What is the Difference: PSC v. NAICS?

Simply put – North American Industry Classification System (NAICS) Codes are for business functions, and Product and Service Codes (PSCs) are for what is being purchased. However, these collections of numbers and letters confuse even the most experienced vendors. Why? Because each taxonomy is used in its unique way when it comes to federal government vs. industry-at-large. 

For example, in the federal government’s case, NAICS Codes determine small business set-aside eligibility. At the same time, PSCs are focused intentionally on market research and contract reporting in the Federal Procurement Data System (FPDS). 

In the industry, vendors use these codes to determine qualification for small business status, search for opportunities, or determine federal buying trends.

Whatever the difference, NAICS Codes and PSCs are essential to any vendor’s federal contracting existence. Both codes, in their own right, literally define your organization as they serve as the first introduction of your offerings to all federal buyers and the general market.

To the federal government, these codes act as the first central “search filter” as they comb through 380k+ vendors to support their requirements. To your organization, they are a critical factor in determining if an opportunity is a good fit and, at times, if you can even compete.

NAICS classifies goods and services by their production processes, usually based on the production process of the final step or joint production, when more than one production process is involved.

Each NAICS code is six digits: 

• the first two digits make up the general sector,
• the third represents the subsector,
• the fourth designates the industry group,
• the fifth is the NAICS industry, 
• and the sixth corresponds to the national industry.

This method divides the economy into 20 sectors i.e. Information Technology; Professional, Scientific, and Technical Services; Arts, Entertainment, and Recreation; Health Care and Social Assistance; and Manufacturing. The products and services are further classified into one of over 1,000 industry codes. Current NAICS Codes are listed on the U.S. Census Bureau website and in the NAICS Manual.

NAICS Codes are updated every five years to improve its organization and account for new developments that accurately represent the work being done in the government contracting industry. By updating the codes regularly, NAICS aims to address emerging industries, service industries in general, and enterprises focused on advanced technologies. The most recent update was in 2022.

NAICS Codes are used to collect and analyze data on the U.S. business economy uniformly. Federal statistical agencies use NAICS Codes because NAICS uses a single conceptual framework that depicts production relationships between inputs and outputs. NAICS is also occasionally used for administrative, regulatory, and taxation purposes.

In 1997 the Office of Management and Budget (OMB) replaced the Standard Industrial Classification (SIC) system, which had only ten divisions and 99 major groups, with NAICS.

The U.S. Economic Classification Policy Committee (ECPC), Statistics Canada, and the Mexican National Institute of Statistics and Geography collaborated on the project to ensure the data would be comparable to other North American countries. This initial project also involved the Department of Agriculture (USDA), Bureau of Transportation Statistics (BTA), Energy Information Administration (EIA), and Federal Emergency Management Administration (FEMA). Various forms of this type of classification system predate NAICS. The original List of Industries dates back to 1938. More recently, NAICS replaced the Standard Industrial Classification (SIC) system, which had only ten divisions and 99 major groups.

Federal procurement and acquisition professionals select the NAICS Code that best represents the purpose of the product or service acquired. The “purpose” leads to miscommunication between the federal and industry.

Federal buyers are buying something for their mission (their purpose). That mission is linked to an allocated budget item from a larger funding source (or a bigger bucket of money). For federal agencies, it is easier to justify expenditures to Congress if they are aligned with the mission vs. the product or service they are using to meet it. 

NAICS Codes are also used when registering a business in System for Award Management (SAM), determining qualification for size standards or small business set-asides, and can impact subcontracting limitations. 

PSCs, or Federal Supply Classification (FSC) Codes, are codes designed to describe what the federal government purchases. Attributes of PSCs include:

• Nature and type of services, supplies, and equipment
• Manufacturing level (raw materials to a completed end item)
• Intended use or application (air, land, sea, or space)
• Environmental attributes (energy efficient, biobased product, environmentally preferable)

PSCs include three broad sections: 

1. Research and Development (R&D) 
2. IT Services
3. Products

There are nearly three times as many PSCs (over 3,500) as there are NAICS codes (just over 1,000), which in many cases allows a more granular PSC designation than NAICS code designation for a given contract.

