From 1,500 Employees To $25.5 Million: Successful NAICS Code Appeal Shakes Up Competition

A successful NAICS code appeal can be a powerful competitive game changer.  Case in point: the recent decision of the SBA Office of Hearings and Appeals in NAICS Appeal of Delphi Research, Inc., SBA No. NAICS-5377 (2012).

In the Delphi Research NAICS code appeal, a contractor questioned the procuring agency’s decision to assign a NAICS code carrying a 1,500-employee size standard.  SBA OHA agreed with the appellant, rewriting the solicitation to exclude companies with more than $25.5 million in average annual receipts–in essence, a much lower size standard.

The Delphi Research NAICS code appeal involved a NASA solicitation for research facilities and engineering support services at a NASA research center.  The predominant tasks called for in the Performance Work Statement were operating and maintaining computer equipment, capturing data, and providing technical support for existing systems.

NASA set-aside the requirement for small business and designated the solicitation with NAICS code 541712 (Research and Development in the Physical, Engineering and Life Sciences).  Although NAICS code 541712 ordinarily carries a 500-employee size standard, the solicitation indicated that NASA’s requirements fit within an exception for aircraft research and development, which carries a 1,500-employee size standard.

After NASA released a draft solicitation designating NAICS code 541712, Delphi Research, Inc., a prospective offeror, submitted comments to NASA questioning the chosen NAICS code.  But instead of revising the NAICS code, NASA doubled down, preparing an agency memorandum justifying its choice.

After NASA issued the solicitation, Delphi filed a NAICS code appeal with SBA OHA.  Delphi argued that NAICS code 541712 was improper and that the appropriate NAICS code was 541513 (Computer Facilities Management Services), which carries a $25.5 million size standard.

SBA OHA agreed with Delphi that NAICS code 541712 was improper.  Referring to the NAICS Manual and prior SBA OHA NAICS code appeal decision, SBA OHA wrote that “procurements classified under NAICS code 541712 must be for research and development, and thus must look to creating new processes or products.”  (The emphasis is SBA OHA’s).  SBA OHA continued, “[t]he procurement here . . . does not call for the contractor to create new processes or products, and thus cannot properly be characterized as research and development.”

SBA OHA also agreed with Delphi that NAICS code 541513 was the correct NAICS code.  SBA OHA held that this code “applies to the on-site management and operation of computer systems and/or data processing facilities,” which “plainly represent a large portion of the instant procurement.”  SBA OHA held that NASA should have selected this NAICS code because it accounted for the greatest percentage of the contract’s value.

By sustaining Delphi’s NAICS code appeal, SBA OHA essentially rewrote the solicitation, substituting NAICS code carrying a 1,500-employee size standard with one carrying a $25.5 million size standard.  Without worrying about competing against thousand-employee behemoths, Delphi, which apparently has less than $25.5 million in average annual receipts, can now compete against companies much closer to its own size, increasing its chances of success.

4 thoughts on “From 1,500 Employees To $25.5 Million: Successful NAICS Code Appeal Shakes Up Competition

    • Guy,

      This one was a very nice win for the small business protester (and other smaller companies interested in competing). The case certainly shows that just because a procuring agency says that a NAICS code with a very high size standard applies, does not necessarily make it so.

      Steven

  1. Thanks for this article Steven. FYI, this SBA OHA decision was recently upheld by the US Court of Federal Claims. Arcata Associates v. United States (March 29, 2013).

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