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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: July 24, 2002

SUBJECT: Small Business Administration; Small Business Size Standard for Information Technology Value Added Resellers

SOURCE: Federal Register, July 24, 2002, Vol. 67, No. 142, page 48419

AGENCIES: Small Business Administration (SBA)

ACTION: Proposed Rule

SYNOPSIS: SBA is proposing to establish a new industry category and size standard of 500 employees for information technology (IT) value added resellers under North American Industry Classification System (NAICS) 541519, Other Computer Related Services.

EDITOR'S NOTE: The SBA's regulations are in Title 13 of the Code of Federal Regulations (CFR). The SBA small business size regulations are in Chapter 1, Small Business Administration; Part 121, Small Business Size Regulations; Subpart A, Size Eligibility Provisions and Standards; Section 121.201, What size standards has SBA identified by North American Industry Classification System codes?/P>

DATES: Comments must be received on or before August 23, 2002.

ADDRESSES: Send comments to Linda G. Williams, Associate Administrator for Policy, Planning, and Liaison, Office of Government Contracting and Business Development, U.S. Small Business Administration, 409 Third St., SW, Mail Code 6510, Washington, DC 20416, or e-mail to SIZESTANDARDS@sba.gov.

FOR FURTHER INFORMATION CONTACT: Gary Jackson, Assistant Administrator for Size Standards, 202-205-6464.

SUPPLEMENTAL INFORMATION: Many federal agencies use contractors to provide solutions to their IT needs. They seek a contractor, such as a value added reseller or solution provider, that can provide a range of services to support the acquisition of computer hardware and software. These contractors provide services such as advising an agency on what types of computer equipment, systems, and technologies will fit its needs; designing and integrating systems; purchasing and installing IT equipment; customizing hardware and software configurations; and providing technical services, maintenance, warranty service, and user support. The agency benefits by having a single contractor coordinate their IT acquisition needs, particularly in a rapidly changing environment where new products and technologies are continually being introduced.

SBA's size standards and program eligibility requirements do not address the classification of federal contracts that combine services with the acquisition of supplies. Federal agencies have had difficulty using small business preference programs for these types of contracts. Under SBA's current policies, such contracts are almost always viewed as a manufacturing or supply contract since the dollar value of the largest component of the contract will be associated with the acquisition of supplies. For supply contracts that are set aside for small business or for SBA's 8(a) and HUBZone programs, an eligible small business must be a small manufacturer of the end item being procured or, if not the actual manufacturer of the end item, must supply the product of a small business manufacturer (referred to as the "nonmanufacturer rule") unless SBA grants a waiver of the nonmanufacturer rule for that specific item (see Title 13 of the Code of Federal Regulations (CFR), Business and Credit Administration, Part 121, Small Business Size Standards, Section 121.406, How Does a Small Business Concern Qualify to Provide Manufactured Products Under Small Business Set-Aside or MED [Minority Enterprise Development] Procurements?). SBA has found that the manufacturer/nonmanufacturer distinction does not adequately address federal IT contracting that combines supplies and services into a single contract. Most acquisitions are for numerous IT products, so it is unrealistic to expect one manufacturer to produce all of the required items. Also, IT contracts often require the contractor to customize computer hardware or install specialized software to meet an individual user's needs. Although these activities usually do not constitute manufacturing, they are beyond the traditional wholesale-distribution function.

To address these types of IT contracts, SBA proposes establishing a category of IT value added resellers under NAICS 541519, Other Computer Related Services. An IT value added resellers industry category will allow federal agencies to better utilize small business preference programs for their IT acquisitions.

SBA recognizes that establishing a category of IT value added resellers as a service activity is a departure from the NAICS in that value added resellers are classified in the Wholesale Trade sector along with merchant wholesalers, distributors, drop shippers, brokers, and agents. These latter types of establishments arrange the delivery of manufactured products to their customers and provide value added services associated with distribution, such as billing or inventory management. While providing manufactured products, IT value added resellers also offer services beyond those associated with the distribution function. SBA believes that IT value added resellers need to be treated in a different manner than wholesale trade firms (or nonmanufacturers) on supply contracts, particularly for federal small business procurement preference programs.

