Small Business Size Standards; Environmental Remediation Services

SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

Small Business Size Standards; Environmental Remediation Services

agency: Small Business Administration.

action: Final rule.

-----------------------------------------------------------------------

summary: The Small Business Administration (SBA) is establishing a size

standard of 500 employees for Environmental Remediation Services, an

activity which involves work identified with a number of different

functions associated with restoring a contaminated environment, such

as: preliminary assessment, site inspection, testing, remedial

investigation, containment, remedial action, the transportation and

disposal of waste materials, and security and site closeouts. The

application of this size standard will be for Federal environmental

remediation procurements which involve three or more environmentally

related activities which in turn can be identified in separate

industries under the Standard Industrial Classification (SIC) system.

It will also apply in SBA's non-procurement programs where an applicant

firm is primarily engaged in environmental remediation services as

defined by this final rule.

The adopted size standard of 500 employees is, in practical effect,

an increase above the size standard of $18.0 million proposed on

October 8, 1993 (58 FR 52452). This higher size standard is supported

by more recent data describing the industry structure for this

activity, as well as by comments received in response to the proposed

rule.

DATES: Effective Date: This rule is effective on October 17, 1994.

Applicability Dates: This rule applies to all Federal procurement

solicitations, except noncompetitive Section 8(a) contracts, issued on

or after October 17, 1994.

For Section 8(a) noncompetitive contracting actions, the rule is

applicable to offers of requirements that are accepted by the Small

Business Administration subsequent to October 17, 1994.

for further information contact: Gary M. Jackson, Assistant

Administrator for Size Standards, (202) 205-6618.

supplementary information: On October 8, 1993 the SBA proposed to

establish an environmental services size standard of $18.0 million for

Federal government procurements meeting the following two criteria: (1)

That the overall purpose of the procurement is to restore a

contaminated environment, and (2) that the procurement is composed of

activities in three or more distinct industries identified with

separate Standard Industrial Classification (SIC) four-digit industry

codes, none of which constitutes 50 percent or more of the contract's

value (58 FR 52452). These criteria were established to distinguish

environmental remediation services involving multiple activities from

other environmental related procurements involving services primarily

associated with one particular industry. For non-procurement

applications of this size standard, a firm would have to be primarily

engaged in three or more activities related to environmental

remediation, none of which accounts for 50 percent or more of the

firm's activities. The environmental services activity was designated

as a sub-category under SIC code 8744, Facilities Support Management

Services, because this SIC code generally requires the performance of a

range of different services in support of facilities where no one

activity may be considered the primary activity (see Standard

Industrial Classification Manual: 1987, Executive Office of the

President, Office of Management and Budget).

In this final rule, SBA is adopting a size standard of 500

employees (equivalent to approximately $50 million in annual receipts)

for environmental remediation services, rather than the $18 million

size standard set forth in the October 8, 1993 proposed rule identified

above. This increase takes into account comments received on the

proposed size standard, an analysis of additional industry data on

firms engaged in environmental remediation, and trends in Federal

procurement for this type of activity. These factors are discussed in

greater detail below.

In addition, SBA has changed the title for this activity from

``Environmental Services,'' the title used in the SBA's proposed rule,

to ``Environmental Remediation Services.'' This stems from comments

that environmental services as a title is very broad and could result

in a misclassification of Federal procurements simply because the title

is not sufficiently specific. After reviewing the proposed definition

for environmental services, SBA is changing the title to

``Environmental Remediation Services,'' a title believed to better

specify the type of services for which the SBA intended to establish a

separate, distinct size standard. The proposed rule was directed

towards remediation services, and not all other possible services that

could be performed in connection with the environment. This

definitional modification is for clarification purposes only.

As discussed in the proposed rule, SBA views environmental

remediation services as an emerging industry not explicitly defined

under the present SIC system. Pursuant to the authority set forth in

section 15(a) of the Small Business Act, 15 U.S.C. 644(a), SBA will

consider establishing a further segmentation of an industry category

defined in the four-digit SIC system to recognize a new industry. In

the past, SBA has established other sub-categories within existing

four-digit SIC industries (e.g., base maintenance, dredging, pneumatic

tires, custom cattle feedlots and food services). In this case, SBA is

establishing a separate sub-category under SIC code 8744 because of a

need to establish a specific size standard for the emerging multi-

discipline activity of environmental remediation services, an area of

Federal procurement that has expanded enormously in recent years.

SBA received a total of 69 comments to the proposal to establish an

$18 million size standard for environmental remediation services.

