NAICS Code Assignment is a Contentious Issue for Contracting Officers and Industry

A North American Industry Classification System (NAICS) code is a set of six digits used to classify a contracting requirement coming out of the federal government. Each NAICS code has an associated business size standard which describes the average annual receipts (over a period of three years) or the average number of employees a business must meet in order to be defined as a small business under the particular acquisition.

More often than not, specifically in information technology or professional services procurements, more than one NAICS code can apply to a particular requirement. Enter appeal cases to the SBA’s Office of Hearings and Appeals (OHA). The selection of one NAICS code over another can largely alter the number of qualified small businesses eligible to bid. Appeals are submitted annually surrounding NAICS assignments with demands from industry members to select a NAICS more conducive to their business size. Businesses find themselves in a predicament when they are able to fulfill a requirement with an opportunity to help gain profit for themselves and reputation with the government and are unfortunately stopped by a set of six numbers.

Within a report on the topic, the GAO observes the process contracting offices take in assigning a NAICS code. Four agencies with the largest spend among indefinite delivery indefinite quantity (IDIQ) contracts between 2011 and 2015 were examined by the GAO: Army, Navy, DHS and HHS.

A contracting officer is required by the Federal Acquisition Regulations (FAR) to select the NAICS code that provides the greatest classification for the component in the requirement that accounts for the greatest percentage of the contract value. To make such a determination, various factors are taken into consideration:

• Review of statements of work and market research reports – the reviews are done by both the contracting office and program office
• Input from small business specialists – small business coordination forms are submitted to the specialists for review and include the chosen NAICS code and size standard
• Codes assigned to previous or similar contracts
• The primary purpose of the order

Contracting officers expressed various challenges in assigning NAICS codes. First, NAICS code definitions are broad and can incorporate multiple types of work or disciplines. Furthermore, more than one NAICS code can equally define the requirement, forcing contracting officials to simply choose the “best fit.” Finally, since the future of orders are unpredictable under IDIQ contracts and those procurements often have extensive statements of work, it is difficult for officials to assign the NAICS code. To alleviate some of these concerns, the SBA established a rule in 2013 allowing for more than one NAICS code assignment to multiple award, IDIQ contracts. However, delays in updates to the FAR and reporting systems have postponed full use of the SBA rule thus far.

The GAO also examined industry concerns in NAICS code assignments. Issues such as the contracting officer assigning a NAICS code primarily based on a certain size standard, selecting a NAICS to give preference to the incumbent or just having a different perception on the work of the requirement were raised.

A total of 62 NAICS code appeal cases were filed with the OHA between calendar years 2014-2016 with very little appeals granted. Appeals can be filed with the OHA within 10 calendar days after the solicitation is issued and must be filed only by small businesses. On average, the OHA take 18-30 days to complete the review of the appeal and the solicitation process is put on hold. OHA must specifically determine if the assigned NAICS is a “clear error of fact or law.” Of those 62 cases, 35 appeals were dismissed due to procedural reasons while 15 appeals were denied based on the determination that the NAICS assignment was not in any violation of fact or law. Approximately 19%, or 12 appeals, were granted.

The assignment of NAICS codes can be troublesome for both contracting officials and industry members. While I do not believe those issues will dissipate for either side very soon, it is always interesting to catch a glimpse into the procurement process and dive into thought for a solution to one of the many qualms in government contracting.