DoD Proposes Aligning DFARS 8(a) Nonmanufacturer Rule with Existing SBA Regulations

The DoD recently issued proposed revisions to the DFARS 8(a) nonmanufacturer rule, found in 48 C.F.R. § 252.219-7010. The proposed revisions would update the admittedly “outdated text regarding the nonmanufacturer rule with updated text” that reflects SBA’s May 2016 final rule implementing the Fiscal Year 2013 National Defense Authorization Act.

While the changes are only for 8(a) concerns, the differences between the existing DFARS and proposed change are significant nonetheless.

The proposed rule change is found in 84 FR 12187, which was published on April 1, 2019. The sole purpose of this proposed rule is to amend the DFARS to align with the SBA’s rule to provide “revised and standardized limitations on subcontracting, including the nonmanufacturer rule, that apply to” participants in the 8(a) Program. Comments are due on or before May 31, 2019.

While 48 C.F.R. § 252.219-7010 has other relevant sections, the proposed rule only impacts section (d). In its current form, section (d)(1) states that an 8(a) concern must furnish “only end items manufactured or produced by small business concerns in the United States or its outlying areas” unless one of the following three exceptions exist:

  1. The SBA has issued a waiver in accordance with FAR 19.502-2(c);
  2. The acquisition is processed under simplified acquisition procedures and the total contract value does not exceed $25,000; or
  3. The contract is a construction or service contract.

The proposed rule alters the language of the waiver exception and eliminates the “does not exceed $25,000” exception. In other words, even if an 8(a) concern is performing a contract under the simplified acquisition threshold, the proposed rule would still apply. The “construction or service contract” exception remains.

SBA’s nonmanufacturer rule can be found at 13 C.F.R. § 121.406(b)(1). Within, there are four requirements a small business, 8(a) or otherwise, must meet to satisfy the nonmanufacturer rule. First, the concern must not exceed 500 employees. Second, it must be primarily engaged in the retail or wholesale trade and normally sell the product being supplied. Third, it must take ownership or possession of the item at issue. Fourth, it must “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 13 C.F.R. § 121.406(b)(5).

The proposed rule only carries three of these requirements. Under the proposed 48 C.F.R. § 252.219-7010(d)(1), an 8(a) participant may be excepted from the nonmanufacturer rule if there is an SBA-issued waiver, in accordance with 13 C.F.R. § 121.1204, which aligns with the fourth requirement listed above. The proposed rule also requires the end item be “manufactured, processed, or produced” by a small business in the United States or its outlying areas. This aligns with, and slightly expands upon, the fourth requirement listed above. The proposed rule further requires the 8(a) participant be primarily engaged in the retail or wholesale trade and normally sell the product being supplied, which aligns with the second requirement listed above. Finally, the 8(a) participant must take ownership or possession of the item, which aligns with the third requirement listed above.

Under the proposed rule, an 8(a) participant does not have an employee count restriction, as is the case with SBA’s regulation. 8(a) companies, however, should still assume that they must fall beneath 500 employees to count as nonmanufacturers: the SBA’s regulation in 13 C.F.R. 121.406(b)(1) imposes this requirement.

The proposed rule also includes an exception for kits of supplies so long as 50 percent of the total cost of the components of the kit are “manufactured, processed, or produced by small businesses in the United States or its outlying areas.”

While we already mentioned this, I want to circle back and remind you that this proposed rule would apply the nonmanufacturer rule even to contracts under the simplified acquisition threshold. In fact, the proposed rule specifically recognizes that “SBA’s final rule applied the nonmanufacturer rule to 8(a) contracts at any dollar value.” By removing the simplified acquisition threshold exception, the proposed rule states the “nonmanufacturer rule will apply to 8(a) contracts at any dollar value, and 8(a) participants that are nonmanufacturers will be required to offer end items manufactured, processed, or produced by small business concerns in the United States or its outlying areas.”

As you can see, the proposed rule almost matches the DFARS regulations, 48 C.F.R. § 252.219-7010(d), with those of the SBA, 13 C.F.R. § 121.406(b)(1). Keep in mind, though, that while SBA’s regulations cover SDVOSB, HUBZone, WOSB, and 8(a) contracts, the DFARS regulation at issue only addresses 8(a) contracts.

Whether you are an 8(a) concern that is losing the “does not exceed $25,000” exception, a WOSB wanting the DFARS to incorporate WOSB nonmanufacturer regulations, or another entity that wishes to have your voice heard, remember that comments are accepted through May 31, 2019.