In a previous post, my colleague Matt Schoonover, discussed the contours of the limitation on subcontracting and mentioned we’d follow up with a discussion on the non-manufacturer rule.
Your wait has ended! In this post we’ll address how SBA defines manufacturers and how a non-manufacturer can qualify to provide supplies under set-aside contracts.
There are two ways for a firm to provide products under a supply contract set aside for small businesses. It can be the manufacturer of those products. Or it can qualify under the non-manufacturer rule. We address each option in turn.
Qualifying as a product’s manufacturer
One way to furnish a product under a set-aside contract is to be the product’s manufacturer. But note: you must produce or manufacture the product in the United States. And there can’t also be another entity who qualifies as the product’s manufacturer.
So, who qualifies as a product’s manufacturer? Under SBA’s regulations, the “manufacturer is the concern which, with its own facilities, performs the primary activities in transforming inorganic or organic substances, including the assembly of parts or components, into the end item being acquired.”
In essence, the the manufacturer of the product must substantially transform raw materials into the product that the Government seeks. If a firm only performs “minimal operations” on a product, it’s not the manufacturer. Likewise, if a firm simply modifies a product (and the original manufacturer performs and offers similar modifications), it’s not the manufacturer.
For example, you won’t qualify as boot manufacturer by putting in the laces and placing them in a box. Rather, a boot manufacturer is the entity that transforms the rubber, leather, or other other material into boot form. The manufacturer, in short, gives a component, material, or part characteristics—through certain processes—that the original component, material, or part did not initially possess.
Now, if you qualify as a product’s manufacturer, the firm must still comply with the limitation on subcontracting applicable to supply contracts. That is, in manufacturing the product, the firm cannot pay more that 50% of the price paid by the Government to a non-similarly situated entity. BUT, in assessing compliance, don’t include material costs to manufacture the item. In other words, materials (say, the leather for the boots above) does not constitute a subcontracted cost.
Supplying products even as a non-manufacturer
What if a firm doesn’t qualify as a product’s manufacturer. Can it still offer products under set-aside contract for supplies?
Yes . . . if it qualifies as a “non-manufacturer.” To quality, a firm must meet these requirements:
- does not have more than 500 employees
- primarily engages in the retail or wholesale business and normally sells the supplies that the Government seeks
- takes ownership or possession of the supplies with its own personnel, equipment, or facilities consistent with industry practice
- supplies the product of a small business manufacturer made in the United States
Individual or class waivers can remove the fourth requirement. SBA may issue an individual (or contract-specific) waiver if (1) the contracting officer determines that no small business manufacturer can likely offer a product meeting the agency’s specifications, and (2) SBA agrees with that determination. SBA can also issue a class waiver if it determines that there is no available small business manufacturer.
If SBA waives the fourth requirement, a small business non-manufacturer can furnish the product of any firm—regardless of that firm’s size or where the product is manufactured. That said, the non-manufacturer rule does not remove the requirements of domestic preference statutes, like the Buy American Act or the Trade Agreements Act. (Take a look here at our coverage of President Biden’s recent executive order addressing various initiatives under the Buy American Act.)
In the end, the non-manufacturer rule functions as an quasi-exception to the limitation on subcontracting for supply contracts. But, to qualify for this exception, it’s critical to carefully assess compliance with the rule’s requirements.
* * *
If you have any questions about the limitation on subcontracting, the non-manufacturer rule, or other SBA procurement-related regulations, give us a call at 913-354-2630.