NAICS Code Appeals (and the One-Shot Rule)

January 24, 2019

For small businesses, entering into the world of federal procurement is often viewed as a costly, complex endeavor.  This is due, in part, to the myriad of laws and regulations governing federal procurement.  Compliance can be both laborious and expensive.  But, familiarity with this vast regulatory regime can occasionally bear a competitive advantage for some small businesses.  One such example is intertwined with North American Industry Classification System (NAICS) codes––or, more specifically, NAICS code appeals.

 

NAICS codes play an important role for small businesses both because the codes are used to classify the product or service being procured and because the Small Business Administration (SBA) pegs their size standards to them. [1]  Principally, SBA’s size standards are based on either the average number of employees or the average annual revenues. [2]  For example, in procurements under NAICS code 541511 (Custom Computer Programming Services), a business must have average annual revenues under $27.5 million to be eligible to compete.  And, in procurements under NAICS code 519390 (Internet Publishing and Broadcasting and Web Search Portals), a business' average number of employees must not exceed 1,000 to be eligible.  

 

In either case above, a successful NAICS code appeal could shrink or expand the competitive landscape.  This may occur where the new NAICS code has a different average annual revenue or employee threshold (or if it changes from a revenue- to an employee-based standard).  Given that a successful NAICS code appeal can reduce/increase your chances of award or render your company ineligible, it’s important to understand the appeal process and one particular hazard, the one-shot rule. 

 

Basics of NAICS Code Appeals
 

Under the Federal Acquisition Regulation, the contracting officer (CO) is responsible for selecting the NAICS code that she or he believes “best describes the principal purpose of the product or service being acquired.” [3]  The CO’s designation not only alerts prospective small businesses as to what goods or services the government seeks to acquire but also sets the competitive playing field.  If, for example, a contractor’s average annual revenues or number of employees exceeds SBA’s corresponding size standard for the NAICS code, then the company will be ineligible to compete.  Fortunately, when a small business believes that the CO’s NAICS designation is unsuitable, SBA’s regulations confer appeal rights on an aggrieved contractor. 

 

Under SBA's regulations, any “interested party” that has been adversely impacted by the CO’s NAICS code designation may appeal the designation to SBA’s Office of Hearings and Appeals (OHA). [4]  The interested party (appellant [5]) must file its appeal with OHA within 10 calendar days after “issuance of the solicitation or amendment affecting the NAICS code or size standard.” [6]  The appellant must also serve a copy of its appeal on the CO. [7]  Importantly, the appeal must be in writing and include, “the solicitation or contract number; the name, address, and telephone number of the contracting officer; a full and specific statement as to why the NAICS code designation is erroneous, and argument in support thereof; and the name, address and telephone number of the appellant or its attorney.” [8]  

 

In practice, the appellant’s argument may include, for example, an analysis of industry descriptions in the NAICS Manual, [9] the solicitation’s statement of work, the tasks that encompass a majority of procurement’s price/labor, and prior NAICS decisions from OHA.  To prevail in a NAICS appeal, the appellant must demonstrate that the CO’s NAICS code designation is based upon a clear error of fact or law. [10]  If OHA grants the appeal and the CO receives the OHA’s decision prior to the date on which offers are due, the CO is required to amend the solicitation with the new NAICS code. [11]  

 

While pursuing a NAICS code appeal seems like a relatively straightforward process, there is one rule that every small business should understand: the one-shot rule.

 

One-Shot Rule
 

While filing a NAICS code appeal is relatively simple (more information about the process may be found on SBA’s website and in its regulations), you may still decide against filing one.  But, that does not mean you are in the clear.  That is, one of your competitors may appeal the CO’s NAICS selection.  Remember, when a contractor files a NAICS appeal, it must serve a copy of the appeal on the CO. [12]  So, what happens next? 

 

When the CO receives a copy of a NAICS appeal, she or he must stay the solicitation and “[a]dvise the public, by amendment to the solicitation or other method, of the existence of the NAICS code appeal and the procedures and deadline for interested parties to file and serve arguments concerning the appeal[.]” [13]  This notice is critical, so pay attention for agency communications (email, FBO notices, [14] etc.) regarding any NAICS code appeal.  

