understanding & complying with the non-manufacturer … · understanding & complying with...

Steven Koprince785-200-8919

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Understanding & Complying With the Non-Manufacturer Rule

GOVOLOGY

July 13, 2016


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Presentation Overview


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Presentation Overview

• Non-Manufacturer Rule Overview

• Application of the Non-Manufacturer Rule

• SBA Non-Manufacturer Rule Waivers

• Kit Assemblers


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Non-Manufacturer Rule Overview


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• Many Government contracts are issued as set-asides • Set-asides may be for small businesses or for certain

subcategories of small businesses, including 8(a)s, HUBZones, SDVOSBs and WOSBs

• All set-aside contracts contain certain “performance of work” requirements– Example: SDVOSB set-aside for construction requires

SDVOSBs to perform at least 15% of the cost of the contract (less materials)


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• When a set-aside contract is designated with a manufacturing (product/supply) NAICS code, the prime contractor is only eligible for award if:

– The prime contractor will not pay more than 50% of the amount paid by the government to firms that are not similarly situated, or

– The prime contractor qualifies as a non-manufacturer


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• Being a “non-manufacturer” means much more than “not manufacturing” the goods being ordered

• Four factors must be satisfied in order to qualify as a non-manufacturer

– See 13 C.F.R. 121.406


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• First, the prime contractor cannot exceed 500 employees.– Employee count is determined using the formula set forth in 13

C.F.R. 121.106

– Most small business brokers have little difficulty meeting this requirement.


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• Second, the prime contractor must be “primarily engaged in the retail or wholesale trade and normally sell the type of item being supplied.”

– Best practice: ensure that there is evidence of regularly selling item being acquired (See Size Appeal of Ira Green Inc., SBA No. SIZ-5287 (2011))


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• Third, the prime contractor must “[take] ownership or possession of the item(s) with its personnel, equipment, or facilities in a manner consistent with industry practice.” – Legal possession without physical possession (e.g., drop shipping)

is acceptable. See Size Appeal of Wear Mark Inc., SBA No. SIZ-5402 (2012).


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• Fourth, the prime contractor must “supply the end item of a small business manufacturer, processor or producer made in the United States, or [obtain] a waiver of such requirement.

• Bottom line: in the absence of a SBA waiver, a small business cannot supply the manufactured product of a large business on a set-aside contract designated with a manufacturing NAICS code.


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• Don’t forget the “domestic” component

– Size Appeal of Novex Enters., SBA No. SIZ-5637 (2013): company could not qualify as nonmanufacturer because end products would be manufactured in Turkey


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• The HUBZone Program:– To qualify as a HUBZone as a nonmanufacturer, the

small business manufacturer must also be a HUBZone company (FAR 19.1303(e))

– Exception: for HUBZone contracts at or below $25,000, “a HUBZone small business concern may supply the end item of any manufacturer, including a large business, so long as the product is manufactured or produced in the United States” (FAR 19.1303(e)(2))


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Application of the Non-Manufacturer Rule


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• SBA: the non-manufacturer rule “applies only to procurements that have been assigned a manufacturing or supply NAICS code.”

• SBA: if a contract is classified as a services or construction contract, but has a supply component, the prime contractor need not comply with the non-manufacturer rule for that component.


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• Rotech Healthcare Inc. v. United States, No. 14-502C (2014): Court holds that non-manufacturer rule applies to all NAICS codes.

• 2016 NDAA: overturned Rotech Healthcare case and applies non-manufacturer rule only to manufacturing/supply contracts.


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• Compliance with the non-manufacturer rule is determined “as of the date of the final proposal revision for negotiated procurements and final bid for sealed bidding.”

• A prime contractor cannot retroactively become compliant after submission of final proposals. SeeSize Appeal of Rich Chicks, LLC, SBA No. SIZ-5556 (2014).


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• Compliance can be evaluated throughout the course of performance.– Third Coast Fresh Distribution, LLC, ASBCA No. 59696

(2016): awardee intended to comply with non-manufacturer rule at time of proposal, but found it “economically infeasible” to do so during performance

– ASBCA upholds agency’s decision to terminate contract for default for failure to actually comply with NMR


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Non-Manufacturer Rule Waivers


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• Exemption (not a waiver): Non-manufacturer rule does not apply to small business set-aside contracts valued between $3,000 and $150,000– This change took effect June 30, 2016

– SBA believes it will “spur small business competition” by making it more likely that Contracting Officers will issue small business set-asides

– Previous exemption was $25,000


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• SBA can waive fourth non-manufacturer rule requirement (supply the end product of a domestic small business) so long as other three factors are met

• SBA waivers may be issued as “individual” or “class”

• There are no NMR waivers in the HUBZone program because end manufacturer must be a HUBZone (FAR 19.303(e)(1))


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• The SBA may issue an individual waiver where “the contracting officer has determined that no small business manufacturer or processor reasonably can be expected to offer” a conforming product.

• The Contracting Officer asks for the waiver; only the SBA can grant the waiver

• A contractor cannot ask for an individual waiver


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• The SBA may issue a class waiver where it “determines that no small business manufacturer of the product or class or products is available to participate in the Federal procurement market”

• Anyone can request a class waiver—but they take time to be evaluated

• Current list of class waivers available at: https://www.sba.gov/content/non-manufacturer-waivers


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• Once granted, a class waiver has no specific time limitation.

• However, the SBA will periodically review the existing class waivers to determine whether small businesses have become available to participate in the Federal market.


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• If a procurement seeks multiple items and some of them are waived, but some not, “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.”


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• Effective June 30, 2016: Contracting Officers must notify prospective offerors of any waivers that will be applied to the procurement.

– Notification must be given “at the time a solicitation is issued.”


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Kit Assemblers


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Kit Assemblers

• Where government seeks a kit of supplies or goods manufactured by different companies and assembled for a special purpose, a unique rule applies.

• A “kitter” qualifies as a non-manufacturer so long as:

– It is under 500 employees

– 50 percent of the total value of the components of the kit is manufactured by small businesses in the United States


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Kit Assemblers

• Unlike a typical non-manufacturer, a kitter need only show that 50% of the value of its products come from small businesses

• Additionally, if the solicitation specifies an item for the kit not produced by U.S. small businesses, the item is excluded from the 50% calculation


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Kit Assemblers

• Size Appeal of B GSE Group, LLC, SBA No. SIZ-5679 (2015): SBA Office of Hearings and Appeals rejects argument that purchasing parts and assembling them is the delivery of a “kit”

• SBA OHA holds that a kit is a collection of items sourced from multiple suppliers, such as tool kits


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For More Information

Steven J. Koprince

Managing Partner

(785) 200-8919

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