This is a transcript from the live video.
Welcome back to another Q&A edition of GovCon Intelligence. Today, I want to discuss several important documents that came out over the past few weeks for small business contractors, specifically the FAR Companion Guide and the Department of Transportation’s frequently asked questions on the Disadvantaged Business Enterprise (DBE) program.
FAR Companion Guide Version 2.0
The FAR Companion Guide came out last week in version 2.0, and we now see the companion guide for Part 19. However, the most interesting part I discovered was actually outside of Part 19, in Part 8, which covers the required use section of the FAR. The companion guide is organized with the same numbering structure as the FAR uses.
Required use
Part 8 of the Companion Guide finally clarified the meaning of the mysterious term “required use.” About two months ago, the FAR changed the requirement to use best-in-class contracts in the overhauled Part 8 to the term “required use,” but at the time we didn’t know what this term meant. Now we have a clue through FAR Companion Guide 8.104.
First, there aren’t any required use contracts designated yet, so we don’t know which specific contracts will fall under this required use category. However, it will be a new tier under the category management program. If you’re familiar with category management, it currently has three tiers, plus a tier zero, making it zero, one, two, and three. Required use will be a tier on top of the existing structure as tier four in the category management program, within what they call “spend under management.”
This tier four will be separate from best-in-class contracts. There are currently a few best-in-class contracts, such as OASIS+ and 8(a) STARS. This required use tier will be entirely separate, though some of those best-in-class contracts may eventually be elevated to tier four, or it may consist of entirely new contracts. Contracting officials organizing contracts will try to meet specific requirements to achieve this required use level.
All of this is to say that required use is an additional element of the existing category management program. It will still fit within the framework of ten categories organized by Product Service Codes (PSCs). If you’re working within those PSCs, it’s worthwhile to examine the structure of the category management program to see what contracts to target and where those might fit into your business plans.
Category Management Buying Guide
In addition to the FAR Companion Guide version 2.0, the FAR drafters also published a category management buying guide available online at acquisition.gov. This guide allows you to see which contracts have been designated as tier three and tier two within the category management program. Eventually, when contracts start being designated as required use, those designations will also appear in the category management buying guide. This was a particularly interesting element of the FAR Companion Guide that came out in version 2.0 last week.
The Rule of Two and Small Business Set-Asides
Moving into FAR Part 19, this was the first version of the FAR Companion Guide that addressed small business contracting. Consistent with what the FAR published in the FAR Overhaul, this Companion Guide makes clear that the Rule of Two, which is the set-aside rule, does not apply to orders.
The Rule of Two is the regulation that tells agencies they must set aside awards for small businesses if there are two or more small businesses that could perform that contract at a fair market price. The FAR Overhaul specifically uses the word “contract” when defining the rule of two, whereas the previous version used the word “acquisitions.” The FAR Companion Guide explains this significant change.
According to the companion guide,
FAR 19.104-1(a) has been updated to use “contracts” instead of “acquisition” for greater clarity. This particular clarification aims to resolve a perceived conflict in interpretations between the Government Accountability Office (GAO) and the U.S. Court of Federal Claims (COFC) around the application of the “Rule of Two” within the context of multiple-award contracts
However, that sentence doesn’t tell the whole story. The real issue stems from a 2020 Court of Federal Claims decision called Tolliver, which stated that the rule of two applies to orders. Orders are issued when agencies make awards off of multiple award IDIQ contracts. The Government Accountability Office responded very quickly, about a month and a half later in early 2021, to say they do not follow that decision. Instead, GAO believes the rule of two only applies to contracts, not to orders. This created a significant conflict between GAO and the Court of Federal Claims on whether the rule of two applied when an agency uses a multiple award IDIQ contract.
Initially, the SBA and the FAR were planning to change their regulations to adopt, in part, the court decision from Tolliver. SBA came out with a proposed rule toward the end of 2024, and the FAR followed with their proposed rule around the same time, receiving comments at the beginning of 2025. However, the FAR has now reversed its policy decision.
Instead of following the Tolliver decision from the court, the FAR is putting its thumb on the scales of the GAO decision, stating that the Rule of Two does not apply when there is an order off of a multiple award IDIQ contract. Agencies can still set aside orders for small businesses or subcategories of small business like service-disabled veteran-owned, HUBZone, 8(a), or women-owned businesses, but they’re not required to under the Rule of Two. That’s the key difference between what the Court of Federal Claims said in Tolliver and what the GAO has maintained, and now the FAR Overhaul drafters have sided with the GAO decision.