Twenty-three comments supported SBA's proposed rule in all respects

without reservation. Among the 62 comments discussing the $18 million

size standard, 21 comments argued for a higher size standard, 10

comments wanted a lower size standard, and 31 comments generally

supported the proposed $18 million size standard. Fifteen of the 21

comments supporting a higher size standard also argued for a size

standard based on number of employees. Other comments raised

alternatives to the proposed size standard, or opposed the

establishment of any specific size standard for environmental

remediation services. A discussion of these latter comments and SBA's

views regarding them will follow a discussion of SBA's basis for

establishing a 500 employee size standard for environmental remediation

services.

Selection of Size Standard

The SBA has decided to establish a 500 employee size standard for

environmental remediation services. SBA now believes the proposed $18

million size standard does not adequately reflect the structure of the

environmental remediation services industry as revealed by available

data on firms engaged in environmental remediation services. The

decision to propose an $18 million size standard was based primarily on

the premise that, from limited information available at that time,

firms which perform environmental remediation services tend to be

larger in size than firms performing non-environmental services in

related industries. Accordingly, a size standard which reflected a

level similar to the highest size standards then in effect for any of

the related construction or services industries was proposed. Since the

time of the proposed rule, SBA continued in its efforts to assemble the

most recent data available on environmental firms. The assessment of

this newly developed data, as well as public comments in response to

the proposed size standard, has convinced SBA that a 500 employee size

standard would be more suitable for the environmental remediation

services industry than an $18 million size standard. The analysis of

the industry data, and the basis for the decision to use number of

employees as the measure of size, are each discussed below.

Analysis of Industry Data

In considering the appropriate size standard for an industry, SBA

generally evaluates the structural characteristics of an industry by

analyzing at least four industry factors. These industry factors

include: Average firm size, start-up costs, competition and the

distribution of firms by size. In addition, the impact of alternative

size standards on SBA's programs is assessed. As a relatively new and

developing industry, comprehensive industry data by which to conduct

this structural analysis are limited for the environmental remediation

services industry. The statistical collection agencies of the Federal

government, the primary sources of economic data on industries in the

economy, do not publish data on environmental remediation services

firms since this activity has not yet been identified as an industry

under the SIC system. To overcome this problem, SBA has constructed its

own data base of environmental remediation services firms based on data

from a non-governmental source. SBA believes this data base is

sufficient in coverage to provide an adequate assessment of the

relevant structural characteristics of the environmental remediation

services industry.

SBA constructed its data base by utilizing data and information

published in the 1993 edition of Wards Business Directory. This

publication is viewed by the SBA as the best single data base currently

available to identify firms engaged in environmental remediation

services. This directory lists individual firms by SIC code, provides a

description of a firm's activities, and shows the size of a firm by

revenues and number of employees. From the description of firm

activities, SBA was able to identify firms that perform activities

associated with environmental remediation services. Firms in nine

industries, considered the primary industries from which firms perform

some or all aspects of environmental remediation work, were reviewed to

identify environmental remediation services firms. The nine industries

reviewed are listed below:

------------------------------------------------------------------------

SIC code Description

------------------------------------------------------------------------

1629...... Heavy Construction, Not Elsewhere Classified.

1795...... Wrecking and Demolition Work.

1799...... Special Trade Contractors, Not Elsewhere Classified.

4212...... Local Trucking Without Storage.

4953...... Refuse Systems.

4959...... Sanitary Services, Not Elsewhere Classified.

8711...... Engineering Services.

8731...... Commercial Physical and Biological Research.

8734...... Testing Laboratories.

------------------------------------------------------------------------

Data on these firms were then combined to derive information on the

structure of the environmental remediation services industry.

Although data obtained from the Wards Business Director provided

SBA with useful information on firms performing environmental

remediation services, the directory does not include all firms within

an industry. Instead, it tends to omit many smaller-sized firms in an

industry, thereby creating a bias in the data towards larger-sized

firms. In view of this aspect of the data, SBA's analysis of industry

characteristics focused on the relative differences between

environmental and non-environmental remediation services firms rather

than on absolute values calculated from the Wards data. SBA believes

that Wards data provide a reasonably accurate picture of the relative

difference in average firm size between industries. If the Wards data

show that the average firm size of one industry is twice that of

another industry, it is likely to be accurate, even if the absolute

values listed are not truly representative of each industry as a whole.

