NAICS Codes - Part 2

We're continuing our discussion on NAICS codes (National American Industry Classification System) from Friday. When the Government issues a solicitation, it specifies the NAICS code and size standard associated with the procurement. For example, a recent solicitation reads as follows:

The solicitation number is xxxxx and is issued as an invitation for bids ... The solicitation document and incorporated provisions and clauses are those in effect through Federal Acquisition Circular FAC 2005-60. The associated North American Industrial Classification System (NAICS) code for this procurement is 332312 with a small business size standard of 500 employees. This requirement is a small business set aside and only qualified offerors may submit bids.

So in this case, if your company has this particular NAICS code, 332312 and fewer than 500 employees, you are qualified to bid for the contract.

Businesses can have more than one NAICS code. The U.S. Census Bureau assigns and maintains only one NAICS code for each establishment based on its primary activity (generally the activity that generates the most revenue for the establishment). However, the Central Contractors Registration (CCR), where business register to become federal contractors, will accept up to 5 or 10 classification codes per establishment. The U.S. Census Bureau is not a central Government agency with the role of assigning, monitoring, or approving NAICS codes for establishments. Individual establishments are assigned NAICS codes by various agencies for various purposes using a variety of methods. There is no formal role for an arbitrator of NAICS classifications.

There is an appeal process for the contracting officer's NAICS code designation and applicable size standard. Appeals must be filed within 10 calendar days after the issuance of the initial solicitation. SBA's Office of Hearings and Appeals (OHA) will usually dismiss summarily an untimely NAICS code appeal. There is no proscribed format for an appeal but it must contain at least:

• The solicitation or contract number and the name, address, and telephone number of the contracting officer
• A full and specific statement as to why the size determination or NAICS code designation is allegedly erroneous and argument support the allegation 
• The name, address, telephone number and signature of the appellant or its attorney.

There are quite a few NAICS code appeals. For example, in August there were six, in July there were nine and in June there were two. Many are successful. Sometimes appeals attempt to change a NAICS code to one that has a higher size standard, allowing the appellant to bid on a contract. Other times an appellant wants to lower the size standard in order to reduce competition.

NAICS Codes - In General

The North American Industry Classification System (NAICS) is the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy. It is also used by the Federal Government for contracting purposes. The official NAICS website can be found here.

NAICS was developed under the auspices of the Office of Management and Budget (OMB), and adopted in 1997 to replace the Standard Industrial Classification (SIC) system. Every five years, the Economic Classification Policy Committee (ECPC), an inter-agency committee established by the OMB. During its review, the ECPC determines the feasibility and adherence to the underlying principles of NAICS, determines if the proposed changes are acceptable, and makes final recommendations to OMB for additions and changes to the NAICS manual. The ECPC recently completed its five year review and has published its 2012 NAICS manual.

The Small Business Administration (SBA) is responsible for developing size standards for each NAICS category on an industry by industry basis. Before a size standard is made available for use by industry, the SBA must solicit comments from the public through the rule-making process and then coordinate with the General Services Administration to update the associated acquisition systems, to reflect industry size standars that have been adopted for new NAICS codes. SBA publishes the corresponding industry size standards on their website.

Contracting officers must identify, in the solicitation or request for proposal, both the NAICS code that best describes the principal nature of the product or service being acquired and the size standard that has been established by the SBA for the NAICS code so that offerors can correctly represent themselves as a large or small business concern.

The process used by OMB/ECPC for developing new NAICS codes and the process used by SBA to approve size standards for new NAICS codes, are not performed simultaneously. Therefore, it is important to note that new NAICS codes are not available for use in Federal contracting until SBA publishes corresponding industry size standards.