Choosing NAICS Codes: In the Size of the Beholder

Ok, this is a cliche, but I’ll say it anyway—no good deed goes unpunished. Many small businesses that succeed in developing a robust portfolio of government contracts often wake up one day to learn that they’ve grown too big for their britches. Why? Because the small business size standards that once afforded them a leg up later eliminate them from retaining the very contracts they won.

Now I suppose there’s some value in kicking your kid out the door to fend for themselves in the real world. But, when you’re being kicked out of multiple doors at the same time, your very survival may depend on a variety of hair splitting exercises. One such exercise is a Contracting Officer’s choice of what NAICS code to apply to a given procurement.

What are NAICS codes? They are numeric designations associated with a range of industry classifications known as the North American Industry Classification System (aka “NAICS”). NAICS is the current iteration of a system of classifying businesses to facilitate the statistical analysis of businesses in North America. The idea is to divy up businesses into particular business sectors that, for lack of a better expression, are based on what they do and how they do it. There are sectors for agriculture, utilities, manufacturing, retail trade, professional and technical services, among others. Within the sectors are subsectors that are subsets of the broader sector. For example, Aircraft Engine and Engine Parts Manufacturing is assigned code 336412. There’s a separate code for Other Aircraft Part and Auxiliary Equipment Manufacturing (code 336413).

The Small Business Administration (“SBA”) has adopted NAICS as the means for determining when a particular business is small for the purpose of a particular procurement. A particular sector will be assigned a “size standard” for its NAICS code. Size standards may be expressed in terms of annual revenue or numbers of employees. For example, the size standard for Aircraft Engine and Engine Part Manufacturing is 1,500 employees; the size standard for Other Aircraft Part and Auxiliary Equipment Manufacturing is 1,250 employees. The size standard for Architectural Services is $8 million; the size standard for Engineering Services is $12 million.

So, as you can see, picking a NAICS code can have significant implications. In the above examples, whether a business might be small for a particular contract could be a real close call depending on what a Contracting Officer thinks he or she is buying. There are some general principles that govern the appropriate selection of NAICS codes for a procurement. SBA regulations dictate “[t]he procuring agency contracting officer ... [shall] designate[] the proper NAICS code and corresponding size standard in a solicitation, selecting the single NAICS code which best describes the principal purpose of the product or service being acquired.” 13 C.F.R. § 121.402(b). SBA regulations specify “[p]rimary consideration is given to the industry descriptions in the U.S. NAICS Manual, the product or service description in the solicitation and any amendments to it, the relative value and importance of components of the procurement that make up the end item being procured, and the function of the goods and services being purchased.” Id., at § 121.402(b)(1). The regulation further states “[a] procurement is usually classified according to the component which accounts for the greatest percentage of contract value.” Id., at § 121.402(b)(2).

This brings us to a decision issued recently by the SBA’s Office of Hearings and Appeals (“OHA”). See NAICS Appeal of Noble Sales Co. d/b/a/ Noble Supply and Logistics, SBA No. NAICS-6067. A potential vendor felt that the Contracting Officer erred when he chose the NAICS code for Warehousing and Storage services over the code applicable to Office Supplies (except Paper) Manufacturing. The warehousing and storage services size standard is $30 million in average annual receipts; the manufacturing code size standard is 750 employees. I have to say that this is a common problem—the revenue of growing businesses often outpaces the size of their workforce. Thus, the choice of a revenue standard versus an employee-defined size standard often determines whether a particular company can be eligible for a small business set aside contract.

The procurement in the Noble case called for the provision of significant quantities of various supplies and products, the cost of which represented the larger proportion of the contract’s overall value. However, the solicitation was framed as a contract to provide a “total supply chain solution” in which the contractor was responsible for obtaining, storing and distributing the specified items. In addition, the contractor was to provide a web-based portal for Government units to place and track orders of the supplies. The prospective vendor argued that the supplies NAICS code should have been selected because the cost of acquiring the supplies outstripped the cost of warehousing, etc. The Government disagreed and argued that the services code should apply because the primary purpose of the contract in its view was to obtain a means for ordering and delivering the products. Buying the products was, therefore, a secondary concern.

When it’s reviewing an appeal concerning the choice of a NAICS code, OHA will not overturn the contracting officer’s selection of a NAICS code in the absence of proof that there was a clear error of fact or law in the selection of the code. See NAICS Appeal of Durodyne, Inc., SBA No. NAICS-4536, at 4 (2003); see also 13 C.F.R. § 134.314. Perfection is not required so long as the Contracting Officer has selected a code “that best describes the principal purpose of the product or service being acquired. . . .” NAICS Appeal of: Evanhoe & Assocs., LLC, Appellant, SBA No. NAICS-5505, 2013 WL 5492238 (Sept. 27, 2013).

In other words, a Contracting Officer can make a bad choice so long as it isn’t a damn bad choice. So, what to do? First, I would do my best to get ahead of the curve—know your customer and take the opportunity to engage with them at a time when procurement personnel might be doing market research before they get to the point of crafting a solicitation and making a NAICS code choice. Sometimes, a contractor might be able to raise a question about the NAICS code choice during the Q&A process that might prompt a Contracting Officer to revisit his or her choice. However, if your business will be shut out of a potentially lucrative contract but for the choice of a NAICS code, you might want to consider protesting if the choice was, indeed, a damn bad choice. You can learn about the process here. You have to move quickly because you the protest of a NAICS code designation “must be served and filed within 10 calendar days after the issuance of the solicitation or amendment affecting the NAICS code or size standard.” 29 C.F.R. § 121.1103(b)(1).

You can get a sense of the breadth of the NAICS codes at the Census Bureau’s NAICS site, which has an FAQ page that provides a high level explanation of the NAICS system. If you want to get in the weeds about how particular classifications are defined, you can take a look at the bureau’s NAICS Manual. The size standards applied by SBA to each NAICS code is set forth in the table that can be found by clicking here.