The Non-Manufacturer Rule: More Than Employees

Back in 1976, Boston (the band, not the city), released its self-titled debut album, featuring the hit “More Than a Feeling.”  The tune is still a staple on classic rock stations everywhere.  Before you curse me for getting the song stuck in your head, think of it as an easy way to remember a critical aspect of the “non-manufacturer” size rule.  Simply put, it’s about more than employees.

When an agency issues a solicitation for supplies or products, it’s easy for small businesses to assume that non-manufacturer rule applies, meaning that a business qualifies as “small” so long as it has less than 500 employees.  But, as the SBA’s Office of Hearings and Appeals has confirmed, a company can only submit a valid offer if your company meets all five “prongs” of the non-manufacturer rule.  Having less than 500 employees only gets you part of the way there.

SBA OHA’s decision in Size Appeal of Ira Green, Inc., SBA No. SIZ-5287 (2011), stands as a warning for any small business that has been a little too lax about its use of the non-manufacturer rule.  In Ira Green, the Air Force issued a solicitation for chevrons and ribbons, carrying a 500 employee size standard.  After the Air Force awarded the contract to Iris Kim, Inc., a competitor filed a SBA size protest, arguing that Iris Kim did not meet the requirements of the non-manufacturer rule.

Let’s back up a second and review the non-manufacturer rule.  The non-manufacturer rule states that in order to qualify as a small business for a products or supply contract for which a company did not manufacture the products itself, the company must: (1) not exceed 500 employees; (2) be primarily engaged in the retail or wholesale trade; (3) normally sell the type of item being supplied; (4) take ownership or possession of the item in a manner consistent with industry practice, and (5) supply the end item of a small business manufacturer made in the United States, or obtain a waiver of the requirement.  So, yes, having less than 500 employees is part—but only part—of the overall non-manufacturer rule.

Returning to Ira Green, the protester argued that Iris Kim did not normally sell the types of items being procured (chevrons and ribbons) and did not plan, at the time it submitted its proposal, to supply the end items of a domestic small business.  The SBA’s Area Office found that Iris Kim was an eligible small business, but on appeal, SBA OHA reversed the decision.  SBA OHA found that the Area Office did not sufficiently investigate whether Iris Kim did, in fact, ordinarily sell chevrons or ribbons, or whether it would supply products produced by a domestic manufacturer.

SBA OHA ordered the Area Office to obtain additional evidence from Iris Kim, such as “advertising materials, price lists, website information, etc.” to demonstrate that Iris Kim ordinarily sold these items.  And, importantly, OHA held that in order to comply with the non-manufacturer rule, Iris Kim (and any other small business hoping to qualify under the rule) must provide “objective evidence” in its proposal that it will supply the end items of a domestic small business.  Merely promising to do so after the fact, in response to a size protest, is not enough.

Unlike Boston’s hit song, which has been covered by artists from Nirvana to *NSYNC (there can’t be many songs in that category, can there?), the nuances of the non-manufacturer rule are not always well-known.  But if you remember that it’s about “more than employees,” you should be well on your way to ensuring compliance.

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