SBA OHA Clarifies the ‘Kit Assembler’ Exception to the Non-Manufacturer Rule

Assembling components into a commercial item does not make a contractor a “kit assembler” for the purposes of the non-manufacturer rule, according to the SBA Office of Hearings and Appeals.

A recent size appeal required OHA to delve in to what is meant by “kit.” In B GSE Group, LLC, SBA No. SIZ-5679 (Sept. 17, 2015), OHA stated that a kit is not a commercial item that has been purchased in parts and assembled, rather, it is a collection of manufactured items packaged together, like a tool kit.

In the case at hand, B GSE Group had been the original awardee of a contract to provide the U.S. Air Force with a 400 Hz frequency converter. The contract had been set aside entirely for small business concerns. B GSE Group put in a bid and on July 8, 2015, was announced as the winner. But a few weeks later, the contracting officer initiated a size protest against the company on the basis that it had proposed to sell a frequency converter manufactured by Piller USA, Inc., a large business.

The non-manufacturer rule provides that in order for a small business to sell products that the small business did not itself manufacture, certain criteria must be met. Among those criteria, the manufacturer generally must be a small business, unless the SBA has granted a waiver (either on an individual basis, or for a certain class of products). The contracting officer’s size protest contended that B GSE Group failed to meet this requirement of the non-manufacturer rule.

The SBA Area Office agreed with the contracting officer.  It determined that B GSE Group did not satisfy all of the criteria under the non-manufacturer rule because B GSE Group’s end manufacturer was a large business. The SBA Area Office issued a size determination finding B GSE Group ineligible for the Air Force contract.

B GSE Group filed an appeal with OHA. In its appeal, B GSE Group admitted that Piller produced a part of the converter.  B GSE Group noted, however, that it had bought that part and other parts and assembled them into the final product, with B GSE Group’s logo and design. This made it a kit assembler, B GSE Group said, and thus eligible for the award under the “kit assembler” exception to the non-manufacturer rule. B GSE Group argued that the SBA Area Office had erred by failing to apply the kit assembler exception.

The kit assembler exception, codified at 13 C.F.R. § 121.406(c), allows a business to sell the government goods it did not manufacture when: (1) the goods are “a kit of supplies or other goods provided by an offeror for a special purpose”; (2) the business does not exceed 500 employees; and (3) 50% of the total value of the kit is manufactured by small businesses in the United States. B GSE Group said that it was responsible for more than 50% of the value because the end item consisted of $10,300 for the part provided by Piller and $12,530 for “engineering, final testing and adjustments to unit at [B GSE Group’s] facility.”

OHA disagreed with B GSE’s group characterization of itself as a kit assembler. OHA wrote that the kit assembler exception applies where a businesses produces a kit of items sourced from multiple suppliers. B GSE Group had only identified one supplier, Piller. Moreover, B GSE Group’s proposed product was not a “kit” according to the regulation. The SBA cited to an older version of the regulation which explained that “[t]he Government often purchases items in the form of kits such as, but not limited to, tool kits and survival kits which are not manufactured items but merely assemblages of separate manufactured items.”

OHA added that what B GSE Group was doing was more akin to manufacturing, stating that “[a]lthough both obtain inputs from other firms, the kit assembler gathers a group of finished items and packages them together, without transforming the items themselves. An example of such a kit is a tool kit. A manufacturer by contrast, does not merely collect separate parts and package them together. Instead, the manufacturer transforms those parts and substances into a new end item.” OHA concluded that because the Air Force wanted a single item, a converter, rather than a collection of items, the idea that a converter was a kit was “meritless.” OHA denied B GSE Group’s size appeal.

The kit assembler exception provides an important avenue for certain companies to qualify as “small” under federal set aside contracts for manufactured products. But as the B GSE Group case demonstrates, a “kit assembler” is somewhat narrowly defined–and assembling components may not count.

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