Subcontractors, NAICS Codes and Small Business Status: The Prime Decides

George W. Bush famously declared himself to be “the decider.”  Although some comedians had fun with the phrase, it’s hard to argue with Bush’s underlying assessment; as head of the government, the President has a lot of decisions to make.  But when it comes to whether you qualify as “small” for purposes of a federal subcontract, it may surprise you to learn that the government isn’t the decider at all.

For a subcontract, the prime contractor—not the government—decides what NAICS code (and corresponding size standard) applies.  The NAICS code the prime contractor selects for your subcontract need not be the same NAICS code assigned to the prime contract as a whole, and you may have the opportunity to lobby the prime contractor to change the NAICS code to one you believe is better-suited for the procurement–and your small business eligibility.

The decision of the SBA Office of Hearings and Appeals in Size Appeal of Nuclear Fuel Services, Inc., SBA No. SIZ-5324 (2012) is a great example of how this can work in practice.  In that case, the prime contractor, Savannah River Nuclear Solutions, LLC, issued a request for proposals identifying the applicable NAICS code as 541990 (All Other Professional, Scientific, and Technical Services), which at the time carried a $6.5 million size standard.  However, the RFP also stated that if an offeror believed that NAICS code 325188 (All Other Basic Inorganic Chemical Manufacturing), with a 1000-employee size standard, was the correct code, it could submit a written justification of its position with its proposal.

Nuclear Fuel Services, Inc. submitted a proposal, certifying that it was small under NAICS code 325188 but large under NAICS code 541990.  NFS also submitted a justification explaining why it believed NAICS code 325188 was the correct code for the work it would perform.  SRNS agreed with NFS’s position and awarded it the subcontract.

After a corporate reorganization, SNRS asked the SBA to perform a size determination of NFS.  The SBA Area Office issued a size determination concluding that NAICS code 541990 best characterized the work NFS would perform and that—as stated in NFS’s certification—NFS was not small under that NAICS code.

SBA OHA reversed the SBA Area Office’s decision.  SBA OHA wrote that under the SBA’s regulations, “the appropriate NAICS code is that which the prime contractor believes best describes the products or services being acquired.”  Accordingly, “the Area Office’s opinion of which NAICS code is most suitable for the subcontract can be given little weight, particularly since the Area Office apparently reached its conclusion without even consulting the prime contractor.”  Because the prime contractor had accepted NFS’s justification and assigned NAICS code 325188, the SBA Area Office erred by evaluating NFS’s size under NAICS code 541990.

The Nuclear Fuel Services SBA size appeal decision confirms that when it comes to federal subcontracts, the prime contractor—not the government—assigns the appropriate NAICS code.  The size appeal decision also demonstrates that a prime contractor may be open to suggestions from prospective subcontractors about which NAICS code to apply.  After all, the prime is the decider.

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