It’s possible that this question may still come up in court before the Court of Federal Claims or another jurisdiction, but the FAR Overhaul drafters have tried to structure this so they are protected if this ever reaches court again. The reason the Court of Federal Claims ruled that the Rule of Two applies to orders was that, at that time, the Rule of Two used the word “acquisitions.” The Court of Federal Claims interpreted “acquisitions” to apply to both contracts and orders.
Now that the term has changed from “acquisitions” to “contracts,” that decision appears to have less influence or precedent on what the new FAR would say. There is still a possibility, though, that “contracts” could be read broadly. The Supreme Court decided Kingdomware v. United States back in 2016, reading “contracts” to include orders, so that precedent may come up in future decisions and litigation.
The FAR Overhaul attempts to prevent this by stating that order-level set-asides are not protestable and would not be able to be heard by GAO or by a court. I’m not sure that approach will work simply by declaring something not protestable. Courts and similar bodies like to make those decisions on their own rather than having someone tell them whether they can hear a case. Nevertheless, the FAR Overhaul has made clear in this companion guide that they were trying to address this particular conflict between GAO and the Court of Federal Claims. They’ve examined what they believe is the right decision in the GAO ruling and stated that the Rule of Two applies only to contracts rather than to acquisitions as a whole.
The FAR Part 19 companion guide also provides specific instructions for agencies to use when they would like to set aside orders under multiple award contracts. There are instructions for total small business set-asides, service-disabled veteran-owned set-asides, instructions for partial set-asides, and instructions for federal supply schedules. So there is specific language that agencies can use when they want to implement a set-aside under a multiple award contract, and that’s all detailed in the FAR Companion Guide.
Subcontracting Goals
One last element I found fascinating in the FAR Companion Guide was guidance regarding subcontracting goals. This is not a specific regulation that must be followed but rather guidance to agencies. Under the statute, specifically the Small Business Act, subcontracting goals apply at the contract level. They don’t necessarily have separate subcontracting goals at the order level. At the contract level, agencies impose subcontracting goals through subcontracting plans.
There is the ability, through contracting officer discretion, to impose additional subcontracting goals for orders. This might happen if the contract is, say, a government-wide contract, and an agency that’s not the original contracting agency comes in and issues an order. They may want different subcontracting goals because of some negotiation with SBA or because they’re doing work that is distinct from what is contemplated in the government-wide contract.
The FAR Companion Guide addresses this situation by stating that the ordering agency should “leverage the master subcontracting plan and not require an order level subcontracting plan unless elements of the plan are considered unacceptable for the order level requirement.” So the FAR Companion Guide is telling those ordering agencies that yes, they may have the discretion to issue separate goals for the order, but the preference is that they not do that. They should leverage the master plan instead of issuing additional goals at the order level.
The reason for this guidance is probably concern about complexity for the contractor and for the agency itself. It does impact the way that agencies are going to make order awards and probably does speed up the process, but this comes at the expense of creating new opportunities for small businesses at the subcontracting level.
DOT’s FAQs on the DBE Program
The Department of Transportation has published official FAQs for the Disadvantaged Business Enterprise (DBE) program. This FAQ follows the interim final rule that DOT published in the Federal Register on October 3rd, which changed the DBE program so that DBEs now have to submit disadvantaged narratives in order to get into the program or to continue their DBE status. The FAQ answers many questions that people had about the interim final rule.
One of the key questions addressed was whether there is a deadline for existing DBEs to submit their narratives to the state certifiers. Some states had imposed very quick deadlines on DBEs, in some cases as short as two weeks, to submit their narratives, and there was significant inconsistency across the country regarding which states were requiring deadlines and which were not. The FAQ clarifies that there is not a specific deadline for companies to submit their narratives, but it should be done as soon as practicable. This means that states should not be able to issue particular deadlines, but companies must get their narratives in so that the state can complete its reevaluation process as quickly as practicable.
