The NAICS Procurement Code: Getting It Right

A recent U.S. Court of Federal Claims decision makes it clear that this often misunderstood 6-digit number can be a potentially defining element for federal procurements.

The North American Industry Classification System (NAICS) is a system that provides common industry definitions of types of products/services that businesses operating in the U.S., Canada and Mexico offer. 

The definitions are organized into a coding “hierarchy” to facilitate statistically based economic analyses. NAICS exists under the auspices of the Office of Management & Budget (OMB) and divides business types into 20 sectors (represented by the first two digits of the code). 

The sectors are subdivided according to specific types of items and services available. Every NAICS code sector and the relevant subordinate groupings are listed in a searchable website: NAICS & SIC Identification Tools | NAICS Association. 

Each 6-digit code is defined with a generalized paragraph that gives examples of services/products included in the sector. And, to help clarify, the paragraph also lists seemingly similar types of services/products that are not within that particular code — and re-directs users to the correct code. 

The Code’s Role in Federal Procurement

The Small Business Administration (SBA) has adopted the NAICS coding system’s 6-digit codes to establish “size standards” for specific industries — in other words, the standards for qualifying as a small business (SB) entity within the specific industry. They are defined in one of two ways:

1. Annual revenue, averaged over several recent years, OR
2. Total number of employees

A complete listing of the SB size standards can be found on the SBA website.  

When considering how to encourage SB participation in every procurement — as required by law — agencies can use market research about small firms that are interested and potentially capable, and should be aware of the reasonably applicable NAICS code and size standard for each procurement.

Agencies are required to include NAICS code identifications in various acquisition planning documents, and the contracting officer (CO) identifies the applicable code in the solicitation. The code becomes especially critical when it’s been determined that only SB firms will be considered for the award.

A Court Challenge

In my experience as a government CO and as an acquisition/procurement consultant, this process is overwhelmingly a simple “check-the-block” drill left to the CO — no other acquisition team members involved. However, a September 2023 Court of Federal Claims decision sustained a firm’s protest against an agency’s NAICS code selection under a SB set-aside procurement. 

The court found that the NAICS code identified by the CO did not adequately reflect the overwhelming majority of effort that would be required to perform the contracted work.

Like most procurements, the agency’s specific requirement had elements that fit within at least two different NAICS codes, but the regulations call for the CO to identify a single NAICS code that represents the majority of the procurement. 

A few salient facts as reported in the COFC decision:

The protesting firm qualified as a SB under the R&D code (541715) — and the COFC found that that code represented more than 80% of the expected work — but the firm was not a SB according to the Environmental Consulting Services code (541620) that the work was listed under. As a result, the COFC ordered corrective action.

So what? The agency lost and must make corrections.

The seemingly avoidable protest and required corrective actions cost the agency delays in awarding the contract to meet its needs. 

Also, the protest cost the specific acquisition team and overall agency significant resources preparing responses (fact statements, arguments and counterarguments) and participating in oral arguments in court. These efforts were expended by the CO, others in contracts, the requirement owner (agency), technical experts, and the agency’s legal advisors. 

This decision should open all of our eyes to the fact that the NAICS code selection is not just an administrative “afterthought” — instead, it requires full understanding of the procurement need, as collectively understood by the members of the acquisition team.

As the Seventh Sense Consulting LLC (SSC) Director of Acquisition Practice, Mr. Patrick Shields has over 45 years of experience as an acquisition/contracting professional and innovative leader. As a Navy Department civilian, he was a major weapons systems contracting officer and manager. Since his civil service retirement, with 2 firms he has provided subject matter expertise support to numerous Federal civilian and DoD organizations, including acquisition strategy/documentation support for key acquisitions, policy development, and personnel training. He also managed a subscription “ask the expert” response team and authored numerous topical publications for over 25,000 professional employees of subscribing agencies.

Image by Mohamed Hassan from Pixabay