A sweeping shift in federal procurement policy is underway. The Rule of Two, a decades-old principle that prioritizes small business participation in contracting, is now facing serious challenges on two fronts: regulatory instability and deep proposed budget cuts to SBA support programs.
The combined pressure is creating uncertainty across the federal marketplace and raising new barriers for firms that rely on set-aside opportunities to compete.
What the Rule of Two Does Today
Federal Acquisition Regulation (FAR) 19.502-2 requires that contracting officers reserve procurements above the micro-purchase threshold for small businesses when market research shows at least two qualified small firms can perform the work at a fair price.
Acting as a long-standing baseline, this procedure has enabled small businesses to gain access to federal prime contracting opportunities. It currently applies to base contracts and is actively embedded in both the FAR and SBA regulations.
However, the only statutory version applies exclusively to the Department of Veterans Affairs under 38 U.S.C. § 8127, leaving the broader federal application dependent on regulation.
Timeline of Disruption Since Late 2024
In October 2024, the Small Business Administration (SBA) introduced a proposed rule, titled Increasing Small Business Participation on Multiple Award Contracts (MACS), designed to remove barriers that often limit small business participation in large-scale federal contracts.
The proposal aimed to extend the Rule of Two to every task or delivery order under most MACs, a shift that would significantly broaden small business access. Contracting officers would have been required to document and justify any decision not to apply the rule, with oversight from small business specialists and SBA’s Procurement Center Representatives.
A complementary FAR proposal followed on January 15, 2025, to synchronize acquisition rules across agencies. The joint effort appeared to set the stage for a major expansion in small business opportunities. Then came a reversal.
On January 20, 2025, President Trump signed Executive Order 14148, which formally rescinded the equity-in-procurement directive first established in 2021. That action cleared the path for a wider deregulatory review, labeling provisions like the Rule of Two expansion as burdensome.
By March, the SBA’s proposal had stalled. On June 12, the FAR Council withdrew its rule entirely, citing Executive Order 14148. Without that regulatory alignment, the SBA’s October 2024 proposal cannot advance. The Rule of Two remains applicable only at the base contract level, leaving order-level implementation effectively blocked.
Legislative Push for Codification
Responding to rising concern from small business advocates and contractors, Representative Nydia Velázquez introduced H.R. 2804, known as the Protecting Small Business Competitions Act of 2025. If enacted, the bill would mandate that every federal agency follow the Rule of Two, making it a statutory part of the Small Business Act.
Supporters argue that codification is the only way to stabilize the rule and protect it from further regulatory erosion. Without a statutory anchor, the Office of Management and Budget (OMB) could significantly revise or eliminate FAR 19.502-2 during its upcoming rewrite of Part 19, expected later this summer.
The House Small Business Committee is scheduled to take up H.R. 2804 in July, where amendments could indicate the level of bipartisan support for stricter set-aside protections.
Why Small Firms Are Concerned
Several pressure points have surfaced since the rollback of the FAR proposal. The most immediate issue is the legal uncertainty created by the regulatory gap.
In the absence of a clear mandate, agencies default to past decisions, such as the Government Accountability Office’s (GAO) ITility LLC ruling, which treats the Rule of Two as discretionary for MAC task orders. It contradicts prior decisions from the Court of Federal Claims, creating confusion and leaving small businesses with limited recourse when set-asides are bypassed.
The policy instability comes at a time when the FY 2026 federal budget proposes major cuts to SBA programs.
The request would eliminate $167 million from Entrepreneurial Development Programs and shut down resource partners like SCORE, Women’s Business Centers, and Veterans Business Outreach Centers; only Small Business Development Centers would remain. Salaries and Expenses would be cut by another $111 million, further diminishing SBA’s ability to offer support.
Without those resources, many small firms will struggle to meet the administrative and technical demands of federal procurement. New entrants would encounter particular difficulties with registrations, certifications, and proposal development, which were services previously provided at no cost through those now-targeted programs.
What Happens if the Rule Weakens
If the Rule of Two remains limited or disappears altogether, the effect on the federal small business base will be significant. Most task-order spending under MACs, especially in IT, R&D, and professional services, would shift back to full-and-open competition. Set-asides would become far less frequent in these essential sectors.
Smaller firms would also have to deal with a steeper uphill battle when protesting an award. Without a mandatory rule in place, legal challenges must show that the contracting officer acted unreasonably, a high bar that rarely succeeds.
Construction firms may see less immediate disruption, as their contracts often remain single-award and are more consistently set aside. But across the board, the erosion of support programs will raise costs, lengthen timelines, and reduce the pool of qualified small business vendors.
The Policy Environment Ahead
The Rule of Two has long played a central role in leveling the playing field for small businesses in federal contracting.
With regulatory changes in motion and SBA support programs under budgetary strain, the ground is shifting. The direction Congress and federal agencies take in the coming months will determine whether small firms retain meaningful access to the marketplace or encounter steeper barriers to entry.
At Diener & Associates, our team of CPAs works closely with federal contractors to adapt to shifting compliance demands, manage risk, and identify sustainable growth strategies. Schedule a consultation online or call us directly at 1-(703)-386-7864 to discuss how to prepare for what comes next.