Five Things You Should Know: NAICS Code Appeals

NAICS codes are limited in what they can challenge, but can have a powerful effect on a procurement. A NAICS code appeal can challenge the size limit attached to a specific government procurement. This can level the playing field by limiting to smaller businesses, or expand the size of businesses that are able to compete. So, it’s good to know a NAICS code appeal works.

1. What is a NAICS Code?

A NAICS code is a six digit code assigned to various industries under the North American Industry Classification System (NAICS), a standard used in classifying business establishments. The codes are assigned by the US Census Bureau for “business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy.” The NAICS manual lays out the system for assigning NAICS codes.

For our purposes, it’s important that the SBA assigns a different size standard to each NAICS code based on dollar number of receipts or number of employees. SBA publishes a table of all the size standards. Here’s an example.

NAICS code 541511 is for Custom Computer Programming Services and has a size standard of $30 million per year. The NAICS manual describes this code as follows: “This U.S. industry comprises establishments primarily engaged in writing, modifying, testing, and supporting software to meet the needs of a particular customer.”

So, if an agency assigns 541511 to a solicitation, then only contractors whose average receipts are under $30 million per year can bid on the procurement.

2. How are NAICS codes assigned?

A contracting officer must must assign the proper NAICS code based on what best describes the principal purpose of the product or service being acquired in light of the industry descriptions in the NAICS Manual, the description in the solicitation, the relative value and importance of the components of the procurement making up the end item being procured, and the function of the goods or services being acquired. 

3. When to challenge a NAICS code.

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.

4. How to challenge a NAICS code.

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. SBA’s regulations allow “any person adversely affected by a NAICS code designation” to challenge its designation.

OHA evaluates NAICS code appeals primarily by comparing the solicitation’s statement of work to the NAICS code definitions in the Census Bureau’s NAICS Manual. 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.

The key to having a good NAICS appeal is to show that, based on clear examples from the solicitation’s scope of work and level of effort, the NAICS code assigned doesn’t match the main purpose of what the agency is purchasing. Look at the majority of work under the solicitation, as well as past examples of similar work (or possibly even the incumbent work) being procured under a different NAICS code.

OHA processes NAICS code appeals before other matters 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.

5. How successful are NAICS code challenges?

Not that many contractors file NAICS codes appeals. But of those that do, and avoid procedural mistakes, they are quite successful. As noted in a GAO report, most NAICS Code appeals (57%) were dismissed for various reasons. It’s noteworthy that contractors only file about 20 NAICS code appeals annually.

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

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.

Final Thoughts

There you have it, five key things to remember about NAICS codes appeals. They can be a powerful tool to alter the procurement landscape by contracting or expanding the size of businesses that can bid on the contract. But there are very short timelines for filing a NAICS code appeal, so if you see a problem with the initial NAICS code assigned to a solicitation, make sure you consider filing a NAICS code appeal early.

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