Fragmented: NAICS Codes and Their Negative Impact on the Restoration Industry

The Restoration industry has been all but ignored by the North American Industry Classification System. Changes to the way in which industries are classified could have a tremendously positive impact on your restoration company and the industry as a whole.  Given the potential of such changes, the RIA’s Advocacy & Government Affairs (AGA) committee is taking the lead to review this issue and potential development of a NAICS code for the restoration industry.

Background

For some restoration companies, Standard Industrial Classification System (SIC) and North American Industry Classification System (NAICS) codes may seem somewhat insignificant. For others, their relative importance is high, particularly for those providing services to federal clients. In a nutshell, SIC and NAICS codes are used to classify businesses into specific industry types. For example, an electrical company would be classified under a SIC of 1731 ELECTRICAL WORK, or a NAICS of 238210 ELECTRICAL CONTRACTORS AND OTHER WIRING INSTALLATION CONTRACTORS.

While the NAICS was rolled out as a replacement to the SIC in 1997, many organizations continue to utilize the SIC, even though it has not been updated for more than two decades. The NAICS is periodically updated by the U.S. Census Bureau in concert with the Office of Management and Budget (OMB) and the most recent update occurred in 2022. For the sake of this article, the NAICS will be used to address classification codes.

The Importance of Classification Codes

Whether your restoration business is small or large, classification codes can have a significant impact on your business. The following are some examples of that impact.

NAICS Codes help clients find service providers

When clients search for service providers, the classification codes are often used to facilitate that search. Vendor portals typically use NAICS codes to identify vendors in a particular industry. For instance, if a client wants to find an HVAC contractor in a specific region, they will search NAICS 238220 PLUMBING, HEATING AND AIR-CONDITIONING. Most primary NAICS classifications, such as 238220, have sub-descriptions, such as Duct Work, or Air Balancing and Testing. For most industries, the NAICS classification allows for rapid search results within vendor and public portals such as the System for Award Management.

NAICS Codes determine the size standard for companies

For most federal solicitations, the NAICS classification is used to determine whether a business is small or large. Each NAICS classification has an associated size standard that is based on either a three-year average revenue or the number of employees. Businesses falling below the size standard are considered small, and those above the standard are considered other-than-small, or large businesses. Ultimately, the NAICS size standards determine eligibility for contract award. While choosing a NAICS code that allows firms to remain a small business for a longer period, it may also subject you to increased competition from larger firms.

NAICS Codes are used to measure the size of an industry

The Internal Revenue Service (IRS) tracks revenue using Business Activity Codes, which are aligned with the codes within the NAICS. Industry revenue information is collected and disseminated by the U.S. Census Bureau. The importance of this information will be discussed later in more detail.

NAICS Codes help to measure safety performance within an industry

The U.S. Bureau of Labor tracks industry safety information by NAICS codes, including statistics for injuries, illnesses, and fatalities. This information is used by a myriad of organizations such as insurers, risk management firms, and vendor prequalification services to compare service provider safety performance relative to the industry in which they serve. Ultimately, this information impacts the cost of insurance premiums. In addition to monitoring safety performance, industry codes help insurers with several analytical processes involving marketing, underwriting, exclusions, loss control, forms, pricing, and other operations.

Problems for the Restoration 

Industry

Lack of a Relevant Primary NAICS Code

Restoration contractor capabilities can range from highly specialized services to full-service restoration. Within the NAICS system, there are only three NAICS descriptions that specifically pertain to restoration services, and all three are subsidiary descriptions as opposed to primary NAICS codes:

1. Fire and flood restoration, multifamily building, general contractors
   This description is a subset of 236118 RESIDENTIAL REMODELERS.
2. Fire and flood restoration, single-family housing, general contractors
3. This description is also a subset of 236118 RESIDENTIAL REMODELERS.

Fire and flood restoration of commercial and institutional buildings
This description is a subset of 236220 COMMERCIAL AND INSTITUTIONAL BUILDING CONSTRUCTION.

In the above examples, any data (revenue, safety statistics, number of employees, etc.) that is collected from restoration providers is relatively meaningless, as it is diluted by the information from thousands of contractors that are not in the restoration industry. To reinforce this point, there are currently more than 540,000 remodeling firms in the U.S., and an estimated 10,000 Restoration companies. Combining information from remodeling and restoration firms would yield worthless market data for the restoration industry.

Among the primary NAICS codes, the closest alternative to restoration would seem to be 624230 EMERGENCY AND OTHER RELIEF SERVICES, but this classification is focused on disaster services for people, not facilities. Another description, Disaster Recovery Services, would seem like a promising prospect, but it is nested beneath primary NAICS 562998 – ALL OTHER MISCELLANEOUS WASTE MANAGEMENT SERVICES.

