Update to SBA’s New ITVAR Size Rule

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Back in February, we wrote about SBA’s new size rule for IT value-added resellers (“ITVARs”) and the major ramifications of the new rule. The rule requires ITVARs to comply with the nonmanufacturer rule when reselling IT products to the federal government under NAICS code 541519, footnote 18, which has a size standard of 150 employees. This was a 180-degree turnaround from SBA’s prior position on ITVARs, which were not previously required to comply with the nonmanufacturer rule. The upshot of the new rule is that ITVARs performing small business set-aside prime contracts will now have to supply products made by small businesses, or obtain a waiver from SBA to supply products made by large businesses.

SBA’s new ITVAR size rule went into effect on February 26. Over the last few weeks, we have been studying the rule closely and have talked with many ITVARs and others in the industry about the implications and implementation of the new rule. There are still many unanswered questions, but the following thoughts and policy issues have crystalized so far:

  • The rule should only apply prospectively, meaning it would cover procurements issued after February 26, 2016 under the ITVAR NAICS code, but would not apply retroactively to ITVAR procurements issued before February 26.
  • The nonmanufacturer rule has a 500-employee size standard. By requiring ITVARs to comply with the nonmanufacturer rule under NAICS code 541519, there is confusion about whether the 150-employee size standard found in NAICS code 541519, footnote 18 is trumped by the nonmanufacturer rule’s 500-employee size standard. We do not believe this was SBA’s intent. Therefore, SBA should clarify that, to qualify as a small business using the nonmanufacturer rule under NAICS code 541519, a firm must have less than 150 employees.
  • In a pending SBA rulemaking related to the limitations on subcontracting, SBA indicated its intent to confirm that the nonmanufacturer rule does not apply to small business set-aside procurements between $3,000 and $150,000. SBA should finalize this intention, and should go a step further to make clear that this exception to the nonmanufacturer rule includes multiple-award contract orders between $3,000 and $150,000.
  • In the same pending SBA rulemaking, SBA signaled the understanding that it needs to facilitate class waivers for name brand IT products, such as software. As part of this rulemaking, the current class waiver rules should be revamped to make it easier and faster to obtain class waivers for name brand items. That way, when an agency desires only name brand items, or when only name brand items will do, it would not be necessary for the agency to go through the individual waiver process.
  • SBA needs to clarify that class waivers tied to a particular manufacturing NAICS code will be applicable whenever that item is supplied under a procurement using NAICS code 541519. Because NAICS code 541519 is a services code, it is unlikely that a class waiver could be issued for this code. That is why it is necessary for existing class waivers under manufacturing codes to apply when the waived products are supplied under NAICS code 541519.

There was a recent GAO protest ruling that heightens our concern over how these policy issues will be resolved. The GAO ruling, Manus Medical LLC, B-412331 (Jan. 21, 2016), found that an agency was not required to set aside a procurement for small businesses because, while there may have been at least two small business distributors of the products sought, there were not at least two small business manufacturers. GAO also found that the agency was not required to pursue an individual waiver for the contract because the decision to seek a waiver is discretionary.

Based on Manus Medical, and the new ITVAR size rule, we are concerned that there will be less small business set asides for ITVARs. One way to mitigate this concern would be to implement more class waivers for IT products, the existence of which an agency presumably would have to consider in determining whether to set aside a procurement for IT products.

Because this is such an important issue for the ITVAR community, we plan to continue monitoring this rule closely and will push the key policy issues with SBA and others. Our next step will be to hold a webinar on April 12, 2016 (more info), with the goal of submitting feedback to SBA shortly thereafter.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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