In performing the analysis of this size standard, the relative

differences of the four industry factors identified above were

calculated between the derived environmental remediation services

industry and a comparison industry group. The comparison industry group

data was also derived from the Wards Business Director and consisted of

the firms within the same nine SIC codes listed above which were not

shown as engaged in environmental remediation work. From these

differences, a range of size standards was indicated based on

relationships between relative industry differences and size standards

for the non-manufacturing industries. This analytical approach was

necessary to accommodate the data limitations discussed earlier. The

remainder of this section describes in greater detail the analysis of

relative differences performed by SBA in establishing this size

standard.

A total of 374 firms within the nine SIC codes identified above

were found to be engaged in environmental remediation services. An

environmental remediation services industry was constructed by

aggregating data on these firms into one industry group. Structural

characteristics of this industry then were estimated. Industry values

were calculated for each of the four industry factors--average firm

size (as measured by average revenues per firm), start-up costs (using

average assets per firm to measure capital typically employed by firms

in an industry), competition (as measured by percent of total industry

revenues attributed to large firms with 1000 or more employees), and

the distribution of firms by size (as measured by the market share of

total industry revenues obtained by firms with revenues of more than $5

million and more than $18 million). Table 1 below summarizes the

industry characteristics of this derived environmental remediation

services industry, the industry characteristics of a comparison group

(identified as the parent industry group), and the difference between

the characteristics of these two groups (as expressed by a ratio).

Table 1.--Characteristics of the Environmental Remediation Services

Industry and Parent Industry Group

------------------------------------------------------------------------

(A) (C)

Environmental (B) Parent Difference

remediation industry ratio

services group (AB)

------------------------------------------------------------------------

Average Revenues Per Firm..... $115.4M $36.4M 3.17

Average Assets Per Firm....... $59.5M $16.8M 3.54

Competition................... 84.7% 67.1% 1.26

Percent of Revenues by Firm

Size Greater Than:

$5 Million................ 99.2% 96.2% 1.03

$18 Million............... 97.1% 74.4% 1.31

Average................... N/A N/A 1.17

------------------------------------------------------------------------

Source: Data derived from 1993 Wards Business Directory. Average assets

estimated by SBA based on Wards Directory and Industry Norms and Key

Business Ratios, Dun and Bradstreet, 1986.

The relative difference between structural characteristics of the

environmental remediation services and the parent industry group can be

expressed quantitatively as a ``difference ratio,'' and is shown in

table 1 for each industry factor. The difference ratio is simply the

value of an industry factor for the environmental remediation services

industry divided by the value of the same industry factor for the

parent industry group (i.e., the difference ratio for the industry

factor of average firm size is: $115.4 million $36.4 million =

3.17). As can be seen in table 1, the difference ratios range between

1.03 and 3.53.

The relative differences clearly show that the environmental

remediation services industry is comprised of larger firms than are

present in the parent industry group, and that larger firms capture a

greater share of total industry revenues in the environmental

remediation services industry than in the parent industry group. The

implication of these findings is that the environmental remediation

services industry warrants a higher size standard than is generally in

effect for the nine parent industries.

The next step in the analysis was to calculate a weighted average

size standard for the nine SIC codes making up the parent industry

group. The nine parent industries have widely varying size standards,

ranging between $2.5 million for engineering services (SIC code 8711)

to 500 employees for research and development (SIC code 8731). To

create a single size standard for environmental remediation services

based on data comparisons with the parent industry group, a single size

standard representing the varying size standards of the industries

within that group needed to be derived. To obtain such a single size

standard, a weighted average of the size standards for the nine parent

industries was calculated.

Based on the current size standards, and weighting each industry by

the total number of firms in the industry as reported by the U.S.

Bureau of the Census, a weighted average size standard of $12 million

was calculated based on annual revenues (the actual calculated figure

of $11.95 million was rounded up). Since the size standard for research

and development is based on number of employees, it was first converted

to a receipts size standard by multiplying the 500 employee size

standard by the revenues per employee for that industry.

A weighted average size standard based on number of employees was

also calculated to assist in the analysis. To make this calculation,

the receipts-based size standards were first converted to number of

employees by dividing the receipts size standards by revenues per

employee for each industry (for the industries of SIC codes 4953 and

4959, revenues per employee for all private sector industries was used

in the absence of current revenue data on these two specific

industries). Using employee equivalent size standards for eight of the

nine industries, a size standard of 141 employees was calculated (the

actual calculated figure of 141.1 employees was rounded down).