SBA proposes to amend 13 CFR 121.201 to establish a small business size standard of 500 employees "Information Technology Value Added Resellers" under NAICS 541519, Other Computer Related Services (the rest of NAICS 541519 will retain its $21 million small business size standard). The new industry category would be explained by the following footnote:

"NAICS code 541519 - An Information Technology Value Added Reseller provides a total solution to information technology acquisitions by providing multi-vendor hardware and software along with significant services. Significant value added services consist of, but are not limited to, configuration consulting and design, systems integration, installation of multi-vendor computer equipment, customization of hardware or software, training, product technical support, maintenance, and end user support. For purposes of Government procurement, an information technology procurement classified under this industry category must consist of at least 15 percent and not more than 50 percent of value added services as measured by the total price less the cost of information technology hardware, computer software, and profit. If less than 15 percent of value added services, then it must be classified under a NAICS manufacturing industry. If the contract consists of more than 50 percent of value added services, it must be classified under the NAICS industry that best describes the predominate service of the procurement. For SBA assistance as a small business concern as an Information Technology Value Added Reseller, other than for government procurement, a concern must be primarily engaged in providing information technology equipment and computer software and provides value added services which account for at least 15 percent of its receipts but not more than 50 percent of its receipts."

SBA provides the following example in the introductory material to this proposed rule: "If a procurement consists of $750,000 for personal computers, printers, and application software; $250,000 for installation of hardware, maintenance, and technical support; and $50,000 profit, then it satisfies the criteria to be classified as an IT Value Added Resellers procurement. In this example, 23.8 percent of the value of the procurement is for value added computer services. (Percent of value added services = value of computer services / total price. 23.8% = $250,000 / $1,050,000.) However, an IT procurement consisting of value added services less than 15 percent or greater than 50 percent must be classified under a different NAICS industry. If a federal procurement is comprised of less than 15 percent of value added services, then it must be classified under a manufacturing industry and incorporate the applicable manufacturer size standard and nonmanufacturer size standard. For example, on a procurement to provide 100 personal computers without any additional services or with only incidental services is classified under NAICS 334111, Electronic Computer Manufacturing...Conversely, if the IT procurement consists of more than 50 percent of value added computer-related services, it must be classified under the computer services industry that best describes the predominate service of the procurement. For example, a procurement to write a custom computer program that includes providing several personal computers and printers accounting for 25 percent of the value of the procurement is classified under NAICS 541511, Custom Computer Programming Services, since 75 percent of the work is for computer programming services. The size standard applicable to this procurement is $21 million in average annual receipts."

The classification of federal contracts under the proposed IT value added resellers industry would alter how two other SBA regulations are applied when such contracts are set aside for small businesses or under the 8(a) and HUBZone Programs. First, an IT value added reseller would be required to meet performance requirements (or limitations on subcontracting) as required on other service contracts -- a service contractor is required to perform at least 50% of the cost of the contract incurred for personnel with its own employees. Second, IT Value Added Resellers would not be subject to the nonmanufacturer rule. As mentioned above, SBA views an IT value added resellers contract as a service rather than a supply contract since its purpose is to assist and provide supporting services to an agency in the acquisition of information technology equipment.

SBA considered three other size standards for IT valued added resellers:

  1. SBA considered proposing the same $21 million size standard that applies to the computer services industries (NAICS 541510 through 541519). If IT value added resellers are viewed as part of computer services, then the same size standard may be appropriate. However, SBA believes an employee size standard is a better measure of the operations of an IT value added reseller and decided not to propose this or another receipts size standard.

  2. SBA considered a 150-employee size standard that represents the employee-equivalent of the $21 million computer services size standard. On average, computer services businesses generate $142,500 sales per employee. Sales in the amount of $21 million translate to approximately 150-employees ($21,000,000 / $142,500 = 147.4 employees). This 150-employee size standard results in a size standard consistent with that of the computer services receipts size standard without being skewed by the value of hardware and software products provided by an IT value added reseller. Nevertheless, SBA did not propose this size standard since it is lower than the size standard that now applies to nonmanufacturers (500 employees).

  3. SBA considered applying the 100-employee size standard for wholesale trade industries to IT value added resellers. SBA adopted the 500 employee size standard for nonmanufacturers in part because of the competition among both distributors and manufacturers on federal supply contracts. Therefore, SBA decided not to propose a 100 employee size standard for the same reason it is not proposing a 150 employee size standard.

SBA is inviting comments on these three alternative size standards, or other alternatives that may more appropriately define a small IT value added reseller. The comments should explain why the alternative is a more appropriate size standard than 500 employees. These comments should also discuss the impact of the 500 employee size standard and alternative size standard on small businesses and how they would assist small businesses. In addition, those submitting comments are requested to identify data sources on IT value added resellers that SBA may be able to use to more definitely evaluate the size standard.

In addition to comments on alternative size standards, SBA specifically desires comments on the following issues:

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2002 by Panoptic Enterprises. All Rights Reserved.

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