[Federal Register Volume 60, Number 102 (Friday, May 26, 1995)]
[Proposed Rules]
[Pages 27924-27926]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12646]



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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121


Small Business Size Regulations; Non-Manufacturer Rule

AGENCY: Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: The Small Business Administration (SBA) proposes to amend its 
size regulations to require that small business non-manufacturers 
provide the product of a small business manufacturer on small business 
set-aside contracts or section 8(a) contracts, regardless of the dollar 
value of the contract. Under certain conditions, a waiver of this 
requirement may be granted by the SBA.

DATES: Comments must be submitted on or before July 25, 1995.

ADDRESSES: Send comments to: Gene VanArsdale, Acting Assistant 
Administrator for Procurement Policy and Liaison, U.S. Small Business 
Administration, 409 Third Street, SW, Mail Code 6252, Washington, DC 
20416.

FOR FURTHER INFORMATION CONTACT:
Gary M. Jackson, Assistant Administrator for Size Standards, (202) 205-
6618.

SUPPLEMENTARY INFORMATION: In order to qualify as small for purposes of 
a small business set aside or section 8(a) procurement of manufactured 
or processed products, the Small Business Act (15 U.S.C. 637(a)(17)) 
and SBA's implementing size regulations (13 CFR 121.906 and 121.1106) 
require non-manufacturers to provide the product of a domestic small 
business manufacturer. An offeror which is not the manufacturer (1) 
must itself be a small business concern, and (2) must also supply a 
product manufactured by a domestic small business concern. This 
requirement is commonly referred to as SBA's ``non-manufacturer rule.'' 
Compliance with the non-manufacturer rule has been a long-standing 
regulatory requirement for the small business set-aside and 8(a) 
programs, and a part of the Small Business Act since 1988. Pursuant to 
the Act, the non-manufacturer rule may be waived by the SBA if SBA 
determines that no small business manufacturer can reasonably be 
expected to offer a project meeting the specifications required by the 
solicitation, or if SBA determines that no small business manufacturer 
is available to participate in the Federal market. Under the SBA's 
existing size regulations, the non-manufacturer rule has not been 
extended to supply contracts processed under ``Small Purchase 
Procedures.''
    Recent legislation, however, has rescinded the Small Purchase 
Procedures. Thus, the exemption to the non-manufacturer rule for 
procurements processed under those procedures no longer exists. This 
action was part of the Federal Acquisition Streamlining Act of 1994 
(FASA) that was signed into law on October 13, 1994. Among its many 
changes, FASA requires that simplified acquisition procedures be 
developed for contracts between $2,500 and $100,000, and that all 
contracts between $2,500 and $100,000 be reserved exclusively for small 
concerns unless the contracting officer is unable to obtain offers from 
at least two small business concerns that are competitive in price and 
quality.
    The SBA is proposing to apply the nonmanufacturer rule to supply 
contracts that are reserved for small business (i.e., set aside for 
small business or reserved for the 8(a) program) regardless of the 
dollar value of the contract. This policy, adopted, would consistently 
apply the non-manufacturer rule to small business set-aside and 8(a) 
contracts for supplies issued under all procurement methods, including 
those processed under the new Simplified Acquisition Procedures. The 
SBA believes that this rule would further the overall purpose of the 
FASA, which is to simplify Federal procurement procedures. Applying 
different rules according to dollar value of contracts would further 
complicate the procurement process. The impact of this proposed rule 
would effectively be limited to those procurements ranging in value 
between $2,500 and $25,000 that were previously exempt from the non-
manufacturer rule as procurements processed under Small Purchases 
Procedures. (Note: Procurements of $2,500 and below will be processed 
under new micro-purchase procedures and will not be reserved for small 
business competition. Thus, the proposed rule would not apply.)
    The SBA does not believe an exception to the non-manufacturer rule 
based on the dollar value of contract is needed. Public Law 100-656 
amended the Small Business Act by statutorily requiring the non-
manufacturer rule. As indicated above, the legislation also included a 
provision granting SBA the authority to waive the nonmanufacturer rule 
when (1) there is no small business manufacturer for that particular 
class of products in the federal market (class waiver); or when (2) 
there is no small business manufacturer which can meet the 
specifications of a particular contract (individual waiver). The waiver 
provision addresses those situations where the application of the 
nonmanufacturer rule is inappropriate due to the absence of small 
business manufacturers in the Federal market. By way of illustration, 
examples of waivers to the non-manufacturer rule are described by the 
two following cases.
    1. Example of class waiver. There are no small business 
manufacturers of four-wheel drive utility trucks. 
[[Page 27925]] Therefore, the SBA has issued a waiver to the 
nonmanufacturer rule for this class of product. Because there is no 
small business manufacturer in the Federal market, a small business 
offeror may provide a product of a large business manufacturer of four-
wheel drive trucks on contracts set aside for small businesses.
    2. Example of an individual waiver. There are occasional instances 
when the government requires a brand-name product. For example, a 
government office may need to purchase computers which are compatible 
with computers already used in that office. If there is no compatible 
unit manufactured by a small business concern in the Federal market, 
the SBA may grant an individual waiver at the request of the 
contracting officer so that a small business offeror may provide a 
product manufactured by a large business for that particular 
procurement even though set aside for small businesses.
    The SBA believes that the implementation of the non-manufacturer 
rule contained in this proposed rule is the application which will best 
assist small business, minimize complexity for procurement, and most 
clearly comply with the congressional purposes of the Small Business 
Act. This proposed rule would ensure that, on procurements reserved for 
small business, a substantial value of the contract is performed by a 
small business. Absent the non-manufacturer rule, a small business non-
manufacturer can obtain a small business contract and, in turn, provide 
a product produced by a large business manufacturer. In that case, the 
benefits to small business of such an award are limited to the mark-up 
of the small business non-manufacturer or dealer. On the other hand, 
when a small business provides the product, directly or through a 
dealer, most of the value of the contract is realized by a small 
business. This fosters increased employment and growth for small 
business manufacturers in the economy.
    The SBA notes that the Federal government's implementation of 
electronic commerce will make it easier for small business 
manufacturers to enter into the government procurement arena. Through 
electronic commerce, they will be able to identify Federal contracting 
opportunities and become potential sources for Federal agencies and 
small business dealers. Requiring small business products on all set-
aside and 8(a) contracts will help such manufacturers do a larger 
amount of business in the federal procurement arena.

