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By
Anonymous on Monday, August 26,
2002 - 10:31 am:
Can anyone tell me what para (c) (2) of ref clause
means? I think I know but I would apprecuate other
views...thanks.
By
anon2 on Monday, August 26, 2002 -
11:56 am:
A typical case of tortured language from the FAR. One
is tempted to just say "Who knows!" and make it apply to
anything they want. Here is a best effort.
52.219-3 -- Notice of Total HUBZone Set-Aside (Jan 1999)
(c) Agreement. A HUBZone small business concern agrees that in
the performance of
the contract, in the case of a contract for --
(2) Supplies (other than acquisition from a nonmanufacturer of
the supplies), at least 50 percent of the cost of manufacturing,
excluding the cost of materials, will be performed by the
concern or other HUBZone small business concerns;
A translation (One from a foreign language might be more
straightforward.) seems to be that a HUBZone small business
contracted for supply manufacture must do 50% of the work in
house or through another HUBZone small business. This is to
prevent HUBZone small business from simply being a front for
large, established firms.
The parenthetical comment in the FAR is an escape for those
supplies or components the HUBZone small business does not make
and is not expected to make under the contract. For example, a
HUBZone small business contracted to manufacture steel trash
cans would not have to build a steel mill to supply sheet metal
for use in manufacturing the contracted cans.
Perhaps we need a HUBZone small business working on a massive
can in which to round file this kind of gobbledygook along with
the writers and editors that create the stuff.
By
Anonymous on Monday, August 26,
2002 - 01:20 pm:
It was the parenthetical comment that I could not
grasp.....and still cannot. Could it have something to do with
the nonmanufacturer waiver rule?
By
Vern Edwards on Monday, August 26,
2002 - 01:40 pm:
The limitation in paragraph (c)(2) does not apply if
the award was made to a nonmanufacturer small business. See FAR
§ 19.102(f) and 13 CFR 125.6. Also see: Marwais Steel
Company, Appellant, Re: Engineered Air Systems, Inc., Small
Business Administration Office of Hearings and Appeals, Docket
No. SIZ-93-12-15-137, February 10, 1994. The decision is old,
but still good.
By
Anonymous on Monday, August 26,
2002 - 02:09 pm:
THANKS.
By
anon2 on Monday, August 26, 2002 -
02:20 pm:
Vern, are you saying the parenthetical comment is
only applicable to cases in which the contract is not for
manufacture of anything -- "award was made to a nonmanufacturer
small business"?
"Supplies (other than acquisition from a nonmanufacturer of the
supplies)" converted to English could just as well mean that
there is no intent to apply the 50% manufacture rule to
components of the end product that a company does not
manufacture and the contract does not require them to
manufacture. Applying the 50% rule to all components of any end
product would exclude the types of businesses covered from
almost all manufacture.
I would argue that my interpretation, that the comment excludes
necessary components the company does not and is not expected
under the contract to make, makes sense simply because very few
manufacturers today are so integrated that they make all their
components. As far as I know no desktop computer maker makes its
own chip sets, monitors, and other such components. Drop down a
notch and few monitor makers make all components of monitors.
The same applies across most modern industries.
Applying the exception comment only to nonmanufacturing
contracts and thus applying the 50% rule to all manufacturing
contracts would seem to exclude these companies almost entirely
from any manufacturing work.
By
Roy on Monday, August 26, 2002 -
03:47 pm:
I believe Anonymous on Monday, August 26, 2002 has
been given an incorrect answer to the question. The reference
cited by Vern at FAR § 19.102(f) does not fit the requirements
under the HUBZone program.
The only exception to the nonmanufacturing rule I know of at the
present time for HUBZones is if the acquisition is for $25,000
or less. See SBA final rule posted in the Federal Register on
January 18, 2001. This is really not classified as a waiver by
SBA. Think SBA applied this monetary exception based on the
authorization provided in general language found in FAR
19.102(f)(7).
The HUBZone can be a nonmanufactor under the set-aside clause in
FAR 52.219-3, but the end item furnished by must be manufactured
or produced by qualified HUBZone SB manufacturer concerns.
In any case, SBA has issued a new proposed rule published on
January 28, 2002 that if adopted, will provide that the
nonmanufacturer rule for HUBZone SB's will not apply to
acquisitions less than the simplified Acquisition threshold,
currently $100,000.
By
Roy on Monday, August 26, 2002 -
04:09 pm:
Would like to add some clarification to my last post.
Under the nonmanufacturer rule Small Business nonmanufacturer's
are required to furnish the product of a small business
manufacturer or producer, unless a waiver has been granted by
the SBA for the product classification.
The difference between this standard definition and the one
applied to an acquisition conducted under HUBZone set-aside is
that the HUBZone SB nonmanufacturer is required to furnish a
product manufactured by one or more Qualified HUBZone SB's.
