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 Clause 52.219-3 (c) (2) -- Means What?
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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