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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: December 29, 2003

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

SOURCE: Federal Register, December 29, 2003, Vol. 68, No. 248, page 74833

AGENCIES: Small Business Administration (SBA)

ACTION: Final Rule

SYNOPSIS: SBA is establishing a new industry category, Information Technology Value Added Resellers (ITVARs), under North American Industry Classification System (NAICS) code 541519, Other Computer Related Services, and establishing 150 employees as the small business size standard for the industry.

EDITOR'S NOTE: For more on the proposed rule, see the July 24, 2002, FEDERAL CONTRACTS DISPATCH "Small Business Administration; Small Business Size Standard for Information Technology Value Added Resellers."

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?

A complete listing of current size standards is available at SBA's Size Standards website at http://www.sba.gov/size/sizetable2002.html, or by calling 202-205-6618 and requesting a copy of the table of size standards.

EFFECTIVE DATE: January 28, 2004.

FOR FURTHER INFORMATION CONTACT: Gary Jackson, Assistant Administrator for Size Standards, 202-205-6464, or e-mail: sizestandards@sba.gov.

SUPPLEMENTAL INFORMATION: Many federal agencies use contractors to provide solutions to their information technology (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 its 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 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 found that the manufacturer/nonmanufacturer distinction did not adequately address federal IT contracting that combines supplies and services into a single contract. Since most acquisitions are for numerous IT products, 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, on July 24, 2002, SBA published a proposal to establish a category of ITVAR under NAICS 541519, Other Computer Related Services, and to establish a small business size standard of 500 employees (the rest of NAICS 541519 would retain its $21 million small business size standard). SBA proposed to explain the new industry category with the following footnote to the small business size table in 13 CFR 121.201:

"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 received 291 comments on the proposed rule: 276 opposed the 500 employee size standard for ITVAR; 12 supported the 500 employee size standard; and 3 either supported a higher size standard or addressed other issues related to the proposed rule. Those opposed to the 500 employee size standard stated that the average size of an ITVAR is 15 employees and 88% have 100 or fewer employees, so most recommended that SBA adopt a 100 employee size standard (which is one of the alternatives that SBA was considering and for which SBA sought comments).

However, based on a review of ITVAR industry characteristics, SBA is adopting a 150 employee size standard for the ITVAR industry (also an alternative considered by SBA) because 150 employees is equivalent to the average number of employees of firms under the $21 million size standard for computer services under the NAICS 5415 industry group. Since firms in these industries also act as ITVARs, SBA believes "it is beneficial to firms in these industries to have a consistent size standard, even though the size standard measures differ...the SBA considered proposing the $21 million receipts size standard and an employee equivalent of 150 employees. An employee size standard is considered a better measure of the size of ITVARs operation than receipts since a substantial proportion of their receipts merely reflect the dollar value of equipment and software sold."

To implement this new industry and its small business size standard, SBA is revising the table in 13 CFR 121.201 to read:

      541519      Other Computer Related Services      $21.0 million
      EXCEPT      Information Technology Value Added Resellers\18\      150\18\

Footnote 18 is adopted as proposed except for minor editorial changes.

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

Copyright 2003 by Panoptic Enterprises. All Rights Reserved.

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