Even Rules have their Limits, Says SBA OHA about the Nonmanufacturer Rule

In a recent size appeal, the SBA OHA made it clear that the nonmanufacturer rule has it limits, and will not apply depending on the dollar value of the acquisition. OHA reminded contractors that the nonmanufacturer rule applies only to acquisitions over the simplified acquisition threshold.

As avid readers of our blog know, some things that can be quite confusing in small business federal contracting are the limitations on subcontracting, and its counterpart, the nonmanufacturer rule. (Luckily, we have a great blog on the nonmanufacturer rule here, and one on limitations on subcontracting here to help break it down). As such, these rules seem to trip up many people, and can result in contracting compliance issues, or size protests.

The nonmanufacturer rule is basically an alternative to the limitations on subcontracting, and to meet this rule it in a supply contract, generally four requirements must be met:

  • The offeror cannot exceed 500 employees;
  • The offeror must be primarily engaged in the retail or wholesale trade and normally sell the type of item supplied;
  • The offeror must take ownership or possession of the item being supplied with its own personnel, equipment, or facilities (in a manner consistent with industry practice); and
  • The item must be manufactured or produced by a small business in the United States (unless this requirement has been waived).

The recent SBA OHA appeal, Chartwell Rx, LLC, SBA No. SIZ-6276 (Apr. 8, 2024) focuses on when the nonmanufacturer rule does not apply. This case concerned a procurement for pharmaceutical supplies. The appellant claimed that it was impossible for the awardee to meet the nonmanufacturer rule because appellant was the only United States company that produced the product and didn’t supply the awardee, so the awardee could not meet the element of the nonmanufacturer rule stating that the product must be manufactured or produced by a small business in the United States. The appellant also argued that the awardee could not meet the requirement to take possession of the product, as it would be drop shipped.

The CO for this procurement explained how they came to the valuation of the contract at issue, and put its valuation at about $85,000. OHA turned to the language of the nonmanufacturer rule itself, which states it does not apply to simplified acquisition procedures, and does not apply to small business set-aside contracts “with an estimated value between the micro-purchase threshold and the simplified acquisition threshold.” Similarly, the limitations on subcontracting rule does not apply to a “small business set-aside contract with a value greater than the simplified acquisition threshold” although it applies to a socioeconomic set-aside (e.g., 8(a)) at any dollar amount. 13 CFR § 125.6.

Generally, the micro-purchase threshold is $10,000, and the simplified acquisition threshold is $250,000. OHA pointed out that this contract falls between those two thresholds, and under the regulation’s clear language, the nonmanufacturer rule would not apply to this contract. Thus, the arguments that the awardee cannot comply with the nonmanufacturer rule are irrelevant and the rule does not apply to this contract.

This case serves as a great reminder to contractors to double check the value of the contract at issue when determining whether to utilize the nonmanufacturer rule or not. It also presents a great reminder that all of the limits and exceptions that keep people up at night worrying about compliance, do themselves often have their own limits and exceptions. In this case, it made clear that the nonmanufacturer rule does not always apply, giving contractors much more latitude in selecting suppliers for supplies contracts that fall between the micro-purchase threshold and simplified acquisition threshold. If you have questions about the nonmanufacturer rule or want help figuring out the web of federal contracting regulations, don’t hesitate to reach out to a federal contracting attorney, such as ourselves.

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