OHA: A Manufacturer Must Own or Lease Facilities to Qualify

In a recent decision, the Small Business Administration’s Office of Hearings and Appeals (OHA) reviewed the requirements to establish that a company is a manufacturer of a product under SBA’s rules. In particular, there is a requirement that a company use “its own facilities” in manufacturing the product. But how does a company establish it will use its own facilities?

The first decision was Size Appeals of: Master Boat Builders, Inc. SBA No. SIZ-6198 (2023) and then a little later OHA reconsidered and reaffirmed its earlier decision. The case looked at a size protest of Birdon America, Inc. (Birdon), which received a contract under a Coast Guard Solicitation for different types of river and inland cutter vessels (known as WCCs). The solicitation was set-aside for small businesses under NAICS Code 336611, Ship Building and Repairing, with a corresponding 1,250 employee size standard. Bollinger Shipyards, LLC (Bollinger) was to assist Birdon in performing the contract.

Initially, the SBA Area Office found Birdon to be small, based on its employee count being below the threshold and because Birdon was the manufacturer of the cutters. The manufacturer test under SBA rules states:

(i) SBA will evaluate the following factors in determining whether a concern is the manufacturer of the end item:

(A) The proportion of total value in the end item added by the efforts of the concern, excluding costs of overhead, testing, quality control, and profit;

(B) The importance of the elements added by the concern to the function of the end item, regardless of their relative value; and

 (C) The concern’s technical capabilities; plant, facilities and equipment; production or assembly line processes; packaging and boxing operations; labeling of products; and product warranties.

13 C.F.R. § 121.406(b)(2)(i). The Area Office found all elements were met.

  • (A) “Birdon is primarily responsible for the design and production process. According to the Proposal, Birdon will ‘install equipment, outfit the vessels, test, train and oversee quality on-site.'” 
  • (B) “Birdon plans to manufacture the superstructure of the cutters, Bollinger will manufacture the bare steel hull and steel pipework under Birdon’s oversight and supervision. Birdon will then turn the bare hull into a cutter with the assistance of other subcontractors.”
  • (C) “The Area Office determined Birdon met factor three of the applicable SBA regulations because of Birdon’s technical capabilities; and the Teaming Agreement between Birdon and Bollinger establish an intent to lease, occupy and control Bollinger Facilities. The Area Office considered Birdon’s technical capabilities as a prime contractor and found them to be adequately supported by the proposal’s past performance section. The Area Office noted Birdon’s intent to execute a lease agreement with Bollinger based upon the terms of the Teaming Agreement and sworn Declarations from officials of both Birdon and Bollinger.

On appeal, OHA disagreed that Birdon was the manufacturer. OHA noted, first, that “that the ostensible subcontractor rule does not apply to procurements for manufactured products.” That argument had been raised by appellants.

OHA focused on one aspect of the manufacturer test, that a company must be “the concern which, with its own facilities, performs the primary activities in transforming inorganic or organic substances, including the assembly of parts and components, into the end item being acquired.” 13 C.F.R. § 121.406(b)(2). SBA doesn’t require outright ownership of the facilities, a lease can be enough: “the phrase “its own facilities” in the regulation means that the contractor need only occupy and control the facilities, if not as an owners, then as a lessor or tenant.”

Here, Birdon owned no shipyard, so the question became what type of lease did it have to have, and at what point in time relative to the proposal.

The OHA judge, in reviewing the regulation and past SBA caselaw, concluded that

to determine a challenged concern’s proposal met the ‘its own facilities’ requirement, a fully executed lease of the proposed premises for manufacturing need not be in place at the time of the proposal. However, there must be some agreement in writing between the challenged concern and its prospective landlord in place at the time of the proposal for the challenged concern to occupy and control the facilities it will use to manufacture the end item-if not as an owner, then as a tenant.

In this case, Birdon had no agreement meeting these standards. Instead, it had a teaming agreement and proposal. The teaming agreement, though, while including a “chart which illustrates Shops 4, 6 and the Wetdock as areas designated for Birdon to perform under the contract, . . . does not state that Bollinger agrees to lease these premises to Birdon.” The proposal, similarly, merely said that Birdon “selected Bollinger as the best available facilities for the construction of the WCCs.” But these documents amounted to “nothing more than an agreement to come to an agreement.” But that is not enough because no document demonstrated Bollinger’s agreement to provide facilities.

On reconsideration, OHA didn’t budge. The teaming agreement in this case did not establish intent to provided leased facilities. Rather, like most teaming agreements it reflected Bollinger’s role in the contract, but did not speak to leased facilities.

OHA remanded the matter back to the area office for further review on the manufacturer question. This case is a good reminder that a contractor must comply with all aspects of SBA’s rules, not just most of them.

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