How Does the SBA Non manufacturer Rule, 13 CFR 121.406, Impact Your Small Business Size?

SBA non manufacturer ruleTheodore P. Watson, Esq: The SBA Non Manufacturer Regulation has 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 for a requirement to provide manufactured products or other supply items as a nonmanufacturer if your company.

What is the Non Manufacturer Rule 13 CFR 121.406? 

The SBA Non manufacturer rule (NMR) is considered an exception to typical performance requirements on a federal government contract. If you are a small business that is not a manufacturer of the specific goods or products sold to the government, you can still qualify under the Non-Manufacturer Rule. A key component and requirement is that your company, as a small business must be supplying a product made in the United States. See 15 USC 637 (a)(17); 13 CFR 121.406.

Under SBA procurement regulations, an offeror cab qualify and provide manufactured goods for a small business set-aside if the offeror is the manufacturer of the end items procured by the government, or of it meets certain. The offeror can also qualify if it meets certain nonmanufacturer exceptions under 13 C.F.R. § 121.406(a).

The NMR applies to government contractors that receive contracts above $25,000 under the SBA 8a set aside program or on a small business set-aside (including set-aside orders against GSA Schedule contracts).  If the value of the order is below $25,000, a small business non manufacturer (including a HubZone) can supply the product of any domestic business. 

The limitations on subcontracting rule and the NMR as set forth in the Small Business Act do not exclude set-asides under other authorities from those requirements based on the value of the contract. 15 USC 637(a)(17). The only set-aside authority that is not cited in the limitations on subcontracting provision is Section 15(j) of the Small Business Act, which is the statutory authority for small business set-asides valued between $3,500 and $150,000.

What is a Manufacturer?

Companies that own their own facilities, performs the primary roles of transforming inorganic or organic substances, including the assembly of parts and components, into the end item being acquired. 13 CFR 121.406(b)(2); FAR 19.102(f)(1). If you do not meet this requirement, then you may very likely 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;
  • ownership or possession of the item(s) with its personnel, equipment or
    facilities in a manner consistent with the industry practice; and
  • Will supply the end item of a small business manufacturer processor or
    producer made in the United States, or obtains a waiver of such requirement
    pursuant to paragraph (b)(5) of this section.

Tip: Most small business fail the last aspect of the requirements and therefore are deemed ineligible for the contract award. As the offeror you want to make sure that if you are proposing to supply  a product manufactured by a large business, then you must apply for a waiver of the non manufacturer requirements.

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 rules applies to both class  individual waivers.” See 13 CFR 121.1206

8a Program SBA Non Manufacturer Rule Waiver List

The Small Business Act contains provisions that allow the Administrator of the Small Business Administration (SBA) to waive the SBA Non Manufacturer Rule requirement when there are no small business manufacturers or processors available to supply the product to the federal government except non-manufacturer waivers are not granted for HUBZone procurements and non-manufacturer waivers cannot be granted after a solicitation has been released.

The SBA Administrator has delegated authority to grant waivers to the SBA Director of Government Contracting. Requests for waivers should be sent to SBA’s Director of Government Contracting.

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

Without a waiver, an offeror on a small business set-aside supply contract 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 (e.g., computers) that are clearly not made by small businesses in the United States. Whether an agency can procure name brand items is not within the jurisdiction of SBA. The contracting officer must make that determination, which can be protested by interested parties.

To become qualified as a small business concern for a small business set-aside, service-disabled-veteran-owned small business set-aside or sole source contract, HUBZone set-aside or sole source contract, WOSB or EDWOSB set-aside or sole source contract, 8(a) set-aside or sole source contract, partial set-aside, or set aside of an order against a multiple award contract to provided manufactured products or other supply items, you must either manufacture the item in accordance with the Limitations on Subcontracting (see FAR section 52.219-14, 52.219-27 and 13 CFR section 125.6)) or supply the product of a small business made in the United States.

The SBA can waive the non manufacturer requirement if there are no small business manufacturers or processors available to supply the product to the Federal Government. The following are the various types of available waivers.

 Individual waiver

 Here the contracting officer must make a 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 by the solicitation.

Class waiver

 This type of waiver comes into play when the contractor makes a determination that under a small business set aside, there are no small businesses available to participate in the Federal procurement market.

Under the rule, 13 CFR 121.406, your small business may qualify for a requirement to provide manufactured products or other supply items as a non manufacturer if your company:

  • 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, processor or producer made in the United States, or obtains a waiver of such requirement pursuant to paragraph (b)(5) of this section. 

The SBA nonmanufacturer rule provides that procurements processed under simplified acquisition procedures, “the offeror does not have to supply the end product of a small business concern.”

In addition, when small businesses in the SBA 8a Program find themselves confused, it is helpful to understand that the non-manufacturer rule regulation also states 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 additional information about non-manufacturer rule waivers.

The confusion is a size determination case is whether a small business must produce the end item under 13 CFR 121.406 (d).  The SBA has often found bidders to other than small.

To eliminate the confusion is a size determination case, government contractors should know that prior to 2014, 13 CFR 121.406 (d) stated that “the offeror need not supply the end product of a small business concern as long as the product acquired is manufactured in the United States, and the offeror does not exceed 500 employees.” 13 CFR 121.406 (d) (2013).

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. See Size determination of Jamaica Bearings Company.

Same Analysis for SBA 8a Program Participants or Regular Small Businesses

Whether or not you are involved in an SBA 8a Program SBA Size Determination, or you are a regular small business, you should make sure that your internal compliance policies address this specific concern. It is also advisable to have someone to keep up on the new procurement policy issues that can impact small businesses.

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 have concerns about your daily operations, call our government small business contract lawyers at 1-866-601-5518.

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