The FAR Companion Guide is where the action is

Plus the FAR's Best-in-Class reversal, small-business participation is down 8.5%, and SBA's OHA defines permissible investment

Subcommittee Chairman Nick LaLota (R-NY) points at a printout of the Federal Acquisition Regulation.

While most people in GovCon are focused on the FAR Overhaul—and we’ll get to that in a moment—the current version of the Federal Acquisition Regulation appeared as a prop at a hearing of the House Small Business Subcommittee on Contracting and Infrastructure. I was in person, and the FAR looked smaller than the 2,000 pages that Chairman Nick LaLota described. But I was also viewing it from the cheap seats, the back row of the committee room.

The reason the current FAR is so long is that it tries to do several things at once: Be the combined source of laws that govern contracting and provide guidance to agency contracting officers. It’s both law and policy. The FAR Overhaul cuts many thousands of words from the existing FAR by limiting itself almost exclusively to law (with some important exceptions).

So where does the guidance part go? In part, it’s in the FAR Companion Guide, which the FAR Council published on Wednesday in a “Version 1.0.” The Companion Guide is “context, additional information, and practical advice” on contracting. Importantly, the Companion Guide states on the first page of text that it is “not intended to serve as the basis for protests or legal action.” A byproduct of reducing the laws that govern contracting is that there are fewer possible violations of law and fewer possible protest grounds.

Reading the FAR Companion Guide reminded me of two things. First, the FAR Overhaul does not come with a preamble, and the Companion Guide provides some of the commentary that we are used to reading in a preamble. A preamble is the explanatory text—spanning many pages—that precedes the technical rule text in a rule. In the recent size-standards proposed rule that I analyzed, the preamble took up 90 pages of the 110-page proposed rule. In a rulemaking, the preamble is where the action is. And, here, the FAR Companion Guide is performing some of that function.

Second, the FAR Companion Guide is opinionated in a way that the overhauled FAR isn’t trying to be. Opinionated design steers users in a certain direction. The FAR Companion Guide does that most clearly in Part 36 when it guides contracting officers on two-phase design-build construction projects. The Companion Guide suggests that contracting officers should limit phase two to three offerors:

While the FAR permits up to five offerors in phase two, consider limiting phase two to the three most highly qualified to encourage meaningful competition while reducing administrative burden.

When determining and announcing the maximum number of offerors that will be selected to submit phase two proposals, the contracting officer can favor the lowest number (e.g. three) that would yield effective competition.

Developing a phase two cost proposal typically includes a firm demonstrating completion of up to 80 percent of the design work and identifying detailed space and material needs. Some in industry report that the cost of developing a full proposal for a phase two design-build contract can exceed three percent of the value of the project (see H. Rept.113-668 - Design-Build Efficiency and Jobs Act of 2014).

Also, offerors submit the best proposals when they believe their probability of win (pWin) is high enough. The maximum number of five would mean 20 percent pWin as opposed to over 33% if the number is set at three.

I can see both sides to this. On one hand, limiting to three offerors instead of five saves two companies thousands of dollars in proposal costs. And the government saves the time of evaluating the extra two proposals. On the other hand, wouldn’t you rather want a shot at the contract if you are offerors #4 and #5?

My point is, though, that the FAR Overhaul has an answer on this issue: “no more than five offerors can be selected for phase-two proposals.” But the Companion Guide has a different—though not contradictory—answer: “three most highly qualified.” Agencies aren’t required to follow the Companion Guide’s answer—though they should be “familiar” with it, whatever that means.

But let’s say that, in the future design-build, the agency limits phase two to three offerors. If someone asks why the agency used three, the answer is not going to be, “each offeror’s pWin is over 33%.” The answer will be that the FAR Companion Guide told them to do that. And that makes the FAR Companion Guide important to read and understand. Fortunately, version 1.0 is less than 50 pages. I’m expecting that to grow in the future.

The FAR Overhaul’s Best-in-Class Reversal

Speaking of numbered versions, the FAR Overhaul drafters demonstrated last week that their initial publishing of FAR parts is more a version 0.9 than a version 1.0 final release. The FAR Overhaul announced by mass email on Friday afternoon that it was eliminating from the overhauled Part 8, on Required Sources, the mandate to use best-in-class contracts. The email read:

FAR 8.104(a) has been corrected to clarify that the Office of Federal Procurement Policy (OFPP) will be establishing a new class of “required use” contracts and criteria for qualifying for this class of contract. “Required use” contracts will be separate from "best-in-class" (BICs) contracts. Required use contracts will be mandated for use. BICs will be prioritized, but not mandated.

I have written about and sharply criticized the best-in-class mandate. Specifically, I pointed out that, while the FAR Overhaul was supposed to limit the FAR to mostly statute, there isn’t a statute that mandates the use of best-in-class mandates. I even went on YouTube and Tan Wilson’s podcast to make the case against the best-in-class mandate.

The FAR Council Strikes Back: How the latest FAR rewrite hurts small-business competition

Now, less than three weeks after it was first announced, that mandate has been erased from the now-overhauled Part 8 overhaul, as well as the accompanying practitioner album.

