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Oles Morrison

ASBCA Confirms Violation of the Nonmanufacturer Rule is Grounds for Termination for Cause

By on May 17, 2016 | Posted in Claims and Disputes

The nonmanufacturer rule is one of the more complicated small business rules.  Under 13 CFR § 121.406(b), a small business may qualify as a nonmanufacturer if it 1) does not exceed 500 employees; 2) is primarily engaged in the retail or wholesale trade and normally sells the type of item being supplied; 3) takes ownership or possession of the item(s) with its personnel, equipment or facilities in a manner consistent with industry practice; and (4) will supply the end item of a small business manufacturer, processor or producer made in the United States.  Recently, in Third Coast Fresh Distribution, LLC, ASBCA No. 59696, the ASBCA determined that a contractor’s failure to comply with this requirement in an applicable contract was grounds for a termination for cause (i.e. default termination).

In Third Coast Fresh, the contract was to provide produce deliveries for the “Dallas TX Zone.”  This zone consisted of two groups, DoD customers and non-DoD customers, including schools and tribes.  The solicitation stated that the government intended to award one contract for both groups; however, it reserved the right to make multiple awards.  Third Coast Fresh Distribution, LLC (TCF) was awarded a contract for Group 1.  A size protest was filed by an unsuccessful offeror challenging the award, alleging, in part, that TCF failed to comply with the nonmanufacturer rule.   The SBA found TCF complied with the nonmanufacturer rule because it intended to take ownership and possession of the produce from manufacturer and growers and then warehouse and deliver the produce itself.

During contract performance, rather than delivering the produce itself, TCF subcontracted the Dallas deliveries to another company.  Upon learning of this, the Contracting Officer initiated another size protest to the SBA.  In response to that size protest, TCF argued that it would financially suffer if it had to perform delivery via the Dallas cross-dock rather than subcontracting.  TCF submitted a chart indicating that the subcontractor had fulfilled 95% of the contract while TCF had fulfilled 5%.  The SBA concluded that TCF had failed to meet its requirements under the nonmanufacturer rule.  The Contracting Officer subsequently terminated TCF for cause.

TCF appealed a claim to the ASBCA on the grounds that the termination was improper because the nonmanufacturer rule does not require a termination for cause rather than a termination for convenience.  The ASBCA determined a termination for cause was proper because the nonmanufacturer rule is intended to prevent “front” organizations set up solely to win government contracts that then supply large business products.  Because the SBA held it was a condition of the contract that TCF take possession in order to qualify as a small business nonmanufacturer concern, TCF’s failure to take possession of the produce provided proper grounds for a termination for cause.   In essence, TCF was acting as the “front” organization that the nonmanufacturer rule was designed to prevent.