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Recent SBA OHA Decision Offers NAICS Code Appeal Guidance

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Koprince Law LLC

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As we’ve noted here on SmallGovCon, appealing the assignment of a NAICS code for a solicitation is often successful. But the time frame for doing so is short, and there are other procedural limitations. Given the short deadlines and procedural hurdles, are there any signals to help identify when a NAICS code appeal might be in order?

Recently, SBA’s Office of Hearings and Appeals provided some guidelines in discussing the assignment of NAICS codes in the Computer Facilities Management Services, Research and Development, and Engineering Services codes.

In Rollout Systems, LLC, SBA No. NAICS-5901 (2018), OHA reviewed a procurement by the Navy for a contractor to provide “full spectrum information technology (IT) engineering and management support services” for the Research, Development, Test and Evaluation (RDT&E) Infrastructure Division in the Navy’s Integrated Battlespace Simulation and Test Department at Naval Air Warfare Center Aircraft Division (NAWCAD).

I will describe the decision in some detail because each part is helpful for analyzing a potential NAICS code appeal.

The Solicitation

The CO set the solicitation as restricted under NAICS code 541715, Research and Development in the Physical, Engineering, and Life Sciences (except Nanotechnology and Biotechnology). NAICS code 541715 normally has a size standard of 1,000 employees, but the RFP indicated that the procurement fit within the exception for Aircraft, Aircraft Engine and Engine Parts, which has a 1,500-employee size standard.

The scope of the contract included the following areas:

a) Network engineering, architecture, design, and implementation
b) Cyber engineering and T&E facility development
c) Aircraft test data solutions
d) Network maintenance and operations
e) Network circuits
f) Network security/Firewall controls
g) System administration
h) Cyber Security
i) High Performance Computing (HPC)

The solicitation included two sample tasks that offerors had to address. First, each had to “propose a secure method of transmitting [aircraft and weapon systems] data to various labs and facilities at NAWCAD,” along with “a long-term data storage, archival, index and retrieval solution.” Second, offerors had to “propose a solution discussing the types of communications networks, cyber security considerations, and data storage systems that would be required” to support a “high fidelity multi-ship battlespace simulation.”

Arguments of the Parties

The various ways the parties argued this appeal demonstrate how different parts of a solicitation can support various NAICS codes.

Rollout Systems filed an appeal with the SBA Office of Hearings and Appeals challenging the assigned NAICS code, arguing that the correct NAICS code for this procurement wsa 541330, Engineering Services. NAICS code 541330 normally corresponds with a size standard of $15 million average annual receipts.

Rollout Systems also noted that  that “there is no R&D work identified to be performed for this effort.” Further, “[n]one of the labor categories have R&D attributes specified in their descriptions or have responsibilities and education requirements that support R&D.” Instead, Appellant maintains, the contractor will perform information technology support services, specifically “the operation and maintenance of the RDT&E network (i.e. operation and maintenance of [NAWCAD’s] IT systems.” Although this procurement is “in support of an RDT&E organization,” the contractor will not itself be engaged in research and development.

Another potential offeror, RMC, similarly argued that the appropriate NAICS code was 541330 but, in contrast to Rollout Systems, said the exception for Military and Aerospace Equipment and Military Weapons should apply with a $38.5 million size standard. NAICS code 541330 has three exceptions that utilize a size standard of $38.5 million. As support, it noted the sources sought proposed code 541330 with the Military Weapons exception. RMC maintained that “[t]here is no original research and experimental development” for this RFP and OHA has stated that a research and development NAICS code such as 541715 requires creating new processes.

A third potential offeror, MIL Corp. argued that code 541715 was correct because this RFP included “research and development efforts” in certain task areas and for certain labor categories. The services here are an integral part of the Navy’s “research, and essential for the conduct of the research”, and the computer services are woven into the Navy’s research.

The CO stated that NAICS code 541715 was correct because the NAICS Manual describes NAICS code 541715 as including “research and experimental development in . . . computers.”

NAICS Manual

The NAICS code manual provides descriptions for various NAICS code industries.

