Nonmanufacturer Rule Drop-Ship Workflow for SDVOSB Resellers

What are the four conditions of the nonmanufacturer rule?

The four conditions are: small business ownership before delivery to government, small business manufacturer source (or applicable SBA class waiver), value-added activity by the small business beyond pure pass-through, and documentation sufficient for SBA review. All four must hold or the contractor is in violation of the set-aside terms and exposed to False Claims Act risk if the violation produced an award.

1. Ownership — small business takes title to the goods before government delivery; pure pass-through (broker model) fails this test
2. Source — manufacturer is itself small business under the applicable NAICS size standard, OR SBA has issued a class waiver covering the product class
3. Value-added activity — receiving, inspection, packaging, labeling, kitting, or similar work performed by the small business
4. Documentation — records sufficient to demonstrate compliance retained for SBA audit and contracting-officer review

When does an SBA class waiver apply?

SBA issues class waivers for product classes where qualified small business manufacturers cannot satisfy federal demand. The list is maintained at SBA.gov and updated periodically. Common waivered classes include industrial machinery, electrical hardware, certain medical equipment categories, and specific PSC codes where supplier scarcity is documented. When a waiver applies, the nonmanufacturer can supply from any size manufacturer.

What value-added work satisfies the rule for a drop-ship operation?

Value-added work is the small business reseller's own activity beyond pure pass-through. Standard activities satisfying the rule include receiving and inspecting the product before forward shipment, repackaging or relabeling per contract specification, kitting individual items into delivery sets, applying asset tags or contract-specific marking, and generating contract-required documentation (packing lists, MSDS, certifications). Pure label-print-and-affix without inspection or repackaging may not satisfy SBA's interpretation; documented receiving + inspection + repackaging is the safe pattern.

How does JTJRE structure documentation for SBA audit?

Documentation includes the purchase order from JTJRE to the manufacturer (proves ownership transfer), receiving log with date and inspection result, packaging or value-added work record (the activity satisfying the rule), shipment documentation to government (delivery receipt, manifest), and the manufacturer's small business representation or applicable SBA class waiver reference. The package is filed per-contract and retained for the FAR-required record retention period.