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Ode to the NAICS Code

A fundamental building block of your company’s government contracting existence. The NAICS codes define you, quite literally, by associating your offerings with a certain segment of the universe of products and services sold in North America.    Then why are they so difficult to get right?

First, let’s define the problem.

According to the U.S. Census Bureau, NAICS, or “North American Industrial Classification System”, is the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy. NAICS was developed under the auspices of the Office of Management and Budget (OMB), and adopted in 1997 to replace the Standard Industrial Classification (SIC) system. It was developed jointly by the U.S. Economic Classification Policy Committee (ECPC), Statistics Canada, and Mexico’s Instituto Nacional de Estadistica y Geografia  to allow for a high level of comparability in business statistics among the North American countries.

As of February 2016, there are 1045 active NAICS codes.  536 of them refer to services (from banking to industrial launderers to fur-bearing animal production), 509 refer to wholesalers and manufacturers (from music stores to dental labs to fasteners/buttons/needles).

And there must be one out there that perfectly describes you, and if you find it, everything is smooth sailing…

Not so fast.

Federal contractors need to look at NAICS Codes, much like they need to look at everything else they’re doing in pursuit of business: from their customer’s viewpoint.

So here are some best practices for figuring out what your NAICS codes should be.

Step I: Easy Stuff

1. The Obvious ones. Go to naics.com, type in a keyword or two for what you do, and a couple will pop up. There might be even several that are close enough or fall within the range of your products and services. Write them all down. You don’t have to pick a “primary” one yet.

2. Follow the Leader. What NAICS are your teaming partners and competitors using? Look at their websites, business cards, capabilities statements – the numbers aren’t a secret code. They’re a common denominator for associating similar products/services. If your direct competitors are using them, you might want to.

3. Procurement History. I happen to love award analysis and historical data – it’s the best prediction of future behavior in government entities, because they tend to follow similar processes when doing the same work.  So if you look at usaspending.gov and www.fpds.gov and even www.fbo.gov, you’ll find that the NAICS codes associated with most of the work they’re going to be procuring are NAICS codes they’ll use again and again.  Much of the time, the NAICS codes will be the same as you found in steps 1 and 2.  So why bother?

Step II: Secret Squirrel  Methodology [The logic behind seemingly illogical coding]

When you searched procurement history, you probably came across NAICS Codes that did not make sense. I have found “frozen foods” purchases coded as IT services. I recently even ran across a Piano purchase that was coded as an armored vehicle (Contract # VA24416F6918 if you want to see for yourself).  There are 2 things you need to think about: why does that happen, and what do you need to do about it.

First, Why, oh why, do NAICS codes used by my customers make no sense to me?

1. Government is buying something to Meet Their Mission. Like I said earlier, put yourself in your customer’s shoes – they are not buying landscaping or cloud software because they want that particular product. They’re buying it because it is part of their mission – and the agencies’ budgets are allocated into big buckets to be spent on missions. It’s much easier to budget, track, award, and maintain contracts in those same buckets, therefore the NAICS Code will often reflect the customer’s end goal, not the (product/service) means they are using to meet it.  If you are building a data center to support a mission to Mars, it might be coded as a data center – but it’s a lot easier for your customer to track the expenditures and justify to Congress an expense that is aligned with a mission vs. just a purchase for the back office.
2. Mistakes Were Made. Government entities have procurement cycles, when something expires, they buy it again.  If the NAICS Code powers change the code and you missed it, you might be buying something under an expired code without realizing it.  Or maybe you transposed a digit and typed 12 where you meant to type 21. And now you have a whole new NAICS code and that’s how pianos get turned into tanks.
3. “Small” Business affinity. NAICS Codes aren’t uniform, they have many different standards for determining whether an entity is small. While they vary across individual codes, the two major delineations are:
   1. For services, the standard is the average of the last 3 years annual revenues
   2. For products / manufacturers / wholesalers, it’s the number of employees

Let’s say there’s a $20 million dollar business that has been doing great work and when the contract comes up for recompete, the government customer wants the company to be included in the competition – have a chance to win the work.  Would the government ever put that procurement, if it’s a small business set-aside, under a NAICS code where the small business threshold is $6M? No, because that would preclude them from competing altogether.

So what do you do? Stay calm and do research.  When you are searching for opportunities and past awards, use a variety of search cirteria – keywords, agencies, vendors, not just NAICS, because if that’s the only criteria – it will be both too broad, and at the same time, too limiting as you are likely to miss good opportunities.