SBa non manufacturer rule lawyerBy Theodore P. Watson, Esq. and Cheryl E. Adams, Esq.

The U.S. Small Business Administration (SBA) Non Manufacturer Rule and FAR guidelines have become the topic of litigation for small businesses in the SBA 8a Program.  Under the rule, 13 CFR 121.406, your small business may qualify as an eligible offeror for a small business set-aside requirement to provide manufactured products or other supply items as a nonmanufacturer, if your company meets certain requirements.

What is the Non Manufacturer Rule ?

The SBA Non Manufacturer Rule is considered to be an exception to typical performance requirements on a federal government contract.  Typically, FAR 19.505 Limitations on subcontracting rules for set-aside contracts to adhere to certain performance requirements.  For small business set-aside contracts for supplies or products the general rule is the small business must perform “at least 50 percent of the cost of manufacturing the supplies or products (not including the cost of materials).”  FAR 19.505(a)(2).

SBA nonmanufacturer size appeal attorneyNonmanufacturer recipients of small business set-aside contracts for manufactured products must provide the product of domestic small manufacturers or processors on small business set-asides—this is the “nonmanufacturer rule.” The U.S Court of Federal Claims has said that the  clear purpose of the nonmanufacturer rule is to prevent brokerage-type arrangements whereby small “front” organizations are set up to bid on government contracts, but furnish the supplies of a large concern. The rule serves, in other words, to prevent dealers from acting as mere conduits for the products of large manufacturers on small business set-aside procurements. Rotech Healthcare, Inc. v. United States, 71 Fed. Cl. 393 (Jul 24, 2006)

If you are a small business that is not a manufacturer of other specific goods or products sold to the government, you may still be qualified to win a small business set-aside contract under an exception to the 50% rule:  the Non Manufacturers. Rule.  One key component and requirement is your company, as a small business, must supply a product made in the United States.  See 15 USC 637(a)(17); 13 CFR 121.406.

Thus, an offeror may qualify to provide manufactured goods for a small business set-aside if the offeror is the manufacturer of the end items procured by the government.  The offeror may also qualify if it is not actually the manufacturer, but it does meet certain nonmanufacturer exceptions under 13 CFR 121.406(a).  In most cases, but not always, the end product must be manufactured by another small business.

The $25,000 Threshold

The restriction on providing the products made by other small businesses under the Non Manufacturer Rule only applies to government contractors that receive contracts above $25,000 under the SBA 8a set aside program, or on small business set asides (including set-aside orders against GSA Federal Supply Schedule contracts).  If the value of the order is below $25,000 a small business non manufacturer can supply the product of any domestic business. The domestic business can be large.  FAR 19.502-2(c) and FAR 19.505(c)

Also, for contracts and orders awarded under the HUBZone Program at or below $25,000 in total value, a HUBZone small business concern may supply the end item of any manufacturer, including a large business, as long as the product acquired is manufactured or produced in the United States. See FAR 19.1308(e)(3).  Same rule, different FAR provision.

Other dollar thresholds can also apply.  For example, see FAR 19.502 for rules regarding acquisitions under $3,500, which do not need to be set aside for small business, and acquisitions from required sources of supply, e.g. Committee for Purchase From People Who Are Blind or Severely Disabled.  Specialized rules also apply to GSA’s Federal Supply Schedule contracts, see FAR 8.405-5.

What is a Manufacturer Under 13 CFR 121.406?

Under the applicable regulation, a “manufacturer” is a company that:

– owns its own facilities, and

– performs the primary roles of transforming inorganic or organic substances, including the assembly of parts and components, into the end item being purchased by the government. 

– There Can Be Only One Manufacturer

Note that under the Non Manufacturer Rule, for size determination purposes, there can be only one manufacturer of the end product being acquired by the government.  FAR 19.505(c)(3).

– Minimal Alteration Is Not Enough

For the purposes of the Non Manufacturer Rule, the manufacturer is the concern that transforms raw materials and/or miscellaneous parts or components into the end product. The FAR draws a distinction between transformation into end products, and minimal alteration. 

Firms only minimally altering the item being procured do not qualify as manufacturers of the end item.  For example, firms adding substances, parts, or components to an existing end item to modify its performance, will not be considered the end item manufacturer, where those identical modifications can be performed by and are available from the manufacturer of the existing end item. See 13 CFR 121.406 for further information regarding manufacturers. FAR 19.505(c)(3).

Non-Manufacturer Criteria

Under the applicable regulation, a “manufacturer” is a company that:

– owns its own facilities, and

– performs the primary roles of transforming inorganic or organic substances, including the assembly of parts and components, into the end item being purchased by the government. If your company does not meet these two requirements, then it very likely may fall into the non-manufacturer category.

