If your company interacts with the federal government in the United States, Canada, or Mexico, you've probably seen the term NAICS Code before. Because of the complex, hierarchical layout of the NAICS taxonomy, understanding how the codes work and what they mean can get pretty confusing. In the simplest terms, the North American Industry Classification System (NAICS) is used to classify all businesses in North America based on what their primary source of revenue is.
The NAICS system is useful both from a procurement standpoint and a census standpoint. If you are, for example, bidding on federal government RFPs, you'll likely want to narrow down your search to only include RFPs within your specific industry. Thanks to NAICS, this is relatively straightforward to do.
From a census standpoint, having each business classified into a unified hierarchy allows the government to track and report out on industry growth in both broad and granular ways.
A SIC History Lesson
NAICS wasn't always the system used for industry classification in the federal procurement world. The NAICS system replaced the far older Standard Industrial Classification system which was first created in 1936. Like NAICS, the goal of SIC was to classify every possible industry that a business might exist in. There were a few major problems with this system that led to its replacement. Since this is a NAICS guide and not a SIC guide, we'll keep it short.
In general, the SIC system slowly became obsolete because:
It was largely unable to adapt to newer, emerging industries that began to arise in the late 20th century. Because these newer industries didn't fit cleanly into the hierarchy, supplier assignments because vague and, at times, incorrect.
As conglomerates became more commonplace, classification of larger enterprise companies became far more complex.
Service-based businesses presented a real challenge due to the complexity of operations when compared to traditional manufacturing-based ones.
Once the federal government began to just stick companies in the Other category, the writing was on the wall for SIC. Perhaps unsurprisingly given the pace that these types of policies have historically evolved, SIC is still used in some governmental departments like the BLS and IRS. All federal procurement contracts now use NAICS instead, though.
The Structure of NAICS Codes
All NAICS codes are either five or six digits long and contain four or five segments. Each segment is part of an overall hierarchy which progressively narrows the classification of the company.
Sector & Subsector
The first two digits of a NAICS code specify the sector that the code refers to. There are 20 possible sector values included in the 2022 NAICS specification that all businesses can be classified into. Some examples of sectors are Mining, Construction, and Manufacturing. The third digit specifies the subsector that the code refers to. Subsectors refer to broad, sometimes arbitrary distinctions between types of industries. A great example of NAICS subsectors is in the construction sector which has 3 possible subsectors: 6 - for building construction; 7 - civil construction like utilities and roads; and 8 - foundational, finishing, and specialty construction.
Industry Group
The fourth digit of a NAICS code specifies the industry group for the code. Industry groups are where NAICS begins to drill down into the specifics of what the supplier primarily offers. For example, underneath the NAICS sector and subsector for Building Construction (236), the industry group code for Residential Construction is 1.
NAICS Industry & National Industry
The final two digits used in NAICS refer to the specific industry that the company operates in. This is as granular as NAICS gets. Continuing our construction example from above, the final two digits for single family housing builders are NAICS Industry 1 and National Industry 5 - making the complete code 236115.
How do NAICS Codes Get Assigned?
The answer is a very unsatisfying "it depends". In general, NAICS codes are self-assigned by businesses who are acting as suppliers for the federal government. When a company registers for the System for Award Management (SAM), one piece of information that they'll have to enter is their primary NAICS code and, optionally, secondary NAICS codes. This self-assignment means that it's up to the business to correctly categorize itself based on its principal source of income.
In some instances, though, the Bureau of Labor Statistics and the Census Department will assign a NAICS code to a business based on whatever information they've collected about the company. This code assignment will not always necessarily be the same code that the business self-assigned. The BLS assignment is based on census information, with the company's self-assigned code code in SAM being only one data point used in the determination.
Businesses can request a reassignment of their code but they must do so by contacting each governmental department individually. If, for example, OSHA has misclassified your business, you will need to specifically contact its parent body - the Department of Labor. The government department will then evaluate your submission and decide whether or not, based upon the information provided, your currently assigned NAICS code is inappropriate. Should you do this, it's critical remember that the assignment is done per department, not by a central governing body. In practice, this means that a NAICS reassignment with the Department of Labor will not result in a NAICS code change within SAM.
Multiple NAICS Codes
Companies do not necessarily have only one NAICS code. With the exception of small, niche businesses, most companies will have multiple codes assigned to them. In addition to the primary NAICS code, a business can have multiple secondary codes that describe all of the different verticals that they serve.
Though there is no real limitation on the number of codes a company can have, different government departments will generally cap the number of codes that a given company is assigned. SAM, for example, allows a company to have one primary code and up to nine secondary codes, giving the company a total of ten codes. The larger the company is, the more NAICS codes they'll have. As an example, Boeing's primary code is 334511 which covers Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing. While that does broadly describe the general purpose of the company, multiple NAICS codes are needed to fully describe the operations of the business.
NAICS codes are oftentimes also assigned per-location of the business. This may seem counterintuitive but it oftentimes makes sense in practice. Continuing our Boeing example, they manufacture everything from ballistic defense systems to passenger airplanes. Due to its size and the number of markets that it sells into, Boeing maintains dozens of factories - each of which manufacture a specific type of product. The facility where it manufactures its ballistic defense systems will have the NAICS code 336414. The passenger aircraft facility will, on the other hand, have the NAICS code 336411. Since it has both of those codes in addition to its primary code, Boeing will register with SAM for all three codes in order to respond to RFPs and RFQs for each.