SBA OHA Provides Clarity on the Nonmanufacturer Rule

To be eligible for a small business set-aside procurement seeking a manufactured product, an offeror has to either be the product’s manufacturer or otherwise qualify under the nonmanufacturer rule.

Determining whether a business qualifies—either as the manufacturer or nonmanufacturer—can be a fact-intensive and confusing task. But it’s a vitally important one, as the penalty for not qualifying can be the loss of an awarded contract.

Recently, however, the SBA Office of Hearings and Appeals provided important clarity on how a small business might qualify as a nonmanufacturer.

Let’s take a look.

Under SBA’s regulations, a firm may qualify as a nonmanufacturer if it meets four criteria:

  1. The business does not exceed 500 employees;
  2. It is primarily engaged in the retail or wholesale trade and normally sells the type of item being supplied;
  3. The business takes ownership or possession of the item(s) with its personnel, equipment, or facilities in a manner consistent with industry practice; and
  4. The business will supply the end item of a small business manufacturer, processor, or producer made in the United States (or gets a waiver of this requirement).

13 C.F.R. § 121.406(b)(1).

Recently, the OHA considered what it takes to comply with the second of these requirements, when it considered a small business protest alleging the awardee did not normally sell the items procured by the government. At issue in SeaBox, Inc., SBA No. SIZ-5881 (2018) was a Marine Corps procurement seeking ISO dry and refrigerated cargo containers. The solicitation was issued as a total small business set-aside, under a manufacturing NAICS code (specifically, code 332439, for Other Metal Container Manufacturing).

After QAF Technologies, Inc. was awarded the contract, SeaBox filed a protest alleging that QAF didn’t normally sell the type of items being procured. SeaBox’s argument was somewhat interesting—though SeaBox acknowledged that QAF sold similar items to the federal government, it said that federal government sales were not sales in “the retail or wholesale trade,” as required under the second nonmanufacturer rule criterion.

This argument was rejected by the SBA Area Office, and SeaBox filed an appeal alleging the same at the OHA. But it wasn’t successful at OHA, either.

After considering the regulatory history, the OHA concluded that federal government sales qualify as sales within the retail or wholesale trade. What’s more, the regulation doesn’t require a company to sell the exact items procured, but only the type of item being procured. Thus, QAF’s past sales of similar items to the federal government were sufficient to meet the second criterion to the nonmanufacturer rule.

The OHA denied SeaBox’s appeal and affirmed that QAF was an eligible small business under the procurement based on its compliance with the nonmanufacturer rule.

As mentioned, complying with the manufacturer rule or nonmanufacturer rule is a prerequisite for a small business’s eligibility for a small business set-aside under a manufacturing NAICS code. For help determining if you comply, give me a call.