Another question concerned DBEs that are certified in multiple states. Many of these companies were receiving notices from multiple certifying entities to submit their narratives, potentially requiring them to complete narratives for multiple jurisdictions. The DOT FAQ addresses this scenario by establishing that only one state will serve as the lead state for reviewing the narrative. A company with certifications in multiple jurisdictions will only have to submit its narrative to one state, specifically the jurisdiction of original certification. Presumably, this is the state that initially certified the company. That jurisdiction will have the lead on reviewing the DBE’s narrative, and if the DBE is recertified, then it can seek reciprocity from the other states in which it is certified.
Withholding payments and terminating contracts
The FAQ includes some surprising policy decisions regarding scenarios where DOT might withhold payments from states and where DBEs might be terminated from their existing subcontracts. These provisions seem like they potentially would have been more appropriate for inclusion in the interim final rule itself rather than appearing in the FAQ.
The provision on withholding appears in question B.1. of the FAQ, which is at the top of page two. It states that if a DBE is performing work on a contract and is not recertified during the reevaluation process, the recipient, which is the state, will be required to take “appropriate action” to discontinue the effect of “the unconstitutional certification.” The FAQ goes on to state that if a recipient does not take “appropriate action” with respect to a contract, DOT will not make any payments with respect to that contract. This language gives DOT the authority to withhold payments from a state if the state does not take so-called appropriate action with respect to a contract. It remains unclear what constitutes “appropriate action” and what they are referring to by an “unconstitutional certification.” However, this FAQ puts states on notice that there are scenarios where DOT would withhold payments from a state because of a DBE not getting recertified during the reevaluation process and then the state not taking “appropriate action” with respect to that contract.
There is also a provision that starts on the second page and continues to page three regarding termination of DBEs on existing contracts. It begins by stating that a prime contractor cannot terminate a DBE without the recipient’s prior written consent and a showing of good cause. This seems to indicate that during this process, a DBE cannot be terminated without good cause unless the state approves it. However, the last part of that question states that “good cause for termination exists if a DBE loses its DBE certification after the reevaluation process is completed because it is ineligible to receive DBE credit for the type of work required.” This suggests that termination could occur if the DBE working on an existing project loses its DBE certification. This provision puts DBEs on notice that this is a critical situation regarding getting their DBE narrative submitted and approved, because if they do not, then good cause for termination could potentially exist under this FAQ.
Case update: MLB Transportation
I also wanted to highlight a federal court decision that came out before I get to the FAQs. GAO is shut down, and the SBA OHA, is shut down. So the court that I’m following the most now is the Court of Federal Claims, which publishes bid protest decisions. An interesting case came out a couple of weeks ago involving the Department of Veterans Affairs. The case is MLB Transportation v. United States.
In this case, the contractor attempted to submit a claim against the government for a transportation contract it had already performed. The contractor claimed there needed to be an equitable adjustment because of some changes that the VA had initiated in that contract. The court made a particularly interesting decision through Judge Thompson Dietz of the Court of Federal Claims. Rather than examining the facts of the claim in this transportation contract, the court decided to look at whether this contractor, which won a service-disabled veteran-owned set-aside, was actually qualified for that set-aside when it received the contract back in 2008 or 2009.
At the time, the contractor was owned by Mr. Baker of MB Transportation Company, and Baker was not a veteran. The company had won a service-disabled veteran-owned small business contract with a non-veteran as the owner. This situation occurred because at that time, the SBA did not have a certification program. The VA may have had a certification program, but perhaps there was some confusion in how this company obtained the contract. After receiving the contract, the company did attempt to reorganize by bringing in the owner’s brother-in-law as a veteran owner, transferring the assets of the firm to the brother-in-law. The brother-in-law’s firm allegedly then carried out the contract.
However, the judge ruled that none of these facts about the brother-in-law and whether the brother-in-law took over the contract really matter. The court declared the contract void ab initio, meaning the contract is void at the outset because the firm was not qualified at the time it received the contract in 2009. Had the firm been qualified initially, perhaps then the court could have examined the claim. But because the firm was not service-disabled veteran-owned and nobody was claiming that it was when it won the contract in 2009, the firm cannot rely on any subsequent facts and cannot submit a claim against the government.
