The non-manufacture rule (NMR) has always been difficult to understand for both contracting professionals and contractors.
FAR 19.001 states: “Non-manufacturer rule” means that a contractor under a small business set-aside or 8(a) contract shall be a small business under the applicable size standard and shall provide either its own product or that of another domestic small business manufacturing or processing concern (see 13 CFR 121.406).
Over the years as a CO, I learned that what the FAR said really didn’t tell the whole story. You need to dig into 13 CFR 121.406 to get the rest of the story.
The SBA Office of Hearings and Appeals (OHA) uses the “three factor test” to determine whether a small business qualifies as a manufacturer of an end item being purchased. OHA looked at the history of the test and concluded that the SBA never intended any one of the factors to hold more weight than the others. As a result, each determination on which factor was more important would be based on the circumstances, on a case by case basis.
The three-part test at 13 C.F.R. § 121.406(b)(2)(i)(A)-(C) reads as follows:
- The proportion of total value in the end item added by the efforts of the concern, excluding costs of overhead, testing, quality control, and profit;
- The importance of the elements added by the concern to the function of the end item, regardless of their relative value; and
- The concern’s technical capabilities: plant, facilities and equipment; production or assembly line processes; packaging and boxing operations; labeling of products; and product warranties.
In NMC/Wollard Inc., SBA No. SIZ-5668, 2015 (S.B.A.), 2015 WL 4604061, the SBA explained that no single factor in the test should have greater weight than the others, and a small business can be a manufacturer even if they only contribute a small percentage of the “total value of the end item” and the contribution was critical to the end item’s function.
NMC/Wollard Inc. involved a small business that modified a John Deere product to make it compliant with military specifications and certifications. The dispute stated that this piece of equipment did not meet part 1 or 2 of the test, that the modifications made by the small business only contributed to 30% of the total value of the product, and that the modifications were not “functionally important.” However, OHA concluded that “a small business may be considered the manufacturer of an end item if it purchases that item from another company and adds significant functionality unavailable from the original manufacturer.”
I’m sure this is not the last we will hear about the NMR. Its interpretation has changed many times over the years. The important point to remember is that if you are a small business who modifies an item to meet specs, you may have to fight to prove the conditions of the NMR have been met.