Alternative Approaches

    The SBA considered two alternatives with regard to application of 
the non-manufacturer rule to small business set-aside or 8(a) contracts 
that will be processed under the Simplified Acquisition Procedures:
    (1) A rule that would not apply the non-manufacturer rule to small 
business set-aside and 8(a) contracts of $100,000 or less, and
    (2) A rule that would not apply the non-manufacturer rule to small 
business set-aside and 8(a) contracts of $25,000 or less.
    Each of these approaches has advantages and disadvantages which are 
discussed below.
    The first alternative, which would not apply the non-manufacturer 
rule to supply contracts on ``Simplified Acquisition Procedures'' until 
the simplified acquisition threshold of $100,000, would expand the 
number of contracts in which a small business non-manufacturer or 
dealer could supply the product of any domestic manufacturer large or 
small. Existing rules exempt from the non-manufacturer rule only those 
contracts which are $25,000 or less in value, and which are processed 
under ``Small Purchases Procedures.'' Under the first alternative, 
small business set-aside and 8(a) contracts of between $25,000 and 
$100,000, would no longer be subject to the nonmanufacturer rule.
    This approach would appear to be consistent with a major purpose of 
the FASA, which is to simplify the formal procurement process. It would 
simplify procurement procedures on relatively low dollar value 
contracts and would facilitate the evaluation and award of these 
contracts (since the small business status of a subcontractor to a 
small offeror would no longer be relevant).
    The SBA is concerned, however, that this alternative might have an 
adverse impact on small business manufacturers. Without the non-
manufacturer rule, large manufacturers could simply supply their 
products to the government indirectly (through small business offerors 
that won the contract). Small manufacturers would then, in effect, be 
competing with large manufacturers on a large number of contracts 
ostensibly reserved for small business. Based on contract award data 
between fiscal years 1989 and 1993, the SBA estimates that over $500 
million has been awarded annually to small manufacturers on small 
business set-aside and 8(a), contracts ranging in size between $25,000 
and $100,000. A failure to apply the non-manufacturer rule to these 
contracts would cause a shift in contract revenues from small 
manufacturers to large manufacturers that is likely to be well into the 
multi-million dollar range. As a consequence, SBA elected not to 
propose this approach.
    The second alternative is to not apply the non-manufacturer rule to 
small business set-aside and 8(a) contracts of $25,000 or less--the 
level of the former Small Business Purchase threshold. However, under 
this approach, all other small business set-aside and 8(a) contracts, 
including those processed under the new Simplified Acquisition 
Procedures, would be subject to the non-manufacturer rule (unless an 
administrative waiver were issued for the class of product or for 
specific procurement). This alternative would, in effect, maintain the 
current application of the non-manufacturer rule to small business set-
aside procurements notwithstanding enactment of FASA.
    Under this approach, small business manufacturers would not be 
subject to new competition from large business (as could occur under 
the first alternative approach) and small business offerors would 
continue to have contract opportunities below $25,000 exempt from the 
rule so they could supply the product of a large manufacturer. In 
addition, a new procurement requirement would not be added to smaller-
sized procurements of up to $100,000 at a time when the Federal 
government is attempting to streamline all procurement procedures.
    The disadvantage of this approach is that it would add unnecessary 
complexity to the new Simplified Acquisition Procedures. A contracting 
officer would have different requirements to follow depending upon 
whether the value of a contract exceeded $25,000 or not. This would 
undercut the overall purpose of FASA, which is to simplify the 
procurement process.
    The SBA believes a uniform approach with regard to the application 
of the non-manufacturer rule to small business set-aside contracts is 
more in-line with the spirit of the procurement reform legislation. In 
this regard, it believes the proposed rule provides the best level of 
assistance to small businesses, especially for small business 
manufacturers.
    The SBA welcomes public comments on the proposed rule, and will 
continue its evaluation of all of the alternative approaches to 
application of the non-manufacturer rule. Comments on any alternative 
to the proposal, including those discussed above, should present the 
reasons why it is preferable to the [[Page 27926]] proposal, and should 
address the following concerns: (1) The interaction between SBA 
programs and the procurement process, including the various statutory 
authorities impacting this process; (2) the effect on small business 
participation; and (3) the prospects for significant new entrants into 
the Federal procurement market.

