Executive Summary
The United States Congress has detailed its declared policy to engage small business contractors in the federal market place to the maximum extent practicable in the Small Business Act of 1953. Time and again, this policy has proven to be beneficial for not only meeting agency missions, but encouraging a completive marketplace, spurring innovation, expanding supply chains, and impacting local economies.
In order to hold agencies accountable to congressional intent, the “rule of two” was implemented into the Federal Acquisition Regulation. This rule basically requires procurement contracts to be set aside for small businesses if, upon market research, the government can identify two or more small businesses that can provide the product or service at a reasonable price.
In order to protect small business manufacturers, the rule also requires that if a contract is set aside for small businesses, then the final manufactured product must be produced by a small business. In some instances, for a matter of convenience or for purposes of adding value, the government engages with small business prime vendors or a small business value-added reseller rather than directly with the manufacturer. Even in these instances, it is not sufficient only for the reseller to be small, but if small manufacturers produce the final product, then the reseller must provide the product of a small business under their set-aside contract with the government. This is referred to as the nonmanufacturer rule.
If, however, no small business manufacturers exist, the requirement can still be set aside for small business prime vendors or resellers where the final product can be produced by any size firm. This process is referred to as the nonmanufacturer rule waiver. In these cases, the government must demonstrate that no small business manufacturers exist and then a waiver of the nonmanufacturer rule must be requested from the SBA in order to set aside the contract for a small business reseller or prime vendor.
Ideally, in order to implement the desired intent of Congress, a federal agency should first analyze the marketplace to determine if small business manufacturers exist for the product or totality of products being procured. If the determination is positive, then the requirement should be reserved for small businesses. If, however, the government determines that no small business manufacturers exist, it should apply the rule of two and analyze the market place to determine if two or more small business resellers or prime vendors exist that could provide the totality of the products at a reasonable price.
If two or more small business resellers exist, then the requirement should be set aside for small businesses. In these instances, under the current rules, the government agency needs to request an NMR Waiver from the SBA to allow it to set aside the requirement for a small business reseller that provides the finished product of manufacturers that are other-than-small.
The NMR Waiver process as it has been implemented, provides the contacting officer with the discretion to request a waiver and does not make it mandatory in cases where no small business manufacturers exist. This discretion, has created a loophole to the rule of two and allows the agency and the contracting officer to circumvent Congress’s intended policy to engage small business suppliers to the maximum extent possible. In effect, once an agency determines that no small business manufacturers exist, they are not even required to analyze the marketplace to determine if two or more small business resellers exist. As stated above, under the current process, in order for a CO to set aside a requirement for small business resellers they would have to request an NMR Waiver; however, the waiver request is at the discretion of a CO, and he/she can decide not to request one, and therefore, not to set aside a requirement even when two or more small business resellers could provide the product or products at a reasonable price. This process unintentionally empowers a CO to undermine the intended purpose of the Small Business Act, and allows COs to undermine the rule of two.
We have identified two possible solutions to address this loophole. The first solution amends the Small Business Act (15 U.S.C. § 644(j)) to specifically address situations where no small business manufactures exist. The second solution requires a change to the rule of two as established in the Federal Acquisition Regulations (FAR 19.502-2 (b)) and removes the discretion of the CO; making it mandatory to request an NMR Waiver where the government determines that no small business manufacturers exist.
Small Business Set-Aside Requirements
According to the Small Business Act, “[i]t is the declared policy of the Congress that the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprise, to insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government (including but not limited to contracts or subcontracts for maintenance, repair, and construction) be placed with small business enterprises…” 15 U.S.C. § 631(a) (emphasis added).
Furthermore, “[t]o the maximum extent practicable, procurement strategies used by a Federal department or agency having contracting authority shall facilitate the maximum participation of small business concerns as prime contractors, subcontractors, and suppliers…” 15 U.S.C. § 644(e)(1) (emphasis added).
Therefore, it is the declared policy of the United States Congress that small businesses participate to the maximum extent practicable in providing the federal government with services and supplies.
Rightfully, FAR 19.502-2 (c) further stipulates that in the case of a small business set-aside to a nonmanufacturer (i.e. supplier or prime vendor), the finished product must be produced by a small business manufacturer unless there are no small businesses that manufacture the product being procured, or the totality of the products being procured (i.e. in the case of prime vendors that supply thousands of products to the government under a supply services contract).
This provision protects small business manufacturers and prohibits the federal government from getting small business credit for the acquisition of products not manufactured by small businesses.
FAR 19.502-2 (c) also allows a small business set-aside to a small business reseller/prime vendor in cases where no small business manufacturers exist. In these circumstances, an official determination must be made that no small businesses manufacture the product or the totality of the products being procured. Once this determination is made, the supply contract can be set aside for a small business reseller/prime vendor, who can then provide the government with the finished products of any manufacturer (small or large).
This process is called a Nonmanufacturer Rule Waiver (NMR Waiver). The NMR Waiver process for specific solicitations/contracts is realized in FAR 19.102(f)(5), and allows contracting officers to request a waiver of that part of the nonmanufacturer rule which requires that the actual manufacturer or processor be a small business concern if no known domestic small business manufacturers or processors can reasonably be expected to offer a product (or products) meeting the requirements of the solicitation.
