Waivers of the Small Business Administration's Nonmanufacturer
Rule Have Limited Effect (19-DEC-02, GAO-03-311R).
Under section 8(a) of the Small Business Act, the Small Business
Administration (SBA) conducts a program for developing small
businesses that are owned by socially and economically
disadvantaged individuals. Participants can receive contracts
under acquisitions that federal agencies offer to the 8(a)
program as well as business development assistance from SBA. A
firm that receives a supply contract under the 8(a) program or a
small business set aside can be either a manufacturer or a
nonmanufacturer of a product. Under SBA's rules, however, a
nonmanufacturer who receives one of these contracts must agree to
supply the product of a domestic small manufacturer or processor.
SBA can waive this requirement when there are no small
manufacturers or processors available to supply the product.
There are two types of waivers to the nonmanufacturer rule: (1)
individual waivers, which apply only to a specific contract and
are effective for the life of that contract, and (2) class
waivers, which apply to categories of items and continue in
effect unless revoked by SBA. Once a waiver of the
nonmanufacturer rule is approved, a firm may supply the product
of a large manufacturer. GAO reviewed (1) the number of
individual waivers SBA approved in fiscal year 2001 and the
dollar amount of fiscal year 2001 contract obligations that
resulted from those waivers, and (2) the number of class waivers
available for use during fiscal year 2001 and the dollar amount
of fiscal year 2001 obligations that resulted from those waivers.
SBA approved 23 individual waivers of the nonmanufacturer rule in
fiscal year 2001. Sixteen of the waivers were used on ten 8(a)
contracts with a total of $6.3 million in fiscal year 2001
obligations. The remaining seven waivers either did not result in
8(a) contracts during fiscal year 2001 or did not involve fiscal
year 2001 funds. SBA approved one class waiver in fiscal year
2001, and there were 84 other class waivers still in effect from
prior years. Five of these 85 class waivers resulted in contracts
with $20.5 million in fiscal year 2001 obligations. The other 80
approved class waivers were not used on 8(a) contracts during
fiscal year 2001. In total, GAO identified $27 million in fiscal
year 2001 obligations for contracts covered by individual or
class waivers.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-311R
ACCNO: A05769
TITLE: Waivers of the Small Business Administration's
Nonmanufacturer Rule Have Limited Effect
DATE: 12/19/2002
SUBJECT: Small business contractors
Small business contracts
Small business set-asides
Small disadvantaged business contractors
Waivers
SBA 8(a) Program
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GAO-03-311R
Page 1 GAO- 03- 311R Nonmanufacturer Rule Waivers
December 20, 2002 The Honorable Christopher S. Bond Ranking Minority
Member Committee on Small Business and Entrepreneurship United States
Senate
Subject: Waivers of the Small Business Administration*s Nonmanufacturer
Rule Have Limited Effect
Dear Senator Bond: Under section 8( a) of the Small Business Act, the
Small Business Administration (SBA) conducts a program for developing
small businesses that are owned by socially and economically disadvantaged
individuals. Participants can receive contracts under acquisitions that
federal agencies offer to the 8( a) program as well as business
development assistance from SBA. In fiscal year 2001, there were 5,110
small businesses that participated in the program.
A firm that receives a supply contract under the 8( a) program or a small
business set aside can be either a manufacturer or a nonmanufacturer of a
product. Under SBA*s rules, however, a nonmanufacturer who receives one of
these contracts must agree to supply the product of a domestic small
manufacturer or processor. 1 This nonmanufacturer rule is one key
mechanism for ensuring that procurement dollars under the 8( a) program
and small business set- asides are spent on products made by small
businesses. 2 SBA can waive this requirement when there are no small
manufacturers or processors available to supply the product. There are two
types of waivers to the nonmanufacturer rule: (1) individual waivers,
which apply only to a specific contract and are effective for the life of
that contract, and (2) class waivers, which apply to categories of items
and continue in effect unless revoked by SBA. Once a waiver of the
nonmanufacturer rule is approved, a firm may supply the product of a large
manufacturer.
In response to your concern about the extent waivers of the
nonmanufacturer rule may be resulting in 8( a) procurement dollars going
to firms that are not small businesses, we determined: (1) the number of
individual waivers SBA approved in fiscal year 2001 and the dollar amount
of fiscal year 2001 contract obligations that resulted from those waivers,
and (2) the number of class waivers
1 A nonmanufacturer is also required to be small and a regular dealer
primarily engaged in the retail or wholesale trade.
2 Section 303( h) of P. L. 100- 656 and section 210 of P. L. 101- 574
incorporated the nonmanufacturer rule and the waiver provision into the
Small Business Act. The nonmanufacturer rule applies only to contracts
that exceed $25, 000. For contracts at or below that amount, an eligible
8( a) firm is not required to supply the product of a small business. In
January 2002, SBA published a proposed rule that would raise the threshold
to $100,000. As of November 2002, the final rule had not been published.
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 03- 311R Nonmanufacturer Rule Waivers
available for use during fiscal year 2001 and the dollar amount of fiscal
year 2001 obligations that resulted from those waivers.
