Court of Federal Claims Provides a Roadmap for Adequate Rule-of-Two Set Aside Market Research

The Rule of Two is a vital mechanism for ensuring that contracting officers satisfy the federal government’s statutory requirement that 23% of U.S. prime contracts be issued to small businesses. FAR 19.502-2(b) (19.104-1(a) of the RFO) requires that agencies set aside procurements for small businesses when there is a reasonable expectation that at least two responsible small businesses will submit offers at fair market prices.  

The U.S. Government Accountability Office (GAO) has a long history of hearing challenges regarding the Rule of Two — both by small business challenging an agency’s decision not to set aside a procurement as well as by large contractors challenging an agency’s decision to set aside a procurement. Crowell has covered recent decisions going both ways. We previously discussed GAO’s 2024 sustain in Knudsen Systems, Inc. that challenged an agency’s decision to set aside a procurement for small businesses. GAO ruled that the agency’s market research was flawed because it failed to account for whether small businesses could comply with the nonmanufacturer rule.

More recently, in our August 2026 Bid Protest Sustain of the Month blog post, we analyzed GAO’s sustain in LJR Solutions, in which GAO found that an agency’s decision not to set aside a procurement was unreasonable and internally inconsistent. Here, the agency’s market research memorandum was prepared after the fact and was conclusory. For one, the contracting officer never explained why firms previously found capable were no longer considered capable. For another, the agency improperly deemed small businesses incapable because they planned to use subcontractors, even though the record showed that the agency believed no firm, large or small, could meet the full scope of requirements independently, and the solicitation expressly permitted the use of subcontractors.

Both Knudsen and LJR provided examples of unreasonable set-aside determinations. However, the recent Court of Federal Claims decision in CORE DC, LLC v. United States (public decision published August 27, 2026) demonstrates the converse, discussing a situation in which the agency’s market research and set-aside determination were found to be rational and sufficiently supported. 

The procurement at issue involved a contract to operate a male Residential Reentry Center (RRC). The Federal Bureau of Prisons (BOP) conducted two rounds of market research, including issuing two sources sought notices (SSN) posted to SAM.gov and making direct email outreach to 16 organizations that included all small businesses currently providing RRC services to BOP in addition to other potential sources. For the four small businesses that submitted valid responses to the second SSN, the agency evaluated each one in detail, assessed their experience, and inquired specifically about their ability to secure a compliant, available facility. BOP explained the ability to supply a compliant facility was particularly important because the protester (who was the incumbent contractor) had been awarded the incumbent contract in 2020, but five years later had still not been able to open and operate an RRC facility. After assessing each response, the agency concluded that none of the four responding small businesses was likely to be considered responsible for purposes of this procurement:

• The agency deemed one non-responsible outright.
• A second lacked RRC-specific experience and did not identify a facility or address zoning requirements.
• A third failed to identify a specific, available site and lacked federal-level RRC experience.
• The protester itself, despite being the incumbent, was considered “functionally not viable” due to its inability to provide an RRC facility over the previous five years under the incumbent contract.

Based on this analysis, the agency concluded that it was unlikely to receive offers at fair market prices from two or more responsible small businesses; therefore, BOP would not set aside the procurement.

CORE DC first protested this decision to GAO, which denied the protest. CORE DC then filed its protest at the Court of Federal Claims. The court upheld the agency’s decision not to set aside the procurement, emphasizing that agencies enjoy substantial discretion in determining how much, and what type, of market research is appropriate. The court stressed that set-aside determinations are a matter of business judgment subject to a highly deferential rational basis review. In denying the protest, the court rejected the protester’s argument that BOP should have made multiple attempts to contact a small business that had not responded to either of the two SSNs. The court also upheld the agency’s substantive evaluations of the small businesses that did respond to the SSN, finding that the agency’s focus on whether a contractor could identify a specific, available, properly zoned facility was rational, given the previous, well-documented difficulty of opening an RRC under the incumbent contract.

Taken together, Knudsen, LJR Solutions, and CORE DC provide useful guidance for contractors considering a challenge to an agency’s set-aside decision. If the agency record contains contemporaneous, documented, rational, and internally consistent findings, both the court and GAO will likely defer to the agency’s determination. On the other hand, set-aside determinations that rely on post-hoc rationalizations, apply inconsistent standards, or rely on market research based on faulty assumptions will likely be considered insufficient.

Key Takeaways

• While market research supporting a set-aside determination need not be perfect, it must be reasonable, sufficiently documented, and based on accurate assumptions and internally consistent analysis.
• The CORE DC decision highlights an important practical lesson for contractors: respond to sources sought notices. The court in CORE DC stressed that an agency may rationally conclude a non-responding firm is unlikely to submit a proposal. If you do not respond to an SSN, you may be inadvertently providing the agency with a justification for concluding that it is not likely to receive offers from two or more small businesses.