As small business provisions disappear from the Federal Acquisition Regulation (“FAR”) (perhaps to be relocated or perhaps to be permanently deleted) and reports of the use of a “Deregulation Tool” at the Small Business Administration (“SBA”) run rampant, a series of recent SBA announcements provide some insight into current thinking around these programs.
First, it was perhaps not surprising that the SBA’s notice of the August 18 tribal consultation meeting (the “Notice”) raised questions about the Nonmanufacturer Rule (“NMR”). See 90 Fed. Reg. 40047. Generally, to qualify as a small business concern for a small business set-aside award to provide supplies, a company must either be the manufacturer of the end item being produced or satisfy the criteria to qualify as a “nonmanufacturer” under 13 C.F.R. § 121.406(b), commonly known as the NMR. SBA regulations allow a company to qualify as a small business concern to provide manufactured products that it did not produce if it meets four requirements: (1) it does not exceed 500 employees; (2) it is primarily engaged in the retail or wholesale trade and normally sells the type of item being supplied; (3) it takes ownership or possession of the items with its personnel, equipment, or facilities in a manner consistent with industry practices; and (4) it will supply the end item of a small business manufacturer, processor, or producer made in the United States. 13 C.F.R. § 121.406(b)(1). In practice, the fourth requirement often appears to be forgotten, although companies may receive a waiver of that factor where no small business manufacturer reasonably can be expected to offer a product that meets the specifications required or where no small business manufacturer of the product is available to participate in the federal procurement market. 13 C.F.R. § 121.406(b)(5).
In short, the NMR (as reflected in regulations but not necessarily in statute) requires small business government contractors to provide the product of a small business manufacturer or processor if the set-aside contract is not the actual manufacturer or processor of the product. As previously discussed on our blog, the NMR has caused confusion for contractors for many years. For example, even when a contractor may believe the rule has been expressly waived for a particular procurement, the courts have made it clear that offerors should trust but verify when a solicitation states that the NMR has been waived with respect to particular items. See Size Appeal of Cypher Analytics, Inc. d/b/a Crown Point Systems, SBA No. SIZ-5986 (2019). In the Cypher Analytics appeal, the awardee relied on the procuring contracting officer’s multiple assertions that an NMR class waiver applied to the items in the solicitation. However, the Office of Hearings and Appeals not only found that the contracting officer was mistaken about the scope of the SBA class waiver but also emphasized that contracting officers themselves did not have the authority to waive the NMR. Id. In short, a contacting officer’s mistaken belief that a class NMR waiver applies to a procurement is not binding, leaving offerors with the responsibility to independently ensure that a waiver does, or does not, apply to the items in their bids. Until recent changes, there had also been confusion about how the NMR would apply to contracts with multiple items. See 88 Fed. Reg. 26164.
Given this confusion, and what appears to be skepticism as to the role of value-added resellers of all sizes, the NMR seems like a reasonable target for review. See, e.g., Executive Order 14271, Ensuring Commercial, Cost-Effective Solutions in Federal Contracts, dated April 16, 2025. As outlined in the Notice, SBA received feedback on the NMR increasing the price paid by the Government for manufactured items and that “original manufacturers do not wish to deal directly with the Government.” Likely to support potential changes, the SBA requested comments on a wide range of topics related to the NMR, including: (1) the role of nonmanufacturers; (2) whether there should be limitations imposed on the rule; (3) whether the value of manufactured items should count as an award to small business through one of SBA’s small business contracting programs; and (4) any additional suggestions related to the NMR. We assume SBA will hear more about the regulatory barriers to small business manufacturers entering the market directly, but it is not at all clear that changes to the NMR would have any effect on that. In fact, the increased focus on acquisition through Best in Class vehicles would seem to mean that nonmanufacturer contract holders would become more, not less, important going forward.
While it potentially threatens the NMR, SBA recently took long-awaited action that will expand the ranks of eligible small businesses. On August 22, 2025, SBA released a lengthy proposed rule, reviewing and updating about half of the SBA’s industry size standards. See 90 Fed. Reg. 41168. Specifically, SBA announced that it was proposed to increase size standards for 263 industries (259 receipts-based and four assets-based) and to retain receipts-based size standards for 237 industries and 12 subindustries (“exceptions”), removing one exception. As a result, somewhat larger businesses with more revenue could qualify as small businesses for federal procurement. In fact, SBA estimates that more than 11,200 additional firms in the 259 industries for which it has proposed to increase receipts-based size standards would be considered small under the new higher standards. SBA also acknowledged that it should have proposed not only an increase in 259 size standards but also a decrease in size standards for 213 industries. This decrease would have eliminated the small business status for around 7,900 businesses. Given the negative effects this could have for overarching small business goals, employment, competition, and other policy considerations, the SBA wisely chose to keep these 213 size standards at the current levels.
For this reason, SBA requested comments on the proposed changes to size standards and the data evaluated to develop the proposed size standards. SBA also requested comments on its proposed policy of not lowering any size standards, except for excluding dominant firms from qualifying as small. This approach suggests that SBA seeks to continue to expand the small business programs rather than limit the competition pool, despite the industry economic data. This will allow many small businesses to continue to grow without losing their status—a positive for many business owners. However, this continues to create a double-edged sword for other small businesses that already experience difficulty when trying to compete with larger businesses that are still classified as small.
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