Phil Bail & Associates

 

The Games We Play 

Over the years both contractors and federal agencies have played games with the Federal Acquisition Regulation (FAR) rules and regulations.  A large business might mentor a small business; not to really help the small business, but to use the small business as a way to eliminate large business competitors.  A federal agency might pick a NAICS code for a procurement that doesn’t best describe the scope of work; but steers a solicitation toward a particular contractor.  A small business and a large business may form a joint venture to secure a small business setaside when both parties know the large business will be performing most of the work involved. 

Of all these games, one of the most often employed involves procurements with both a manufacturing and services segment where the contracting agency assigns a services NAICS code and gets around the non-manufacturing rule by its assignment of the services NAICS code.  The Court of Federal Claims, in its Rotech Healthcare, Inc., v United States, Case No. 14-502C (September 19, 2014) (Damich, J.), decision may have effectively stopped this practice.

If the Court's decision stands it will reduce the number of small business set-aside procurements in cases where there are no domestic small business manufacturers available (because no offeror could comply with the NMR). At the same time, the ruling will substantially increase opportunities for small business manufacturers as long as the procurement itself remains set aside for small businesses. Conversely, this ruling may eliminate small business set-aside contracts for resellers providing services along with products of a large business manufacturer.

So what is the existing non-manufacturer rule? The NMR allows a firm to qualify as a small business concern under a solicitation for the provision of manufactured products or other supplies as a "non-manufacturer" as long as it meets certain requirements. One of these requirements is that the small business non-manufacturer must provide only end items that were manufactured by another small business in the United States. 13 C.F.R. § 406(b); 15 U.S.C. § 637(a) (17) (B). This requirement is implemented through FAR 52.219-6, Notice of Total Small Business Set-Aside, which requires offerors in all small business set-asides to agree to furnish "only end items manufactured or produced by small businesses in the United States, or its outlying areas." FAR 52.219-6(d). Remember however that construction and services contracts are exempt from this requirement. .

The SBA's current regulations allow agencies (and small business offerors) to avoid the constraints of the NMR when the procurement is for both supplies and services:

(3) The non-manufacturer rule applies only to procurements that have been assigned a manufacturing or supply NAICS code. The non-manufacturer rule does not apply to contracts that have been assigned a service, construction, or specialty trade construction NAICS code.

(4) The non-manufacturer rule applies only to the supply component of a requirement classified as a manufacturing or supply contract. If a requirement is classified as a service contract, but also has a supply component, the non-manufacturer rule does not apply to the supply component of the requirement. 13 C.F.R. § 406(b).

Under these rules, if an agency designates a procurement as a "services" contract, it is the SBA's position that the NMR should not apply. Therefore, a small business services contractor would be permitted to supply end items manufactured by a large business or foreign business because the NMR does not apply to "services" contracts.

The Rotech decision concluded that these regulations were contrary to the Small Business Act, which unambiguously states that the NMR applies "for any procurement contract for the supply of a product," not just procurements that the agency designates as a supply or manufacturing procurement. 15 U.S.C. § 637(a) (17) (A) (emphasis added).

The Court's decision is notable because it directly refutes the SBA's attempted rulemaking and interpretation of the Small Business Act. The Court's decision notes that a prior Court of Federal Claims case (Rotech v. United States, 71 Fed. Cl. 393 (2006) (Bush, J.)), already examined the statutory text and held that the word "any" unambiguously means that the NMR applies to all supply contracts, not just those that an agency decides to classify as a supply contract. Subsequent to this ruling, however, the SBA promulgated the above-quoted regulations to address the question previously unanswered in the SBA's regulations—that is, whether and to what extent the NMR rule applies to procurements that have both a supply and services component.
Following the Supreme Court's holding in Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967 (2005), which relied on Chevron, U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984), the latest Rotech decision concluded that the Court of Federal Claim's prior judicial construction of 15 U.S.C. § 637(a) (17) (A) trumps the SBA's rulemaking. The Court explained that the prior judicial decision in this case (Rotech v. United States, 71 Fed. Cl. 393 (2006)) indeed held that the language of the statute was unambiguous ("any" means any and all). As a result, the SBA's subsequent interpretation of the statute and corresponding rulemaking was not entitled to any Chevron deference.  According to Rotech, the SBA's regulations attempting to limit the application of the NMR in procurements with both services and supplies are invalid and contrary to law.

As a result of the Rotech decision, the validity and future of 13 C.F.R. § 406(b) (3) and (4) is doubtful. "Any" procurement for supplies, even if it includes a services component, is now “probably” subject to the NMR.
  • At a minimum, all contractors (small and large) should look carefully at combination supply/services solicitations and assess the impact of the NMR on the field of eligible prime small business offerors, as well as available domestic small business manufacturers. Agency decisions to set aside certain supply/services solicitations for small businesses may be protested if no small business can comply with the NMR.
  • This ruling will likely impact the number of supply/services solicitations capable of being set aside for small businesses since it will now require offerors to satisfy the constraints of the NMR (e.g., likely impact on the agency's Rule of Two analysis).
  • Small business services contractors should look carefully at combination supply/services solicitations and determine whether they can comply with the NMR for the supply component; in particular, whether they can supply end items manufactured by another small business in the United States. Failure to demonstrate compliance with the NMR in a proposal may be grounds for disqualification (and therefore, the subject of a potential protest by a competitor).
  • There may be pressure on the SBA to issue waivers of the NMR, but that requires a determination that there are no small business manufacturers or processors available to participate in the federal marketplace for that class of products. 13 C.F.R. § 121.1202.

Best,

Phil

FARbyte is a periodic service from Phil Bail & Associates that provides clients and prospective clients with up-to-date information about topics related to contracting with the federal government.  Each FARbyte covers some aspect of the Federal Acquisition Regulations in a simple easy to understand format.  Topics include Contractor Purchasing System Reviews (CPSRs), Small Business Program issues, determning prices fair and reasonable, interpreting clauses, contract law basics, key terminology and techniques/best practices.

Send an email to phil@philbail.com with questions or comments about the service.

FARbyte is a periodic service from Phil Bail & Associates that provides clients and prospective clients with up-to-date information about topics related to contracting with the federal government.   Each FARbyte covers some aspect of the Federal Acquisition Regulations in a simple easy to understand format.  Topics include Contractor Purchasing System Reviews (CPSRs), Small Business Program issues, determining prices fair and reasonable, interpreting clauses, contract law basics, key terminology and techniques/best practices. Send an email to phil@philbail.com with questions or comments about the service.

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