Compliance With Executive Orders 12866, 12778 and 12612, the Regulatory 
Flexibility Act (5 U.S.C. 601, et seq.), and the Paperwork Reduction 
Act (44 U.S.C. Chap. 35)

    The SBA believes that this proposed rule, if finalized, would have 
a significant impact on a substantial number of small entities within 
the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. In 
addition, this rule constitutes a significant rule for the purpose of 
Executive Order 12866. A regulatory flexibility analysis follows:

(1) Description of Entities to Which This Rule Applies

    With eleven million small purchase contract actions during FY 1993, 
the SBA estimates that tens of thousands of small manufacturers active 
in Federal contracting potentially could be impacted by this rule. In 
addition, thousands of non-manufacturers or dealers providing 
manufactured products under small purchase procedures could be impacted 
by this rule since their product mix and small business status could be 
affected.

(2) Description of Potential Benefits of This Rule

    A decision to apply the non-manufacturer rule to supply contracts 
in the $2,500 to $25,000 range of contract size would have an estimated 
impact on small business participation in excess of $100 million. 
During FY 1993, $7.9 billion was awarded to small business concerns 
under small purchase procedures. Although available data would not 
permit the SBA to determine the extent to which Federal agencies 
utilize small business non-manufacturers to satisfy contracts awarded 
as small purchases, or to identify which contracts are in the $2,500 to 
$25,000 range affected by this rule, the magnitude of the $7.9 billion 
figure suggests that a decision to apply the non-manufacturer rule 
waiver to small business procurements in this dollar range would likely 
have an annual small business impact exceeding $100 million.

(3) Description of the Potential Costs of This Rule

    The SBA believes the procurement costs to the Federal government 
would be minimal. All set-aside and 8(a) contracts are expected to be 
awarded at no more than fair-market value. If reasonable pricing does 
not exist, the procuring agency should issue an unrestricted 
solicitation. There should be no significant increased costs to the 
government.

(4) Description of the Potential Net Benefits of the Rule

    If the proposed rule is adopted, the SBA estimates that tens of 
thousands of small manufacturers would provide the products that 
formerly have been provided by large manufacturers. At a minimal cost 
to the government, small business participation in the Federal market 
would likely be increased. The direct impact would be entirely 
concentrated in the area of Federal procurement.
(5) Legal Basis for This Rule

    The legal basis for this rule is sections 3(a), 5(a), 8(a), and 
15(a) of the Small Business Act, 15 U.S.C. 632(a), 634(b)(6), 637(a) 
and 644(a).

(6) Federal Rules

    There are no Federal rules which duplicate, overlap or conflict 
with this proposed rule. The SBA has been given exclusive statutory 
jurisdiction in establishing size standards.

(7) Significant Alternatives to This Rule

    In compliance with the Regulatory Flexibility Act, the SBA has 
examined alternatives to the proposed application of the non-
manufacturer rule. These are discussed in the supplementary 
information. The public is invited to comment on the proposed rule and 
alternative approaches to assist the SBA in developing a final rule.
    For purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA 
certifies that this rule contains no new reporting or recordkeeping 
requirements.
    For purposes of Executive Order 12612, SBA certifies that this rule 
does not have any federalism implications warranting the preparation of 
a Federalism Assessment.
    For the reasons set forth above, Title 13, Code of Federal 
Regulations (CFR), is amended as set forth below.

PART 121--[AMENDED]

    1. The authority citation for 13 CFR Part 121 continues to read as 
follows:

    Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c); and Pub. 
L. 102-486, 106 Stat. 2776, 3133.


Sec. 121.906  [Amended]

    2. Section 121.906(d) is removed.

    Dated: April 19, 1995.
Philip Lader,
Administrator.
[FR Doc. 95-12646 Filed 5-25-95; 8:45 am]
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