A Refresher on the Non-Manufacturer Rule

September 2, 2015

By Kathryn V. Flood

Unless you are a small business regularly engaged in selling supplies to the U.S. Government, you may have only a passing familiarity with the requirements of the Non-Manufacturer Rule (NMR). The NMR is an exception to the usual requirement that contractors supplying goods to the government perform at least 50 percent of the cost of manufacturing the items.

A manufacturer is a business concern that, with its own facilities, performs primary activities in transforming organic or inorganic substances, including the assembly of parts and components, into the end item being acquired. A small business may supply products it did not manufacture itself on a small business set-aside, so long as the products were manufactured by another small business.

Generally, small businesses may submit proposals for award of supply-based set-aside contracts, but in order to be eligible those small businesses must be the manufacturer or must supply the product of another small business located in the United States. So, a small firm receiving a small business set-aside contract for supplies in an amount greater than $25,000 may provide products it did not manufacture itself, as long as the products come from another small business located in the United States. However, these products may come from a large business if SBA assesses the availability of other small business manufacturers and determines that a waiver of the requirement is warranted.

The NMR requirements are different from the standard limitation on subcontracting rules. Specifically, to qualify as a nonmanufacturer, a small business must:

  1. Have 500 employees or less;
  2. Be primarily engaged in the retail or wholesale trade and normally sell the items being supplied under the contract; 
  3. Take ownership or possession of the items being supplied with its own personnel or facilities; and 
  4. Supply the end item of a small business manufacturer unless the contracting officer obtains a waiver or a class waiver exists for the items being supplied.

SBA can provide two types of NMR waivers:  class waivers and individual waivers. A class waiver is issued only when no small business manufacturer exists within a specific industry. An individual waiver will be issued when there is justification that no small business manufacturer exists that can meet the requirement on a specific solicitation.

In a recently-released proposed rule, SBA proposed to clarify that the limitations on subcontracting and the NMR do NOT apply to small business set-aside contracts between $3,000 and $150,000. This change is expected to spur more small business set-asides because agencies will not need to request a waiver of the NMR, and small businesses will be able to supply products manufactured by large businesses, such as computers and other “name brand items.” This exception will only apply for small business set-asides; the normal limitations on subcontracting would continue to apply to 8(a), HUBZone, SDVOSB, and WOSB/EDWOSB set-asides between $3,000 and $150,000.

This proposed rule also included proposed changes to how waivers of the NMR will be issued. Contracting officers would be required to notify potential offerors in the solicitation as to whether a class waiver or an individual waiver is applicable to the procurement. Additionally, SBA would be authorized to grant a waiver for an individual contract award after the solicitation has been issued, as long as the contracting officer gives all potential offerors additional time to respond.

SBA would also be authorized to grant waivers after contract award when additional items that are waiver-eligible are sought through an in-scope modification. The proposed rule provides clarification that waiver of the NMR does not exempt the contractor from complying with other requirements pertaining to the supplied item, such as the Buy American Act and the Trade Agreements Act.

The proposed rule also clarifies the SBA’s position with regard to a case decided last year by the U.S. Court of Federal Claims. On September 19, 2014, U.S. Court of Federal Claims’ Rotech decision held that the plain language of the NMR rule in the Small Business Act applies to “any” supplies being procured via small business set-asides, meaning, even supplies procured as an ancillary part of a services or construction contract must be obtained from a small business manufacturer, unless SBA grants a waiver.

SBA’s view is that the NMR applies when supplies constitute the primary purpose of the project, but not when a primarily services contract includes some ancillary supplies. While the government decided not to appeal Rotech, the proposed rule confirms SBA’s view that the contracting officer’s selection of a NAICS code will determine whether the contract is subject to services or supply limitation on subcontracting.

As you can see, if you are providing supplies to the government, it is important to keep abreast of the requirements of the NMR, which are still evolving. Please contact us if you have any questions regarding the NMR or how it will apply to a specific procurement.

About the Author: Katie Flood is an associate with PilieroMazza in the Government Contracts Group. She may be reached at kflood@pilieromazza.com.

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