The proposed rule by SBA dated January 28, 2002 would allow
HUBZone nonmanufacturers under an acquisition less that $100,000
to furnish products of any manufacturer, including large
business firms. They will not have to be qualified HUBZone Small
Businesses.
By
Roy on Monday, August 26, 2002 -
05:04 pm:
Anon2,
I believe that the parenthetical language is there simply for
clarification of the sentence as a whole, due to other language
in the sentence which reads "will be performed by the concern
or...".
The specific rule as it relates to a HUBZone nonmanufacturer is
stated in paragraph (e) of the clause. This same requirement can
also be found in (c)(2), i.e, "will be performed by the concern
or other HUBZone small business concerns."
By
Vern Edwards on Monday, August 26,
2002 - 08:23 pm:
Roy:
My answer to Anonymous was correct. I said that the
subcontracting limitation in FAR § 52.219-3(c)(2) does not apply
to small business nonmanufacturers.
The SBA has applied the nonmanufacturer rule to HUBZONE small
businesses. See 13 CFR 126.206, which says:
"Sec. 126.206 May non-manufacturers be certified as qualified
HUBZone SBCs?
Non-manufacturers (referred to in the HUBZone Act of 1997 as
'regular dealers') may be certified as qualified HUBZone SBCs if
they meet all of the requirements set forth in Sec. 126.200. For
purposes of this part, a 'non-manufacturer' is defined in Sec.
121.406(b)(1)(i) and (ii) of this title."
The inapplicability of the 50 percent limitation to HUBZONE
nonmanufactureres is made clear in 13 CFR 126.700, which says,
in pertinent part:
"(a) Subcontracting percentage requirements. A qualified HUBZone
SBC prime contractor can subcontract part of a HUBZone contract
provided:
* * *
(4) In the case of a contract for procurement of supplies
(other than a procurement from a regular dealer in such
supplies) the qualified HUBZone SBC spends at least 50
percent of the manufacturing cost (excluding the cost of
materials) on performing the contract in a HUBZone. One or more
qualified HUBZone SBCs may combine to meet this subcontracting
percentage requirement." Italics added.
Vern
By
Vern Edwards on Tuesday, August 27,
2002 - 10:20 am:
For those who may not be following this discussion --
some background:
When a procurement of supplies is set aside for HUBZone small
businesses, the contractor must be the manufacturer of the end
items being procured (see 13 CFR § 121.406(a)). However, there
is an exception to the requirement that the contractor be the
manufacturer, which is called the "nonmanufacturer rule" (see 13
CFR § 121.406(b), 121.1201, and 126.206). The nonmanufacturer
rule allows HUBZone small business wholesalers and retailers
("regular dealers") to receive supply contracts awarded under
HUBZone set-asides.
If the HUBZone contractor is a manufacturer, then it must comply
with certain subcontracting percentage limitations apply (see 13
CFR § 126.700). These are the limitations referred to in FAR §
52.219-3(c)(2). They are as follows, quoting from the FAR
clause:
"[A]t least 50 percent of the cost of manufacturing, excluding
the cost of materials, will be performed by the concern or other
HUBZone small business concerns."
The SBA refers to this rule (and to the one in FAR §
52.219-14(b)(2), which is an absolute limitation on
subcontracting) as "the 50 percent rule." However, this
percentage limitation does not apply if the HUBZone contractor
is a nonmanufacturer, i.e., a regular dealer instead of a
manufacturer. Instead, a different rule applies, which, as
quoted from FAR § 52.219-3(e), is as follows:
"A HUBZone small business concern nonmanufacturer agrees to
furnish in performing this contract only end items manufactured
or produced by HUBZone small business manufacturer concerns."
Now, what is the difference between the subcontracting
limitation in FAR 52.219-3, paragraph (c)(2), and the HUBZone
small business nonmanufacturer performance requirement in
paragraph (e)?
The difference is significant. In the case of the subcontracting
limitation, compliance with the contractual requirement is
determined through application of a complex cost measurement
test, sometimes referred to as the "Phoenix methodology," after
an SBA Office of Hearings and Appeals decision. See: Phoenix
Systems & Technologies, Inc., Docket No. SIZ-89-9-29-129,
November 29, 1989; and, Columbian Rope Company, Docket
No. SIZ-96-2-8-13, June 6, 1996. See, too, 13 CFR 125.6(b).
However, SBA uses different criteria to determine whether or not
a firm is "the manufacturer of the end item being procured." The
criteria are described at length in 13 CFR § 121.406(b)(2), and
include the following:
"(i) The proportion of total value in the end item added by the
efforts of the concern, excluding the costs of overhead,
testing, quality control, and profit; and (ii) the importance of
the elements added by the concern to the function of the end
item, regardless of their relative value."
