Changes to the Nonmanufacturer Rule

March 17th, 2015 | Posted by Sarah Jones in Guest Blogs - (Comments Off)

This week on NVTC’s blog, member company Venable shares Calculation of Annual Receipts, Recertification Requirements, and Service-Disabled Veteran-Owned and HUBZone Small Business Regulations,” part four of their five part series on the SBA’s Proposed Rules to Implement the 2013 NDAA. This post focuses on SBA’s proposal to exempt acquisitions valued between $3,000 to $150,000 from the nonmanufacturer rule.


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 BancroftPaul DeboltDismas LocariaRob BurtonRebecca PearsonJames BolandNathaniel Canfield, or Anna Pulliam.

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This week on NVTC’s blog, member company Venable shares “The Limitation on Subcontracting and Small Business Subcontracting Plans,”part 1 of their five part series on the SBA’s Proposed Rules to Implement the 2013 NDAA. 


The current limitation on subcontracting rule, or the “50 percent rule,” requires small business prime contractors on set-aside services contracts to incur no less than 50 percent of the cost of performance for labor. A similar methodology applies to materials and construction contracting. To implement requirements of the 2013 NDAA, the SBA proposes to alter the rule as follows:
No more than 50 percent of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated, and in addition

  • Any work that a similarly situated entity subcontractor further subcontracts to an entity that is not similarly situated will count toward the 50 percent subcontract amount.
  • A similar 50 percent limitation applies to the amount paid by the government for supply contracts; a 15 percent limitation is applied to the amount paid by the government for construction contracts.

Accordingly, under the new rule a small business prime is barred from subcontracting more than 50 percent of the amount paid by the government under the prime contract, unless a subcontract is to a similarly situated entity, i.e., a subcontractor with the same small business program status as the prime contractor. Thus, a HUBZone small business prime contractor can subcontract to another HUBZone small business subcontractor without it counting toward the 50 percent limitation. That HUBZone small business prime contractor, however, will have to count a subcontract to a woman-owned small business toward the 50 percent limitation, because it is not a similarly situated entity.

The SBA has gone a step further from Congress. The 2013 NDAA focused only on prime contractor restrictions. This limitation, however, could allow a similarly situated subcontractor – to which the 50 percent limitation does not count – to further subcontract some or all of the value of its contract to a large business. Thus, on a $100,000 set-aside, a HUBZone small business prime contractor could subcontract $75,000 of the amount paid by the government to another HUBZone small business. That subcontractor, in turn, could subcontract some – or all – of its subcontract to a large business. The SBA proposes to block that loophole by imposing limitations to contractors at any tier, and specifies that subcontracts to entities that are not similarly situated will count toward the rule’s limitations. This would bar the HUBZone small business subcontractor in the example above from subcontracting too much work to a large business subcontractor.

The wording of the proposed new rules also would dramatically simplify the methodology for determining how the percentage of subcontracting is calculated. For both services and supplies, the percentage is calculated simply as a percentage of the amount paid by the government to the prime. This is a substantial change from the current calculation methodology, as services contractors who have spent time and effort determining the “cost of contract performance incurred for personnel” will attest.

The SBA has proposed significant penalties for small business prime contractors that misrepresent compliance with the rule. Those penalties include imprisonment for up to 10 years, and a fine that is the greater of $500,000 or the dollar amount spent in excess of the permitted levels for subcontracting.

The Bottom Line: What You Should Know

Under the SBA’s proposed rule, small business primes must be vigilant in tracking the amount of work subcontracted throughout their subcontracting chain, particularly the work subcontracted by similarly situated entities. Failure to keep track of subcontracting could result in the contracting team exceeding the 50 percent limitation on subcontracting without the prime contractor’s knowledge, and risk an accusation that the prime misrepresented compliance with the rule.

Small Business Subcontracting Plan Requirements

The SBA proposes to toughen up requirements pertaining to small business subcontracting plans, which could have significant consequences for large business prime contractors.

  • Reporting Fraudulent Activity or Bad Faith: The SBA proposes to allow small business concerns and commercial market representatives (CMRs) to report fraudulent activity or bad faith behavior by large business prime contractors with respect to their subcontracting plans. Reports would be made to the SBA’s Area Office where the firm is headquartered.
  • Strengthening Corrective Action Plans: Large business prime contractors failing to provide a written corrective action plan after receiving a marginal or unsatisfactory rating for their subcontracting plans will be subject to material breach of contract, which will be considered in the contractor’s past performance evaluation.
  • Data Collection and Reporting: The SBA proposes to require agencies to collect, report, and review data on the extent to which each contractor meets its goals and objectives as set out in subcontracting plans.

This proposed rule, coupled with the recent rule allowing small business subcontractors to communicate directly with contracting officers about a lack of payment, will affect how large business prime contractors and their small business subcontractors interact. Failure by a large business prime contractor to reconsider a strained relationship with a small business subcontractor could lead to an allegation of fraudulent activity or bad faith with respect to small business subcontracting plan compliance. This proposal by the SBA leaves no recourse for the prime contractor to respond to allegations of fraudulent activity or bad faith, which could have significant adverse effects for contractors.

The Bottom Line: What You Should Know

Under the SBA’s proposed rule, large businesses must be aware of increasing scrutiny about small business subcontracting. The SBA’s proposed rule does not specify that any of the data collected on its subcontracting plan will be limited. Therefore, representations as to plan compliance under one contract must be consistent with plan compliance under another contract, or a large business prime runs the risk of allegations of making false statements to its agency customers.

Submitting Comments

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 Venable’s authors: Keir Bancroft, Paul Debolt, Dismas Locaria, Rob Burton, Rebecca Pearson, James Boland, Nathaniel Canfield, or Anna Pulliam.

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