SBA Eliminates Use of Product Service Codes For Nonmanufacturer Rule Class Waivers

As January 5, 2022, SBA will no longer use Product Service Codes (PSCs) to classify products covered by class waivers for the nonmanufacturer rule. SBA’s rationale for discontinuing PSC’s to classify class waivers is to “improve consistency in the application of class waiver.” SBA will use North American Industry Classification System codes (NAICS) as its sole classification system to identify products covered by class waivers going forward. Notification of the change of SBA’s rule was published in the Federal Register on December 6, 2021.

To understand just exactly what SBA’s discontinuation of using PSC’s for class waivers means to government contractors, a review of the nonmanufacturer rule found in 13 CFR § 121.406  may be helpful.  In a nutshell, when a manufacturing or supply contract is set aside for small businesses, the small business offeror must either be the manufacturer of the end item, or fall within the exceptions described in the nonmanufacturer rule. The nonmanufacturer rule states that a company may still qualify as a small business as a nonmanufacturer. To do so, the firm: (1) cannot exceed 500 employees; (2) must be primarily engaged in the retail or wholesale trade and normally sell the type of item being supplied; (3) take ownership or possession of the item(s) with its personnel, equipment or facilities in a manner consistent with industry practice, and (4) will supply the end item of a small business manufacturer or producer made in the United States, or obtain a waiver of this requirement.

The SBA Administrator may waive the nonmanufacturer rule if it determines that there are no small business manufacturers that can reasonably be expected to offer a product meeting the solicitation specifications (an individual waiver), or when SBA determines that no small business manufacturer of a product or class of products is available to participate in the federal procurement market (a class waiver).  Under a waiver, “[a] firm can supply the product of any size business without regard to the place of manufacture.”

PSCs come into play with respect to class waivers. SBA previously identified class waivers using a combination of (1) the six-digit NAICS code, (2) the four-digit PSC, and (3) a description of the class of products. SBA’s old procedure as to how nonmanufacturer rule class waivers are supposed to work is that SBA would define “class of products” as an individual subdivision within a NAICS code and use PSCs to further identify particular products within the NAICS code to which a waiver would apply. The idea being that PSCs would provide a more granular industry-related description than NAICS codes. In practice however, the PSC often provides little more detail about the products covered than is described in the NAICS classification.

For example, a class waiver for commercially available off-the-shelf laptop and tablet computers would have previously been identified under NAICS code 334111 (Electronic Computer Manufacturing) and PSC 7435 (Office Information Systems Equipment). While PSC 7435 indicates that minicomputer and microcomputer controlled systems are included in the Product Code, it does not specify that the Product Code is limited to those types of systems which would ostensibly include laptop and tablet computers. Attempting to describe products to fit into the appropriate NAICS code and PSC placed an extra burden on agencies seeking procurements for which it intended a nonmanufacturer rule class waiver to apply.

Using only the NAICS code for class waivers going forward should allow government agencies flexibility in covering a wider range of products. So, it should be easier to qualify for a class waiver and allow small businesses to supply the products of a large business in more instances.

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