Lawmaker wants to scrap small-business classification system

With a six-page bill, Sen. Claire McCaskill (D-Mo.) would upend the entire federal procurement world.

McCaskill wants to dump the North American Industry Classification System (NAICS) codes system — which she in the past has called “complex and clumsy” and “nuts” — and have the Small Business Administration create an entirely new way to categorize the size of a company and delineate a contract based on what’s being bought.

Under McCaskill’s Fairness for Small Businesses in Federal Contracting Act (S. 1590), the new replacement system could have no more than 20 industries classified in it. It would be based on the most recent market conditions according to the U.S. Economic Census.

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It would also require the SBA to issue new rules within months to close a loophole in law that allows some non-manufacturers to qualify as manufacturers. That loophole enables those companies to win small-business contracts when they should not be eligible, McCaskill said.

“This is really about the government getting its act together and stopping what I would call a huge scam that’s going on,” said the chairwoman of the Homeland Security and Governmental Affairs Committee’s Contracting Oversight Subcommittee.

An investigation by her subcommittee pointed to a flawed system used to determine eligibility for contracts based on a system using more than 1,200 NAICS codes never intended to be used in federal contracting, as well as the ability of businesses to self-select their categories. In a hearing on small-business contracting July 26, the senator used as an example a company that was identified as a manufacturer when it was only selling print toner to the government.

“All this does is skew the numbers in a way that in long run harms small businesses,” she said at the hearing.

McCaskill said the code has to be simplified for people, particularly small-business owners who have to navigate the system if they want to be federal contractors.

“I think everyone is so used to using it in your world that you don’t realize how nuts it is,” McCaskill told a panel of procurement officials at the hearing.

The bill was sent to the Senate Small Business and Entrepreneurship Committee for consideration.