Non-Manufacturer Rule Confusion: House Proposes Fix

Many small contractors (and the SBA) were surprised when the Court of Federal Claims held last year that the non-manufacturer rule applies any time the government buys manufactured products–regardless of the NAICS code assigned to the procurement.

Now the U.S. House of Representatives is proposing to fix the confusion caused by the Court’s decision.  The House version of the 2016 National Defense Authorization Act would amend the Small Business Act to specify that the non-manufacturer rule applies only to contracts for supplies.

In Rotech Healthcare Inc. v. The United States, No. 14-502C (2014), the Court effectively invalidated SBA regulations that limit the application of the non-manufacturer rule to procurements designated with manufacturing NAICS codes.  The Court held that those regulations were inconsistent with the Small Business Act, which–in the Court’s view–requires that the non-manufacturer rule be satisfied anytime the government buys supplies under set-aside contracts.

Section 834 of the House 2016 NDAA would amend the Small Business Act to specify that the non-manufacturer rule applies only to a procurement contract which “has as its principal purpose the supply of a product.”  The bill also specifies that the non-manufacturer rule does not apply “to a contract that has as its principal purpose the acquisition of services or construction.”

The House Armed Services Committee, in its Committee Report on the proposed legislation, commented:

The committee notes that the non-manufacturer rule (NMR) was established to ensure that, when competition for a contract for goods is restricted to small business, the goods ultimately purchased were indeed the product of a small business.  However, the committee is concerned that the NMR is being applied to services and construction contracts and could limit small business participants contracting for services and construction to the Federal Government.  Therefore, the committee believes this clarification to [the Small Business Act] is necessary.

The 2016 NDAA was passed by the House Armed Services Committee on April 30, and now awaits a vote by the full House.

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