Nonmanufacturer Rule: Large Manufacturers OK’d For Certain Simplified Acquisitions

In a small business set-aside simplified acquisition of $25,000 or less, small business offerors may propose using large business manufacturers while still complying with the requirements of the nonmanufacturer rule.

In a recent decision, the SBA’s Office of Hearings and Appeals held that an apparent ambiguity contained in the nonmanufacturer regulation for certain simplified acquisitions should be resolved in favor of exempting offerors from the requirement that the manufacturer be a small business concern.

OHA’s decision in Jamaica Bearings Co., SBA No. SIZ-5677 (Sept. 3, 2015) involved a DLA small business set-aside for bearings, rollers and tape. The procurement was to be conducted under simplified acquisition procedures.

Electrical & Electronic Suppliers, Inc. (“E&E”), a small business, submitted an offer.  E&E proposed supplying bearings produced by Timken Bearings, which is a large Venezuelan corporation with bearing manufacturing facilities in Canton. After evaluating competitive proposals, the DLA awarded the contract to E&E.

Jamaica Bearings Co., an unsuccessful competitor, filed a SBA size protest. Jamaica Bearings argued that E&E did not comply with the nonmanufacturer rule because E&E’s principal bearing supplier, Timken, was a large business. Jamaica Bearings contended that this arrangement violated the nonmanufacturer rule, which ordinarily requires that a firm may only qualify as a small business under a set-aside contract for manufactured goods where the firm will manufacture the goods itself or “supply the end item of a small business manufacturer, processor or producer made in the United States . . ..”

The SBA Area Office found that E&E satisfied the nonmanufacturer rule because of a special regulatory exception for certain simplified acquisitions. Under 13 C.F.R. 121.406(d), “where the procurement of supplies or manufactured items is processed under Simplified Acquisition Procedures . . . and the anticipated cost will not exceed $25,000, the offeror does not have to supply the end product of a small business concern.”  Because E&E’s contract apparently did not exceed $25,000, the SBA Area Office found that E&E was authorized to supply the end product of a large manufacturer.

Jamaica Bearings filed a size appeal with OHA. Among the issues raised in OHA’s decision was an ambiguity in the text of the non-manufacturer rule. Although, as stated above, the rule specifies that small manufacturers are not required for simplified acquisitions under $25,000, the portion of the regulation establishing this exception also specifies that the small manufacturer must “meet the requirements of paragraph (b)(1)(i) through (b)(1)(iv) of this section.” Paragraph (b)(1)(iv), in turn, is the paragraph requiring the prime contractor to supply the end item of a small business manufacturer.

To resolve the ambiguity, OHA turned to the regulatory history of the nonmanufacturer rule. The nonmanufacturer rule was amended in 2014. Rather than recite each element of the nonmanufacturer rule in both subparts (b) and (d), the SBA instead referred readers of the simplified acquisition exceptions in subpart (d) to the general nonmanufacturer rule in subpart (b). Despite this change, there was no indication the SBA intended to substantively change the settled interpretation of the rule that offerors in certain simplified acquisitions do not need to comply with the small business manufacturer requirement of the rule.

OHA therefore concluded the circular reference was “an administrative error, and does not require an offeror to supply the end item of a small business for a procurement conducted under simplified acquisition procedures.” OHA denied Jamaica Bearings’ size appeal.

OHA’s decision in Jamaica Bearings confirms that, despite the regulatory ambiguity, offerors need not propose small business manufacturers to comply with the nonmanufacturer rule for small business set-aside simplified acquisition procurements of $25,000 or below.

It is also worth noting that the exception discussed in Jamaica Bearings may soon expand. In a proposed rule released on December 29, 2014, the SBA proposed to waive the nonmanufacturer rule for all small business set-aside contracts between $3,000 and $150,000. We will keep you posted on the progress of that proposed change.

Ian Patterson, a law clerk with Koprince Law LLC, was this post’s primary author.

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