PSCs utilizes a four-digit coding structure. The first two numbers of the code identify the group, and the last two digits indicate the classes within each group. Code numbers are assigned to make it possible to expand the number of groups and classes as necessary.

In most instances, gaps have been left within each group, between the numbers assigned to adjacent classes, to permit the insertion of new classes in a logical sequence, when necessary, because of technological advances or to accomplish other desirable additions and changes (i.e., PSCs ending in “99”). However, miscellaneous PSCs ending in “99” are often selected as the default codes rather than the exception. To support data integrity and prudent business decisions, acquisition professionals are encouraged to use miscellaneous codes sparingly since they are vague and do not supply adequate information on purchase types and categories.

Similarly to NAICS Codes, the federal government revisits these codes every five years.  The PSC Manual maintained General Services Administration (GSA) lists all the existing product/service codes. The Standard Operating Procedures are developed and updated by subject matter experts, Category Managers from GSA, the Department of Defense (DOD), the Department of Homeland Security (DHS), the Office of Personnel Management (OPM), the Department of Veterans Affairs (VA), and the Federal R&D Community of Practice. The Procurement Committee for e-Government (PCE) decides on any changes. 

In the 1970s, the federal government developed the PSC classification. In a centralized database (i.e., FPDS), PSCs categorize federal purchases using more than 3,500 four-digit codes. Today PSCs are also used to map spending into the ten Common Government Spend Categories and the nine Defense-Centric Spend Categories providing insight into spend in each category and facilitating Category Management (CM) within a department.

PSCs are critical to the federal government as they assist leadership with the data they need to compile legally mandated reports, examine existing trends in federal spending, and help link procurement systems to contracting and financial data. From a federal buyer’s perspective, PSCs intentionally focus on market research and contract reporting. 

For industry, PSCs help make your vendor profile on SAM more engaging than competitors who do not include them. The codes communicate to federal buyers what service or product you provide with more clarity because they are narrower than NAICS Codes.

It is also important to note that PSCs are essential in generating a National or NATO Stock Number (NSN), as the first four digits of an NSN are PSC. For those unfamiliar, NSNs are an essential part of the military logistics supply chain used in identifying, managing, moving, storing, and disposing of almost every item or material under the sun.

There must be more information on how the codes are leveraged in federal contracting. A few common fallacies plaguing the industry are:

False. Most federal opportunities have a corresponding NAICS Code associated with its formal listing (i.e., when posted on SAM.gov.) It is a common misconception on both sides of the table that to qualify for a contract award, and a vendor must be registered in SAM with the NAICS Code associated with that solicitation. Legally? You don’t. This case law is further substantiated by Veterans Electric, LLC, B-413198, Aug 26, 2016.

False. NAICS is used for economic analysis, whereas the PSC system is designed intentionally for acquisition methods. There is no crosswalk between NAICS and PSC. PSCs can be referenced against any number of NAICS Codes. And there can be multiple codes related to a contract, but if numerous products and services are bought, the contract or task/purchase order will be classified using the code with the highest cost. These code systems are not perfect. There are mistakes (human error, assigning the wrong code, a code not identically matching an industry or product, etc.). These errors can cause discrepancies in what a code means; however, you can appeal a code assignment if you suspect a code misrepresents the solicited work.

False. We, as an industry, incorrectly differ to NAICS Codes as services and PSCs for products, but that is not true. NAICS Codes represent the purpose of the product or service being acquired, while PSCs represent the product or service is obtained.

False. It has been a long-taught business development lesson that NAICS Codes are the best tool to filter and identify contract opportunities and trends. Wrong. No one knows how it started or who started this rumor, but this has established NAICS Codes as the favorite in the industry.

Conversely, NAICS Codes are barely relevant from the federal perspective. PSCs are critical for the federal government, and while they may be an inadequate way to understand purchasing (that is a conversation for another day), it is how they primarily conduct market research.

Ultimately, every organization must be versed in both codes for a successful working relationship with the federal government. Using each accurately gives you, the federal contractor, more chances to be seen while expediting your search for the correct federal solicitations