This void ab initio concept appears to be applied only in the veteran-owned context. That’s the only place that I see it. It actually used to be in the VA’s rules before those rules came over to SBA, and there have been other cases addressing the void ab initio concept for VA contracts. As far as I recall, this is the first time it has actually been applied at the claim level, where a company has gone through the entire process of winning the contract and performing on the contract, only to have the court determine that it cannot pursue a claim because the contract was void at the very outset. This case serves as an important reminder for companies with certifications to understand that if there is a false certification, particularly a clear false certification in the facts of the case, they may not be entitled to anything under the contract because it would have been void from the very beginning. This is certainly something for companies to consider carefully as they plan their submissions for certifications.
Contracting Q&A
I did get a couple of questions in at GovCon Intelligence. Please keep your questions coming. You can find me on the website, GovConIntelligence.com, you can find me on LinkedIn, or you can go to my website, samlelaw.com, and submit something through the contact form.
Multiple Certifications in Set-Asides
There’s a question about whether an agency can prepare a set-aside that has more than one certification required. For example, could you do an 8(a) certification set-aside for only service-disabled veteran-owned firms that also have an 8(a) certification? The answer is, for the most part, no. You’re not able to do that. The VA may have some special authority—I’m not certain about that—but the SBA regulations say that you are not able to issue set-asides with more than one certification. The idea behind that is that SBA wants to make the certifications valuable in their own right. They don’t want to have, say, only firms with HUBZone and 8(a) qualify for contracts. It has to be either a HUBZone set-aside or an 8(a) set-aside and not both. So under SBA regulations, you are not permitted to have set-asides with more than one certification.
FAR Part 19 Companion Guide and OSDBU
There’s a question about the FAR Part 19 Companion Guide and whether it refers to OSDBU authorities and functions or small business specialists. Remember from the FAR Part 19 Overhaul, the FAR took out a really long section that went over the 21 or 22 responsibilities of OSDBUs and deleted that whole thing. At the time, I said, look, it’s not such a big deal because it still appears in law. It’s still in the Small Business Act. There’s still a legal requirement for it. This FAR Overhaul is speaking to contracting officers, and this really isn’t relevant to contracting officers. Also, it might appear in the FAR Companion Guide. Well, it did not appear in the FAR Companion Guide. The FAR Companion Guide did not refer to OSDBUs or small business specialists.
Is that surprising? I think it still doesn’t release agencies from having OSDBUs or having these responsibilities for OSDBUs. They’re still in the Small Business Act and actually appear in SBA’s regulations as well. So the legal requirement is still there. The fact that it’s not in the Companion Guide doesn’t have any sort of legal effect, but it may have some sort of persuasive effect where agencies aren’t including small business specialists because they don’t necessarily see them in the Companion Guide or in the FAR overall. We’ll see how that works out.
Impact of Rule of Two Changes on Small Business Contractors
Somebody also asked about the change that I alluded to at the beginning with changing from “acquisition” to “contracts” in the rule of two, and how will that affect small business contractors? Well, let me take it the other way. Had the SBA position been adopted where the rule of two applies to orders, what would have been the impact for small business contractors? SBA had calculated that would be an additional $6 billion going to small businesses because of these additional set-asides for contracts at the order level. So going from “acquisition” to “contract” instead of including orders is a lost opportunity of about $6 billion.
Six billion dollars in the grand scheme of things—you have $600 billion or more in contracts every year—so that’s less than one percent of government contracting. So it’s not a huge amount percentage-wise, but it would add to the amount of contract dollars that small businesses are able to obtain. Overall, for any specific small business contractor, it does create the opportunity for an agency to circumvent small business protections by going to a vehicle with large businesses or perhaps only large businesses so that they don’t have to necessarily use a small business.
I hope that won’t happen. I hope small businesses will continue to get prioritized under these vehicles, and agencies have the opportunity to go to many vehicles that are already set aside for small businesses or have an 8(a) pool or a small business pool that they can use. An agency should take the opportunity to do so so that small businesses still get a fair share of government contracting. We’ll certainly be watching this very closely to see what the impact of this change in the rule of two is. And there already have been congressional proposals to expand the rule of two to orders. And if the small business share of contracting drops, then you might expect for those proposals to move forward.
Please keep your questions coming at GovConIntelligence.com. Thanks very much, everybody. Talk to you again soon.
With 20 years of Federal legal experience, Sam Le counsels small businesses through government contracting matters, including bid protests, contract compliance, small business certifications, and procurement disputes. His website is www.samlelaw.com.
This article is for informational purposes only and does not constitute legal advice.