The NMR Waiver allows for a small business set-aside even in cases where no small business manufacturers exist. This provision allows small business reseller/prime vendors to participate in the federal marketplace, and corresponds with congressional intent found at 15 U.S.C. § 644(e)(1) (i.e. “maximum participation of small business concerns…and suppliers”).
Problem
Based on the statutory provisions of the Small Business Act, one can conclude that if there is no small business manufacturer that can provide all of the products being procured, then the next best alternative is to set the requirement aside for a small business non-manufacturer or prime vendor. Practically, this means if a contracting officer determines that no small business manufacturers exist, he/she should automatically implement the rule of two with respect to small business resellers or prime vendors. If two or more small business resellers exist, the requirement should be set aside for competition amongst those resellers.
In reality however, the non-manufacturer rule waiver, which is supposed to assist in setting aside requirements for resellers and prime vendors, actually circumvents this policy and allows contracting officers to sidestep the rule of two.
The NMR Waiver rule, as stated in the FAR, provides the contracting officer with the discretion to request an NMR Waiver from the SBA. So, if there are no small businesses that produce or manufacture the requirement(s) being procured, the contracting officer is not required to request an NMR Waiver, and therefore is not required to implement the rule of two and set the procurement aside for a small business reseller. In fact, the CO is never even required to analyze the marketplace to determine if there are two or more small business resellers that can provide the service to the government at a fair and reasonable price.
This “loophole” allows COs to bypass the rule of two as soon as he/she determines that no small business manufacturers exist for the product or products being procured. Clearly, this could not have been the intent of Congress when it established the priority to engage small business suppliers to the maximum extent practicable.
Furthermore, because the NMR Waiver process has been deemed to be discretionary, the enforcement mechanisms that exist through the Small Business Administration are not effectively implemented. Procurement Center Representatives (PCRs) are supposed to work with agency acquisition personnel to review and identify barriers to small business participation in Federal contracting and recommend appropriate measures to remove such barriers. In this case, a PCR should recommend that a supply contract be set aside for small business nonmanufacturers (when small manufacturers do not exist), but since an NMR Waiver is required to do so, and since the request for the NMR Waiver is at the discretion of the CO, PCRs are reluctant to make that recommendation. Furthermore, even if they do make the recommendation, the PCR has very little recourse to appeal the decision if a CO does not agree with his/her recommendation.
Solution
In order to close the NMR loophole and still protect small business manufacturers, Congress should act to clarify that when procuring supplies, a federal agency or buying activity must first prioritize a set-aside for small business manufacturers, and if none exist, then the agency must prioritize a set-aside for small business nonmanufacturers. An ideal sequence would be as follows:
- Determine if a small manufacturer exists that can provide the product or totality of the products being procured.
- If a small manufacturer exists, then the requirement must be set aside for small businesses, and the finished product(s) must be produced by small business manufacturers.
- If no small business manufacturers exist, then the federal agency or buying activity must determine if two or more small business resellers or prime vendors exist.
- If two or more qualified resellers exist that can provide the product(s) at a fair market price, then the contract must be set aside for small business resellers and the final product can be manufactured by business that are other-than-small.
In our opinion, the above objective can be realized by amending 15 U.S.C. § 644(j) as follows:
(j) Small business reservation
(1) Each contract for the purchase of goods and services that has an anticipated value greater than the micro-purchase threshold, but not greater than the simplified acquisition threshold shall be reserved exclusively for small business concerns unless the contracting officer is unable to obtain offers from two or more small business concerns that are competitive with market prices and are competitive with regard to the quality and delivery of the goods or services being purchased.
(2) In carrying out paragraph (1), a contracting officer shall consider a responsive offer timely received from an eligible small business offeror.
(3) In carrying out paragraph (1), if no small business manufacturer can provide the totality of goods/products being procured, the contract shall be reserved exclusively for small business nonmanufacturers unless the contracting officer is unable to obtain offers from two or more small business nonmanufacturers that are competitive with market prices and are competitive with regard to the quality and delivery of the goods being purchased.
(3)(4) Nothing in paragraph (1) shall be construed as precluding an award of a contract with a value not greater than $100,000 under the authority of subsection (a) of section 637 of this title, section 712 [3] of the Business Opportunity Development Reform Act of 1988 (Public Law 100–656; 15 U.S.C. 644 note), or section 7102 of the Federal Acquisition Streamlining Act of 1994.
Alternatively, FAR 19.102(f) subsections 4 and 5 can be amended as follows:
(4) In the case of acquisitions set aside for small business or awarded under section 8(a) of the Small Business Act, when the acquisition is for a specific product (or a product in a class of products) for which the SBA has determined that there are no small business manufacturers or processors in the Federal market, then the SBA may shall grant a class waiver so that a nonmanufacturer does not have to furnish the product of a small business. For the most current listing of classes for which SBA has granted a waiver, contact an SBA Office of Government Contracting. A listing is also available on SBA’s Internet Homepage at http://www.sba.gov/content/class-waivers. Contracting officers may shall request that the SBA waive the nonmanufacturer rule for a particular class of products if no known domestic small business manufacturers or processors can reasonably be expected to offer that class of products. For procedures in requesting a waiver see 13 CFR 121.1204.
(5) For a specific solicitation, a contracting officer may shall request a waiver of that part of the nonmanufacturer rule which requires that the actual manufacturer or processor be a small business concern if the contracting officer determines that no known domestic small business manufacturers or processors can reasonably be expected to offer a product meeting the requirements of the solicitation.
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