On January 26, 2016, SBA issued its final rule regarding proposed size standard increases to numerous NAICS codes. However, there is a new clarification from SBA that Information Technology Value Added Resellers (“ITVAR”) under the footnote/exception to NAICS Code 541519 do have to comply with the non-manufacturer rule when reselling software under that code.
SBA maintains the ITVAR sub-industry or “exception’’ under NAICS 541519 (Other Computer Related Services) with the 150-employee size standard, but amends Footnote 18 to SBA’s Table of Size Standards by adding the requirement that the supply (i.e., computer hardware and software) component of small business set-aside ITVAR contracts must comply with the non-manufacturing performance requirements or non-manufacturer rule (NMR)
This change does not impact those ITVAR contractors where the largest portion of the dollar value are services that are needed for the software being provided. It does, however, apply to contractors with contracts where the value of the software is the largest portion of the contract. Those contractors must comply with the NMR which requires the resellers provide the product of a small business. So those contractors will have to provide software manufactured (i.e., written/coded) by a small business – not Microsoft, Oracle, or any other large company.
There are many ITVAR contracts under NAICS Code 541519 where the government is buying mostly services and the software purchases are considered “incidental”. This would be true when the government hires a small business to start or support an entire IT system using a specific piece of software. In those cases, the majority of the contract value is the service portion and so small businesses performing under those contracts can still use products from large software manufacturers for that work.
Many comments to the final rule noted that there are also contracts under NAICS Code 541519 where the government is only interested in acquiring certain software products. This new rule makes it clear that to be considered a small business, it must follow the NMR and provide software created by a small business. Thus, contractors working under a small business set-aside procurement, under the ITVAR exception, will no longer be able to resell the product of large software companies.
SBA states that the ITVAR exception under NAICS Code 541519 was not intended to allow small businesses to resell software created by a large business. However, many comments on the final rule suggested that the NAICS code was being incorrectly used for just that purpose. In order for the government to buy the products of large software companies, the contracting officer will have to request a contract-specific waiver to the NMR to allow (for that specific contract) a small business to sell the end product of a large business.
There are class waivers to the NMR rule for certain products that allow small businesses to resell products manufactured by large business without any action needed by the CO, but none of these class waivers apply to NAICS Code 541519.
Bottom line is that if the government is trying to get small business credit for purchasing products made by Microsoft or other large software companies, the CO will be required to request – and justify – why a waiver of the NMR is needed. Or the small business set-aside contracts will have to be ITVAR procurements where the government is purchasing IT services provided by small business employees and the software used is not a significant portion of the contract.
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