It’s hard to think of a decision a small business government contractor can make at its founding more impactful—and often less considered—than selecting a primary North American Industry Classification System (NAICS) code.
Raise your hand if you picked your NAICS code by going to the U.S. Census website (or a similar site) and using the search function. Don’t be ashamed. That’s a great start. The only problem is that the Census makes no mention of the size standard associated with the code. That means, some contractors chose their code with only half the story.
What is the role of NAICS codes?
By way of background, NAICS codes weren’t designed to measure a company’s size. Their sole purpose is to categorize industries so as to aid the federal government in statistical data collection.
The U.S. Small Business Administration borrowed the codes to help it answer the devilishly simple question: What is a small businesses? SBA knew that a one-size-fits-all arbitrary limit—something like $25 million—would be massive for some companies (like dry cleaners) and woefully inadequate for others (like international trade financiers).
NAICS codes gave SBA a way to assign different standards to different categories of business either in terms of average annual revenue or average employee count. Thus, dry cleaning companies (NAICS 812320) are small if their average annual receipts are less than $6 million. Meanwhile, international trade financial companies (NAICS 522293) are small if their annual receipts are less than $41.5 million.
What’s so important about a primary code?
When a concern signs up for SAM.gov (one of the first steps to becoming a government contractor) it has the option of listing numerous NAICS codes, which help potential customers understand the business’ many capabilities, but must select only one primary code. This is a fraught choice. Some relatively similar sounding codes can have wildly different size standards. Computer Training (NAICS 611420), for example, has a size standard of $12 million, while Other Computer Related Services (NAICS 541519) has a size standard of $30 million.
You might think, so what? The contracting officer will assign a NAICS code to any solicitation and thereby set the size for that competition, absent any appeal. If you’re small under that code and capable, it doesn’t matter what your primary code is.
That’s true. But there’s so much more going on. For example, primary codes are used to determine eligibility for the SBA’s socioeconomic programs. If a concern wants to be an SDVOSB, WOSB/EDWOSB, HUBZone, or 8(a) company, it must be small in its primary NAICS code. Likewise, a concern has to be small in its primary code to be a protégé in the Mentor-Protégé program. So, if you think you might be interested in one or more of those programs, your primary NAICS code makes a huge difference. This is particularly true for the WOSB/EDWOSB program where only certain industries are eligible.
Select the best primary NAICS for you
You might be thinking, great, I’ll pick the biggest one that applies. Sure, that will give you some room to grow, but it also means you’re swimming with sharks—established companies at the top of the size standard. It’s not necessarily important to pick the biggest code, it’s important to pick the best code.
Now, that doesn’t mean you can pick any old code. It has to fit your business. SBA could always determine that the code you’ve picked is wrong. It may look at your receipts, employees, and cost of doing business and reserves the right to look at patents, contract awards, and assets to determine your proper NAICS code. SBA generally takes a contractor’s word for it. And why shouldn’t it? A misrepresentation on a SAM.gov profile could lead to a False Claims Act violation.
Once you select a primary NAICS code, you could be stuck with it. While the SBA generally allows you to pick your own primary NAICS code, it may have concerns if there on conflicting primary NAICS representations. A common place for inconsistency is on your tax return. Business tax forms require a NAICS code to be specified. Often tax professionals will assign a code without a second thought. If there are inconsistencies between a small business program application and tax returns, it can cause hiccups at the SBA.
The takeaway
A concern should never select a primary code without at least checking the size standard associated with it. A good code is one that is broad, but accurately describes your business. And a code isn’t best just because it is large. Pick a code because it is right. And once you’ve made that selection, stick to it. In short, don’t be nonchalant with your NAICS. There could be more to the decision than you think.
If you’re concerned about all things NAICS, give us a call at 913-354-2630.