These two weighted average size standards became the base size

standards ($12 million and 141 employees) by which to estimate how much

higher the size standards should be for environmental remediation

services than for the parent industry group based upon the relative

industry differences shown in Table 1. Table 2 below shows the

calculations used in developing the weighted average size standards.

Table 2.--Weighted Average Size Standards for the Parent Industries

----------------------------------------------------------------------------------------------------------------

Size standard Composite

--------------------------- No. of Percent of -------------------------

SIC Employees\1\ firms total firms

Receipts Receipts Emp.

----------------------------------------------------------------------------------------------------------------

1629............................. $17.0M 162 10,088 9.3 $1.57M 15.0

1795............................. 7.0M 92 865 0.8 0.06M 0.7

1799............................. 7.0M 91 23,181 21.3 1.49M 19.4

4212............................. 18.5M 235 37,145 34.1 6.31M 80.2

4953............................. 6.0M 45 2,208 2.0 0.12M 0.9

4959............................. 5.0M 38 852 0.8 0.04M 0.3

8711............................. 2.5M 29 28,494 26.2 0.65M 7.5

8734............................. 5.0M 79 2,844 2.6 0.13M 2.0

8731............................. \2\52.7M 500 3,265 3.0 1.58M 15.0

--------------

Total...................... ........... ............ 108,942 100.0 11.95M 141.1

----------------------------------------------------------------------------------------------------------------

Source: U.S. Bureau of the Census, Standard Statistical Establishment List, Special Tabulation, 1990.

\1\Estimated employee size standard based on revenues per employee (except SIC code 8731).

\2\Estimated receipts size standard based on revenues per employee.

The next step in the analysis was to assure that the new size

standard would be consistent with all of SBA's size standards as to the

way in which those standards in turn relate to industry differences.

Failure to take this factor into account could result in a size

standard that would be aberrational in terms of SBA's overall size

standards system. This step was an examination of each of the same four

industry factors and the existing size standards with respect to two

large groups of industries close to either end of the existing size

standard spectrum for non-manufacturing industries. To demonstrate this

analysis, the paragraph below sets forth the calculations with respect

to one of the four industry factors: average firm size. The groups of

industries selected for consistency purposes were (1) representative

industries covered by a $5 million standard, and (2) representative

industries covered by standards of $17 million-$25 million, which have

an average of $18.5 million.

This examination revealed that, as to the representative industries

covered by the $5 million standard, those industries in the aggregate

had an average firm size of $1.15 million, and as to the representative

industries covered by standards of $17 million-$25 million, those

industries had an average firm size of $3.76 million. In order to

identify the relationship between size standards and average firm size

in terms of the extent to which differences between average firm size

have influenced size standards, SBA used ratios of the size standards

between the two groups of industries and the average firm sizes between

the two groups. These ratios are expressed as 18.5/5 divided by 3.76/

1.15, or 1.13. This number suggests that there is a consistency

correlation of 113 percent between average firm size and size standards

generally. This means that data which reveals average firm size for a

particular industry needs an adjustment by only an added 13 percent

before calculating the size standard in order to achieve consistency

with the way average firm size relates to size standards as a whole.

Table 3 shows the calculations of a ``consistency ratio'' for average

firm size and the other industry factors. The size standards ratio of

3.7 (18.5/5) is a constant in these calculations, and is shown in the

description of column (D).

Table 3.--Characteristics of Selected Non-Manufacturing Industries

----------------------------------------------------------------------------------------------------------------

(A) (D)

Industries (B)Industries (C)Difference Consistency

with $5M with $17M to ratio ratio

standard $25M standard (BA) (3.7C)

----------------------------------------------------------------------------------------------------------------

Average Revenues Per Firm............................ $1.15M $3.76M 3.27 1.13

Average Assets Per Firm.............................. $0.76M $2.10M 2.76 1.34

Competition.......................................... 25.5% 41.1% 1.61 2.30

Percent of Revenues by Firm Size Greater Than:

$ 5 Million...................................... 56.2% 84.8% 1.51 2.45

$18 Million...................................... 36.1% 59.5% 1.65 2.24

Average.......................................... N/A N/A 1.58 2.35

----------------------------------------------------------------------------------------------------------------

Source: U.S. Bureau of the Census, Special Tabulation, Standard Statistical Establishment List, 1990.

