The nonmanufacturer rule puts additional regulations on small-business resellers that large businesses don't face
Plus veteran-certification applications need to be consistent; a contractor wins a big change to the NAICS code; and SBA publishes a massive size-standards proposal
SBA doesn’t mess much with the nonmanufacturer rule, possibly because it’s one of the more complicated rules in small business government contracting. But SBA could be changing it soon. Earlier this week, SBA announced in a notice of a Michigan tribal consultation that the agency was seeking comments on issues related to the nonmanufacturer rule: the role of nonmanufacturers, whether “there should be any limitations imposed on the rule,” and whether SBA should change how contracts with nonmanufacturers are reflected on SBA’s scorecard.
The rule has an unhelpful name (it’s generally good practice to name something based on what it does, not what it doesn’t do). It’s better thought of as the reseller rule because it places limits on the activities of resellers.
Under the rule, a small-business reseller that wins a set-aside contract for supplies must supply the domestic product manufactured by another small business. SBA can waive that requirement if either the contracting agency or SBA concludes that there aren’t small-business manufacturers for the required product. SBA calls those waivers nonmanufacturer-rule waivers.
Most of the questions about the rule come up in cases where the rule doesn’t apply. It doesn’t apply to contracts that aren’t for supplies—like services or construction. It doesn’t apply to small-business manufacturers, since those are selling their own items. And it doesn’t apply to open competitions because those aren’t set aside (with the exceptions of where the small business uses the HUBZone price evaluation preference—in that case, the rule applies).
The waivers come up a lot. SBA can waive the rule for whole classes of products. These products are on a 19-page list, and they include things like laptops and refrigerators. Agencies can ask for individual waivers for specific contracts. SBA approves 80 percent of those requests.
In the tribal consultation notice, what SBA is really suggesting when it asks whether there “should be any limitations imposed on the rule” is what should happen when SBA waives the rule. When SBA waives the rule—either because the product is on the 19-page list or because the agency received SBA’s approval for a specific contract—the reseller can provide any conforming product, manufactured anywhere, by a company of any size.
In cases with the waiver, the rule allows resellers to act a lot more like traditional mom-and-pop businesses. When you shop small on, say, Small Business Saturday, you don’t much care that the boutique you are in sells foreign-made clothing or that the corner record store is selling products from a large music label. I still consider that shopping with a small business, even where the underlying product is made by a large business.
But, for this consultation, SBA’s questions are premised on the suspicion that resellers sell their products at high markups and the government would be better served by buying direct. There are good objections to that premise—see John Shoraka’s op-ed in Federal News Network—and GSA’s OneGov initiative proves that. Reportedly, the much-touted $1 deal with OpenAI and Anthropic was done through Carahsoft, a reseller.
Through this consultation process, SBA also appears to be seeking to balance its support for small-business manufacturers with the interests of small-business resellers. There are a lot more resellers than manufacturers. Of the 22,422 small businesses that won supply contracts in fiscal year 2024, only one-third (7,591) claimed to be manufacturers. (And even that percentage overstates the number of manufacturers because the representation as a manufacturer is not specific to the item being supplied.)
I would propose this as a balance: Apply tiered evaluation of manufacturers and resellers at the contract level:
First preference would be small-business manufacturers selling their own domestic product.
The second preference would be small-business resellers selling the domestic product of another small business.
After that, look at small-business resellers of domestic products of a large business.
Then review small-business resellers of foreign products (with the TAA applied) before moving to direct contracts with large businesses.
(This is only for set-asides, so if there aren’t two small businesses available—whether resellers or manufacturers—the purchase wouldn’t be set aside and likely wouldn’t go to a small business at all.)
Why split up the rule that way? The reseller (nonmanufacturer) rule is a restriction that applies to small businesses only. Large businesses aren’t bound by the rule. So the rule is a case of additional regulation and burden on small businesses that don’t exist for large businesses. In those cases, considering that small businesses don’t have the same level of resources to devote to compliance, the rule should be structured to alleviate burdens on small businesses and create more opportunities for small-business participation, not fewer.
Whether SBA agrees will depend a lot on what is said at the tribal consultation in Wayland, Michigan. The consultation is on September 17, with registration due by September 12.
Documentation for veteran control needs to be consistent
A recent case out of SBA’s Office of Hearings and Appeals shows the level of attention to detail that you need when applying for SBA certification. A Colorado small business, Display Devices, submitted its application for veteran-owned small business certification after 35 years in business. The firm submitted two different copies of meeting minutes: one reflecting the veteran owner as the firm’s president, another with the veteran’s son as the president. SBA denied the application because, among other reasons, the veteran did not hold the highest officer position.
OHA upheld the denial because the application had inconsistent information on who exactly was the firm’s president. Although Display Devices argued that the veteran was the actual president, OHA found that the case file is “contradictory on this point.” The firm also lost because of the admission that the veteran did not run day-to-day operations.
The Display Devices case demonstrates that applicants should be reviewing their files for discrepancies before submitting to SBA. There probably should not be two copies of the same meeting minutes in the application. If one of the copies shows a lack of veteran control, SBA can and will—as it did here—reject the application.
For NAICS selections, performing is different from advising
In another OHA decision, the contractor was able to get SBA’s judge to increase the size standard by $27 million—from $20 million to $47 million—by drawing a distinction between contractors that advise the government versus contractors that perform alongside the government. The Missile Defense Agency had set aside a weapon-systems support contract under NAICS 541614, Process, Physical Distribution and Logistics Consulting Services, which sets the size standard at $20 million. The contractor, ITC Defense, presumably did not qualify for the set-aside at that size standard and appealed to OHA for a $47 million size standard under the engineering services for military weapons.
ITC Defense won because the OHA judge read the solicitation to require the contractor to work alongside troops on the weapons system. Those are not consulting services, OHA ruled. In rejecting MDA’s use of the consulting size-standard, Judge Christopher Holleman wrote, “The contract does not call for the provision of advice as much as it does the handling of logistics.”
It’s also significant that OHA supported the $47 million size standard for weapon-related engineering services, rather than the $25.5 million size standard normally associated with engineering services. In this case, the solicitation provided that the contractor would perform “maintenance directly on the weapons involved.” That made it appropriate for the higher size standard.
Next week: an analysis of SBA’s proposed size standards
I’ll do a deeper dive next week into SBA’s massive proposed rule on size standards. This is the largest size-standard proposal SBA has ever issued. In past years, SBA has split up the proposals on size standards into multiple batches by sector—for example, one for agriculture and another for wholesale/retail. This time SBA is only doing two rules: this one for dollar-based size standards and a future one for the size standards expressed in number of employees.
My first reaction is that, for some of the industries most significant to small-business contractors, such as IT services, commercial construction, and facilities support services, SBA proposed no change to the size standards. In fact, SBA’s data analysis would support lowering the size standard. But SBA decided as a policy matter not to lower the size standard. That policy decision might be controversial, however. So whatever side you are on, it is worth considering commenting by SBA’s deadline of October 21.
Sam Le is a Virginia- and D.C.-licensed attorney. His website is www.samlelaw.com.