Multiple-award ID/IQ contracts refer to situations  when contracts are awarded to two or more contractors under a single  solicitation. The  FAR requires that contracting officers assign the NAICS code that best  describes the principal purpose of the acquisition and states that the  contracting officer’s assignment of the NAICS code is final unless a  person adversely affected by the decision or SBA files an appeal. OHA was established in 1983 and is  responsible for reviewing appeals of NAICS code assignments. Contracting Officers Consider Various Factors When Assigning NAICS Codes, and SBA’s 2013 Rule Provides Additional Guidance for Multiple-Award Contracts

		Contracting Officers Consider Several Factors When Assigning NAICS Codes

Officials at the Army, the Navy, DHS, and HHS stated that contracting  officers refer to the FAR when assigning NAICS codes and consider a  variety of factors. Additionally, in 2010 the Department of Defense (DOD)  disseminated a memorandum to its components, which include the Army  and the Navy, reiterating the process for determining the size status of  contractors, including the requirement that contracting officers determine  the appropriate NAICS code and related small business size standard  and include them in solicitations. However, one small business  specialist noted that assigning NAICS codes to ID/IQ contracts may be  challenging for contracting officers because the statements of work may  cover more than one code. SBA’s 2013 Rule May Clarify NAICS Code Assignments on Multiple- Award Contracts

In 2013, SBA issued a rule on assigning NAICS codes to multiple-award  contracts that may further clarify code assignment for contracting officers. Updates to the FAR and FPDS-NG are required to fully implement the  portion of SBA’s final rule related to NAICS codes. Some Stakeholders Expressed Concerns about NAICS Code Assignments, but Few Appeals Have Been Filed

		Some Industry Groups and Firms Expressed Concern That Contracting Officers Assign NAICS Codes Based on Size Standards

Some of the stakeholders we interviewed—three industry groups and five  small businesses that had filed NAICS code appeals (appellants)— expressed concern that some contracting officers assign NAICS codes  because they want specific size standards, not because they are the most  appropriate codes, but several also stated it was difficult to determine  how often this occurs. OHA officials acknowledged that assigning  codes based on size standards may occur, but noted that it is OHA’s role  to review the appropriateness of appealed NAICS code assignments, not the contracting officer’s intention behind assigning the code. The majority of NAICS code appeals were dismissed, and less than half  of the remaining appeals were granted (see fig. DOD, DHS, and SBA had no comments on the draft  report. GSA and HHS provided technical comments, which we  incorporated as appropriate. Appendix I: Objectives, Scope, and Methodology

This report examines (1) what contracting officers consider when  assigning North American Industry Classification System (NAICS) codes  to federal contracts and the status of efforts to clarify code assignment  and (2) stakeholder views on NAICS code assignment and the number  and outcomes of appeals filed with the Small Business Administration’s  (SBA) Office of Hearings and Appeals (OHA). For our first objective, we reviewed federal laws and regulations related to  NAICS code assignment and relevant policies and procedures from the  four agencies with the highest indefinite delivery/indefinite quantity (ID/IQ)  contract obligations from fiscal years 2011–2015 (the 5 most recent years  of Federal Procurement Data System-Next Generation (FPDS-NG) data  available when we began our review): Army, Navy, Department of  Homeland Security (DHS), and Department of Health and Human  Services (HHS). Of the contracting officers who assigned the NAICS codes to  the selected contracts, three no longer worked at the agencies. To identify the number and  outcomes of NAICS code appeals, we obtained and analyzed SBA’s OHA  decisions on NAICS code appeals filed during calendar years 2014–2016.
Why GAO Did This Study

Federal regulations require that contracting officers assign the NAICS code that best describes the principal purpose of the acquisition. SBA's OHA is responsible for reviewing appeals of NAICS code assignments. Questions have been raised about whether agencies assign the appropriate NAICS codes to ID/IQ contracts with multiple task orders.
GAO was asked to review several issues related to NAICS codes. In this report, GAO examines (1) what contracting officers consider when assigning NAICS codes to federal contracts and the status of efforts to clarify code assignment and (2) industry views on NAICS code assignment and the number and outcomes of appeals.
GAO reviewed policies and procedures of the four agencies with the highest ID/IQ obligations from fiscal years 2011–2015: Army, Navy, Department of Homeland Security (DHS), and Department of Health and Human Services (HHS); reviewed one contract and 10 related task orders at each of the selected agencies and interviewed the related contracting officers; analyzed 2016 federal contracting data to identify commonly used NAICS codes and size standards; interviewed three industry groups and five firms that filed appeals for industry views on NAICS code assignment; and analyzed SBA decisions on NAICS code appeals in 2014–2016.
The Department of Defense, DHS, and SBA had no comments on the report. The General Services Administration and HHS had technical comments, which we incorporated as appropriate.

What GAO Found

Agencies' contracting officers consider various factors in assigning North American Industry Classification System (NAICS) codes to federal contracts, and the Small Business Administration (SBA) issued a rule in 2013 intended to clarify NAICS code assignment. NAICS codes are the basis for SBA's size standards; therefore, the code that the contracting officer assigns determines whether a firm is eligible for federal contracting preferences, such as small business set-asides. The contracting officers GAO interviewed cited several factors that affect their assignment of NAICS codes, including information on the work to be performed and input from agency small business specialists. However, they stated that assigning a NAICS code can be challenging when one or more codes could apply to a contract. In the 2013 rule, SBA clarified that under certain circumstances, contracting officers may assign more than one code to multiple-award contracts. Such contracts are awarded to two or more contractors under a single solicitation and include indefinite delivery/indefinite quantity (ID/IQ) contracts used when quantities and timing are not known at the time of the award. However, updates to the Federal Acquisition Regulation (FAR)—the rules governing the federal government's purchasing process—are required to fully implement SBA's final rule. The agencies GAO interviewed plan to implement this rule after it is adopted into the FAR and they can make necessary updates to their information technology for contracting. This FAR rule-making process is ongoing.
Some industry groups and firms GAO interviewed expressed concerns about how contracting officers assign NAICS codes, but SBA's Office of Hearings and Appeals (OHA) dismissed most appeals and denied more than half of the remaining appeals. Some industry groups and firms GAO interviewed expressed concerns that contracting officers may assign NAICS codes based on the size standard (thereby affecting the number of firms that can compete as a small business) and not the work to be performed. However, some also stated it was difficult to determine how often this practice occurs, and OHA officials noted it is the office's role to review the appropriateness of appealed NAICS codes, not the contracting officer's intention when assigning the code. Of the 62 NAICS code appeals that were filed in calendar years 2014–2016, OHA dismissed 35, denied 15, and granted 12 (see fig.). Appeals were dismissed because, among other things, they were untimely or the contracting officer cancelled the acquisition.