Since average firm size ``data'' in the case of environmental

remediation has to be calculated as a differential figure (see Table

1), the consistency ratios were multiplied by the corresponding

difference ratios. For example, the average firm size consistency ratio

of 1.13 was multiplied by the average firm size difference ratio of

3.17, for a final size factor of 3.58. Looking back to the weighted

average size standards established for the parent industry group of

either $12 million or 141 employees, average firm size, as one of only

four industry factors, would therefore suggest that for the

environmental remediation services industry the size standard should be

3.58 times greater than those parent industry group standards, or

approximately $45 million or 500 employees. Similar calculations were

performed with respect to each of the other three industry factors. The

data are shown in Table 4 below.

Table 4.--Computation of Suggested Environmental Remediation Services Size Standards

----------------------------------------------------------------------------------------------------------------

(A) (D)Suggested (E)Suggested

Environmental (B)Consistency (C)Size receipts employee

difference ratio factor (A x standard standard

ratio B) ($12M x C) (141 x C)

----------------------------------------------------------------------------------------------------------------

Average Revenues Per Firm............... 3.17 1.13 3.58 $42.9M 505

Average Assets Per Firm................. 3.54 1.34 4.74 56.9M 668

Competition............................. 1.26 2.30 2.90 34.8M 409

Percent of Revenues by Firm Size Greater

Than:

$5 Million.......................... 1.03 2.45 2.53 30.3M 355

$18 Million......................... 1.31 2.24 2.93 35.2M 413

Average............................. N/A N/A N/A 32.7M 385

----------------------------------------------------------------------------------------------------------------

Preliminary size standards were suggested by the calculations in

table 4 of approximately $42 million or 490 employees. These

preliminary size standards reflect an average of the suggested size

standards indicated by the four industry factors, without giving one

factor more weight than another.

The impact of preliminary size standards of these magnitudes on

Federal procurements was also assessed before finally adopting a size

standard. This assessment also supported a very high size standard. The

primary reason for development of this size standard is to standardize

the classification of environmental remediation service activities

under one industry size standard for procurement purposes. Information

available to SBA shows that a number of full-service Federal

remediation projects and site restoration projects, usually multi-year

projects, have been projected to fall in the $20 to $30 million range,

with some contracts exceeding $100 million. In rate cases such

contracts may even exceed $1.0 billion with prime contractors

subcontracting much of the work. These are extraordinarily large

contracts for Federal procurements that are not contracts for

manufactured goods. In addition to the large size of contracts, there

is also an extensive level of sophistication required on these

contracts given the concern for public health and safety regarding

hazardous materials, and the specialized equipment, personnel and work

precautions needed by a contractor when handling hazardous materials.

Moreover, since the SBA is requiring that contracts which fall in this

category be composed of activities in three industries (as explained

below), such contracts would naturally tend to be larger contracts.

Relatively large companies will necessarily have to be involved on

environmental remediation services contracts given the size and

sophistication of Federal government remedial efforts. A very high size

standard is thus suggested by the nature of the Federal procurement

marketplace and the presence of large firms which tend to dominate

these Federal procurement activities. The preliminary size standards of

$42 million and 490 employees are consistent with this factor.

Based on the industry analysis and a consideration of the available

information on Federal procurement, the SBA has decided to establish a

500 employee size standard for environmental remediation services. As

the previous industry analysis shows, a 490 employee size standard

adequately reflects the structure of the environmental remediation

services industry based on available data on firms engaged in these

services. For administrative convenience, the 490 employee level is

rounded up to 500 employees to be consistent with other SBA employee-

based size standards.

The SBA has decided to adopt number of employees as the size

standard measure for environmental remediation services rather than a

size standard based on annual receipts, as was proposed. As stated in

the proposed rule, the SBA generally utilizes a receipts-based size

standard for non-manufacturing industries, but it stated it would

consider establishing an employee-based size standard for environmental

remediation services if information was provided that indicated the use

of a receipts-based size standard would be inequitable. SBA

specifically solicited comments indicating the need for an employee-

based size standard. In response, SBA received 15 comments which

advocated adoption of an employeee-based size standard. Only one

comment was received which specifically stated that the size standard

should be based on receipt and not member of employees. Other comments

supported or opposed the $18 million size standard,but did not discuss

specifically whether receipts or employees would be a more equitable

means of measuring size. SBA also continued its own assessment of

whether a receipts-based or an employee-based size standard would be a

better measure of size for this new, emerging industry.