Your company may qualify as a non-manufacturer if it meets the following criteria:

  • – Does not exceed 500 employees;
  • – Is primarily engaged in the retail or wholesale trade, and normally sells the type of item being supplied;
  • – Takes ownership or possession of the item(s) with its personnel, equipment or facilities in a manner consistent with industry practice; and
  • – Will supply the end item of a small business manufacturer or processor or producer made in the United States, or
  • – Obtains a waiver of such requirement pursuant to paragraph (b)(5) of 13 CFR 121.406.

Tip Most small businesses fail the last aspect of the requirements.  If so, the government Contracting Officer may deem the firm ineligible for the set-aside contract award.  As the offeror, you may want to make sure that if you are proposing to supply a product manufactured by a large business that you have applied for a waiver.

Tip:  When it comes to the Non Manufacturer Rule waiver list, SBA regulations make clear that “[c]ontracting officers must provide written notification to potential offerors of any waivers being applied to a specific acquisition whether it is a class waiver or a contract specific waiver,” and that if such notice is not provided, “then the waiver cannot be applied to the solicitation.  This rule applies to both class and individual waivers.”  See 13 CFR 121.1206.

Kits of Supplies or Kits of Other Goods

FAR 19.505(2) provides specialized rules for kits.  In addition to the other rules, “…when the end item being acquired is a kit of supplies or other goods, 50 percent of the total value of the components of the kit shall be manufactured in the United States or its outlying areas by small business concerns. Where the Government has specified an item for the kit which is not produced by U.S. small business concerns, such items shall be excluded from the 50 percent calculation. See 13 CFR 121.406 (c) for further information regarding nonmanufacturer kit assemblers.”

8a Program SBA Non Manufacturer Rule FAR & Waiver List and Waiver Requests

The Small Business Act contains provisions allowing the Administrator of the Small Business Administration (SBA Administrator) to waive the SBA Non Manufacturer Rule requirements.  The SBA Administrator may provide a waiver when there are no small business manufacturers or processors available to supply the product to the federal government except for non manufacturers. Non manufacturer rule waiver list cannot be granted for HUBZone procurements.  Also, waivers cannot be granted after the solicitation has been released.

The SBA Administrator has delegated authority to grant waivers to the SBA Director of Government Contracting.  Accordingly, requests for waivers should be sent to SBA’s Director of Government Contracting.  See FAR 19.505(c)(4)(ii) for information on where to send requests for individual waivers. See information about SBA 8a Mentor Protégé Joint Venture Rules 13 CFR 124.513 & 13 CFR 121.103.]

Under the SBA rules, in order to request a waiver, a government contracting agency must provide SBA with the solicitation, and market research on whether manufacturers exist, and then wait several weeks for SBA to verify the data and decide whether to grant the waiver.

Without a waiver, an offeror for a small business set-aside supply contract usually must either manufacture at least 50% of the product on its own, or supply the product of a small business made in the United States.  Many waiver requests below $150,000 are for name brand items (for example, computers) that are clearly not made by small businesses in the United States. 

Other rules apply regarding when agency procurements may be restricted to name brand items.  For example, see generally, FAR Part 11.  This area is not within the SBA’s jurisdiction.  The agency Contracting Officer must make the determination whether the agency will restrict a purchase to name brand items.  If this determination is not made properly, it can be protested by interested parties.

Types of Set Aside Procurements

It is possible to become qualified as a small business concern under various U.S. Government socioeconomic preference programs.  The preference programs include:  small business – e.g. any business which is “small” under the NAICS code for a specific government procurement; Service Disabled Veteran Owned Small Business (SDVOSB); HUBZone; Women Owned Small Business (WOSB) or Economically Disadvantaged Women Owned Small Business (SDWOSB); participants in the SBA’s  8(a) program, and more.  Government contract set-asides can be total or partial, and can be sole source or competition can be restricted to members of a specific category or categories of businesses.  Also orders against a multiple award contract may be set aside. 

In any set-aside situation, if the procurement is for manufactured products or other supply items, eligible offerors must either manufacture the item in accordance with the Limitations on Subcontracting rules (see FAR section 52.219-14, 52.219-27, and 13 CFR  125.6) or supply the product of a small business, made in the United States.

Types of Waivers:  Individual Waivers, and Class Waivers

As mentioned above, the SBA can waive the non manufacturer requirement if there are no small business manufacturers or processors available to supply the particular product the government needs.   Two types of waivers can be granted, individual waivers, and class waivers.

