The SBA Office of Hearings and Appeals reaffirmed recently that a business need not manufacture the most expensive component of an item in order to be considered its manufacturer.

Rather, under the SBA’s size rules, a company may be considered a manufacturer if it adds important functionality to the end product, even if the proportion of total dollar value added by the company is relatively small.

The case, Size Appeals of MPC Containment Systems, LLC & GTA Containers, Inc., SBA No. SIZ-5802 (Jan. 11, 2017), involved a solicitation issued by the DLA to acquire collapsible fabric fuel tanks. Basically, the tanks would need to hold fuel but collapse when empty for easy storage and transport. The procurement was 100% set aside for small businesses and competed under NAICS code 313320 (Fabric Coating Mills). The corresponding size standard was 1,000 employees.

DoD awarded Avon Engineered Fabrications, Inc., the contract on April 11, 2016. Two of Avon’s competitors, MPC Containment Systems, LLC, and GTA Containers, Inc., filed size protests, arguing among other things, that Avon was a subsidiary of Avon Rubber, P.L.C., a publicly-traded British company with over 500 employees, and a number of other businesses.

One of the protesters also argued that Avon was not the manufacturer of the fuel tanks, and that therefore the 500-employee standard of the nonmanufacturer rule should apply. The nonmanufacturer rule allows a small business to sell the manufactured goods of other businesses, presuming certain conditions are met. Among those conditions, the prime contractor must have no more than 500 employees, even if the solicitation’s NAICS code (like the Fabric Coating Mills NAICS code) carries a higher size standard.

The SBA Area Office issued a size determination on August 12, 2016. The SBA Area Office found that Avon was owned by Avon Rubber and Plastics, Inc., which was owned by Avon Rubber Overseas Limited, which is in turn owned by Avon Rubber (the parent publicly-traded British company). Avon was therefore affiliated with its parent company as well as the various holding companies, and sister companies in the Avon Rubber family–a total of 15 companies.

The SBA Area Office then examined whether Avon was the manufacturer of the end items in question.  The SBA Area Office determined that rubber fabric was the most expensive component of the fuel tanks. Rubber fabric accounted for 67% of all material costs and 54% of total product costs. Avon was not the manufacturer of the rubber fabric.

However, Avon would transform rubber fabric and other components into the fuel tanks. The SBA Area Office held that Avon was the manufacturer because, without Avon’s modification and assembly, the final contract deliverables would not exist.

Because Avon was deemed the manufacturer, the Area Office applied the 1,000 employee size standard under NAICS code 313320, not the 500-employee size standard applicable to nonmmanufacturers. The Area Office found that Avon, together with its affiliates, did not exceed the 1,000 employee size standard.

MPC and GTA filed size appeals with OHA. The appeals centered on the question of whether the SBA Area Office had correctly found Avon to be the manufacturer of the fuel tanks. The appellants argued that Avon should not have been considered the manufacturer, and its small business status should have been evaluated under the 500-employee size standard.

OHA wrote that, under the SBA’s regulations, “[t]he manufacturer is the concern that, 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.” The end item “must possess characteristics which, as a result of mechanical, chemical, or human action, it did not possess before the original substances, parts or components were assembled or transformed.” However, “the proportion of value added by the manufacturer can be a very small proportion of the total value, provided that the concern adds important functionality.”

In this case, “although the rubber fabric will be manufactured by a third party, Avon will transform the fabric, through a ‘series of labor and machine steps,’ into collapsible tanks.” Avon’s work is “of crucial importance” because “without Avon’s modification and assembly the coated fabric alone would not function as a collapsible fuel tank.”

OHA held that “the Area Office reasonably determined that Avon will transform raw materials into the end items being acquired, and therefore qualifies as the ‘manufacturer’ within the meaning of” the SBA’s regulations. OHA denied the size appeals.

The question of whether a company is a “manufacturer” for purposes of the SBA’s size rules is determined on a case-by-case basis. As the MPC Containment Systems case demonstrates, a company may qualify as the manufacturer even if the proportion of total value it adds is relatively small.