One of the rules we get asked about the most as government contracts attorneys is what’s known as the nonmanufacturer rule, 13 C.F.R. § 121.406 (So much so that we felt it wise to go over the rule in one of our “Back to Basics” posts to help clear some things up). It’s pretty understandable why: It has numerous provisions, exceptions, and requirements that can make it pretty difficult to follow. It also shows up in two different regulations: 13 C.F.R. § 121.406 as mentioned above, as well as FAR 19.505. Unfortunately, this often leads to contractors getting tripped up by the rule, either not realizing it applies where it does or, as we’ll explore here, thinking it applies where it doesn’t. Recently, SBA addressed a size protest that asserted the awardee didn’t meet the requirements of the nonmanufacturer rule, and noted to the unfortunate protestor that the rule didn’t apply for the procurement anyways.
In Mission Analytics, LLC, SBA No. SIZ-6325, 2024 (Dec. 12, 2024), the protester filed a size protest on an award of a contract to upgrade camera systems for the Air Force. This procurement was issued under NAICS code 561621, Security Systems Services (Except Locksmiths). The protester asserted that the awardee was not a manufacturer of the products the procurement sought and thus had to meet the nonmanufacturer rule to be eligible for award. In particular, the protester asserted that FAR 19.505(a)(2) applies the nonmanufacturer rule to all awards under FAR Subpart 19.14. The protest was dismissed by the SBA area office (and we’ll get to why in just a moment here).
Raising the same issues in the size appeal, the protester again asserted that the nonmanufacturer rule applied to the procurement. However, the protester was mistaken. SBA pointed out that the procurement was issued under a services NAICS code. 13 C.F.R. § 121.406(b)(3) states: “The nonmanufacturer rule applies only to procurements that have been assigned a manufacturing or supply NAICS code, or the Information Technology Value Added Resellers (ITVAR) exception to NAICS code 541519.” In other words, the nonmanufacturer rule wasn’t applicable here because this was a services contract. This was why the area office had dismissed the protest in the first place.
We aren’t going to stop here, though. It’s worth exploring further what the protester argued in this case. The protester was aware of 13 C.F.R. § 121.406(b)(3). However, the protester argued that this regulation was overruled by FAR 19.505(a)(2). To be sure, that part of FAR 19.505 does give the impression that the nonmanufacturer rule applies to all awards under FAR subpart 19.14. The protester then asserted that this was a problem recognized by the government in revisions made to the FAR back in 2021.
However, the protester made a few mistakes here. First, those revisions were to the limitations on subcontracting, not the nonmanufacturer rule. These rules are similar in some respects, so let’s make some clarification here. One question the nonmanufacturer rule in 13 C.F.R. § 121.406 asks is, who is the actual manufacturer of the end item? When it comes to determining whether a company is the manufacturer, one factor that is considered under the rule is how much value the company adds to the end product in question as compared to the total value of that product.
The limitations on subcontracting also require a calculation of value, but not in the same way as the nonmanufacturer rule. Instead, the limitations on subcontracting limit how much a contractor for a set-aside can pay out to its subcontractors. For example, under 13 C.F.R. § 125.6 for a set-aside services contract, the contractor cannot pay more than 50% of the contract value to subcontractors (that aren’t similarly situated). We go over the limitations on subcontracting in more detail here.
The protester also made another error. FAR 19.505 clearly states that the nonmanufacturer rule doesn’t apply to services contracts, just like 13 C.F.R. § 121.406: “Any concern, including a supplier, that is awarded a contract or order subject to the nonmanufacturer rule, other than a construction or service acquisition…is required to…” FAR 19.505(c)(1). As such, the area office’s decision to dismiss was correct, and SBA concluded accordingly.
With all this said, we admit some sympathy for the protester in this one. FAR 19.505(c)(1) could really use some better wording, it lacks clarity. It also really doesn’t help that there’s so many different regulations that essentially include the entire nonmanufacturer rule instead of simply having one regulation with the rule and referencing that regulation where needed. SBA was correct in its decision, to be sure. After all, it doesn’t make sense to have a rule about what must be done if a company isn’t a manufacturer of the desired product when the contract is for services. But all the same, we think this case could serve as some impetus to further clean up the FAR and SBA regulations to make things clearer for everyone.
Questions about this post? Email us. Need legal assistance give us a call at 785-200-8919.
Looking for the latest government contracting legal news? Sign up here for our free monthly newsletter, and follow us on LinkedIn, Twitter and Facebook.