This is the accessible text file for GAO report number GAO-03-311R 
entitled 'Waivers of the Small Business Administration's 
Nonmanufacturer Rule Have Limited Effect' which was released on January 
22, 2003.



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Letter:



December 20, 2002:



The Honorable Christopher S. Bond:



Ranking Minority Member:



Committee on Small Business and Entrepreneurship:



United States Senate:



Subject: Waivers of the Small Business Administrations Nonmanufacturer 

Rule Have Limited Effect:



Dear Senator Bond:



Under section 8(a) of the Small Business Act, the Small Business 

Administration (SBA) conducts a program for developing small businesses 

that are owned by socially and economically disadvantaged individuals. 

Participants can receive contracts under acquisitions that federal 

agencies offer to the 8(a) program as well as business development 

assistance from SBA. In fiscal year 2001, there were 5,110 small 

businesses that participated in the program.



A firm that receives a supply contract under the 8(a) program or a 

small business set aside can be either a manufacturer or a 

nonmanufacturer of a product. Under SBAs rules, however, a 

nonmanufacturer who receives one of these contracts must agree to 

supply the product of a domestic small manufacturer or 

processor.[Footnote 1] This nonmanufacturer rule is one key mechanism 

for ensuring that procurement dollars under the 8(a) program and small 

business set-asides are spent on products made by small businesses. SBA 

can waive this requirement when there are no small manufacturers or 

processors available to supply the product. There are two types of 

waivers to the nonmanufacturer rule: (1) individual waivers, which 

apply only to a specific contract and are effective for the life of 

that contract, and (2) class waivers, which apply to categories of 

items and continue in effect unless revoked by SBA. Once a waiver of 

the nonmanufacturer rule is approved, a firm may supply the product of 

a large manufacturer.



In response to your concern about the extent waivers of the 

nonmanufacturer rule may be resulting in 8(a) procurement dollars going 

to firms that are not small businesses, we determined: (1) the number 

of individual waivers SBA approved in fiscal year 2001 and the dollar 

amount of fiscal year 2001 contract obligations that resulted from 

those waivers, and (2) the number of class waivers available for use 

during fiscal year 2001 and the dollar amount of fiscal year 2001 

obligations that resulted from those waivers.



Results in Brief:



SBA approved 23 individual waivers of the nonmanufacturer rule in 

fiscal year 2001. Sixteen of the waivers were used on ten 8(a) 

contracts with a total of $6.3 million in fiscal year 2001 obligations. 

The remaining seven waivers either did not result in 8(a) contracts 

during fiscal year 2001 or did not involve fiscal year 2001 funds.



SBA approved one class waiver in fiscal year 2001, and there were 84 

other class waivers still in effect from prior years. Five of these 85 

class waivers resulted in contracts with $20.5 million in fiscal year 

2001 obligations. The other 80 approved class waivers were not used on 

8(a) contracts during fiscal year 2001.



In sum, we identified close to $27 million in fiscal year 2001 

obligations for contracts covered by individual or class 

waivers.[Footnote 2] This represents 4.4 percent of the $606 million 

obligated in fiscal year 2001 for supplies and equipment under the 8(a) 

program, and a fraction of 1 percent of the $6.2 billion obligated for 

all 8(a) contracts during the fiscal year.



We are not making recommendations in this report. During our review, 

however, we determined that some of the information disseminated by SBA 

on existing class waivers was inaccurate. We discussed this problem 

with SBA officials and suggested that the information be revised. SBA 

revised the class waiver information and made changes to its Web site 

on November 15, 2002.



We received written comments on the draft of this report from the Small 

Business Administration. SBA concurred with our findings but suggested 

two changes in our discussion of the nonmanufacturer rule. We made the 

suggested changes. SBAs written comments are enclosed.



Background:



To be eligible for SBAs 8(a) program, a firm must be a small business 

that is at least 51-percent owned by one or more socially and 

economically disadvantaged individuals.[Footnote 3] An eligible firm 

generally must have been in business for at least 2 years and have a 

reasonable prospect for success in the private sector.



SBAs Associate Administrator for Government Contracting is responsible 

for approving requests for individual and class waivers of the 

nonmanufacturer rule. Only a contracting officer of a federal agency 

can request an individual waiver. After conducting market research and 

determining that no domestic small business exists that can supply the 

product in the quantity, time frame, or specifications needed by the 

agency, a contracting officer can submit a waiver request to SBA. Class 

waivers may be requested by anyone, including suppliers, subject to 

approval by SBA. Class waivers may be approved for all contracts 

involving a particular class of products[Footnote 4] if no small 

manufacturer is available to participate in the federal procurement 

market. Such classes currently include construction equipment, 

mainframe computers, and certain chemicals.



