In my legal career representing hundreds of small businesses in government contracting, few topics have caused as much confusion as the limitations on how much work can be subcontracted on small business set-aside contracts and sole source contracts (like 8(a) Program direct awards).
Earlier, working with my friends at Govology, I put together step-by-step compliance guides for service contractors, construction contractors, manufacturers, and nonmanufacturers. Each guide is written in plain English and includes examples to help demonstrate how the SBA’s limitations on subcontracting rule (13 C.F.R. 125.6) works in practice.
Here’s where to find my limitations on subcontracting guides:
To be eligible for a small business set-aside procurement seeking a manufactured product, an offeror has to either be the product’s manufacturer or otherwise qualify under the nonmanufacturer rule.
Determining whether a business qualifies—either as the manufacturer or nonmanufacturer—can be a fact-intensive and confusing task. But it’s a vitally important one, as the penalty for not qualifying can be the loss of an awarded contract.
Recently, however, the SBA Office of Hearings and Appeals provided important clarity on how a small business might qualify as a nonmanufacturer.
Let’s take a look.
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.
A business was not engaged in “manufacturing” within the meaning of the SBA’s regulations where the firm provided another entity with specifications and financing, and the second entity produced the end item being acquired by the government.
As demonstrated in a recent SBA Office of Hearings and Appeals decision, being a “manufacturer” means engaging in the primary activities of transforming substances into an end item. Merely providing specifications and financing doesn’t do the trick.