  – Individual Waiver

Here, the SBA reviews a Contracting Officer determination that no small business processor or manufacturer can reasonably be expected to offer a product that can meet the specifications (including the period of performance) required of an offeror, or required by the solicitation. 15 USC § 637(17)(B)(iv)(I)

  – Class Waiver

Here, SBA grants a waiver for a product (or class of products) after determining that no small businesses is available to participate in the Federal procurement market.  15 USC § 637(17)(B)(iv)(II)

On occasion, offerors have challenged a Contracting Officer’s decision whether to seek a waiver.  The structure and purpose of the Non-Manufacturer Rule demonstrates that the rule was meant to be the default setting, and a waiver the exception, not the other way around.  The GAO has found that the decision is afforded significant deference.  In the absence of any hint of a corrupt or unscrupulous motive in the agency decision to not seek a waiver, the U.S. Court of Claims has found that there is no basis upon which it could question the agency’s decision.  Geo-Med, LLC V US, 126 Fed. C. 440 (April 20, 2016).

Tip It can be a mistake to assume that just because a waiver exists for the large-business product your small business proposes to sell that you will be free to do so under the Non Manufacturer Rule.  Whether the CO provided written notice to offerors of the waiver can matter.  If the CO did not include in the solicitation a written notice of the waiver, then the waiver cannot be applied to the solicitation.  This is true for both class waivers and individual waivers.  Thus, silence in a solicitation can mean that the waiver does not apply under SBA regulations.  See 13 CFR 121.1206  Size Appeal of:  Mystic Ventures Group, LLC, SBA No. SIZ-6006 (May 21, 2019)

HUBZone participants should be aware that there are no class waivers or waivers to the nonmanufacturer rule for individual solicitations for contracts and orders awarded under the HUBZone Program.  See FAR 19.1308(e)(2).

Eligibility Requirements

Under the Non Manufacturer Rule, 13 CFR 121.406, your small business may qualify as a “non-manufacturer.”  If it does, your small business may be eligible to win a federal government requirement to provide manufactured products, or other supply items, if it:

– Does not exceed 500 employees;

– Is primarily engaged in the retail or wholesale trade, and normally sells the type of item being supplied;

– Takes ownership or possession of the item(s) with its personnel, equipment or facilities in a manner consistent with industry practice; and

– Will supply the end item of a small business manufacturer or processor or producer made in the United States, or

– Obtains a waiver of such requirement pursuant to paragraph (b)(5) of 13 CFR 121.406.

The SBA Non Manufacturer Rule provides that procurements processed under the FAR’s Simplified Acquisition Procedures “the offeror does not have to supply the end product of a small business concern.” The new SBA 8a certification rules do not require an offeror to supply the end item of a small business for a procurement conducted under simplified acquisition procedures.  Size Appeal of Jamaica Bearings Company RE: Electrical & Electronic Suppliers, Inc., SBA No. SIZ-5677 (Sept 3, 2015).

Additionally, when small businesses in the SBA 8a Program find themselves confused, it can be helpful to understand that the Non Manufacturer Rule regulations also state that an offeror must comply with 13 CFR 121.406(b)(1)(iv).  This part of the rule requires offerors to “supply the end item of a small business manufacturer,” (See also information about Non Manufacturer Rule waivers.)

See information where Contractor Faces Service Disabled Veteran Fraud and False Claims Act Criminal Liability

Common Mistakes to Avoid When Applying the Non Manufacturer Rule

Ask, if the solicitation is ambiguous.

It can be a mistake to remain silent when it is unclear whether or how the Non Manufacturer Applies.  When bidding for a set-aside competition, it can be unclear whether the Non Manufacturer Rule applies.  Remember that if the solicitation has a glaring ambiguity, an offeror has a duty to inquire.  The standard is whether the ambiguity would be apparent to a reasonably prudent contractor.  Sometimes the agency Contracting Officer does not always make the correct decision regarding whether the Rule applies.  If you ask, and receive an answer from the Contracting Officer that you believe is incorrect, the procurement can be protested.  Rotech Healthcare, Inc. v. US, 71 Fed. Cl. 393 (Jul 24, 2006)

– The Non Manufacturer Rule can apply to contracts including both supplies and services.

It can be a mistake to assume that if a contract includes services, as well as supplies, the nonmanufacturer rule no longer applies.  It is true that the Non Manufacturer Rule does not apply to service contracts.  However, the U.S. Claims Court has made it clear that the Non Manufacturer Rule applies to all supply contracts, whether they implicate some level of services or not.  In other words, the rule does apply to contracts for the supply of manufactured items which also require the provision of some services.  Rotech Healthcare, Inc. v. US, 71 Fed. Cl. 393 (Jul 24, 2006); Also, on January 26, 2016, SBA promulgated a final rule providing that the supply component of a small business-set aside ITVAR contract is required to comply with the non-manufacturer rule.  York Telecom Corp. v. US, 130 Fed. Cl. 186 (Jan 11, 2017)

The NAICS code is not everything.

