Don’t Ignore NAICS Code Changes: New Rule a Reminder to Contractors

While many industries have existed since time immemorial, new industries are created and old industries fade all the time. A mere twenty-five years ago, there was no such thing as social media and video rental stores were all the rage. Now the former is a multi-billion-dollar industry, and the latter is basically extinct. In recognition of the changes that we experience over time, the U.S. Office of Management and Budget routinely revises the North American Industry Classification Systems (NAICS), which the SBA in turn incorporates as the new applicable NAICS codes. More importantly for contractors, this includes a change in size standards for businesses. In early July 2022, the SBA proposed a rule doing just that which would apply effective October 1, 2022, which we will explore in this post.

The NAICS revision of 2022 created 111 new NAICS industries, although it’s worth noting that most of these aren’t “new” industries in the sense they are providing completely new kinds of products or services. Most of these new designations were created by splitting, merging, or otherwise modifying existing industry designations. For example, the industries of gold ore mining (former NAICS code 212221) and silver ore mining (former NAICS code 212222) have been combined into one industry, Gold Ore and Silver Ore Mining, with a new NAICS code of 212220.

In general, the changes to the industry designations themselves mostly concern industries that rarely engage in federal contract work. Construction and engineering NAICS were not affected by the change, among others. Additionally, many of the changes are really just changes to the NAICS codes, without any real change to the underlying industry’s title or scope. For example, the industry of software publishers is no longer NAICS code 511210, but 513210. Worth noting when reviewing a solicitation to make sure that the right code is listed, but such a change in and of itself will have no substantive impact on contractors in that field.

One major change, however, concerns electronically-based retailers (think Amazon and the like). For years, there have been industries in NAICS titled “Electronic Shopping and Mail-Order Houses” (Former NAICS code 454110) and “Other Direct Selling Establishments” (Former NAICS code 454390).

This is no longer the case.

In recognition of the ubiquity of e-commerce, solely online retailers are now being subsumed into the respective retail industries they specialize in. For example, if you had a website that provided sales of flowers and similar florist services, your business now simply falls under NAICS code 459310, Florists. This actually has tremendous implications for many companies. The old “Electronic Shopping and Mail-Order Houses” industry had a size standard of $41.5 million. Now, the size standard that applies to your company is the same as that for florists: $8.0 million. That’s a sudden reduction in applicable size standard of $33.5 million! If this rule passes, as we presume it will, this will have tremendous implications for online retailers of all kinds that have up to now been considered small by the SBA.

While most, if not all, of the changes in this proposed rule will likely have little impact on the average federal contractor, there is an important lesson here: Do not disregard changes to NAICS codes as simply procedural or cosmetic changes. There are situations where you could find your size standard has shrunk or ballooned overnight with how these changes can work. Federal contracting is highly technical stuff, and a close eye to detail is essential for the federal contractor to stay in compliance with the rules.

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