The comments which explained their preference for an employee size

standard pointed out that environmental remediation contracts using

this size standard would be obtained by contractors who would

subcontract out a relatively high proportion of work, and that revenues

passed-through to subcontractors should not be attributed to the prime

contractor. SBA agrees that there likely will be a very high percentage

of subcontracting; this consideration, in combination with the fact

that the contracts involved will be extremely large contacts, and the

fact that environmental remediation is an emerging industry, suggests

that a receipts-based size standard would be less equitable than an

employee standard. If a $42 million size standard were established

instead of one at 500 employees, a firm which is already generating

significant revenues could receive a single environmental remediation

contract in an amount close to the size standard and effectively become

large for purposes of future contracts, even though one-third or more

of the revenues of the contract might be attributed to another firm.

This result would hinder the ability of small businesses in this

emerging industry to grow and continue to participate in the Federal

market. SBA believes it would be inconsistent with the purposes of the

small business and minority small business set-aside programs to

establish a size standard which would effectively be useful to firms on

only one or two contracts before disqualifying them from further

benefits from the program. This principle is particularly important for

new industries where the small business segment is generally less able

to compete effectively due to uncertainties as to market and fast-

moving technologies. Moreover, since firms from nine or more industries

have the capability to perform some or all of the environmental

remediation requirements, the type and amount of activity to be

subcontracted will vary considerably by contract and by the

capabilities of the prime contractor. Accordingly, SBA doubts that it

can establish a receipts-based size standard which reflects a

``typical'' subcontracting pattern for environmental remediation

services.

SBA recognizes that, in other contexts, pass-through revenue by

itself has not warranted establishment of an employee-based size

standard. Here, the additional factors of the extremely large size of

the expected contracts, and the status of environmental remediation

services as an emerging industry with its special needs for growth

opportunities for small business, have persuaded SBA that an employee-

based size standard is appropriate.

Comments to Proposed Rule

In response to its proposed rule, the SBA received comments from 69

interested parties. Sixty-two of those comments discussed the proposed

size standard. All comments dealing with the appropriate level or type

of size standard were carefully considered by SBA, and the discussion

above has explained in detail how SBA has selected the size standard of

500 employees. None of the comments presented SBA with credible data

which would conflict with SBA's analysis in any significant way, and

most comments discussed the proposed size standard in only general

terms. Some comments did raise other issues related to the proposal

which warrant discussion. Those issues are discussed below:

Environmental Remediation and the Brooks Act

A few comments questioned whether SBA's designation of

Environmental Remediation Services as a new sub-category under SIC code

8744, Facilities Support Management Services, complied with the Federal

Government's selection criteria for awarding architecture and

engineering services contracts under the Brooks Act. These comments

primarily came from engineering firms and associations. Under the

Brooks Act procedures (see Subpart 36.6 of the Federal Acquisition

Regulation (FAR), Title 48 of the Code of Federal Regulations),

contracts for architecture and engineering services are competed based

on the qualifications of architectural and engineering firms. This

differs from many of the procedures for most other services where the

primary criterion is usually price competition.

Because application of the Brooks Act procedures does not depend on

the SIC code assigned to a particular requirement, it is SBA's view

that the establishment of a new sub-category within SIC code 8744 for

Environmental Remediation Services will not disturb the Brooks Act

determination process. It is a requirement's statement of work and how

the requirement is to be performed, and not the SIC code assigned to

it, that determines whether Brooks Act procedures should be used. The

Brooks Act and Subpart 36.6 of the FAR do not require contracts to be

awarded through Brooks Act procedures merely because architects or

engineers might do part of the contract work. In this regard, the

Brooks Act procedures apply to requirements that include both

architect-engineer services and other services ``if the statement of

work, substantially or to a dominant extent, specifies performance or

approval by a registered or licensed architect or engineer,'' FAR,

Sec. 36.601-3(b). As such, architect and engineering services may

account for an identifiable portion of a particular requirement without

the Brooks Act applying where these services are not substantial or

dominant. The SIC code assigned to a requirement will not preclude

Brooks Act procedures where the statement of work itself specifies a

substantial or dominant amount of work by a registered or licensed

architect or engineer. It is the extent of the architect and

engineering services to be required by the statement of work that

drives that determination. Case law and the Brooks Act's legislative

history make clear that contracting officers have a great deal of

discretion in determining whether the Brooks Act procedures apply to a

particular procurement. See, e.g., H.R. Rep. No. 1070, 100th Cong., 2d

Sess. 89, 90, reprinted in 1988 U.S. Code Cong. & Ad. News 5523;

Association of Soil and Foundation Engineers, B-209547, 83-1 CPD 551

(May 23, 1983); and Department of Energy Request for Decision, B-

207849, 82-2 CPD 63 (July 20, 1982).

