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The Intersection of Government Contracts and Small Businesses

July 15, 2017

When we typically think about government contracts, prominent companies such Lockheed Martin, Exxon Mobile, and AT&T usually come to mind as key players who take the lead on large, high-valued projects. However, because the government seeks to protect the best interests of all players involved, certain regulations are put into place to safeguard small businesses so that they are not easily outcompeted and excluded. My exposure to government contract litigation at the Department of Justice this summer opened my eyes to a specific standard, called the Rule of Two, which helps small businesses penetrate the government contract industry and stay relevant despite competition from large and powerful contractors [1]. Moreover, from a policy perspective, the Rule of Two enables small and disadvantaged entrepreneurs to take on government contract work and build up their own business capacity and expertise in order to eliminate the “Catch 22” of this field.

The Rule of Two - What is it?

According to the U.S. Small Business Association (“SBA”), government contracts valued over $3,500 are required to be set aside for at least two small businesses (“SBs”) that are competitive for the contract in terms of market prices, quality of output and performance, and delivery [1][2]. As worded in the Federal Acquisition Regulation (FAR) statute §19.502-2(b), which implements the goals of the Small Business Act, the government “shall set aside” acquisitions to small businesses when the Rule of Two is satisfied [3]. In other words, when two or more SBs can take on a contract, the government must give them a chance. Some set-asides are open to all SBs, while others are only open to SBs with certain designations [1]. Additionally, in order to qualify as a SB, the following three criteria must be met, as laid out by the SBA:

• 51% or more of the business must owned and controlled by one or more disadvantaged persons
• They must be both socially and economically disadvantaged
• The business must be “small” according to SBA’s standards [4]

Additionally, the Contracting Officer is a key individual in this process who ensures that SBs not only have the opportunities available to them to enter into their desired contracts but also that SBs receiving bids have the proper resources and capabilities in place to successfully fulfill their responsibilities [5]. The Contracting Officer may require additional information from SBs such as their annual revenue data, their history of performing similar work, the percentage of overall work that the SB can perform independently, and more [5]. This information helps the Contracting Officer gauge the SB’s interest and ability to execute their part. Moreover, SBs have a check on this system by which they can appeal a Contracting Officer’s determination of their capabilities for further review [5]. Overall, this program, called the Certificate of Competency (COC) program, exemplifies how there is a system of checks and balances in place throughout the SB set-aside process that is designed to keep the best interests of SBs in mind [5].

Along similar lines, the SBA mandates government agencies to deliver procurement forecasts in order to “giv[e] small businesses the opportunity to see how much money is going to be spent by division, by quarter, [as well as] …if the contracts are going to be set aside for any particular certification [6].” Additionally, the SBA also has an “8(a) Business Development Program” that provides managerial, technical, and contractual assistance to SBs entering the government contract arena [7]. Overall, this illustrates a strong commitment to assist SBs in various capacities throughout in order to ensure that they are not left as the underdogs when it comes to powerful players and competitive markets.

Image: Over 60% government contracts were awarded via the set-aside program to small businesses, 0.44% of which were awarded to women-owned small business (WOSB). Source: Wikimedia Commons.Image: Over 60% government contracts were awarded via the set-aside program to small businesses, 0.44% of which were awarded to women-owned small business (WOSB). Source: Wikimedia Commons.

From a Policy Perspective

Undoubtedly, there exists a strong dedication to helping SBs compete more effectively, grow internally, and perform large contract deals in niche markets [8][9]. As a result, The Rule of Two benefits the public interest by encouraging small businesses to be competitive and have a spot in government contract work, while also minimizing speculation surrounding their abilities to perform large contracts despite their size. Furthermore, the SB set-aside helps minority businesses via targeted sub-goal preferences for business categories such as women-owned SBs, disadvantaged-owned SBs, service disables veteran-owned SBs, and HUBZone SBs [6]. These sub-goals have significantly helped these minority business groups break into the industry and assume contract roles [8][9].

Additionally, a positive discourse currently surrounds the Rule of Two set-aside. In the fiscal years of 2013, 2014, and 2015, the government exceeded its goals by awarding $91 billion in government contracts to SBs [10]. This trend has also made its way into local communities where government contractors have begun hiring more SBs to execute contract bids [10]. The only downside to such a trend, however, is that SBs must now manage the competing forces of time and money spent on completing these contracts internally, which hinders their current growth (in varying degrees) at the expense of future gains [10]. Luckily, SBs may also consider teaming agreements with other companies to help execute large projects if they feel that they cannot pull through on their own, and must inform the government early in the process if such a partnership arises [8]. Once again, there exists a mechanism in place to assist SBs who are trying to launch their businesses and remain competitive the government contract market. Notably, from a policy perspective, the government does not wish to leave any SB behind, and instead focuses its efforts on helping SBs break into what often times seems as a rather impermeable market.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.




  [1] https://www.sba.gov/contracting/government-contracting-programs/what-small-business-set-aside

  [2] https://www.acquisition.gov/far/html/Subpart%2019_5.html

  [3] https://www.law.cornell.edu/cfr/text/48/19.502-2

  [4] https://www.sba.gov/contracting/government-contracting-programs/8a-business-development-program/about-8a-business-development-program

  [5] https://www.sba.gov/contracting/contracting-officials/certificates-competency

  [6] http://www.businessnewsdaily.com/985-small-business-government-contract

  [7] https://www.sba.gov/contracting/government-contracting-programs/8a-business-development-program

  [8] Global Computer Enterprises, 88 Fed. Cl. 466 (2009)

  [9] Rutter, 706 F.2d at 707 (explaining that SBA is based on the idea that small “firms can eventually become self-sufficient, viable businesses” large enough to compete effectively)

  [10] http://www.govexec.com/contracting/2016/04/small-businesses-win-more-25-federal-contracts/127918/


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