Assigning NAICS Codes to Subcontracts
Federal prime contractors often overlook a very important detail in their subcontracts: a North American Industry Classification System (NAICS) code. Prime contractors sometimes assume that the NAICS code the government assigns to the prime contract flows down to subcontracts, but that’s not the rule. Instead, the prime contractor is supposed to choose the best NAICS code for each subcontract it issues.
The “prime contractor decides” NAICS code rule applies to both large business and small business prime contractors, but under different circumstances. Let’s briefly examine both, starting with large prime contractors.
Large Business Prime Contractors
Most large prime contractors are subject to the clause at FAR 52.219-9 (Small Business Subcontracting Plan). Paragraph (e)(7) of the clause says that the prime contractor shall “[a]ssign each subcontract the NAICS code and corresponding size standard that best describes the principal purpose of the subcontract.” The U.S. Small Business Administration’s regulations impose a similar requirement in 13 C.F.R. 125.3(c)(1)(v).
If a large business prime contractor mistakenly believes that the prime contract’s NAICS code automatically flows down, the prime may incorrectly count work toward its small business subcontracting goals that should not be counted. For example, if the prime contract is designated with NAICS code 236220, a general construction code, the prime contract’s size standard is $45 million. However, the best NAICS code for a plumbing subcontractor is likely 238220, which has a much smaller size standard–$19 million.
Small Business Prime Contractors
Unlike their large business counterparts, small businesses are not required to adopt subcontracting plans. However, small businesses ordinarily must comply with the limitations on subcontracting (LoS) under FAR 52.219-14 and 13 C.F.R. 125.6.
The “LoS,” in turn, allows a small prime contractor to meet its performance obligations by subcontracting to a “similarly situated entity” (SSE). A similarly situated entity must have the same certification status required by the prime contract, such as 8(a) or HUBZone. An SSE must also be a small business, but not under the size standard associated with the prime contract’s NAICS code. FAR 52.219-14(b)(2) explains that an SSE must be “small for the size standard under the North American Industry Classification System (NAICS) code the prime contractor assigned to the subcontract.” The SBA’s regulation at 13 C.F.R. 125.1 includes a similar definition.
Like large prime contractors, small business prime contractors can go astray if they mistakenly believe that the prime contract’s NAICS code automatically flows down. In the case of a small business prime contractor, this could result in counting an entity as an SSE that doesn’t qualify–and potentially falling out of compliance with the subcontracting limits.
Conclusion
In federal government contracting, the prime contract’s NAICS code doesn’t flow down to subcontracts. Instead, the prime decides the best NAICS code, considering the definitions set forth in the NAICS Manual. Large business and small business primes alike should make assigning appropriate NAICS codes a part of their standard subcontracting practices.
Disclaimer:
Nothing contained in this article is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This article is intended for educational and information purposes only. Although the author strives to present accurate information, the information provided in this article is not guaranteed to be accurate, complete, or up-to-date. Reading this article does not establish an attorney-client relationship with the author.
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