Among other things, you will note that overhead and profit are
not considered when determining whether or not a firm is the
manufacturer, but they are included in the when applying the 50
percent rule. Under the manufacturer criteria, a firm may be the
manufacturer of the end item even if it incurred less than 50
percent of the total cost of manufacture. It can be the
"manufacturer" even if all it did was assemble the end item
components, so long as its contribution included more than just
"minimal operations," such as unpacking or "on-site assembly
that does not substantially transform the item."
To read about the differences in the two tests in more detail,
read: Columbian Rope Company, cited above (application of
the 50 percent rule), and Nordic Sensor Technologies, Inc.,
Docket No. SIZ-99-07-12-34, August 30, 1999 (application of the
manufacturer of the end item rule).
The clause at FAR 52.219-3 will make a lot more sense once you
understand the nonmanufacturer rule and the difference
between the 50 percent rule in paragraph (c)(2) and the
manufacturer of the end item rule in paragraph (e).
By
Vern Edwards on Tuesday, August 27,
2002 - 11:25 am:
One more point of clarification. On August 26 at 3:47
p.m., Roy said:
"The only exception to the nonmanufacturing rule I know of at
the present time for HUBZones is if the acquisition is for
$25,000 or less. See SBA final rule posted in the Federal
Register on January 18, 2001. This is really not classified as a
waiver by SBA. Think SBA applied this monetary exception based
on the authorization provided in general language found in FAR
19.102(f)(7)."
Roy is referring to the rule that appears at 13 CFR §
121.406(d), and which states:
(d) Simplified Acquisition Procedures. Where the procurement of
a manufactured item is processed under Simplified Acquisition
Procedures, as defined in Sec. 13.101 of the Federal Acquisition
Regulation (FAR) (48 CFR 13.101), and where the anticipated cost
of the procurement will not exceed $25,000, the offeror need not
supply the end product of a small business concern as long as
the product acquired is manufactured or produced in the United
States, and the offeror does not exceed 500 employees. The
offeror need not itself be the manufacturer of any of the items
acquired."
This is not an exception to or waiver of the nonmanufacturer
rule. Rather, like the nonmanufacturer rule, it is an exception
to the general requirement in 13 CFR 121.406(a) that an offeror
responding to a solicitation for supplies that is set aside for
small businesses must be the manufacturer of the end item. See,
too, 13 CFR 121.406(c).
By
Vern Edwards on Tuesday, August 27,
2002 - 08:50 pm:
A correction: I said that overhead and profit are
included in the determination of the cost of manufacture when
applying the 50 percent rule. Overhead and G&A are included, but
not profit or fee. See 13 CFR 125.6(b)(3).
By
Roy on Friday, August 30, 2002 -
06:06 am:
Vern,
The problem I am having with what you are saying is the
application of two entirely different standards for products
furnished under a HUBZone set-aside. I don't think we disagree
on the fact that it doesn't matter if the product is furnished
by a qualified HUBZone SBC manufacturer or a qualified HUBZone
SBC non-manufacturer, it still must be produced in a HUBZone
area, by one or more qualified HUBZone SBC Manufacturers.
Thats where my hang-up is. I just don't see how you can apply
two different standards relating to the cost of manufacturing?
There was some language in the final rule that relates to the 50
percent rule and it seemed to send a signal about how the SBA
interpreted the legislation and what constitutes a qualified
HUBZone product under the subcontracting rules set forth in 13
CFR 126.700. It read:
"One commenter proposed that large firms be authorized to
perform up to 75 percent of manufacturing as a subcontractor on
contracts that are performed on Indian reservations. This
proposal is inconsistent with the HUBZone legislation which
states that not less than 50 percent of the cost of
manufacturing supplies (not including the cost of materials)
will be incurred in connection with the performance of the
contract in a HUBZone by one or more HUBZone small business
concerns."
This quotes exactly the 50 percent rule included in the
set-aside clause. Now I know what you are going to say, (but it
has a parenthetical the excludes non-manufacturers from this
criteria). However, in all fairness, how can a regular dealer
(non-manufacturer) be allowed to furnish a product under a more
relaxed standard than a HUBZone manufacturer. Do you know of any
decisions that relate specifically to HUBZone products? Do you
think SBA or a judge would apply two different standards for
determining when a product qualifies under the HUBZone rules,
given the language in the HUBZone Act?
Yea, regular dealers can still participate under the program but
the products they supply must be manufactured in a HUBZone by
qualified HUBZone SBC’s meeting the test of the 50 percent rule
(excluding the cost of materials). That’s my view on the
subject.
By
Vern Edwards on Friday, August 30,
2002 - 09:34 am:
Roy:
There are, indeed, two different standards: one for HUBZone
manufacturers and another for HUBZone nonmanufacturers. Read 13
CFR 126.615, which says:
"May a large business participate on a HUBZone contract?