 

Where the CO provides such notice, it may be prudent to intervene.  Failure to do so could be detrimental should OHA grant a competitor’s appeal and the new NAICS code renders your company ineligible to compete or alters the competitive landscape (e.g., by allowing a larger company into the mix).  Likewise, once OHA issues a decision on a NAICS code appeal, it may not be reconsidered. [15]

 

In other words, where a contractor fails to intervene in a competitor’s NAICS appeal, and OHA grants the appeal, thereby directing the CO to amend the solicitation with a new NAICS code, the contractor is then barred from appealing the new NAICS code. [16]  While this may seem unfair to some, the rule is designed to prevent contractors from endlessly relitigating NAICS code appeals. 

At bottom, the one-shot rule is something that small businesses must consider when dealing with a competitor's NAICS appeal. Unfortunately, for one contractor, OHA recently dismissed its appeal with prejudice after the contractor failed to intervene in a competitor’s NAICS appeal. [18]

 

Takeaway
 

NAICS code appeals can be a powerful tool for small business contractors.  A successful challenge can sometimes reset the competitive landscape (which may even provide your company with a competitive edge).  But, this tool has a danger zone––the one-shot rule.  Because small businesses are only afforded one chance to appeal the CO’s NAICS code designation (via appeal or intervention), small businesses that have decided against filing an appeal should consider intervening in any appeal filed by a competitor.  Failure to do so, in some cases, could ruin your chances of competing.  

 

So remember, when dealing with NAICS code appeals, you only get one shot.

 

______________________

[1] See U.S. Small Business Administration, Table of Small Business Size Standards Matched to North American Industry Classification System Codes, available here.

[2] See 13 C.F.R. Part 121, Subpart A.

[3] See FAR 19.303; see also 13 C.F.R. § 121.402(b).

[4] 13 C.F.R. § 121.1103(a)(1). NAICS code appeals typically occur in set-aside procurements, however, the regulation also provides appeal rights under unrestricted procurements.

[5] As the process is an appeal, OHA refers to the interested party as the “appellant.”

[6] 13 C.F.R. § 121.1103(b)(1).  

[7] 13 C.F.R. § 121.1103(b)(3).

[8] 13 C.F.R. § 121.1103(b)(2).

[9] U.S. Census Bureau, NAICS Manual, available here.

[10] 13 C.F.R. § 134.314; see NAICS Appeal of Durodyne, Inc., SBA No. NAICS-4536, at 4 (2003).

[11] 13 C.F.R. § 134.318(b).  Where the CO receives OHA's decision after the date on which offers are due, “OHA's decision will not apply to the pending procurement, but will apply to future solicitations for the same supplies or services.” Id.

[12] Supra note 7.

[13] 13 C.F.R. § 121.1103(c).   

[14] Federal Business Opportunities, available at: https://www.fbo.gov.

[15] 13 C.F.R. § 134.316(f); see NAICS Appeal of Aero Spray, Inc. d/b/a Dauntless Air, SBA No. NAICS-5969 (2018) (dismissing a NAICS appeal with prejudice where appellant failed to intervene in competitors’ earlier NAICS appeals); see also NAICS Appeal of Palladian Partners, Inc., SBA No. NAICS-5553 (2014).

[16] Id.; see also Palladian Partners, Inc. v. United States, 783 F.3d 1243 (Fed. Cir. 2015) (confirming that the Court of Federal Claims has jurisdiction to hear a challenge regarding an OHA NAICS decision but because Palladian failed to intervene in an earlier NAICS appeal, it lost it’s right to challenge OHA’s decision in court).

[17] Supra note 15.  In Aero Spray, the contractor failed to intervene in a competitor’s NAICS appeal; and, consequently, OHA dismissed its later-filed NAICS appeal with prejudice.  Because OHA’s new NAICS designation changed the procurement from average employees standard (NAICS 481212, 1,500 employees) to an average annual revenue standard (NAICS 115310, $19m revenues), one must presume that the new NAICS code rendered Aero Spray ineligible to compete.

 

DISCLAIMER: This post is for informational purposes only and may be construed as attorney advertising in some jurisdictions.  The information provided above is not intended to be legal advice and should not be construed or relied upon as legal advice. If you need legal advice, please consult an attorney.

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