Contracts can be classified into three categories: (1) research, (2) 

other services and construction, and (3) supplies and equipment. The 

nonmanufacturer rule applies only to contracts for supplies and 

equipment. In fiscal year 2001, 87 percent of the 8(a) purchases were 

under services and construction contracts while research contracts 

accounted for just 3 percent. The remaining 10 percent, about $606 

million, was used for contracts for supplies and equipment. (See table 

1.):



Table 1: 8(a) Program Obligations by Category for Fiscal Year 2001 

(Dollars in millions):



Contract category: Research; Obligations: $180.8; % of total 

obligations: 2.9.



Contract category: Supplies and equipment; Obligations: 605.9; % of 

total obligations: 9.8.



Contract category: Other services and construction; Obligations: 

5,389.8; % of total obligations: 87.3.



Contract category: Total; Obligations: $6,176.5; % of total 

obligations: 100.0.



Source: Federal Procurement Data System (FPDS)--includes obligations 

greater than $25,000.



[End of table]



Use of Individual Waivers in Fiscal Year 2001 Was Limited:



SBA approved 23 individual waivers in 2001. Seven individual waivers 

were approved for one multiple-year contract at the National Institutes 

of Health, which contracted with Integrated Concepts and Research 

Corporation, an Alaskan Native Corporation participating in the 8(a) 

program. The waivers allowed the firm to supply seven different types 

of medical testing equipment from large manufacturers, including 

scanners and cameras. The other waivers were requested for 16 separate 

proposed contracts--4 at the Department of Energy, 3 at the U.S. Army, 

and 9 at eight other agencies. In one of these cases, for example, the 

Department of Energy obtained a waiver and contracted with an 8(a) firm 

to make a one-time purchase of fiber optic ground wire.



Our analysis showed that $6.3 million in fiscal year 2001 obligations 

were associated with individual waivers approved in fiscal year 2001. 

This represents a fraction of 1 percent of the total of $6.2 billion 

obligated on 8(a) contracts during the fiscal year. Although the 23 

individual waivers were requested for 17 contracts, only 10 of these 

contracts had obligations during the fiscal year. Six of the contracts 

did not have fiscal year 2001 obligations because the contracts were 

not signed during fiscal year 2001 or there was no delivery order 

issued until fiscal year 2002. One contract was awarded to a company 

that was not an 8(a) firm. The results of our analysis are shown in 

table 2.



Table 2: Summary of 8(a) Contracts Resulting from SBA-Approved 

Individual Waivers in Fiscal Year 2001:



Product: Medical test equipment; Dollars obligated in fiscal year 2001: 

$818,176.



Product: Fiber optic equipment; Dollars obligated in fiscal year 2001: 

1,991,000.



Product: Microsoft computer equipment; Dollars obligated in fiscal year 

2001: 2,192,000.



Product: Microsoft software upgrades/licenses; Dollars obligated in 

fiscal year 2001: 39,118.



Product: Cisco video telecommunication equipment; Dollars obligated in 

fiscal year 2001: 103,000.



Product: Data tapes; Dollars obligated in fiscal year 2001: 149,000.



Product: Xerographic paper; Dollars obligated in fiscal year 2001: 

442,866.



Product: TV/camera equipment; Dollars obligated in fiscal year 2001: 

261,222.



Product: Generator engines; Dollars obligated in fiscal year 2001: 

32,000.



Product: Custom configured information technology; Dollars obligated in 

fiscal year 2001: 300,000.



Product: Total; Dollars obligated in fiscal year 2001: $6,328,382.



Source: Obligation data was obtained from the FPDS and supplemented by 

data provided by agency contracting officers.



[End of table]



In the first 6 months of fiscal year 2002, the waivers approved in 

fiscal year 2001 resulted in additional obligations of $5.9 million on 

8(a) contracts.



Obligations Using Class Waivers Also Limited:



During fiscal year 2001, there were 85 SBA-approved class waivers that 

contracting officers could use. Of these, 84 had been approved in prior 

years. During fiscal year 2001, there were 209 purchases for products 

covered by five class waivers, totaling $20.5 million in obligations on 

8(a) contracts. This was a very small percentage of the total $6.2 

billion obligated on 8(a) contracts during the fiscal year. The most 

frequently used class waiver was for fruit and vegetable canning, as 

shown in table 3.



Table 3: Class Waiver Obligations on 8(a) Contracts in Fiscal Year 

2001:



Product: Telephone apparatus; Actions: 5; Dollars: $ 926,000.



Product: Electronic computer; Actions: 13; Dollars: 4,554,000.



Product: Other computer peripheral equipment; Actions: 49; Dollars: 

2,205,000.



Product: Fruit and vegetable canning; Actions: 141; Dollars: 

12,817,000.



Product: Iron and steel; Actions: 1; Dollars: 26,000.



Product: Total; Actions: 209; Dollars: $ 20,528,000.



Source: FPDS.



