A NAICS code appeal can be a powerful tool for altering the competitive landscape of a bid by changing what size of business is allowed to submit a bid and thereby either increasing or decreasing the potential competitor pool. This post explores some of the important reasons for considering filing a NAICS code appeal. While NAICS codes appeals are not that common, they have a fairly high rate of success.
What is a NAICS Code?
A NAICS code is a six-digit code that is assigned to various categories of industries under the North American Industry Classification System (NAICS), a standard used in classifying business establishments. The North America part in the name, means these codes are also used in Mexico and Canada, meaning revisions to the codes have to get approval of all three countries. 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. The manual has convenient search form to use to look up the descriptions for each code.
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 $34 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 $34 million per year can bid on the procurement.
1. The Solicitation Description of Work Does Not Match the NAICS Code Description
A contracting officer 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 and the description in the solicitation. 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.
In one example we blogged about, a solicitation at the time of its posting was assigned NAICS code 561311, Employment Placement Agencies, which carried a $30 Million size standard. In the NAICS manual examples of businesses under that code may include employment registries, babysitting bureaus, and employment agencies. The work, as described, called for at least 8 supervisory medical support assistants, and over 150 full-time employees. These employees would conduct general administrative functions, perform a variety of technical support that will help the work of medical staff, cover general administrative staff on leave, and help cover vacancies, among other duties.
The protester argued that the RFQ calls for “100% administrative services” and that there is no requirement for the agency to “purchase the suppliers of the administrative services.” Consequently, the protester proposed that NAICS 56110, Office Administrative Services, would be a better fit for this RFQ. The NAICS manual provides examples of businesses under that code such as, administrative management services, management services, managing offices of physicians and surgeons, and medical office management services. SBA agreed and sustained the appeal.
2. The Largest Dollar Amounts in the Solicitation Do Not Correspond to the Chosen NAICS Code
The NAICS code must match 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. Say that 90% of the dollar value of a contract is for work under a contract that does not match the NAICS code. Based on those dollar amounts, it appears the government may have used the incorrect NAICS code.
That would be a good candidate for a potential NAICS code challenge.
3. The NAICS code size standard doesn’t allow you to bid.
The NAICS code is based on the type of work performed. But it has an important impact on the size of businesses that can bid on a solicitation. Going back to our earlier example, say that a solicitation had a NAICS code 541511 for Custom Computer Programming Services and has a size standard of $34 million per year. If your company has average receipts of $10 million per year, it would be competing with companies potentially more than three times as big.
In that situation, it might make sense to consider a NAICS code appeal, if there was a reasonable basis for one.
4. The Agency Recently Updated the NAICS Code in a Solicitation
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. So, if you see that a solicitation was recently amended to change the NAICS code, you may want to examine why the agency changed it. Otherwise, however, you must challenge the NAICS code within 10 days of the initial issuance of a solicitation. Many appeals are dismissed for being untimely. Counting just those NAICS code appeals decided on the merits, about 45% were granted, per a GAO report.
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These are reasons why your small business might consider a NAICS code appeal. A NAICS code appeal can be a powerful way to change the competitive nature of a procurement. But you must act fast and have a logical basis for suggesting the agency’s chosen NAICS code does not fit. If both of those are true, a NAICS code appeal can be a good bet.
Questions about this post? Need help filing or responding to a size protest of your own? Or need additional government contracting legal assistance? Email us.
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