The federal government’s commitment to supporting small businesses through procurement remains strong, but the shape and scale of that support may soon look very different. In accordance with recent executive orders, sweeping changes to acquisition policies are already underway and the future of key non-statutory provisions favoring small businesses is uncertain. While there has been no clear indication that the Federal Acquisition Regulation (FAR) Council intends to eliminate one of the most important of those provisions, known as “the Rule of Two,” its non‑statutory status means such a move is within the realm of possibility and is likely the reason that, as noted below, legislation codifying the Rule of Two was introduced earlier this year. This uncertainty underscores how dynamic the government contracting landscape has become and raises important questions about how reforms could impact small businesses that rely on federal contracts.
Rule of Two Background
The “Rule of Two,” found in FAR 19.502-2, Total Small Business Set-Asides, generally requires that agencies reserve acquisitions over the Simplified Acquisition Threshold, which is typically $250,000, for small businesses when there is a reasonable expectation that at least two responsible small businesses will submit offers that are competitive with respect to price, quality, and delivery. With limited exceptions applicable only to certain Department of Veterans Affairs procurements, the Rule of Two is not a statutory mandate. Instead, it originated in 1964 as a Department of the Navy policy. Other agencies followed suit, and in 1984, the FAR Council expanded the Rule of Two government-wide. Today, it serves as one of the cornerstones of the government’s efforts to promote small business prime contracting. In 2023, set-aside awards made up “65% of contracting dollars awarded to small businesses, the highest percentage since data became available in 2010.” Those awards “pushed the government’s spending with small businesses prime contracts to $178 billion, or 28.4%” in that same year. Before the Rule of Two expansion in 1984, small businesses received only about 21% of federal procurement dollars.
Executive Order “Restoring Common Sense to Federal Procurement”
The potential elimination of the Rule of Two is due to the April 15 Executive Order 14275, in which President Trump directed his administration to simplify and streamline the FAR. The order states that the FAR “should contain only provisions required by statute or essential to sound procurement, and any FAR provisions that do not advance these objectives should be removed.”
Consistent with that directive, the administration is considering a regulatory sunset clause that would cause non-statutory FAR provisions to expire after four years unless renewed.
Because the order requires revisions to ensure the FAR includes only provisions mandated by statute or necessary “to support simplicity and usability, strengthen the efficacy of the procurement system, or protect economic or national security interests,” there is a real possibility that the Rule of Two could be eliminated.
Recently Withdrawn FAR Rules
In line with the administration’s stated goal of simplifying federal regulations, two pending rules relevant to small business set-asides that were issued in the final days of the Biden administration have recently been withdrawn. Executive Order 14148, Initial Recessions of Harmful Executive Orders and Actions, repealed Executive Order 14091, Further Advancing Racial Equity and Support for Underserved Communities Through the Federal Government, prompting the FAR Council to withdraw the proposed rules and shift focus toward broadly “reducing the regulatory burden for all small businesses with the goal of increasing small business participation in Federal procurement.”
Withdrawn FAR Proposed Rule, “Small Business Participation on Certain Multiple-Award Contracts”
On June 12, the FAR Council withdrew a proposed rule published on January 15 that sought to “expand the use of small business set‑asides for orders under multiple‑award contracts” by applying the Rule of Two to such orders. Under the proposal, contracting officers would have been required to set aside an order for small businesses whenever they determined there was a reasonable expectation that at least two responsible small‑business contract holders could submit competitive offers, evaluated on factors such as fair market price, quality, capability, ability to meet delivery or performance schedules, and past performance. The rule also carved out exceptions for General Services Administration (GSA) schedules and permitted agencies to establish their own procedures for contracting officers to apply agency‑specific exceptions.
This rule was introduced to carry out the directives of a Biden-era Office of Federal Procurement Policy (OFPP) memorandum and corresponds closely with the Small Business Administration’s (SBA) October 2024 proposed rule, which contains similar provisions and remains active for now, though it too may be withdrawn in the coming days.