It can be a mistake to look only at the NAICS code, and stop there.  When determining whether the Non Manufacturer Rule applies, whether the NAICS code is a manufacturing, or supply NAICS code can matter.  However, it is important to realize that the NAICS code assigned by the CO is not the end of the story.  Courts will also look at a number of other factors, including whether the value of the contract is mostly, if not entirely, attributable to the portion which calls for the supply of manufactured goods.  Rotech Healthcare, Inc. v. US, 71 Fed. Cl. 393 (Jul 24, 2006)  Be aware that if a solicitation contains a NAICS code with a size standard, the statutory non-manufacturer rule requires that an offeror seeking coverage under the rule must satisfy the size standard imposed by the NAICS code for the relevant contract.   York Telecom Corp. v. US, 130 Fed. Cl. 186 (Jan 11, 2017)

Leases, and items not sold to the general public.

It can be a mistake to assume that the Non Manufacturer Rule prevents your small business from leasing to the government an item made by a large business.  Also it can be a mistake to assume that the Rule prevents your small business from selling to the government items, if these items are not sold to the general public.  Pride Int’l, LLC v. United States, 64 Fed. Cl. 754 (Jan 31, 2005)

GSA Federal Supply Schedule (FSS) awards need not be set asides.

It can be a mistake to assume the government must set aside for small business a GSA Federal Supply Schedule award.  The Contracting Officer has discretionary authority to set-aside an order against the FSS, but is not required to do so.  According to GAO, agencies are not required to follow the Small Business Rule of Two (e.g. a minimum of two offerors are anticipated) when issuing orders or establishing BPAs under the FSS.  Accordingly, the U.S. Claims Court dismissed a challenge to the reasonableness of a Contracting Officer’s market research, and a challenge to a CO’s refusal to seek a waiver of the Non Manufacturer Rule.  Am. Relocation Connections, L.L.C. v. US, 139 Fed. Cl. 747 (Sept 24, 2018)

A waiver does not necessarily apply to all items.

It can be a mistake, in the case of multiple item contracts, to assume that a Non Manufacturer Rule waiver applies to the whole contract.  Where a waiver is granted, the waiver only applies to the items subject to the waiver.  Thus, “more than 50% of the value of the products to be supplied by the nonmanufacturer that are not subject to a waiver must be the products of one or more domestic small business manufacturers or processors.”  This can result in a situation where the same small business may act as both a manufacturer and a nonmanufacturer.  Land Shark Shredding, LLC v. US, 145 Fed. Cl. 530 (Oct 9, 2019)

Understand which types of work do not count as “manufacturing.

One common mistake made by both government officials and contractors is to misunderstand what types of work are, and are not, manufacturing.  In determining which entity is the manufacturer, it matters what roles the prime contractor and its subcontractors play in the manufacturing process.  For example, OHA has repeatedly explained that product design and engineering are not manufacturing.  Similarly, if the prime performs testing and quality control, again, that work does not constitute manufacturing.  Manufacturing is transformation of raw materials into end items.  For example, activities such as cutting and sewing are integral to all types of apparel manufacturing process, even if not expressly included in the applicable manufacturing NAICS code.  Size Appeal of HWI Gear, RE: Appellant, SBA No. SIZ-6072 (Sept 16, 2020). See also information about similarly situated entities and limitations on subcontracting.

Changes to business relationships can jeopardize your small business status.

It can be a mistake to allow your small business to be acquired while you are competing for a small business set aside.  To do so can introduces the possibility that the new affiliations can cause you to suddenly be too large to be eligible for the contract award.  For example, if you are a small business at the time your submit your initial proposal, and then you are acquired by a large business, you may not still be “small” under the applicable NAICS code at the time you submit your final proposal to the government.  

The basic rule is that in determining whether a firm is the manufacturer of an end item, size is assessed as of the date of initial offers (including price).  However, for purposes of the Non Manufacturer Rule, size is determined at the time of final proposals.  If before you submit your final proposal you are bought by a large business, or become large through other changes to your affiliations, you could find that your business is suddenly no longer eligible for award of the contract.  Size Appeal of HWI Gear, RE: Appellant, SBA No. SIZ-6072 (Sept 16, 2020).

The Non Manufacturer Rule Compliance Analysis Is the Same for Regular Small Businesses and for SBA 8a Participants

Whether your firm is involved in an SBA 8a Program SBA size determination, or your firm is a regular small business, you should ensure that your internal compliance policies address Non Manufacturer Rule compliance concerns.  It is advisable to have someone available to keep up with the new procurement policy issues that can impact small businesses. Learn how to avoid costly mistakes with SDVOSB joint ventures.

 Speak to an Attorney & Get a Free Initial Consultation 

For help in appealing an SBA Size Determination based on the SBA Non Manufacturer Rule or if you have concerns regarding your daily operations, call our small business and FAR. government contract lawyers at 1-866-601-5518.

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