Results in Brief
SBA approved 23 individual waivers of the nonmanufacturer rule in fiscal
year 2001. Sixteen of the waivers were used on ten 8( a) contracts with a
total of $6. 3 million in fiscal year 2001 obligations. The remaining
seven waivers either did not result in 8( a) contracts during fiscal year
2001 or did not involve fiscal year 2001 funds.
SBA approved one class waiver in fiscal year 2001, and there were 84 other
class waivers still in effect from prior years. Five of these 85 class
waivers resulted in contracts with $20. 5 million in fiscal year 2001
obligations. The other 80 approved class waivers were not used on 8( a)
contracts during fiscal year 2001.
In sum, we identified close to $27 million in fiscal year 2001 obligations
for contracts covered by individual or class waivers. 3 This represents 4.
4 percent of the $606 million obligated in fiscal year 2001 for supplies
and equipment under the 8( a) program, and a fraction of 1 percent of the
$6.2 billion obligated for all 8( a) contracts during the fiscal year.
We are not making recommendations in this report. During our review,
however, we determined that some of the information disseminated by SBA on
existing class waivers was inaccurate. We discussed this problem with SBA
officials and suggested that the information be revised. SBA revised the
class waiver information and made changes to its Web site on November 15,
2002.
We received written comments on the draft of this report from the Small
Business Administration. SBA concurred with our findings but suggested two
changes in our discussion of the nonmanufacturer rule. We made the
suggested changes. SBA*s written comments are enclosed.
Background
To be eligible for SBA*s 8( a) program, a firm must be a small business
that is at least 51- percent owned by one or more socially and
economically disadvantaged individuals. 4 An eligible firm generally must
have been in business for at least 2 years and have a reasonable prospect
for success in the private sector.
SBA*s Associate Administrator for Government Contracting is responsible
for approving requests for individual and class waivers of the
nonmanufacturer rule. Only a contracting officer of a federal agency can
request an individual waiver. After conducting market research and
determining that no domestic small business exists that can supply the
product in the quantity, time frame, or specifications needed by the
agency, a contracting officer can submit a waiver request to SBA. Class
waivers may be requested by anyone, including suppliers, subject to
approval by SBA. Class waivers
3 There could have been additional obligations in fiscal year 2001 related
to individual waivers approved in prior years. Our scope did not include a
review of these waivers. 4 A firm is considered a small business if it
meets size standards established by SBA for the firm*s particular
industry. Size
standards are based on either the average number of employees during the
previous 12 months or sales averaged over the previous 3 years.
Page 3 GAO- 03- 311R Nonmanufacturer Rule Waivers
may be approved for all contracts involving a particular class of products
5 if no small manufacturer is available to participate in the federal
procurement market. Such classes currently include construction equipment,
mainframe computers, and certain chemicals.
Contracts can be classified into three categories: (1) research, (2) other
services and construction, and (3) supplies and equipment. The
nonmanufacturer rule applies only to contracts for supplies and equipment.
In fiscal year 2001, 87 percent of the 8( a) purchases were under services
and construction contracts while research contracts accounted for just 3
percent. The remaining 10 percent, about $606 million, was used for
contracts for supplies and equipment. (See table 1.)
Table 1: 8( a) Program Obligations by Category for Fiscal Year 2001
(Dollars in millions)
Contract category Obligations % of total obligations
Research $180.8 2. 9 Supplies and equipment 605.9 9. 8 Other services and
construction 5,389. 8 87.3
Total $6,176. 5 100.0
Source: Federal Procurement Data System (FPDS)* includes obligations
greater than $25,000.
Use of Individual Waivers in Fiscal Year 2001 Was Limited
SBA approved 23 individual waivers in 2001. Seven individual waivers were
approved for one multiple- year contract at the National Institutes of
Health, which contracted with Integrated Concepts and Research
Corporation, an Alaskan Native Corporation participating in the 8( a)
program. The waivers allowed the firm to supply seven different types of
medical testing equipment from large manufacturers, including scanners and
cameras. The other waivers were requested for 16 separate proposed
contracts-- 4 at the Department of Energy, 3 at the U. S. Army, and 9 at
eight other agencies. In one of these cases, for example, the Department
of Energy obtained a waiver and contracted with an 8( a) firm to make a
one- time purchase of fiber optic ground wire.
Our analysis showed that $6. 3 million in fiscal year 2001 obligations
were associated with individual waivers approved in fiscal year 2001. This
represents a fraction of 1 percent of the total of $6. 2 billion obligated
on 8( a) contracts during the fiscal year. Although the 23 individual
waivers were requested for 17 contracts, only 10 of these contracts had
obligations during the fiscal year. Six of the contracts did not have
fiscal year 2001 obligations because the contracts were not signed during
fiscal year 2001 or there was no delivery order issued until fiscal year
2002. One contract was awarded to a company that was not an 8( a) firm.
The results of our analysis are shown in table 2.
5 A class of products is defined based on the North American Industry
Classification System and the General Services Administration*s Product
and Service Codes Manual. In each six- digit code, there are subdivisions
of products that can be considered for waiver.
