NAICS Code Appeals: Infrequent, but Often Successful

Because the NAICS code governs the size standard used to determine whether a company qualifies as a small business, the choice of a NAICS code can dramatically affect the competitive landscape for a set-aside acquisition.

The only legal procedure for challenging the NAICS code assigned by the contracting officer is to appeal the assignment to the SBA’s Office of Hearings and Appeals. A NAICS code appeal can be an extraordinarily powerful tool for a business to challenge whether a contracting officer assigned the correct NAICS code in setting aside a procurement.

So how often are NAICS code appeals filed, and how often do these NAICS code appeals succeed? A recent GAO report has some answers.

The GAO’s report summarizes the use and disposition of NAICS appeals: “Of the 62 NAICS code appeals that were filed in calendar years 2014–2016, OHA dismissed 35, denied 15, and granted 12.” GAO noted that, in the same period, “1.4 million new federal contracts were awarded, and 284 other types of appeals were filed with OHA.”

In other words, NAICS code appeals have been a very small part of the federal contracting world, and a small part of all the appeals handled by OHA (which, of course, also decides size appeals and certain other SBA appeals).

To put these statistics into context, a little background on NAICS code appeals is in order.

Basics of NAICS Code Appeals

GAO writes that OHA expedites NAICS code appeals and will issue decisions as soon as practicable. As a result of this expedited treatment, the NAICS code appeal process takes an average of 18 to 30 days to complete.

Also noteworthy is that interested parties have a short time frame to file NAICS code appeals. These appeals must be filed within 10 calendar days after issuance of the solicitation or amendment to the solicitation affecting the NAICS code. This, of course, differs from the ordinary rule for protesting a defect in a solicitation. At the GAO and Court of Federal Claims, protests of other solicitation defects ordinarily are timely if filed before the due date for initial proposals.

Only small businesses can file NAICS code appeals. While SBA has an independent right to file NAICS code appeals, it only filed 3 out of 62 appeals in the GAO study’s time period.

OHA reviews the assignment of the NAICS code for “clear error of fact or law.” The review of a NAICS code assignment is procedurally different from other types of OHA appeals in that OHA is directly reviewing the contracting officer’s action. For other types of appeals, such as size determinations or SDVOSB eligibility determinations, OHA is reviewing the SBA Area Office’s initial determination.

What are the common outcomes of NAICS code appeals?

GAO’s headline was Most Code Appeals Were Dismissed, but I think the numbers may tell a different tale, just as the headline from a recent report about GAO protests may have missed the mark.

As mentioned in the report, most NAICS Code appeals (57%) were dismissed for various reasons. The reasons for dismissal are:

  • not filing before the 10-day deadline
  • the contracting officer cancelled the solicitation
  • the appeal was withdrawn
  • the contracting officer amended the NAICS code
  • the appellant was not authorized to file an appeal

Unfortunately, the report does not break down the number of decisions dismissed for each of these reasons.

Of these reasons, those involving the contracting officer’s actions are basically out of the control of a potential appellant, but dismissals based on timeliness are within the appellant’s control. Given the short timeline on these appeals (and the variance with the ordinary protest rules for challenging solicitation defects), it’s likely that many were dismissed because the appellant didn’t file within the 10-day period.

Of course, not all dismissals are bad news for the appellant. If the result of the appeal was that the contracting officer voluntarily amended the NAICS code, this might be just what the protester was seeking. But without a breakdown of the reasons for dismissal, it’s impossible to determine the overall success rate of NAICS appeals–a metric that would include both favorable OHA decisions and voluntary agency corrective actions.

Counting just those NAICS code appeals decided on the merits, about 45% were granted. This is actually a fairly high success rate, especially given the appellant’s burden of proof. Statistically, then, a NAICS code appeal is likely to succeed almost half the time, provided there are no procedural defects.

Takeaways

There are three major takeaways from these statistics.

First, NAICS code appeals are infrequent. In fact, they seem underused. The GAO handles several thousand bid protests each year. In contrast, contractors file about 20 NAICS code appeals annually. Given the power of NAICS appeals to shape the competitive landscape, it seems that some contractors may not be aware of their NAICS appeal rights.

Second, the dismissal rate of NAICS code appeals is very high. Some of these dismissals are undoubtedly due to voluntary agency corrective action, but many dismissals are likely caused by defects in the appeals themselves, or misunderstandings about how the procedural rules work. For instance, as we’ve written, the ten-day clock on a NAICS code appeal is not paused by a prospective offeror’s discussions with the contracting officer.

A final takeaway, though, is one the GAO did not focus on: of those appeals decided on the merits, nearly half resulted in OHA determining that the contracting officer made a mistake in assigning the NAICS code. For potential appellants, that’s good news. Get the procedural stuff right, and the statistical odds of success aren’t bad.