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Small Business Set-Asides: Closing the FAR Loophole to Made in China and Non-TAA Products

Last week, this blog highlighted the need for systemic change in our procurement system to meet the growing challenge facing our nation.  In particular, we identified several critical, self-inflicted obstacles arising from that system that hinder the acquisition and delivery of best value mission support across government, including:

  • Bureaucratic process delays that inject time and cost into the acquisition cycle
  • Uncertainty surrounding the program funding process
  • Compliance checklist of activities associated with meeting the regulatory burden layered into the procurement process

Consistent with the effort to identify needed change in the procurement system, in this blog, the Coalition offers another striking example of a self-imposed challenge that should be addressed immediately by the FAR Council.

The government supports the innovation and entrepreneurial spirit of our nation’s small businesses through laws that establish certain preferences for federal small business contracting.  Rules implementing those laws seek to harmonize them with other laws governing federal procurement.  In an article appearing in this week’s Friday Flash (below), however, Ken Dodds, Vice President at Live Oak Bank, points to a strange regulatory anomaly that, despite continuing efforts to address supply chain resiliency, provides back door access to the federal market for goods that are made in China.  In so doing, it disadvantages the government’s domestic supply chain and undermines our allies’ supply chain capabilities, the very supply chains on which the government relies to address existential threats.

When the government sets aside a procurement, the product of a domestic small business manufacturer must be provided.  Correspondingly, under the “non-manufacturer” rule, a small business reseller/dealer must certify that it will supply the product of a small business manufacturer.  When, however, the SBA provides a non-manufacturer waiver (NMR) for a set-aside procurement, a small business reseller/dealer is permitted to supply the product of any size business without regard to place of manufacture.

Under FAR Part 25, the Buy American Act (BAA) applies to set-asides, and in particular, set-asides where the SBA has issued a NMR.  The BAA and its implementing regulations apply the preference for the purchase of domestic products through a price evaluation differential.  The regulatory price differential adds, for evaluation and award purposes only, a percentage price premium to the price of the foreign end products if no domestic end-product offer represents the lowest-priced offer.  Simply put, the BAA only provides a preference for domestic products, but it does not preclude the supply of foreign products, including products from China.

In contrast, for procurements where the Trade Agreements Act (TAA) applies, offerors must certify that each end product is a US-made or designated country end product.  The TAA generally applies to procurements exceeding $183,000.  Under the TAA, products other than US-made or designated country end products are not eligible for award, including products from China.

Unfortunately, the application of the FAR Part 19 small business rules and FAR 25 sourcing rules creates a “supply chain” loophole.  This loophole raises the potential for small businesses under a NMR waiver to provide a product from China (because the BAA applies), while, in contrast, under a similar, “full and open” procurement, a product from China would be unacceptable (because the TAA applies).  It is clear that TAA provides a much more effective policy framework for ensuring that the federal government is not purchasing products made in China.

Dodds correctly points out that the interplay between the small business contracting rules, the BAA, and the TAA has potential negative effects for the government and its suppliers, especially in critical industries like information technology and healthcare.  In addition to providing a channel through which products from China or another non-designated country could enter the government market, by designating the procurement a small business set-aside, the government forecloses market access to domestic manufacturers that otherwise could meet its needs with domestic products.

These rules are a self-inflicted challenge to our domestic supply chains and the supply chains of our allies.  On the bright side, the fact that we created them means that we can remove them and remove them we should (quickly!).  The time is now to apply the TAA, consistent with the regulatory thresholds, to small business set-aside procurements where there is a waiver of the NMR.

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