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In small business and socioeconomic set-aside solicitations, the North American Industry Classification System code is like a burly, tattooed bouncer standing beside a velvet rope, deciding who’s cool enough to come inside. (For some reason, my attempts to demonstrate my coolness by discussing the FAR always seem to fall flat). The agency’s NAICS code selection is critical because the NAICS code determines the applicable size standard–and by extension, the competitive playing field.

Steven Koprince | Dec 28, 2023

A mostly-overlooked decision by the U.S. Court of Federal Claims earlier this year emphasizes that when a Contracting Officer selects a NAICS code, “good enough for government work” doesn’t cut it. Instead, a Contracting Officer must pick the single best NAICS code for the work, using a process outlined in the SBA’s regulations.

The court’s decision in Consolidated Safety Services, Inc. v. United States, No. 23-521C (2023) involved a NOAA solicitation issued as a small business set-aside. The NOAA Contracting Officer assigned NAICS code 541620 (Environmental Consulting Services) with a corresponding $19 million size standard.

Consolidated Safety Services, Inc., which did not qualify as a small business under the $19 million standard, challenged the NAICS code. CSS argued that the appropriate code was NAICS code 541715 (Research and Development in the Physical, Engineering and Life Sciences) with a corresponding 1,000-employee size standard, under which CSS qualified as a small business.

(Clearly, the competitive playing field is completely different under a $19 million size standard than under a 1,000 employee size standard. The six little digits comprising a NAICS code are powerful–which is why I’m surprised not to see contractors filing many more NAICS code appeals).

CSS filed its NAICS code appeal with the SBA’s Office of Hearings and Appeals. CSS argued that the services being solicited by NOAA “predominantely entail performing research, not advising the agency about research.” Accordingly, CSS argued, the correct NAICS code was the R&D code, 541715, not the consulting code, 541620.

SBA OHA denied CSS’s NAICS code appeal, holding that CSS had not met its burden of demonstrating that the Contracting Officer’s chosen NAICS code was erroneous. Undeterred, CSS filed an appeal with the Court of Federal Claims, challenging SBA OHA’s decision, and by extension, the Contracting Officer’s underlying NAICS code selection.

The Court wrote that, under the SBA’s regulations, a Contracting Officer must designate “the single NAICS code which best describes the principal purpose of the product or service being acquired.” (FAR 19.102 imposes a similar requirement). That is, with apologies to the late, great Tina Turner, not just any ol’ NAICS code will do–the assigned NAICS code must be simply the best.

In this regard, the court wrote, an agency “cannot justify its selection of a particular NAICS code on the basis that it fits the procurement in some general sense or that the selection is ‘good enough for government work.'” Quoting from the SBA’s regulations, the Court explained that, when selecting a NAICS code:

Primary consideration is given to the industry descriptions in the U.S. NAICS Manual, the product or service description in the solicitation and any attachments to it, 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 purchased.

Further, the SBA’s regulations specify that “a procurement is generally classified according to the component which accounts for the greatest percentage of contract value.” These regulatory requirements, the court wrote, “are the substantive yardsticks the Court must use to assess the agency’s NAICS code selection and the subsequent OHA Decision.”

Applying these provisions, the court found that SBA OHA’s analysis was flawed in multiple respects. For example, examining the Performance Work Statement, the court found that the solicitation “primarily seeks R&D services,” including “literally dozens of tasks in the Solicitation that naturally fit the definitions of ‘research’ and ‘experimental development’ in the NAICS Manual.” In contrast, the court found, the solicitation included “minimal consulting tasks.” Additionally, an estimated 80% of the ordering value–that is, the ‘greatest percentage of contract value’–was comprised of R&D tasks.

In sum, the Court held, the Contracting Officer’s decision to assign the Environmental Consulting Services NAICS code, and SBA OHA’s decision upholding that selection, were “objectively unreasonable.” The court issued an injunction preventing NOAA from proceeding with the solicitation until another NAICS code was assigned.

The Consolidated Safety Services case offers valuable lessons for government and industry alike.

For agencies, it is important that Contracting Officers receive effective training on the rules and processes assosciated with selecting NAICS codes. The Consolidated Safety Services case itself is a good starting point from a training perspective, as the decision not only demonstrates the potential consequences of a flawed selection, but contains numerous references to the applicable regulations and interpretive case law.

For industry, the Consolidated Safety Services case is a valuable reminder that a Contracting Officer must pick the “best” NAICS code–that is, the one that’s “better than all the rest”–for the work and that a potential offeror is entitled to file a NAICS code appeal if the offeror believes that the NAICS code selection was flawed.

NAICS codes are just six little digits, but the NAICS code selection can mean the difference between participating in a set-aside competition–or finding yourself like me, stuck outside the velvet rope because the bouncer inexplicably doesn’t see the inherent coolness in my insights on FAR 19.102.

Boring but important disclaimer: The information in this article is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

Article link: https://www.linkedin.com/pulse/naics-codes-good-enough-government-work-doesnt-cut-steven-koprince-gaauc