The lack of a relevant primary NAICS and related sub-descriptions for the restoration industry poses a challenge in many respects. Service providers are left to choose among scores of primary NAICS, never feeling quite sure that they have covered their bases. Choosing the wrong NAICS could result in them not being identified in a client search for local resources. It could also result in them being deemed unqualified for a particular opportunity if their safety statistics are compared to an unrelated industry. As you consider which NAICS might be best for your company, the list on the previous page might be of interest. It contains NAICS codes that are indirectly related to services typically performed within the restoration industry.

The below matrix illustrates how fragmented the NAICS codes and sub-descriptions are for the restoration industry. A survey of 22 of the largest restoration providers illustrates their choices for primary and secondary NAICS codes below, and includes their frequency of adoption.

You will note that NAICS 236118 RESENTIAL REMODELERS was adopted by 16 of the 22 providers sampled. Most likely, this was due to two sub-descriptions of that NAICS code that reference Fire and Flood Restoration, one pertaining to Multifamily Buildings, and the other to Single-Family Housing. Yet, NAICS 236220 COMMERCIAL AND INSTITUTIONAL BUILDING CONSTRUCTION, that contains a sub-description of Fire and Flood Restoration of Commercial and Institutional Buildings, was only adopted by one of the top firms.

Like you, we have spent hours navigating the NAICS in search of the codes that will be the most beneficial to our firm. Our clients are faced with a similar challenge as they seek NAICS codes that will allow for greater competition among restoration providers. In the federal market, there are few standalone contracts for restoration services, which are often added to the scope of work for other contracts classified as 561210 FACILITY SUPPORT SERVICES, 236220 COMMERCIAL AND INSTITUTIONAL BUILDING CONSTRUCTION, and 562910 REMEDIATION SERVICES. To further confuse the issue, task orders issued under such contracts are often solicited with a completely different NAICS code.

We are an estimated $200B-per-year industry, in the U.S. alone, that deserves our own primary NAICS codes. NAICS 624230 EMERENCY OF OTHER RELIEF SERVICES could be considered a sister NAICS code and is often misused to classify restoration procurements. It contains all the sub-descriptions of relief services provided to people when disasters occur. Yet, at just over $11B per year in annual revenue, the relief industry is a small fraction of the size of the restoration industry.

Lack of Reliable Information

As addressed earlier, a logical, relevant primary NAICS code with applicable sub-descriptions enables clients to find local resources, determines industry size by region, including employee count, allows for accurate comparison of safety statistics, and provides for suitable insurance rates. The ability to assess opportunities is also enhanced, whether it be a small company looking to expand, or a recent graduate looking for their first job.

The fragmented nature of the restoration industry in the context of classification codes has caused the industry to go largely unnoticed, or misunderstood, on many fronts. Public procurement has had difficulty in performing market research for restoration Request for Proposals (RFPs), as it is somewhat of a manual exercise given the lack of a relevant, industry NAICS code. Conversely, restorers who register for public procurement opportunities are asked to check the boxes for all services they provide, only to have their inboxes flooded with non-relevant opportunities.

We work in a $200B industry that helps people recover from disasters, under the worst of conditions.  What a noble endeavor! Yet, the notoriety of our industry seems obscure. If our industry and market information was not spread throughout a galaxy of NAICS codes, we could truly define our remarkable industry. Perhaps young entrepreneurs would consider a restoration start-up or a franchise, and college graduates might consider the restoration industry as a first choice. Investors might be more willing to invest given defined industry and market data. Blue-collar workers might be more easily recruited within a defined, substantial industry such as ours. A suitable primary NAICS code would yield the much-needed awareness of the restoration industry and our noble mission to help others in time of need.

What Is Being Done to Help

The RIA’s AGA committee recognizes the impact classification codes have on business development, safety statistics, recruitment, investment, insurance premiums, market data, and even general industry awareness. As the industry’s first unified advocacy team, the AGA seeks to unite the restoration industry and advocate for the best interests of restoration contractors nationwide. This includes developing and implementing strategies to help create and maintain equity between restorers and insurers, and their partners.

The AGA committee is currently evaluating NAICS code issues relative to the restoration industry.  This effort includes the potential development of an industry-specific NAICS description as well as the subordinate descriptions for the most common of industry services.  A specific area of concern is whether a primary NAICS for the restoration industry will have a negative impact on workers’ compensation rates. “The issue certainly warrants a deeper dive,” stated Marco Flores, Chief Risk Officer for ATI. “Insurance providers use workers’ compensation (WC) class codes, versus NAICS codes, to estimate the level of risk associated with a specific job. Regardless of which WC class codes a restorer may choose, an annual audit by the carrier will determine their suitability, and adjustments will be made accordingly.  That said, it is a good idea to explore the potential impact of an industry NAICS on insurance premiums in general.”

The AGA will keep RIA membership informed of their progress and will be reaching out for feedback along the way.  For questions or comments regarding this effort, please email us at info@restorationindustry.org.