Successful NAICS Code Appeal Turns Large Company Into Small Business

A little more than a week ago, I blogged about the SBA Office of Hearings and Appeals decision in NAICS Appeal of Delphi Research Inc., SBA No. NAICS-5377 (2012), in which a small business used the NAICS code appeal process to change the relevant size standard from 1,500 employees to $25.5 million.  The Delphi NAICS code appeal decision effectively lowered the solicitation’s size standard, increasing the ability of smaller companies like the protester to compete.

However, it is important to remember that the NAICS code appeal process works both ways.  If a company is too large for the size standard the procuring agency assigns to a solicitation, it may be able to use the NAICS code appeal process to replace the agency’s preferred NAICS code with a NAICS code carrying a higher size standard.  This is precisely what happened in a recently-decided SBA OHA case, NAICS Appeal of CHP International, Inc., SBA No. NAICS-5367 (2012).

The CHP International SBA OHA NAICS code appeal decision involved a Department of Labor solicitation for outreach, admissions, and career training services.  The DOL designated NAICS code 561990 (All Other Support Services), with a corresponding $7 million annual receipts size standard, as the appropriate NAICS code for the procurement.

CHP International, which apparently was a large business under the $7 million size standard, filed a NAICS code appeal with SBA OHA.  CHP contended that NAICS code 561900 was erroneous because the services required under the solicitation were professional and technical in nature.  CHP argued that the appropriate NAICS code was NAICS code 541990 (All Other Professional, Scientific, and Technical Services), which has a $14 million annual receipts size standard.

After reviewing the definition of NAICS code 561990 in the NAICS Manual and comparing it to the solicitation’s requirements, SBA OHA agreed with CHP that NAICS code 561990 was inappropriate.  SBA OHA wrote:

“NAICS code 561990 provides for organizational support services, but excludes office administrative services and employment services.  Furthermore, the illustrative examples for NAICS code 561990 are largely for services requiring manual labor such as bartering, cloth cutting and lumber grading services.  NAICS 561990 covers the provision of support services to businesses which are largely of a manual or clerical nature.  They do not appear to require the exercise of any judgment or any professional skill.”

In contrast, SBA OHA found, “this procurement calls for direction, management, and administration of programs that would support the outreach, admissions, and career transition services of the Job Corps, which require provision of professional services.”

However, having found that NAICS code 561990 was inappropriate, SBA OHA also determined that CHP’s suggested NAICS code, 541990, was also improper.  SBA OHA stated, “NAICS code 541990 does not cover the type of professional services required by the solicitation. The illustrative examples under this code are narrow specialties, which mostly require a professional license, and deal with some specialized trade or skill.  Here, the Contractor will be performing services related to human resources and marketing.”

SBA OHA determined that a third NAICS code, 541611 (Administrative Management and General Management Consulting Services) best fit the solicitation.  SBA OHA wrote that “this code covers establishments which offer advice and assistance on human resources and marketing.  This solicitation requires the Contractor to perform services in primarily those two fields.”  SBA OHA held, “[w]hile NAICS code 541611 was neither designated by the CO nor advocated by the Appellant, OHA will make use of its discretion to designate the most appropriate NAICS code for a solicitation, once clear error in the CO’s designation is determined.

Although SBA OHA rejected CHP’s suggested NAICS code, SBA OHA’s decision was a victory for CHP, because NAICS code 541611, like NAICS code 541990, carries a $14 million size standard.  CHP ended up with the size standard it wanted, allowing it to compete for the procurement.

The CHP International NAICS code appeal decision illustrates how a “large” business can effectively use a NAICS code appeal to get into the competition for a set-aside contract.  If CHP ultimately emerges as the winner of the DOL procurement, its successful NAICS code appeal will be the reason why.

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