2025 Fall Seminar Series Seminar: Benjamin Brunjes University of Washington

The “Rule of Two” and Federal Contract Set-Asides: The Effect of Kingdomware vs. U.S. on Contract Spending

Abstract: Government contracts often invest in small and disadvantaged businesses (SDBs), both to help such firms grow and to advance marginalized communities. In the U.S., the federal government has established goals to ensure agencies actively seek and engage in contracts with woman-, minority-, and veteran-owned small firms. Yet, agencies regularly struggle to meet these goals. To ensure agencies are setting aside contracts when possible, the government uses the “Rule of Two,” which requires agencies to contract with SDBs when there is a reasonable expectation that (1) offers will be obtained from at least two responsible small firms and (2) the awarded contract will be made at fair market prices. Though designed to spur investment in small firms, the “Rule of Two” could also be difficult to implement in markets with few small businesses, where there is political pressure to buy from specific firms, or when “responsible” proposals are hard to identify. To date, little is known about how the “Rule of Two” affects the allocation of contracts. To fill this gap, this study uses a natural experiment to assess the causal impact of the “Rule of Two” on the selection of small, disadvantaged contractors.'

In 2016, the U.S. Supreme Court ruled in Kingdomware v. U.S. that the Department of Veterans Affairs (VA), which had been struggling to meet its goals for service-disabled veteran-owned small businesses, must use the “Rule of Two” for all supply schedule contracts. Implementation began on July 25th, 2016. Using this intervention point, this analysis performs a difference-in-differences analysis of contract allocations from 2014 - 2019, comparing VA with the U.S. Department of Health and Human Services (HHS), a similar federal agency engaged in high levels of social service contracts, including the routine purchase of supply schedule items. Results show that the enforcement of the “Rule of Two” is associated with rapid and sustained increase in contracts allocated to small, disadvantaged businesses overall and in industries where small, disadvantaged businesses are established in the marketplace. However, the Rule has a lower effect in markets with fewer SDBs, suggesting that both procurement rules and market dynamics impact the attainment of social goals. These findings offer causal evidence about the effectiveness of set-aside rule programs and insights into how to balance market dynamics with administrative rulemaking.