Code shopping

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Join Associate Editor Michael Hardy for an online forum 11 a.m. March 15. He'll discuss this story and take questions on NAICS code shopping and small-business issues.

With no one watching, agencies can pick and choose NAICS codes

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Agencies have some leeway in defining small business for individual contracts, but some government observers fear that lax oversight is letting them push that flexibility beyond reasonable boundaries.

They point to the Army's recent Information Technology Enterprise Solutions-2 Hard-ware contract as a possible case in point. GTSI Corp., of Chantilly, Va., and World Wide Technology Inc., of St. Louis, won the small-business contracts under ITES-2H.

World Wide reported $2 billion in annual revenues in 2006, while GTSI had $882 million in 2005.

The Army chose for the contract a North American Industry Classification System (NAICS) code ? 517110, wired telecommunications carriers ? with a small-business threshold of 1,500 employees, a criterion both companies met.

Both companies declined to comment further, saying the contract is still in the protest period.

Neither the Army nor the companies appear to have done anything improper in the ITES-2H procurement, but some critics said the contract might be an example of NAICS shopping, or picking a code that gives the agency the broadest small-business definition possible, even if it doesn't exactly match the contract score.

Unless a small business protests the code designation within 10 days of the solicitation's release ? none did with ITES-2H ? the code is likely to stand.

"It may be a case where the traditional application of this NAICS code doesn't match up closely with the stated definition," said Paul Murphy, president of Eagle Eye Publishers Inc., based in Fairfax, Va. "Strictly interpreted, wired carriers like Verizon need to be licensed from the states they operate in. Still, it sounds like NAICS shopping to me."

Army officials said ITES-2H, which provides IT hardware such as computers and servers, has the ultimate goal of creating a wired data network and therefore falls under the 517110 definition. On an Army Web site for questions and answers about the contract, an Army official said no single NAICS code covers the complexity of the acquisition, but 517110 fits and "allows the most liberal small-business threshold."

Some small-business advocates said the system is already set up in a way that defines small business too broadly. They say the flexibility that agencies have to choose NAICS codes with little oversight is another element they can abuse.

"Manipulating [the NAICS] is a misuse, not a use, of discretion," said Charles Tiefer, a law professor at the University of Baltimore.

Although the law affords contracting officers flexibility in choosing a NAICS code for a contract, there are guidelines to follow, said Gary Jackson, division chief of size standards at the Small Business Administration. The NAICS should be based on the principal purpose of the goods or services being purchased, he said.

Jackson declined to comment specifically on ITES-2H, but he said in general a determination should be based on what is being acquired. "We had a rather farfetched case some years ago where somebody wanted to contract the care and feeding of lab rats and wanted to use the R&D code," he said. In that case, SBA insisted that the contract was not itself an R&D contract, so the agency could not use that code, he said.

SBA does not routinely check contract NAICS classifications, he said. The agency's Office of Hearings and Appeals rules on NAICS protests.

At least one small business that unsuccessfully bid on ITES-2H believed the Army should have applied the nonmanufacturer's rule, a provision of federal law that allows resellers of other companies' products to be considered small if they have no more than 500 employees. Because the company wants to do future business with the Army and with the prime contractors, its officials spoke on condition of anonymity.

The so-called nonmanufacturer's rule does not apply to competitions conducted on a full and open basis, said an SBA spokeswoman.

The company spent considerable time and resources on a bid its officials now believe was a waste of time. Their costs included not only the direct expenses but also the potential revenue lost by concentrating on ITES-2H.

Now the company believes the Army chose the NAICS code it did because it wanted to consider the larger companies and still get small-business credit. Said one company executive, "We didn't have a shot in hell."

Associate Editor Michael Hardy can be reached at mhardy@1105govinfo.com.

About the Author

Technology journalist Michael Hardy is a former FCW editor.

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