It is not uncommon for a single procurement to require more than

one product or service. These products or services are often

individually associated with different industries and size standards.

Where this occurs in connection with an environmental remediation

services procurement, this final rule provides explicit guidance as to

the classification of the procurement by SIC code based on the

principal purpose of the procurement and the relative value and

importance of each of the components in the procurement. This guidance,

however, refers only to the classification of the procurement for SIC

code designation and size standard purposes. It leaves undisturbed the

possible application of the Brooks Act or the award procedures to be

used for the procurement.

Impact on Small Business Competitiveness Demonstration Program

A few comments also questioned whether the establishment of the

environmental remediation service size standard circumvents the Small

Business Competitiveness Demonstration Program (Demonstration Program)

by shifting procurements that might otherwise be designated as

engineering, construction or refuse systems procurements into the

environmental remediation services industry.

The Demonstration Program was established by Title VII of the

Business Opportunity Development Reform Act of 1988, Public Law 100-

656, 102 Stat. 3853, 3889, to test, over a four-year period, ``whether

the expanded use of full and open competition will adversely affect

small business participation in designated industry categories.'' It

was statutorily extended through September 30, 1996. Four designated

industry groups have been identified for inclusion in the program

consisting of (1) all construction industries except for dredging; (2)

the refuse systems and related services industries within SIC codes

4212 and 4953, but generally not including contracts for dealing with

hazardous materials; (3) the architectural and engineering services

industries within SIC codes 7389, 8711, 8712, and 8713, but generally

not including contracts for military and aerospace equipment, military

weapons, marine engineering and naval architecture; and, (4) non-

nuclear ship repair.

In general, the Demonstration Program was implemented to remedy the

problem of too many set asides in industries where small businesses

dominated because agencies overused set asides in those industries. The

Demonstration Program targeted the specific industry categories listed

above because they were overwhelmingly dominated by small business set

asides, suspended the set asides in these specific industry categories,

and barred SBA from changing the size standards for these industries.

Pursuant to the Small Business Act, SBA generally has the authority

to establish size standards on an industry by industry basis, and

particularly for emerging industries. See, 15 U.S.C. sections 632(a)

and 644(a). Although the Agency is constrained from changing the size

standards for the industries within the Demonstration Program, it is

SBA's view that the statutory restriction imposed by the Demonstration

Program would not apply to the establishment of a sub-category within

SIC code 8744, which is not one of the SIC codes statutorily identified

for inclusion in the Program.

Under this rule, a contracting officer may use the newly

established Environmental Remediation Services sub-category and

accompanying size standard only where (1) a procurement's general

purpose is to restore a contaminated environmental area, (2) three or

more distinct types of services are required by the procurement, and

(3) no single industry accounts for at least 50 percent of the value of

the entire procurement. It is our view that where these conditions are

met, the requirement loses its identity as one for ``construction,''

``refuse systems,'' or ``architectural or engineering services.'' Thus,

the restriction imposed by the Demonstration Program on changing the

size standards for those industries is inapplicable. If a procurement

is primarily (i.e., at least 50 percent) engineering, or construction,

or refuse cleanup and disposal, it still would be assigned a SIC code

in one of those industries and not in the environmental remediation

services industry. Such a procurement could be subject to the

Demonstration Program. Because of the rule's definition of

environmental remediation services, only procurements which have

multiple industry activities and which are also designed to restore the

environment would be classified properly under the environmental

remediation services size standard, and procurements properly

classified in industries covered by the Demonstration Program would not

be affected by this rule.

Prior to this rule, solicitations requiring environmental remedial

services type work have been classified inconsistently and sometimes

incorrectly within the Demonstration Program. Some requirements have

been classified under one of the SIC codes within the Demonstration

Program, even though the requirement actually was for a multi-

disciplinary approach to environmental cleanup with most of the work

not related to the assigned SIC code.

This rule will have the effect of clarifying that any environmental

remediation services requirement for which one component accounts for

at least 50 percent of the value of the requirement should be

designated under the SIC code for that component. Thus, if that one

component is an item covered by the Demonstration Program, the

procurement should be assigned a Demonstration Program SIC code, and

the contracting officer should not avoid the Demonstration Program by

assigning a different SIC code to match another type of service

contained within the requirement. As a consequence of this rule, fewer

solicitations will be misclassified because there will be a more

accurate classification system for the environmental remediation

services requirements.

