SBA Proposes Changes to Nonmanufacturer Rule and Limitations on Subcontracting

The SBA recently proposed regulatory changes for a number of small business rules. While my colleagues have addressed some of the other big changes, I’ll focus on changes to the nonmanufacturer rule and limitations on subcontracting. The SBA noted that these changes are meant to eliminate confusion and streamline both processes.

Keep reading to see if you agree.

Nonmanufacturer Rule

First, some background on the nonmanufacturer rule. For procurements of manufactured products or supplies, SBA’s regulations require an offeror to be the item’s manufacturer or, alternatively, comply with the nonmanufacturer rule. Briefly, to qualify under the nonmanufacturer rule, an offeror must generally meet four requirements:

  • The offeror cannot exceed 500 employees;
  • The offeror must be primarily engaged in the retail or wholesale trade and normally sell the type of item supplied;
  • The offeror must take ownership or possession of the item being supplied with its own personnel, equipment, or facilities (in a manner consistent with industry practice); and
  • The item must be manufactured or produced by a small business in the United States (unless this fourth requirement has been waived).

For a deeper dive into the nonmanufacturer rule, check out this post.

SBA’s proposed changes to the nonmanufacturer rule affect the math surrounding multiple item acquisitions. The current regulatory language is found at 13 C.F.R. 121.406. “Multiple item acquisitions” are as straight-forward as they sound – the government is using one contract to procure multiple items. The regulations use “50% of the estimated contract value” as the demarcation point to determine whether an awardee is compliant with the nonmanufacturer rule for multiple item acquisitions. If at least 50% of the estimated contract value is composed of items that are manufactured by small business concerns, then an awardee is compliant with the nonmanufacturer rule. If this is not the case, then either a waiver is required or the awardee is not compliant with the rule.

The question now is how do you determine compliance with the nonmanufacturer rule? For example, what if you have an RFQ for 10 items, but not all of them have a waiver? Fortunately, in 13 C.F.R. 125.6(c) SBA provided several examples of how waivers could effect compliance with the nonmanufacturer rule in multiple item acquisitions. One such example contemplates a $1,000,000 contract for the acquisition of 10 items. Assume SBA has issued a class waiver for 1 of the 10 items, and the projected value of this item under the hypothetical solicitation is $10,000. In other words, $990,000 of the contract value is not covered by a waiver. Applying the rule’s 50% benchmark to this $990,000 shows that at least $495,000 of the goods must be supplied by one or more domestic small business manufacturers.

SBA’s proposed rule keeps the 50% benchmark in place, but changes the order of the math. Instead of applying the waiver and then calculating 50% of the post-waiver value, the proposed rule will calculate 50% of the contract value and then apply the waiver. “Tomayto, tomahto” you say? Not so fast.

Let’s look at the same proposed $1,000,000 contract for 10 items, one of which is worth $10,000 and has a waiver. Using the proposed rule’s math, you apply the 50% calculation before applying the waiver value. 50% of $1,000,000 is $500,000. After subtracting the $10,000 waiver we see that compliance with nonmanufacturer rule requires the awardee to supply $490,000 from domestic small business manufacturers. Following the old math, compliance with rule requires at least $495,000 of the items be provided by domestic small business manufacturers.

In other words, the new math could mean that less contract value must come from domestic small business manufacturers, although SBA commented that this new “approach might cause more requirements to be set aside for small business.”

Keep in mind that “SBA is considering this in the final rule, but seeks comments on whether this approach makes sense.”

Limitations on Subcontracting

SBA also proposed to change the limitations on subcontracting rule to rectify what SBA calls an inadvertent error in the regulations. The current rule, found at 13 C.F.R. 125.6, has a provision for mixed contracts, those in which both services and supplies are being procured. Basically, under this provision the limitation on subcontracting would only apply to the majority part of a mixed contract.

These provisions, however, only apply when “a contract combines services and supplies” but not construction. Even with this omission, “SBA has applied this section to a contract requiring, for example, both services and construction work.” “The proposed revision would merely recognize that a mixed contract is one that integrates any combination of services, supplies, or construction.”

This is the only proposed change to the limitations on subcontracting. As such, the applicable limitation, and performance of work requirement, is still determined through the NAICS code designated by the contracting officer for the solicitation at issue. These limitations and requirements are also found at 13 C.F.R. 125.6.

As with all proposed regulations, there is an open comment period which ends January 17, 2020. Regardless of your stance on the changes outlined above, your voice is an important part of the rule-making process.

Questions about this post? Email us or give us a call at 785-200-8919.

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