[End of table]



Some of SBAs Information on Class Waivers Was Inaccurate:



During our review of class waivers, we analyzed SBA information used by 

agency contracting officers when they decide whether a class waiver is 

available to purchase a product from an 8(a) firm. We determined that 

SBAs listing of class waivers dated October 2000 included many 

instances where product codes were not accurate or the product codes 

were inconsistent with product definitions. For example, one product 

was miscoded and classified as a nuclear battery when it should have 

been classified as a storage battery. In another case, several 

different chemicals were matched with a North American Industry 

Classification System code that did not exist. According to SBA 

officials, the inaccurate information on the class waiver listing 

existed prior to the last change to its Web page in October 2000.



We discussed this problem with SBA officials and suggested that the 

class waiver listing be revised. As a result, SBA revised the listing 

for the 85 class waivers in effect during fiscal year 2001, and made 

changes to 47 of the waiver codes or product descriptions. SBA 

incorporated these changes into its Web site on November 15, 2002. SBA 

did not know whether these inaccuracies affected any contracting 

officers decision to use the class waivers.



Agency Comments and Our Evaluation:



We provided a draft of our report to SBA for its review and comment. 

SBA concurred with our findings, but suggested two changes in our 

discussion of the nonmanufacturer rule. We agreed, and made the 

suggested changes where appropriate. SBAs comments are enclosed.



Scope and Methodology:



To determine the extent of fiscal year 2001 obligations on 8(a) 

contracts using waivers of the nonmanufacturer rule, we focused on 

individual waivers approved by SBA in fiscal year 2001 and class 

waivers available for use during that year. We discussed the waiver 

process with officials at SBA headquarters (Washington, D.C.) and 

reviewed case files for individual waivers approved during that period. 

We then contacted federal agency contracting officers who requested the 

individual waivers to identify which 8(a) firms were awarded the 

contracts, and the number and value of purchases under those contracts. 

Further, we compared this information to obligations reported in the 

Federal Procurement Data System (FPDS). For the class waivers, we 

reviewed SBAs listing of all active waivers in effect during fiscal 

year 2001 and compared the product codes cited to all codes reported in 

FPDS. We also relied on previous GAO reports, SBA reports, and 

applicable laws and regulations for background information on waivers 

and the 8(a) small business development program. We conducted our 

review from May through October 2002 in accordance with generally 

accepted government auditing standards.



As we agreed with your office, unless you publicly announce the 

contents of this report earlier, we plan no further distribution of it 

until 30 days from the date of this letter. We will then send copies of 

this report to the Administrator, SBA, and the Director, Office of 

Management and Budget. We will also make copies available to others 

upon request. In addition, the report will be available at no charge on 

the GAO Web site at http://www.gao.gov.



If you have any questions on this report, please contact me at (202) 

512-8214 or Karen Zuckerstein at (202) 512-6785. Major contributors to 

this report were William Bricking, Jean Lee, Sylvia Schatz, and Robert 

Swierczek.



Sincerely yours,



William T. Woods 

Director, Acquisition and 

 Sourcing Management:



Signed by William T. Woods:



Enclosure:



Comments From the U.S. Small Business Administration:



U.S. SMALL BUSINESS ADMINISTRATION WASHINGTON, D.C. 20416:



DEC 13 2002:



Mr. William T. Woods Director:



Acquisition and Sourcing Management U.S. General Accounting Office 

Washington, DC 20548:



Dear Mr. Woods:



Thank you for your letter of November 27, 2002, requesting the U.S. 

Small Business Administrations (SBA) comments of your draft briefing 

report on Waivers of the Small Business Administrations 

Nonmanufacturer Rule Have Limited Effect (GAO code 820028).



While GAO made no formal recommendations, we concur with the findings 

in the report with the following exceptions found on page 1, paragraph 

2, which needs to be clarified that the nonmanufacturer rule is a 

requirement that applies equally to 8(a) and small business set-aside 

programs. Also, refer to page 3, paragraph 3, concerning guidance on 

existing class waivers. We suggest that the word guidance on existing 

class waivers be changed to information on existing class waivers.



Should you have questions, please contact Linda Williams, Associate 

Administrator for Government Contracting, at (202) 401-8150.



Sincerely, 



Fred C. Armendariz: 



Associate Deputy Administrator for Government Contracting 

and Business Development:



Signed by Fred C. Armendariz: 



FOOTNOTES



[1] A nonmanufacturer is also required to be small and a regular dealer 

primarily engaged in the retail or wholesale trade.



[2] There could have been additional obligations in fiscal year 2001 

related to individual waivers approved in prior years. Our scope did 

not include a review of these waivers.



[3] A firm is considered a small business if it meets size standards 

established by SBA for the firms particular industry. Size standards 

are based on either the average number of employees during the previous 

12 months or sales averaged over the previous 3 years.



[4] A class of products is defined based on the North American Industry 

Classification System and the General Services Administrations Product 

and Service Codes Manual. In each six-digit code, there are 

subdivisions of products that can be considered for waiver.