Federal and state governments often require NAICS codes to determine if a business is eligible for government purchase contracts or grants. In this article, we answer common questions faced by small business owners trying to understand the importance of NAICS codes & how it can impact selling to the government.
1. What is a NAICS code?
NAICS (pronounced NAKES) is a two- through six-digit hierarchical classification system, offering five levels of detail. Each digit in the code is part of a series of progressively narrower categories, and the more digits in the code signify greater classification detail. The first two digits designate the economic sector, the third digit designates the subsector, the fourth digit designates the industry group, the fifth digit designates the NAICS industry, and the sixth digit designates the national industry. The five-digit NAICS code is the level at which there is comparability in code and definitions for most of the NAICS sectors across the three countries participating in NAICS (the U.S., Canada, and Mexico). The six-digit level allows for the U.S., Canada, and Mexico each to have country-specific detail. A complete and valid NAICS code contains six digits.
2. What is the relationship between NAICS and the Small Business Administration's size standards?
NAICS categories do not distinguish between small and large business, or between for-profit and non-profit. The SBA developed size standards for each NAlCS category. For more information visit the Electronic Code of Federal Regulations (e-CFR) site. Or check out the Size Standards Tool that the SBA offers on their site. You may also contact SBA's Office of Size Standards via phone (202) 205-6618.
3. Why the change?
The government recently released new Federal Acquisition Regulations (FAR) rules associated with small business requirements. For this particular change, FAR 19.301-1, FAR 52.219-9 and 13 CFR 125.3 require all formal solicitations, as well as the purchase orders, have the proper NAICS code and the size standard on each piece of documentation. Prior to the work being performed, the small business supplier awarded the purchase order must have a matching NAICS code along with its self-certified size according to the Small Business Administration's (SBA) size standard in order to be counted as small business.
4. What does a supplier need to do?
The supplier will be required to update their profile in the procurement system by certifying their size to the NAICS code listed on the solicitation that they are bidding on. By doing this, they are selfcertifying to their size at the date they make their offer on the solicitation.
5. What happens if a supplier does not have the same procurement NAICS code in their profile that is identified on the PO?
If the NAICS code being used in the procurement is not in the supplier's profile, the procurement will be counted as a large business commitment, even if the supplier is small. We must have a selfcertified size of small in a supplier's profile to count it as a small business commitment. FAR 19.702 requires us to get a small business plan from suppliers who are considered large, when a procurement is over $700,000. Therefore, if the supplier does not have the procurement NAICS identified on the procurement in their profile, and is awarded the procurement, they will be considered a large business and therefore may be required to submit a small business plan.
6. What if the NAICS code specified for the PO is different than the NAICS code we would use for that PO?
Per the FAR, the contractor identifies the NAICS code to be used on the procurement. lf you are bidding on the award, and more importantly, if you have won the award, this NAICS code should be entered into your profile, along with your self-certified size to that NAICS code. If you disagree with the NAlCS code that is on the solicitation/award, you should address this with the buyer. There is logic in our systems that identify the NAlCS codes for procurements.
7. What if our size standard has changed after we received a purchase order?
When a purchase order is released, the NAICS code and size to that NAICS remains the same for the life of the procurement. If, after your size standard has changed, you receive another purchase order your new size will be used.
8. Why am I not allowed to self-certify with a NAICS that begins with 42, 44 or 45?
SBA prohibits us from procuring or purchasing against NAICS codes beginning with 42, 44 or 45. The applicable manufacturing NAICS code shall be used to classify acquisitions for supplies. A Wholesale Trade or Retail Trade business concern submitting an offer or a quote on a supply acquisition is categorized as a nonmanufacturer and deemed small if it has 500 or fewer employees and meets the requirements of 13 CFR 121.406. Per SBA "When a company selects a manufacturer NAICS, it is declaring that it provides a manufactured product, not necessarily declaring that it is "THE MANUFACTURER." The manufacturing codes are for manufacturers and non-manufacturers supplying products." The wholesale and retail NAICs are in the NAICS system for other uses, such as SBA loans. They are not for federal procurements.
9. Why isn't my NAICS code coming up when I browse?
The SBA reviews and updates NAICS codes and size standards approximately every five years. The current SBA size standard table was established in 2017, which changed so.me NAlCS codes and size standards. Please visit the SBA Size Standards website to find your current NAlCS code as it may have changed. You may also view the NAICS update process fact sheet for more information.
10. Our company manufactures custom products that do not fall clearly within any specific NAICS code. How do we find out how our products will be classified?
You are responsible for identifying your NAICS code. The SBA website can help with this. When you receive a solicitation/RFl/RFQ a NAICS code will be identified on it. If you feel that your company works in that NAICS code, and you reply to the solicitation, please consider adding the NAlCS identified to your supplier profile.
Considerations for potential Small Business Subcontractors: Large business may have a proprietary system or data base of business partners, you need to ensure that ask questions regarding their systems to ensure that you enter your company's information correctly! Remember each prime contractor may have different requirements to become their partner; however, data integrity is critical to ensuring that you are not misrepresenting the size of your company. It could jeopardize future contracts!
Source: U.S. Census Bureau FAQs
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