A large business may not participate as a prime contractor on a
HUBZone award but may participate as a subcontractor to an
otherwise qualified HUBZone SBC, subject to the contract
performance requirements set forth in Sec. 126.700."
Now read 13 CFR 126.700(4), which says:
"What are the subcontracting percentages requirements under this
program?
(a) Subcontracting percentage requirements. A qualified HUBZone
SBC prime contractor can subcontract part of a HUBZone contract
provided: (4) In the case of a contract for procurement of
supplies (other than a procurement from a regular dealer in such
supplies) the qualified HUBZone SBC spends at least 50 percent
of the manufacturing cost (excluding the cost of materials) on
performing the contract in a HUBZone. One or more qualified
HUBZone SBCs may combine to meet this subcontracting percentage
requirement."
Roy, did you see the parenthetical language excepting regular
dealers? This language tracks 15 U.S.C. 632(p) [definitions
relating to HUBZones] (5) [definition of "qualified HUBZone
small business concern] (A)(i)(III)(bb), which says:
"[W]ith respect to any subcontract entered into by the small
business concern pursuant to a contract awarded to the small
business concern under section 657a of this title, the small
business concern will ensure that - in the case of a contract
for procurement of supplies (other than procurement from a
regular dealer in such supplies), not less than 50 percent of
the cost of manufacturing the supplies (not including the cost
of materials) will be incurred in connection with the
performance of the contract in a HUBZone by 1 or more HUBZone
small business concerns[.]"
Roy, note, again, the parenthetical language excepting regular
dealers. That's in the statute. The 50 percent rule does not
apply when the contractor is a "regular dealer," which, as I
have already pointed out, is called a nonmanufacturer in the SBA
regulations.
FAR § 52.219-3 reflects SBA's application of different rules to
manufacturers and nonmanufacturers. The 50 percent rule
[FAR 52.219-3(c)(2)] applies to manufacturers. The end items
manufacturered or produced by HUBZone small business
manufacturing concerns rule [FAR 52.219-3(e)] applies to
nonmanfacturers. I have already described the difference between
those two rules.
Roy, I have cited and quoted references and you should be able
to determine the correctness of my interpretation by reading
them. The meaning of the parenthetical comments in FAR §
52.219-3(c)(2) should be clear to you once you have checked them
and understand the difference between the two rules. I have
checked Westlaw and cannot find any decisions by SBA dealing
with HUBZones and the 50 percent rule. I don't know why you
think you need such a decision. SBA's regulations are to be very
clear.
Vern
By
Roy on Friday, August 30, 2002 -
10:56 am:
Vern,
I have read the references and decisions you cite and much more,
and I understand the general rule as it relates to a normal SB
set-aside purchase vs a HUBZone set-aside. I don't reach the
same conclusions as you for these HUBZone purchases. When they
say the item furnished must be manufactured in a HUBZone by one
or more qualified HUBZone SBC Manufacturers, I believe there is
only one set of criteria that can be applied in determining
whether or not that item is a qualified HUBZone product. It
should be the same criteria that a manufacturer is required to
meet.
Think I will check with the SBA. Thanks for your response.
Roy
By
Vern Edwards on Friday, August 30,
2002 - 01:47 pm:
Roy:
Well, I can lead you to water, but...
Vern
By
Vern Edwards on Friday, August 30,
2002 - 02:23 pm:
All:
See 13 CFR 126.601(d):
"A qualified HUBZone SBC which is a non-manufacturer may submit
an offer on a contract for supplies if it meets the requirements
under
the non-manufacturer rule as defined in Sec. 121.406(b) of this
title and if the small manufacturer is also a qualified HUBZone
SBC."
Here are the rules for determining who is the manufacturer of
the end item, quoted from 13 CFR 121.406(b)(2):
"(2) For size purposes, there can be only one manufacturer of
the end item being acquired. The manufacturer is the concern
which, with its own facilities, performs the primary activities
in transforming inorganic or organic substances, including the
assembly of parts and components, into the end item being
acquired. The end item must possess characteristics which, as a
result of mechanical, chemical or human action, it did not
possess before the original substances, parts or components were
assembled or transformed. The end item may be finished and ready
for utilization or consumption, or it may be semifinished as a
raw material to be used in further manufacturing. Firms which
perform only minimal operations upon the item being procured do
not qualify as manufacturers of the end item. SBA will evaluate
the following factors in determining whether a concern is the
manufacturer of the end item:
(i) The proportion of total value in the end item added by the
efforts of the concern, excluding costs of overhead, testing,
quality control, and profit; and
(ii) The importance of the elements added by the concern to the
function of the end item, regardless of their relative value."
As you can see, the standard for determining who is the
manufacturer of the end item is different from the 50 percent
rule, which is a strict cost test.
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