserve every available contract opportunity for HUBZone small businesses whenever the rule of two is met.”

GAO and COFC After the Small Business Jobs Act of 2010

GAO recognizes that regardless of how the Rule of Two could have been interpreted prior to 2010, 15 U.S.C. § 644(r) gave agencies the express authority to circumvent the Rule of Two as it applies to contracts by ordering under a MAC. After passage of 15 U.S.C. § 644(r), GAO has also denied protests arguing the Rule of Two applied to Schedule orders.

In 2011 in Mori Associates v. United States, the Court of Federal Claims (COFC) held the Rule of Two applied at the task or delivery order level and implied that the Rule of Two does not apply prior to issuing a solicitation for a MAC. The solicitation in Mori was issued in 2007 and the court focused its Rule of Two analysis on FAR 19.502-2. The court in a footnote acknowledged the enactment of 15 U.S.C. § 644(r), stating, “[p]resumably, this new discretionary authority either supplements or may be used to carry out the mandatory responsibility to set aside acquisitions under the Rule of Two” without discussing the Advisory Panel or Task Force reports leading up to 15 U.S.C. § 644(r) or contemplating why Congress felt the need to act if the Rule of Two was already mandatory. Even more recently in Tolliver Group, Inc. v. United States, the plaintiff challenged the procuring agency’s attempt to cancel two solicitations for orders that were set aside for Service-Disabled Veteran-Owned SBCs under the Schedule, and instead issue the solicitation under a MAC that the plaintiff did not possess. The orders were solicited under the Schedule because the prior agency MAC had expired. After protests, the agency decided to cancel the orders and award under an agency MAC that had been awarded in the interim to large business concerns under full and open competition. COFC found that the Rule of Two applied before an agency decides to use an existing MAC, noting that FAR 8.404(a) provides that the mandatory provisions of FAR part 19, Small Business Programs, do not apply to the Schedule, but that same language does not appear in FAR subpart 16.5, Indefinite-Delivery Contracts. The court recognized that the agency could have issued the solicitations under the Schedule without applying the Rule of Two. The court quoted from GAO’s 2002 LBM decision, which was decided prior to passage of 15 U.S.C. § 644(r), without explaining why, if the Rule of Two already applied, Congress felt the need to address the issue through statute. A key factor in Tolliver was that the plaintiff was challenging the agency’s decision to cancel solicitations after the plaintiff had expended time and money responding to the solicitations, which is how the court found jurisdiction despite the statutory ban on task order protests. Fairness was also a factor in LBM and its aftermath when GAO denied the Army’s request for a new recommendation allowing the Army to set aside the work for small business as an order under an existing MAC that the protester did not have. Although COFC decisions are not binding on other COFC judges, COFC judges seem to be following Tolliver and reviewing agency set-aside decisions under a rational basis standard.

The recent mLINQS case illustrates what many policymakers hoped to avoid. The Air Force awarded a small business a sole source contract for commercial software with a one-year base term and four one-year options. Over the next three years, the Air Force found the software “was not fulfilling the Air Force’s needs” and the Air Force informed the contractor it would not exercise the next option. The Air Force conducted market research and found only one capable small business (not including the incumbent, who was found to be “tentatively capable”) and ultimately decided to issue a solicitation on an unrestricted basis under an existing MAC. The protester challenged the Air Force’s determination that only one small business was capable and the timing of when the small business market research occurred. Ultimately, the court concluded the Air Force’s Rule of Two analysis was rational and sufficiently timely.


Congress was clearly aware of the difference between “may” and “shall” when it amended the Small Business Act in 2010 to make HUBZone set-asides discretionary, at the same time it created the statutory authority for order set-asides. SBA and the FAR Council would have used words like “shall” and “must” instead of words like “may” or “discretion” if they had intended for the Rule of Two to be mandatory with respect to agency ordering decisions. There would not be separate sections of the FAR and SBA rules that apply to set-aside contracts and sections that apply to set-aside orders if the two were treated identically. In finding the Rule of Two mandatory for MAC orders, COFC has not sufficiently discussed or considered the Advisory Panel and Task Force findings that led to the passage in the first place of 15 U.S.C. § 644(r), the HUBZone changes, or the regulatory history implementing 15 U.S.C. § 644(r). If COFC is correct that the Rule of Two already applied to MAC orders, then the only logical explanation for 15 U.S.C. § 644(r) is that it authorizes agencies to set aside orders for small business even if the agency does not have a reasonable expectation of receiving fair market price offers from capable small businesses, which is an inefficient use of government and industry resources.

How will this confusion be resolved? First, the Federal Circuit could issue a decision agreeing with Tolliver, finding the Rule of Two is mandatory with respect to non-Schedule orders, or rejecting Tolliver, finding that Congress intended for agencies to have the discretion to decide how to procure goods and services without court review of MAC ordering decisions with respect to small businesses. However, as long as COFC judges continue to follow Tolliver, the Department of Justice is likely disinclined to appeal the decision to avoid the possibility of Tolliver becoming binding precedent. Thus, it would probably take a COFC judge declining to follow Tolliver for the Federal Circuit to weigh in. Second, because the Rule of Two above the simplified acquisition threshold is regulatory, not statutory, the FAR Council could amend FAR subpart 16.5 to clarify whether the Rule of Two is mandatory with respect to non-Schedule orders. In a regulatory agenda in the Fall of 2022, SBA indicated its intent to address Tolliver through rulemaking, but SBA has yet to issue a proposed rule. Subsequently, in the spring of 2023 the FAR Council published its intent to issue a proposed rule (estimated to be in December) to address the use of set-asides in the placement of orders under MACs. Third, Congress could further clarify whether the Rule of Two is mandatory with respect to orders in various ways. If Congress wants to be bold and promote small business to the fullest extent, it would delete 15 U.S.C. § 644(r)(2) and amend 15 U.S.C. § 644(j) to include “orders” (including Schedule orders), blanket purchase agreements, basic ordering agreements, and any other procurement vehicle, while also removing the simplified acquisition threshold limit to the statutory Rule of Two. More conservatively, Congress could make the Rule of Two mandatory for non-Schedule orders by removing the word “may” from 15 U.S.C. § 644(r) and replacing it with “shall,” while also including Rule of Two language in 15 U.S.C. § 644(r) while simultaneously exempting orders under the Schedule program (41 U.S.C. § 152(3)). Until one of these occurs, the threat of COFC litigation (especially as guided by the Tolliver decision) probably makes the Rule of Two mandatory with respect to non-Schedule orders for the time being. This is a good thing for small business, but it takes a tortured statutory and regulatory path to get there.

    The material in all ABA publications is copyrighted and may be reprinted by permission only. Request reprint permission here.

    Ken Dodds

    Live Oak Bank

    Ken Dodds is an industry expert on the government contracting lending team with Live Oak Bank, which serves small business owners in all 50 states. He has more than 20 years of experience in government contract policy, regulation, and industry insight, having served at the U.S. Small Business Administration as a Senior Executive in the office responsible for small business government contracting policy and a senior attorney in the Office of General Counsel.