Page 4 GAO- 03- 311R Nonmanufacturer Rule Waivers
Table 2: Summary of 8( a) Contracts Resulting from SBA- Approved
Individual Waivers in Fiscal Year 2001 Product Dollars obligated in fiscal
year 2001
Medical test equipment $818,176 Fiber optic equipment 1,991, 000 Microsoft
computer equipment 2,192, 000 Microsoft software upgrades/ licenses 39,118
Cisco video telecommunication equipment 103,000 Data tapes 149,000
Xerographic paper 442,866 TV/ camera equipment 261,222 Generator engines
32,000 Custom configured information technology 300,000
Total $6,328, 382
Source: Obligation data was obtained from the FPDS and supplemented by
data provided by agency contracting officers.
In the first 6 months of fiscal year 2002, the waivers approved in fiscal
year 2001 resulted in additional obligations of $5. 9 million on 8( a)
contracts.
Obligations Using Class Waivers Also Limited
During fiscal year 2001, there were 85 SBA- approved class waivers that
contracting officers could use. Of these, 84 had been approved in prior
years. During fiscal year 2001, there were 209 purchases for products
covered by five class waivers, totaling $20. 5 million in obligations on
8( a) contracts. This was a very small percentage of the total $6.2
billion obligated on 8( a) contracts during the fiscal year. The most
frequently used class waiver was for fruit and vegetable canning, as shown
in table 3.
Table 3: Class Waiver Obligations on 8( a) Contracts in Fiscal Year 2001
Product Actions Dollars
Telephone apparatus 5 $ 926,000 Electronic computer 13 4, 554, 000 Other
computer peripheral equipment 49 2, 205, 000 Fruit and vegetable canning
141 12,817,000 Iron and steel 1 26, 000
Total 209 $ 20, 528, 000
Source: FPDS.
Some of SBA*s Information on Class Waivers Was Inaccurate During our
review of class waivers, we analyzed SBA information used by agency
contracting officers when they decide whether a class waiver is available
to purchase a product from an 8( a) firm. We determined that SBA*s listing
of class waivers dated October 2000 included many instances where product
codes were not accurate or the product codes were inconsistent with
product definitions. For example, one product was miscoded and classified
as a nuclear battery when it should have been classified as a storage
battery. In another case, several different chemicals were
Page 5 GAO- 03- 311R Nonmanufacturer Rule Waivers
matched with a North American Industry Classification System code that did
not exist. According to SBA officials, the inaccurate information on the
class waiver listing existed prior to the last change to its Web page in
October 2000.
We discussed this problem with SBA officials and suggested that the class
waiver listing be revised. As a result, SBA revised the listing for the 85
class waivers in effect during fiscal year 2001, and made changes to 47 of
the waiver codes or product descriptions. SBA incorporated these changes
into its Web site on November 15, 2002. SBA did not know whether these
inaccuracies affected any contracting officer*s decision to use the class
waivers.
Agency Comments and Our Evaluation
We provided a draft of our report to SBA for its review and comment. SBA
concurred with our findings, but suggested two changes in our discussion
of the nonmanufacturer rule. We agreed, and made the suggested changes
where appropriate. SBA*s comments are enclosed.
Scope and Methodology
To determine the extent of fiscal year 2001 obligations on 8( a) contracts
using waivers of the nonmanufacturer rule, we focused on individual
waivers approved by SBA in fiscal year 2001 and class waivers available
for use during that year. We discussed the waiver process with officials
at SBA headquarters (Washington, D. C.) and reviewed case files for
individual waivers approved during that period. We then contacted federal
agency contracting officers who requested the individual waivers to
identify which 8( a) firms were awarded the contracts, and the number and
value of purchases under those contracts. Further, we compared this
information to obligations reported in the Federal Procurement Data System
(FPDS). For the class waivers, we reviewed SBA* s listing of all active
waivers in effect during fiscal year 2001 and compared the product codes
cited to all codes reported in FPDS. We also relied on previous GAO
reports, SBA reports, and applicable laws and regulations for background
information on waivers and the 8( a) small business development program.
We conducted our review from May through October 2002 in accordance with
generally accepted government auditing standards.
-- -- -- - As we agreed with your office, unless you publicly announce the
contents of this report earlier, we plan no further distribution of it
until 30 days from the date of this letter. We will then send copies of
this report to the Administrator, SBA, and the Director, Office of
Management and Budget. We will also make copies available to others upon
request. In addition, the report will be available at no charge on the GAO
Web site at http:// www. gao. gov.
Page 6 GAO- 03- 311R Nonmanufacturer Rule Waivers
If you have any questions on this report, please contact me at (202) 512-
8214 or Karen Zuckerstein at (202) 512- 6785. Major contributors to this
report were William Bricking, Jean Lee, Sylvia Schatz, and Robert
Swierczek.
Sincerely yours, William T. Woods Director, Acquisition and
Sourcing Management Enclosure
Enclosure Page 7 GAO- 03- 311R Nonmanufacturer Rule Waivers
Comments From the U. S. Small Business Administration (120188)
*** End of document. ***