A recent decision by the Office of Hearings and Appeals (OHA) of the U.S. Small Business Administration (SBA) demonstrates an advantage in appealing a North American Industry Classification System (NAICS) code designation for a procurement with a small-business set-aside.
|This decision demonstrates this principle: When the government chooses a NAICS code that allows a greater number of offerors to participate in the bidding, an offeror may be able to reduce the number of competitors by getting the NAICS code changed to one in which fewer competitors are found.|
Basic background of small-business set-asides
In the world of government procurement, what’s a small business? The answer is, “It depends . . . .” Sometimes it depends on the amount of average annual receipts the business has. Other times, it depends on the number of employees it has. It even depends on when the request for proposal (RFP) or request for quotation (RFQ) is issued because the definition of small business can change over time. Even more important, it depends on the NAICS code assigned to the procurement. That’s because the NAICS code establishes the size standard for that procurement.
For the appeal we are discussing, three different NAICS codes were involved, with each having a different size requirement for average annual receipts:
- NAICS Code 812320, Drycleaning and Laundry Services (except Coin Operated), $5.5 million in average annual receipts.
- NAICS Code 812331, Linen Supply, $32.5 million in average annual receipts.
- NAICS Code 812332, Industrial Launderers, $38.5 million in average annual receipts.
For ease of readability, we’ll refer to these codes by their last two digits: 20, 31, and 32.
RFQ for laundry services
The Army Medical Command issued an RFQ for bulk laundry services at the San Antonio Military Medical Center. The RFQ contemplated the award of a single indefinite-delivery, indefinite-quantity (IDIQ) contract. The command assigned Code 31 to the procurement.
The performance work statement (PWS) indicated that the contractor would provide all personnel, equipment, transportation, supplies, and supervision required to perform bulk laundry services typically found in a hospital laundry facility. The RFQ required experience in providing hospital laundry services. The PWS also indicated the laundry had to be cleaned in a way to reduce dissemination of microbial contaminants and required the contractor to have equipment and a ventilation system for this purpose, something that commercial and dry-cleaning facilities normally lack. The Army was to supply the items to be laundered (Army property), but the contractor was to repair or replace items that did not meet Army standards. The items to be cleaned included blankets, coats, gowns, sheets, towels, and trousers.
American West Laundry, Inc., filed an appeal and asserted that the contracting officer (CO) had selected the wrong NAICS code and that Code 20 should have been selected instead because the contractor will not supply or own the items to be laundered.
Division Laundry & Cleaners, Inc. (DLC), responded to the appeal, asserting that the correct code had been selected. DLC pointed out that the description for Code 31 in the NAICS manual describes businesses that clean bed linens, towels, and hospital gowns—the same items mentioned in the RFQ.
The SBA also responded to the appeal, asserting that Code 32 was the correct code because—
- Code 32 corresponds to the old Standard Industrial Classification (SIC) Code 7218, which best describes the current procurement. (SIC Code 7218 was the predecessor of NAICS Code 812332.)
- Contractor facilities are supposed to have special equipment and ventilation.
- Code 32 is related to hospital laundry services.
Finding of administrative law judge
The best code is Code 20 because its description indicates the contractor is to clean items owned by the customer (in this case, the Army). Codes 31 and 32 both describe services in which the contractor owns the items to be cleaned and in essence “rents” those items to the customer for use and cleans them.
Because the OHA rendered its decision after the deadline for receiving the proposals, the decision doesn’t apply to the current procurement, but may apply to future solicitations for the same supplies or services.
To prevail in its appeal, the offeror must show that the NAICS code designation is a clear error of fact or law. The OHA will not reverse a designation merely because it would have selected a different code.
The NAICS code designation may be critical to improving an offeror’s competitive position. Because it may prefer to compete with other smaller providers, a smaller offeror may appeal a NAICS code to get a lower monetary size designation. But the strategy can also work to the advantage of a larger offeror, who may appeal the NAICS code to get a higher monetary size designation.
Prevailing may not always affect a current procurement, but can lay the groundwork for future bids.
For more information
Decision of the OHA in the NAICS Appeal of American West Laundry, Inc., SBA No. NAICS-5842 (2017).
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