I couldn’t be more supportive of the change. It’s admirable that the Overhaul drafters moved so quickly to respond to what might have been an intense negative public response. The informal comments on the Overhaul aren’t published, unlike comments in normal rulemakings. The experience with this FAR Part 8 reversal, though, shows another difference between the Overhaul and the normal regulatory process. Usually, if an agency wants to make a substantive change to a regulation, the agency needs to go through the months-long notice-and-comment process again. That’s because a final rule is just that: final. But the FAR Overhaul isn’t a final regulation. So it can be changed, in this case, through an email.

We’re not out of the clear yet on Part 8, though. Something to watch closely is what happens to blanket purchase agreements under the GSA Schedule, what people usually call “8.4 BPAs.” Under the current FAR, those GSA Schedule BPAs must be awarded to multiple firms if the value is above $100 milllion. That prevents vendor lock-in by requiring the agency to spread orders around—or at least compete them—with the multiple firms. And BPAs were limited to five years. The Overhauled FAR creates a separate set of GSA Schedule rules that lets agencies award BPAs to a single firm with unlimited value and duration. That could create severe vendor lock-in and fewer opportunities for small businesses.¹

Also, there’s still a concern that the new term “required use” is just a rebranding of the much-maligned best-in-class designation. I don’t get that sense, but I also don’t know what “required use” is going to mean. New guidance—published the same time as the reversal email—states: “OFPP will establish the criteria for determining what vehicles should qualify as required use contracts. If an existing BIC meets the new criteria, it will be designated as a required use contract, but no existing BIC will be automatically designated as a required use contract.” So “required use” may just end up meaning best-of, best-in class.

A big drop in FY25 small business participation

A universal theme at this week’s hearing was that small businesses are leaving Federal contracting and something needs to change to stop that. The legislators and witnesses all had different approaches: abolish lowest-price technically acceptable contracts, codify the Rule of Two, simplify the language in solicitations, raise size standards, stop bundling and consolidating contracts, train contracting officers, or hire more OSDBU small-business specialists and SBA Procurement Center Representatives. But everyone agreed, on both sides of the aisle, that we should be growing the number of small businesses that get government contracts, not shrinking it.

The current data shows the situation getting worse, though. As compared to this point in FY24, the number of small-business vendors is down 8.5%:

Though there’s been a consistent decline over the past 15 years—leading to an overall drop of 50%—this year will be especially steep. The number of small-business vendors will drop by 5,000 from last year at the current pace. By comparison, the decrease from 2023 to 2024 was only 350.

If you think a 50% drop in 15 years is bad, an 8.5% drop in a single year is much worse. Year over year, that leads to another 50% drop in just 8 years. The number of small businesses in government contracting would dip below 50,000 by 2027. There are 34 million small businesses in the United States. Having just 1 in 700 of them participating in Federal contracts is unfathomable.

So which of those policy proposals that came up at the hearing should Congress take up? I’d say all of them. That's what you need to do when you lose 5,000 small businesses in a single year.

SBA’s OHA defines permissible investments

One way to keep small businesses afloat in contracting is to make it easier to find investment and financing. Earlier this year, SBA tried to make investing in small businesses easier by expanding the “extraordinary circumstances” rule. That rule recognizes that investors might be wary of small-business contractors because ordinary investor protections might cause the contractor to lose small-business or socioeconomic preferences.

SBA addresses that wariness by creating a list of circumstances—extraordinary ones—that the contractor’s corporate documents can allow a minority shareholder can block. In other words, the minority shareholder won’t cause the contractor to lose its status just because the shareholder wants to protect their investment.

The list has both defined circumstances and a “catch-all” provision. The defined ones include adding a new shareholder, dissolving the company, or selling the company. The “catch-all” covers any term “crafted solely to protect the investment.” When SBA published the “catch-all” rule, I got a lot of questions about what it meant. And the response was typically that it would get clearer as SBA saw more cases.

One case came out this week. In VSBC Appeal of Blue Skye Foods, OHA ruled that the catch-all provision covers terms that allow the minority shareholder to block the company from engaging in business that contradicts an operating agreement. The provision also covers a term that prevents a firm from changing its accounting method or tax classification. The latter term makes sense because the investor could face serious tax consequences in a classification change. The former, about engaging in contrary business, could lead to some very detailed operating agreements in the future.

OHA also ruled on a case in the other direction: What financing terms can cause the contractor to lose its status? In a case involving the oil company Sunoco, OHA ruled that a lease agreement with Sunoco’s wholly owned subsidiary caused the lessee to be affiliated with Sunoco, and therefore a large business. The lease agreement had a term requiring revenues to be deposited directly with Sunoco’s subsidiary. That and several other unusual terms led OHA to find the subsidiary affiliated with the lessee under SBA’s totality-of-the-circumstances test. The test on totality of the circumstances doesn’t come up in OHA cases very often, so this Sunoco case is going to be cited for quite a while.

Sam Le is the managing member of Sam Le Law, where he draws on his 20 years of Federal legal experience and deep knowledge of SBA programs to counsel small businesses through complex regulatory challenges. His website is www.samlelaw.com.

1. Credit to

Shauna Weatherly

, who pointed this out in the comments on my recent GSA article.