There’s a chance you’ve heard me discuss North American Industry Classification System codes (NAICS Codes) and Product Service Codes (PSC Codes) previously. For the most part, those and my continuing comments, are based on one code being more useful than the other in market research. This particular discussion is about the market research and reporting done by government agencies. Specifically, this is to question the accuracy of the metrics used by the Government when describing the industries where small federal contractors are making headway, or where they are lagging.

The U.S. Small Business Administration uses the NAICS Code assigned to contracts as one attribute in measuring the impact of fiscal obligations made to small business. This measurement can be viewed annually in the SBA Small Business Procurement Scorecard. In short, SBA (and the rest of Government) represents how many dollars went to businesses in specific industries, based on the industry indicated by the assigned NAICS Code.

Here comes the rub.

If the Government is using the NAICS Code to make decisions about the industries in which small business concerns need support, then doesn’t it seem logical the NAICS should represent the industry of the good or service being provided to the Government? More often than not, what companies are selling is not aligned to the industry represented by the NAICS Code assigned to a specific contract. I’m just going to leave this here for a bit.

Moving on.

If you have ever conducted a query using a NAICS Code as a primary criteria and received results that had little or nothing to do with your offering, you are on the way to understanding this discussion and my previous ones, too. Here is an example that depicts both of my points.

In Fiscal Year 2023, agencies reported obligations of just over $610 billion year-to-date. This total does not include current Department of Defense obligations due to their reporting ninety days in arrears. As a result, just over one-thousand NAICS Codes have been referenced. Concurrently, nearly three-thousand PSC Codes have been referenced based on that same spend. Among all of the referenced NAICS Codes, 541330 – Engineering Services, represented $42 billion in obligations. According to NAICS.com, here is what Engineering Services means:

This industry comprises 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.

Yes, I did boldface part of that definition for a reason. As you think about the $42 billion obligated under this NAICS Code, know that billions of those dollars were obligated to contracts where the PSC Codes started with a number, representing products. Billions more were used to pay for service disciplines (these codes begin with a letter) not related to engineering. Overall, more than eight-hundred unique PSC Codes were referenced under this particular NAICS. Nothing improper happened here since this is how the system currently works. When assigned to a contract, NAICS Codes represent ‘how the Government intends to use what they purchase,’ and PSC Codes represent ‘what they purchase.’ The real point? How many of the eighty-four categories representing goods, and the twenty-four categories representing services provide engineering outcomes as described in the NAICS.com definition? For the sake of argument let’s say one-third of the 114 groups representing goods and services are engineering-based. That leaves two-thirds as misrepresented in statistical counting by industry. That would be as many as seventy-six different industries, such as brick manufacturing, courier services, medical supply, training, and more, being represented under the NAICS Code for engineering services. Now consider decisions being made to allow or not allow set-asides for certain groups in certain industries, based on an inaccurate measure of industry activity. What comes to mind first are the specific industries selected for the Woman-Owned Small Business (WOSB) and Economically Disadvantaged Woman-Owned Small Business (EDWOSB) programs.  How much of the total reporting about small business is not quite what it seems?

Are the correct industry metrics being used in deciding the fate of small business concerns in federal contracting?

Let’s diminish the limiting belief of the set-aside mindset. U.S. small businesses are an indispensable resource for agency mission goals and to our Nation’s economic well-being. Let’s own our role.

Peace, Health, and Kicking Butt in FY 2024,

Go-To-Guy Timberlake

For a PDF of this blog, click here.