NAICS code 541715. NAICS code 541715, Research and Development in the Physical, Engineering, and Life Sciences (except Nanotechnology and Biotechnology), covers:

establishments primarily engaged in conducting research and experimental development (except nanotechnology and biotechnology research and experimental development) in the physical, engineering, and life sciences, such as agriculture, electronics, environmental, biology, botany, computers, chemistry, food, fisheries, forests, geology, health, mathematics, medicine, oceanography, pharmacy, physics, veterinary and other allied subjects.

The NAICS Manual defines “research” as “original investigation undertaken on a systematic basis to gain new knowledge,” and “experimental development” as “the application of research findings or other scientific knowledge for the creation of new or significantly improved products or processes.”

For NAICS code 541715, a footnote in the Size Standards table states that:

“Research and Development” means laboratory or other physical research and development. It does not include economic, educational, engineering, operations, systems, or other nonphysical research; or computer programming, data processing, commercial and/or medical laboratory testing.

13 C.F.R. § 121.201, n.11(a).

NAICS code 541330. NAICS code 541330, Engineering Services, in contrast covers:

establishments primarily engaged in applying physical laws and principles of engineering in the design, development, and utilization of machines, materials, instruments, structures, processes, and systems. The assignments undertaken by these establishments may involve any of the following activities: provision of advice, preparation of feasibility studies, preparation of preliminary and final plans and designs, provision of technical services during the construction or installation phase, inspection and evaluation of engineering projects, and related services.

NAICS code 541513. Finally, NAICS code 541513, Computer Facilities Management Services, covers:

establishments primarily engaged in providing on-site management and operation of clients’ computer systems and/or data processing facilities. Establishments providing computer systems or data processing facilities support services are included in this industry.

How to Assign the Proper NAICS Code

OHA reiterated the rule that “the CO must assign the NAICS code that best describes the principal purpose of the product or service being acquired in light of the industry descriptions in the NAICS Manual, the description in the solicitation, the relative value and importance of the components of the procurement making up the end item being procured, and the function of the goods or services being acquired. The key with this sort of fact-specific analysis is how OHA decides what is proper, and in this case OHA’s analysis is pretty straightforward (at least in my opinion).

OHA decided that NAICS code 541715 was inappropriate because the solicitation did not call for research and development. Research and development means “creating new processes or products.” Reviewing the solicitation, it called for network administration; cyber security; data storage; and other information technology and computer-related technical support. Because the computer networks already existed, the contractor would not invent or create them.

Interestingly, OHA noted that, because there were few labor categories with advanced research or educational requirements, this reinforced that the agency was not looking for research and development. In other words, research and development often requires advanced degrees.

Further, under the NAICS code table notes, “computer programming,” “data processing,” and “engineering, operations, systems, or other nonphysical research” is excluded from the definition of “research and development.”

OHA also held that in some cases, supporting research by an agency can make it into a research procurement. But this procurement was not in direct support of research because the particular division of the Air Force seeking services (RDT&E Infrastructure Division, with the “R” standing for Research) did not do research. Rather the RDT&E Infrastructure Division provided the “computer and communications infrastructure to support research and development conducted by the ‘RDT&E labs’ and ‘the RDT&E community.’”

In order to fit this exception for supporting research efforts, the contractor must also perform work integral to the research. Here, the contractor would not be doing research and was not required to have experience in aircraft or weapons research; the contractor would supply the computer services to assist those doing the research.

OHA succinctly rejected NAICS code 541330, Engineering Services, because so little of the required labor consisted of engineers.

So what NAICS code did apply?  541513, Computer Facilities Management Services, with a size standard of $27.5 million. Oddly, none of the parties suggested this code, but that did not stop OHA from applying it. Here, the contractor would supply operation and maintenance of government-owned computer systems; that fits NAICS code 541513.

Takeaways

This case demonstrates that there are many ways to advocate for the appropriate NAICS code for services in this arena. Three potential NAICS codes or variants were put forth, and OHA chose a fourth, and the size standards ranged from $15 million to 1,500 employees. Second, the line between some of these NAICS codes are quite fuzzy. Finally, OHA seemed to take a broad approach to analyzing the appropriate NAICS code, meaning OHA looked at the overall work being done, without getting bogged down too much in individual parts of the Solicitation.


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