An offeror submitting a proposal under a solicitation designated with the Information Technology Value Added Resellers exception to NAICS code 541519 must qualify as a small business under a 150-employee size standard–even if the offeror is a nonmanufacturer.

In a recent decision, the U.S. Court of Federal Claims held that an ITVAR nonmanufacturer cannot qualify as small based solely on the ordinary 500-employee size standard under the nonmanufacturer rule, but instead must also qualify as small under the much smaller size standard associated with the ITVAR NAICS code exception.

By way of background, NAICS code 541519 (Other Computer Related Services) ordinarily carries an associated $27.5 million size standard.  However, the SBA’s regulations and size standards table state that an ITVAR procurement is an exception to the typical size standard.   An ITVAR acquisition is one for a “total solution to information technology” including “multi-vendor hardware and software, along with significant value added services.” When a Contracting Officer classifies a solicitation with the ITVAR exception, a 150-employee size standard applies.

ITVAR acquisitions, like others under NAICS code 541419, were long deemed to be service contracts; the nonmanufacturer rule did not apply.  But in a recent change to 13 C.F.R. 121.406, the SBA specified that the nonmanufacturer rule applies to the supply component of an ITVAR contract.

When is a nonmanufacturer small?  The SBA’s rules are not entirely clear.  13 C.F.R. 121.402(b)(2) states that a company that “furnishes a product it did not itself manufacture or produce . . . is categorized as a nonmanufacturer and deemed small if it has 500 or fewer employees” and meets the other requirements of the nonmanufacturer rule.  But 13 C.F.R. 121.402(a) also states that an offeror “must not exceed the size standard for the NAICS code specified in the solicitation.”

So, for an ITVAR acquisition, which size standard applies to a nonmanufacturer: 150 employees or 500?  According to the Court, the answer is “both.”

York Telecom Corporation v. United States, No. 15-489C (2017) involved the solicitation for the NASA Solutions for Enterprise-Wide Procurement V GWAC.  The procurement was divided into several groups.  The group at issue in this case (Category B, Group C) was a small business group.  NASA designated the category with the ITVAR exception to NAICS code 541519.

The solicitation included FAR 52.212-1, which provided, in relevant part:

INSTRUCTIONS TO OFFERORS – COMMERCIAL ITEMS (52.212-1) (JUL 2013)
(a) North American Industry Classification System (NAICS) code and small business size standard. The NAICS code and small business size standard for this acquisition appear in Block 10 of the solicitation cover sheet (SF 1449). However, the small business size standard for a concern which submits an offer in its own name, but which proposes to furnish an item which it did not itself manufacture, is 500 employees.

York Telecom Company submitted an offer for Category B, Group C.  After evaluating proposals, NASA awarded a contract to Yorktel.  But NASA developed concerns about Yorktel’s size, and referred the matter to the SBA for a size determination.

In its size determination, the SBA Area Office concluded that the applicable size standard for the procurement was 150 employees.  Because the SEWP V solicitation had been issued before the changes to 13 C.F.R. 121.406, the SBA Area Office concluded that the nonmanufacturer rule did not apply.  The Area Office issued a decision finding Yorktel to be ineligible under the solicitation’s 150-employee size standard.  The SBA Office of Hearings and Appeals upheld the SBA Area Office’s decision.

Yorktel took its case to the Court.  Yorktel argued that it was a nonmanufacturer, and therefore, its size was governed by a 500-employee size standard–not the ordinary 150-employee ITVAR size standard.

After addressing various procedural issues such as jurisdiction and standing, the Court concluded that Yorktel’s protest was an untimely challenge to the terms of the solicitation.  The Court dismissed Yorktel’s protest for this reason.

Interestingly, though, the Court didn’t stop there.  It wrote that “even if Yorktel could pursue its challenge of the size standard for the SEWP V Contract in this litigation, this claim is unsupported by the terms of the RFP and the statutory nonmanufacturer rule.”

Discussing FAR 52.212-1(a), the Court wrote:

When read in its entirety, the Court construes the above provision to require that a non-manufacturer first meet the 500 employees or less size standard to compete for the contract and to also impose the more restrictive size standard of 150 employees or less under the NAICS code in order for the non-manufacturer to be eligible for contract award. And so, to the extent that Yorktel qualifies as non-manufacturer under the statutory non-manufacturer rule, the RFP requires that Yorktel meet the more restrictive, 150-employee, size standard to be eligible for contract award.

The Court wrote that its interpretation was buttressed by the Small Business Act, which (in 15 U.S.C. 637(a)(17)), specifies that a nonmanufactuer must “be a small business concern under the numerical size standard . . . assigned to the contract solicitation on which the offer is being made.”  The Court concluded that “the statutory non-manufacturer rule, thus, requires that an offeror seeking coverage under the rule satisfy the size standard imposed by the NAICS code for the relevant contract.”

The relationship between the nonmanufacturer rule’s 500-employee standard, on the one hand, and the size standard imposed by a solicitation, on the other, was previously a question merely of academic interest (and then, only to true government contracts law nerds like yours truly.)  That’s because almost all of the size standards for manufacturing and supply contracts are 500 employees or greater; it would be no problem for a nonmanufacturer to satisfy the solicitation’s size standard.  In contrast, the ITVAR size standard is much lower than 500 employees.  Now that the SBA has amended its regulations to specify that the nonmanufacturer rule applies to the supply component of ITVAR contracts, the Court’s decision in York Telecom Corporation may have major ramifications for other ITVAR nonmanufacturers.