New SBA Industry Codes: What Do They Mean for Small Businesses?
June 27, 2001
The U.S. Small Business Administration (SBA) recently converted from Standard
Industrial Classification (SIC) industry codes to North American Industrial
Classification System (NAICS) industry codes for purposes of establishing small
business size standards by industry. The change could mean expanded
opportunities for contractors to participate in federal small business programs.
NAICS, like its predecessor, SIC, is a system for classifying business
establishments by type of economic activity. The rapid changes in the U.S. and
world economies in the early 1990s brought SIC under increasing criticism for
failing to accurately reflect significant emerging industries in the economy.
NAICS is intended to standardize industrial classifications among the U.S.,
Canada and Mexico and to reflect the significant changes in technology and in
the growth and diversification of services that have occurred since 1987 when
SIC, which originally was developed in the 1930s, was last updated.
The cornerstone of NAICS is the classification of industries according to
their use of similar production processes. The NAICS code structure was chosen
to permit greater detail in classifying industries than was possible under the
1987 SIC code structure. NAICS gives special attention to production-oriented
classifications for (a) new and emerging industries, (b) services industries in
general (not addressed in detail under SIC), and (c) industries engaged in the
production of advanced technologies.
The 1997 NAICS (United States version) designates 170 more industries than
the 1987 SIC, with most of the increase occurring in the services industries.
NAICS designates 149 more service industries; 14 more industries in the
manufacturing sector; seven more in agriculture, forestry, hunting and fishing;
two more in construction; one more in utilities and three less in mining. Eight
new sectors were created from the 1987 SIC Services division, including new
sectors for information; professional, scientific and technical services; health
care and social assistance; real estate and rental and leasing; administrative
and support; and waste management and remediation services. Additional new
sectors were established to better classify other industries, such as the arts,
entertainment, and recreation sector and the accommodation and food services
sector.
Each of these new sectors contains many new production-oriented subsector
industry classifications. For example, in the manufacturing sector, a new
subsector was created for computer and electronic product manufacturing, which
brings together industries producing electronic products and their components
because of the inherent technological similarities of their production
processes, and the likelihood that these technologies will continue to converge.
NAICS was adopted for use by the federal government in 1997. NAICS must be
used by U.S. government statistical agencies that collect or publish data by
industry for published federal statistical data relating to years beginning on
or after January 1, 1997. NAICS also is widely used by state agencies, trade
associations and other organizations. In 1999, the SBA announced its intention
of converting to the NAIC standard, a change-over which took place on October 1,
2000, the beginning of the government's fiscal year.
What does this mean for businesses who wish to qualify (or continue to
qualify) for federal small business programs? Most industries have the same size
standard under NAICS as they did under SIC, because the conversion was not meant
to change any size standard. The conversion did, however, identify many new
industries, especially information technology related industries and services
industries, that formerly were included in broader industry classifications. The
expanded listing of industries under NAICS increases the opportunity for
contractors to request SBA to change the size standard where it may be
appropriate to set a larger size standard in a contractor's particular industry.
The broader SIC classification may have included so many firms that SBA
determined a relatively low size standard was appropriate. That conclusion may
change under NAICS, where there are fewer companies within each classification.
The new subcategories of industries create an opportunity for contractors to
request a change in the size standard for their industry, which they are
permitted to do under SBA regulations (see 13 C.F.R. § 121.102). In
reviewing size standards, SBA seeks to ensure that the standard is high enough
so that no single firm within the standard would be dominant in the industry. No
such review was done for the 170 new industries established under NAICS.
Considering the fact that certain industry categories under SIC were divided
into several new subcategories under NAICS, a larger size standard may be
appropriate under a particular subcategory because the number of competitors has
decreased under each of the subcategories, which increases the likelihood that
one competitor dominates that subcategory under the present size standard.
Contractors that exceed the present size standard in an industry where a
particular company dominates the market among firms that meet the small size
standard may wish to consider submitting a request to the SBA to review the
existing size standard. Requests may be submitted to: Mr. Gary M. Jackson,
Assistant Administrator for Size Standards, Small Business Administration, 409
3rd Street, S.W., Washington, D.C. 20416.
Given the conversion to NAICS by all federal agencies that collect or publish
economic data, SBA's adoption of NAICS for size standards was inevitable. The
increase in the number of industry categories under NAICS may provide
contractors that do not meet the present small size standard with an opportunity
to request and obtain an upward adjustment to the size standard applicable to
their industry. This possibility is particularly present in the information
technology and services industries, where the number of small business
competitors has decreased within many of the subcategories established under
NAICS.