Withdrawn FAR Proposed Rule, “Protests of Orders Under Certain Multiple-Award Contracts”
On June 12, the FAR Council also withdrew another January 15 proposed rule that would have added language to FAR 16.505 clarifying that, under 15 U.S.C. § 644(r), a contracting officer’s decision to set aside, or not set aside, an order for small business concerns is an exercise of agency discretion and, therefore, not a valid basis for a protest. The language also noted, however, that this limitation would not bar protests on other grounds recognized under FAR 16.505(a)(10)(i). According to the drafters, the rule was “expected to deter contractors from submitting protests of decisions to set aside or not set aside orders placed against multiple‑award contracts, thereby saving contractors and the Government time and resources.”
The proposed rule, in combination with the other withdrawn rule, appeared to be in response to a relatively recent Court of Federal Claims case, Tolliver Group, Inc. v. United States, 151 Fed. Cl. 70 (2020), in which the court held that agencies must apply the Rule of Two before deciding to use a multiple‑award contract. If the Rule of Two is met, the court found, the agency is required to set aside the contract for small businesses. The court rejected the argument that 15 U.S.C. § 644(r) gives agencies discretion to first select a multiple‑award contract vehicle and only later decide whether to set aside specific orders for small businesses.
By contrast, the Department of Defense, GSA, and NASA have aligned themselves with the Government Accountability Office’s (GAO) conclusion in ITility, LLC, B‑419167 (Dec. 23, 2020), that the statute’s grant of discretion does not mandate application of the Rule of Two before issuing an order, unless the multiple‑award contract or task order solicitation itself expressly contemplated its use. GAO further explained that this statutory discretion shields an agency’s decision on whether to set aside an order from being challenged in a bid protest: “Where Congress has enunciated a clear policy granting contracting officials discretion, and the Executive Branch’s regulatory implementation similarly emphasizes the statutory grant of discretion, our Office cannot substitute the parties’ or our own judgments on the matter.”
Despite its stated goal of reducing protests and streamlining procurement, the rule has since been rescinded.
FAR Current Status
Neither the FAR Council nor the SBA has provided a definitive answer on whether the Rule of Two might be eliminated as part of the ongoing procurement regulation overhaul. While a few proposed rules have been withdrawn in ways that arguably narrow the Rule of Two’s reach, those changes only affect its application to orders under multiple-award contracts that were not initially set aside for small businesses. Currently, the only statutory codification of the Rule of Two applies specifically to the Department of Veterans Affairs and covers Veteran-Owned and Service-Disabled Veteran-Owned Small Businesses.
If the FAR Council were to remove the Rule of Two —a move almost certain to face legal challenges—it could attempt to do so in a way that avoids the full procedural requirements of the Administrative Procedure Act (APA). In line with the executive order, revisions to FAR Parts 1, 6, 10, 11, 18, 29, 31, 34, 35, 36, 39, 43, and 52 have been implemented through the deviation process outlined in FAR Subpart 1.4, rather than through the traditional notice‑and‑comment rulemaking process. Those deviations, along with similar measures adopted by individual agencies, are publicly available here. Notably, the changes in FAR Part 10 have removed all references to small businesses, signaling a potential shift in how acquisition planning treats small‑business considerations.
At the same time, Congress is paying attention. In April, Rep. Nydia Velázquez (D‑NY) introduced legislation that would codify the Rule of Two and expand its reach to cover task and delivery orders, closing a long‑debated gap in its application. Small business advocacy groups are almost certainly driving this effort, and similar coalitions may be lobbying the White House and other policymakers to preserve or even strengthen the Rule of Two before any FAR‑level changes are made.
Of course, even though, with limited exception, the Rule of Two is not statutory, the FAR Council could preserve this key small business provision in accordance with the executive order by finding that it “strengthen[s] the efficacy of the procurement system, or protect[s] economic or national security interests.” By requiring that contracts be set aside for small businesses when at least two can do the job, the Rule of Two helps to maintain a broad and competitive industrial base and arguably strengthens supply chains, making it harder for a single failure, or even a foreign adversary, to bring critical government operations to a halt. Many also argue that small businesses serve as the innovation engine of the U.S. economy, delivering cutting‑edge technologies, specialized services, and unique solutions that larger firms may overlook. The Rule of Two, therefore, could be found to bolster the U.S. economy by channeling federal dollars into local communities, fueling job creation, entrepreneurship, and long‑term growth across a wide range of industries.
