Contracting Preferences for Service-Disabled, Veteran-Owned Small Businesses (SDVOSBs)

As mandated by federal law, the “Rule of Two” is the requirement that, whenever two or more SDVOSBs are capable of fulfilling a contract requirement, that requirement must be set aside exclusively for SDVOSBs. In 2016, the U.S. Supreme Court affirmed in Kingdomware Technologies, Inc. v. United States that the Rule of Two is mandatory for all VA contracts and purchasing, without exception. In 2020 the U.S. Court of Federal Claims made clear, in The Tolliver Group, Inc. v. United States, that the Rule of Two applies to all individual task and deliver orders under IDIQ contracts and Multiple Award Contracts. In a January 25, 2024 Office of Management and Budget Memorandum further affirmed the Executive Branch’s commitment to the Rule of Two.

Recent amendments to the Veterans Administration Acquisition Regulation (VAAR) enables contracting officers to use a tiered set-aside evaluation approach when re-soliciting bids. This new Tiered Preference System, VAAR 819.7010, allows a Contracting Officer, when the Rule of Two determination indicates a set-aside is required, but other circumstances preclude a confident conclusion that an award can be made to an SDVOSB, to use a tiered evaluation process whereby the Contracting Officer solicits and receives offers from targeted tiers of small business groups, with SDVOSBs as the top tier. The  Contracting Officer first evaluates whether an SDVOSB bid meets the VA’s need before considering bids from any other organizations. Only if the SDVOSB’s bid fails to qualify may the Contracting Officer then move down the tiers of preference to determine if a bid from any Veteran-Owned Small Business (VOSB) is acceptable, followed by bids from 8(a) and HUBZone small businesses, followed by all other small businesses. The effect of this new Tiered Preference System is that, even if only one SDVOSB is truly capable of submitting a qualifying bid, they will still receive contracting preference over all other types of businesses.

The Trade Agreements Act, 19 U.S.C. § 2518, et seq., identifies permissible countries of origin for any end product for purposes of government acquisition. A product is the end product of a country if it is either wholly manufactured there or if it is “substantially transformed” in the end country. Many federal government contracts require that goods being purchased be TAA compliant. See FAR 52.225-5. While the Veterans Administration has some latitude to waive TAA compliance, the Department of Defense adheres to strict TAA-compliance requirements unless certain very limited exceptions are met. See DFARS 252.225-7021. Spartan Medical provides TAA-Compliant products, the vast majority of which are USA end-product items, with a minority of products sourced from fellow NATO nations France and the UK.

Whenever a small business—including an SDVOSB—receives any contracting preference from the Veterans Administration, that small business cannot simply “pass-through” the products of a large-company manufacturer. Rather, the small business must be in full compliance with the Nonmanufacturer Rule. ("NMR"), VAAR § 819.7003(d) and 13 C.F.R. § 121.406(b), which requires that “The Contractor shall provide an end item that a small business has manufactured, processed, or produced in the United States or its outlying areas.” Compliance with the Nonmanufacturer Rule can be challenging for the VA to verify. For that reason, Spartan Medical has self-certified that it is in full compliance with the Rule, exclusively supplying products manufactured by approximately 55 individual small businesses and directly supporting over 3,000 American high-technology manufacturing jobs. Learn more about challenges in enforcing the Nonmanufacturer Rule, and Spartan Medical’s efforts to challenge illegal pass-throughs.