January 29, 2015

Changes to the Nonmanufacturer Rule

3 min

The SBA is proposing to exempt acquisitions valued between $3,000 to $150,000 from the nonmanufacturer rule. The nonmanufacturer rule is an exception to the limitations on subcontracting for small business set-aside supply contracts. In essence, if the small business awardee cannot perform 50% of the cost of manufacturing the items on its own, the nonmanufacturer rule allows a small business that is engaged in the wholesale or retail trade to supply the items as long as they are manufactured by a small business in the United States. By exempting all acquisitions valued between $3,000 to $150,000 from the nonmanufacturer rule, agencies will be permitted to purchase supplies from small business resellers on a set-aside basis without regard to the size of the manufacturer or the location of manufacturing.

The SBA's stated intent is to incentivize small business set-asides by eliminating the need to request waivers from the nonmanufacturer rule, which the SBA suggests would delay the procurement by several weeks. The SBA believes that agencies will be more likely to set aside an acquisition valued between $3,000 to $150,000 for small businesses if they do not have to request a waiver from SBA if no small business manufacturers are available. Given that agencies are already required to set aside acquisitions valued between $3,000 and $150,000 for small businesses pursuant to Section 15(j) of the Small Business Act, however, it is unclear how a permanent "waiver" as envisioned in the proposed rule will meaningfully increase the number of small business set asides. While the proposed rule would appear to streamline a process that is already taking place, such as routine waivers for brand name computers, it may also have an unintended adverse impact on small businesses. By eliminating the nonmanufacturer rule for these smaller acquisitions across the board, the SBA may actually incentivize the acquisition of supplies manufactured by large businesses and/or those outside of the United States – through a small business prime contractor – using multiple, individual contracts not exceeding $150,000 since these acquisitions would be exempt from the nonmanufacturer rule. In such a scenario, the majority of the economic benefit of the "small business" contract would flow to the large manufacturer.

Under existing requirements, per FAR 19.502-2(c), a waiver is only obtainable when no small business manufacturers are available. In contrast, under the proposed rule, a small business would be permitted to supply the items of a large business or non-domestic manufacturer irrespective of whether small business manufacturers in the United States are available.

In addition to this proposed change, the proposed rule includes several changes to the regulation governing waivers. Included among them is a provision that would allow agencies to execute a waiver for an individual contract both after proposal submission and after contract award, if an in-scope modification requires the delivery of supplies that cannot be sourced from a domestic, small business manufacturer.

The Bottom Line: What You Should Know

The proposed changes to the nonmanufacturer rule would exempt awardees of small business set-aside supply contracts valued between $3,000 and $150,000 from the current requirement that they source from domestic small business manufacturers. While the stated aim is to encourage the use of small business set-asides, the new rule may actually result in greater utilization of large business manufacturers.

Contractors wishing to submit comments on these proposed rules can do so through regulations.gov by searching for RIN: 3245-AG58. Comments are due by February 27, 2015.

Continue following Venable's Small Business Series for additional analysis and take-aways from the SBA's proposed rule implementing the 2013 NDAA. If you have any questions about how these proposed rules could affect your business, please contact any of our authors: Keir Bancroft, Paul Debolt, Dismas Locaria, Rob Burton, Rebecca Pearson, James Boland, or Nathaniel Canfield.