Non-Manufacturer Rule: Foreign-Made Products Didn’t Qualify

A contractor did not qualify as a small business under the non-manufacturer rule where it proposed to sell foreign-made products–even though the contractor itself was well below the solicitation’s 500-employee size standard.

In a recent decision, the SBA Office of Hearings and Appeals held that a contractor was ineligible to be awarded a small business set-aside contract for manufactured products because the products were to be manufactured in Turkey.

OHA’s decision in Size Appeal of Novex Enterprises, SBA No. SIZ-5637 (2015) involved an Army procurement for the acquisition of M3 heaters. The solicitation was issued as a small business set-aside under NAICS code 334419 (Other Electronic Component Manufacturing).

Novex Enterprises submitted a proposal.  In its proposal, Novex stated that it would partner with Menatek Yedek Parca International, a manufacturer located in Turkey.  Menatek would manufacture the heaters, which Novex would then sell to the Army.

The Army deemed Novex to be non-responsible and asked the SBA to perform a Certificate of Competency review.  The SBA Area Office subsequently notified Novex that a size determination would be performed in conjunction with the COC review.

After it completed its review, the SBA Area Office issued a size determination finding Novex to be ineligible for award of the Army contract.  The Area Office explained that to qualify for a small business set-aside to provide manufactured products, the prime contractor either must manufacture the end item being procured or comply with the non-manufacturer rule.  The non-manufacturer rule, in turn, provides, among other things, that a non-manufacturer must “supply the end item of a small business manufacturer, processor or producer made in the United States,” or obtain a SBA waiver of the requirement.

In Novex’s case, the Area Office found that Menatek would manufacture the heaters.  Menatek is a Turkish company and would manufacture the heaters in Turkey.  Accordingly, Novex did not qualify as a non-manufacturer.

Novex filed a size appeal with OHA.  Novex argued, in part, that it qualified as small because it only had “one or two” employees–far below the 500-employee size standard for NAICS code 334419.

OHA rejected Novex’s argument.  OHA explained that when a company intends to qualify as a non-manufacturer, it must meet all of the requirements of the non-manufacturer rule, even if the company itself is below 500 employees:

Lastly, Appellant asks how the Area Office could determine that Appellant is ineligible for this procurement, given that Appellant has only “one or two” employees. To be an eligible small business for a manufacturing or supply contract that is set aside for small businesses, though, the prime contractor either must be the manufacturer of the end item being acquired, or must comply with the nonmanufacturer rule. Here, the Area Office found – and Appellant does not dispute – that Menatek, and not Appellant, would manufacture the M3 heaters. The Area Office also found – and Appellant again does not dispute – that Appellant does not meet the fourth element of the nonmanufacturer rule test, i.e., the requirement to supply the end item of a small business manufacturer made in the United States. Thus, although Appellant itself is apparently a small business, Appellant is not eligible for this procurement because Appellant does not manufacture the end item or comply with the nonmanufacturer rule.

OHA denied Novex’s appeal.

The Novex decision is an important reminder that it takes more than a certain employee count to qualify as a non-manufacturer.  Where, as in this case, a company will not manufacture the products itself, it must meet all elements of the non-manufacturer rule to qualify for award–even if the company itself has only “one or two” employees.

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