Why Federal Distributors Must Understand the Non-Manufacturer Rule (NMR)

January 13, 2019

“Special thanks to Steven Koprince, Koprince Law LLC, for contributing to this post.” – Carroll Bernard

Do you understand the non-manufacturer rule?

In my experience of working with small businesses, I observed that most don’t understand the non-manufacturer rule. In this particular case, ignorance is not bliss – actually, it’s quite opposite. Lack of understanding puts these businesses at a high risk for unintentional non-compliance.

Non-manufacturer rule

As a distributor bidding on federal supply contracts, it is important to understand the non-manufacturer rule for several reasons:

  • To ensure that your company is compliant with the non-manufacturer rule.
  • To understand what is meant by taking “ownership” or “possession” of the property, and what is allowable by law.
  • To be able to alert the federal agencies of non-compliant competitors who you know are not in compliance with the rule.
  • Bid Matching Service (great for helping you find government opportunities)
  • And last but not least, to understand how this impacts the NAICS codes you should be including in your SAM and SBA profiles.

This is a complex subject and one blog post will not do it justice; but here is the gist of it.

What Is The Non-Manufacturer Rule?

The Small Business Act and regulations established by the U.S. Small Business Administration (SBA) impose performance requirements/limitations on subcontracting for firms that are awarded set-aside contracts.

Manufacturers’ Limitations

When supplying an end item on a supply contract, the manufacturer may not pay more than 50% of the amount paid by the government to firms that are not similarly situated. Costs of materials are excluded and are not considered to be subcontracted. Please note that this formula is the updated one based on the 2013 National Defense Authorization Act and the SBA’s regulations. The FAR has yet to be updated; FAR 52.219-14 currently calls for the prime contractor to perform at least 50% of the cost of manufacturing (less the cost of material).

Distributors’ and Value Added Resellers’ (VARs) Limitations

The Non-Manufacturer Rule (NMR) is an exception to the performance requirements and provides that a firm that is not a manufacturer may qualify as a small business on a supply contract set aside for small business if, among other things, it supplies the product of a small business made in the United States. But wait there’s more…

Caveat

A little known but critically important aspect of the non-manufacturer rule allows distributors and VARs to be awarded contracts under the manufacturing NAICS codes. 

The reason why this is so important is that many distributors and VARs usually do not include these NAICS codes on their public profiles. Hence, they are most likely missing out on many opportunities because the government uses these Manufacturer NAICS codes when searching for manufacturers, distributors, and VARs in the System for Award Management (SAM) and the U.S. Small Business Administration’s (SBA) databases. In fact, the SBA’s regulations prohibit the government from assigning distribution or wholesale NAICS codes to solicitations. When government officials search the databases, they use the manufacturing NAICS codes, even if the contract ultimately is awarded to a distributor. 

When Does The Non-Manufacturer Rule Apply?

The non-manufacturer rule applies when: (1) an agency puts out a set-aside solicitation under a manufacturing or supply NAICS code; and (2) the estimated value of the acquisition is (a) over $150,000 (small business set-asides); or (b) over $3500 (8(a), SDVOSB, and WOSB set-asides). The FAR currently specifies that the non-manufacturer rule applies to HUBZone set-asides with an estimated value over $25000. When the non-manufacturer rule applies, the distributor must meet all of the criteria to be a non-manufacturer under 13 C.F.R. 121.406. Critically, unless an exception applies (see below), the distributor must provide an item that was manufactured by another small business based in the United States.

Are There Any Exceptions?

YES! If no U.S. based small business can reasonably be expected to offer a product meeting the specifications of a particular solicitation, the contracting officer could request an individual waiver of the non-manufacturer rule from the SBA. Individual waivers apply only to a single solicitation. 

In the NAICS codes where SBA has recognized that certain NAICS and Product Service Codes do not have any small business manufacturers based in the U.S., they maintain a list of class waivers. Hence, if an acquisition falls within one of these NAICS codes, the non-manufacturer rule may be waived. 

You can find a list of these NAICS codes at 

http://www.sba.gov/category/navigation-structure/contracting/contracting-officials/non-manufacturer-waivers

I’d recommend bookmarking the web address for quick reference in the future when you want to check if the solicitation you are looking at requires the non-manufacturer rule or allows a waiver. This should be a routine checkpoint on every solicitation you are considering to bid.  

Please be aware, however, that a class waiver does not apply to an entire NAICS code: in order for the class waiver to apply, the NAICS code, Product Service Code, and product description must all align with the solicitation. 

Additionally, under new SBA rules that took effect last year, the contracting officer is supposed to specify in writing when a solicitation is subject to a non-manufacturer rule waiver.

Last Piece Of Advice

If you know that you sell an item that’s not manufactured by a U.S. based small business and would like to try to keep it set aside for small business on future acquisitions, you may find some success in working with the federal agency buying the item in question and asking them to request a non-manufacturer waiver from the SBA. Instructions on this process are also provided in FAR 19.102(f).

Additional Resources

Non-Manufacturer Rule Primer
– A good tutorial created by the SBA for contracting officers, although I find it just as valuable for contractors.

Understanding and Complying with The Non-Manufacturer Rule
 – Govology course presented by Steven Koprince.

Non-Manufacturer Rule: SBA OHA OK’s Drop Shipments
 – Blog article by Steven Koprince. 

ITVAR Nonmanufacturer Subject To 150-Employee Size Standard, Court Says
– Blog article by Steven Koprince. 

Regulations:

  • 15 USC §§ 637(a)(14), 644(o)
  • 13 CFR § 125.6
  • Federal Acquisition Regulation (FAR) §§ 52.219-14, 52.219-27