The Three Industry Criteria

Some comments raised concerns regarding the definitional

requirement that for a procurement to be designated under the

environmental remediation services category and given the applicable

size standard, it would have to contain at least three different

industry components. Several of the comments argued that the three

industry requirement would limit the use of the size standard of

environmental remediation services procurements. Several other comments

alleged either that the present SIC codes are adequate to classify

environmental remediation services procurements or that a three

industry criteria would be confusing and result in errors in which

procurements would be misclassified by SIC code and size standard.

Several comments mentioned that a firm would have to be performing in

three or more industries before it could qualify as a small business

for environmental remediation services procurements.

For a number of reasons, SBA believes it is appropriate to

establish a separate description of environmental remediation services

with the requirement that there be three or more activities associated

with distinct four-digit SIC codes. First, the available information

and data reveal an emerging industry which is characterized by firms

that already have multi-disciplinary capabilities related to different

aspects of environmental cleanup. Second, environmental remediation

procurements frequently include requirements for many different

services that need to be interrelated by a single prime contractor. As

indicated above, such procurements have been vulnerable to widely

divergent approaches by contracting offices as to the proper SIC code

classification. Third, the three industry requirement, when combined

with the requirement that a single component not exceed 50 percent,

ensures that procurements which primarily consist of an activity within

the Competitiveness Demonstration Program are so classified rather than

as an environmental remediation services requirement.

SBA believes that limiting the use of the environmental remediation

services size standard to contracts where less than 50 percent of a

procurement consists of a particular activity is appropriate. As

indicated above, many of the SIC codes which sometimes entail

environmental remediation activity are also included within the

Competitiveness Demonstration Program. In its desire to accommodate an

emerging industry, SBA does not wish to create a size standard which

would permit the avoidance of that Program where the majority of the

work required would fall under one of the SIC codes covered by the

Program. Since an emerging industry exists, which is not adequately

defined by an existing SIC code other than SIC code 8744, a further

segmentation of that SIC code is required for size standard purposes.

SBA also believes that the three industry criteria will not be

confusing to any great extent. The same general criteria apply to the

selection process of the size standard for Base Maintenance, a category

which the SBA has maintained as a separate component of Facilities

Support Management Services for many years without significant

confusion.

Comments received on this issue suggest a need to clarify the

application of the three industry requirement. The description of

environmental remediation services regarding Federal procurements is

designed to inform contracting officers as to which procurements should

be assigned the size standard. Section 121.902 of SBA's regulations

describes the criteria for making SIC designations. A firm qualifying

as an eligible small business on an environmental remediation services

procurement is only required to meet the size standard for that

procurement. It is the contracting officer's responsibility to

determine if the eligible small business is capable of performing the

various requirements of the procurement, and whether that firm intends

to perform all of the activities associated with the procurement or to

subcontract one or more activities to another firm.

For other SBA programs, such as the ``7(a) General Business Loan

Program,'' the size standard would be based on a firm's primary

industry activity. A firm citing environmental remediation services as

its primary industry would have to demonstrate that it currently

operates in three or more industries and that no one industry accounts

for 50 percent or more of its total business activity.

Multiple Size Standards

A few comments recommended a two-tier standard for environmental

remediation services in which ``technical or professional''

environmental remediation services would have a different size standard

from ``non-professional and non-technical remediation'' services. These

comments generally recommended a size standard of $18 million to $25

million for non-professional remediation services, but disagreed on the

size standard for professional environmental services. Some believed a

size standard lower than $18 million would be appropriate to assist

small businesses, while others recommended $25 million or 750 employees

to increase procurement opportunities for small businesses. Other

comments recommended establishing a separate size standard within many

industries which sometimes perform activities related to environmental

services, rather than a single environmental remediation size standard

under SIC code 8744. SBA believes that either the establishment of two

separate environmental remediation services size standards, or the

establishment of a separate environmental size standard within a number

of related industries, would be unwarranted and would add needless

complexity and confusion to SBA's size standards.

The SBA generally establishes size standards by four-digit SIC

code, unless a segment of an industry possesses unique characteristics

which make the size composition of firms within that industry segment

substantially different from other firms in the industry. The SBA

believes this to be the case for environmental remediation services. To

go further and create yet another segmentation within environmental

remediation services would be unprecedented and unnecessary. The SBA

lacks any significant data suggesting that a further differentiation

within this industry is needed to reflect different characteristics

divided along professional versus non-professional lines.

To create a new segmentation of each of the nine SIC codes

primarily associated with environmental remediation would be

impractical, would add substantial and needless complexity to the size

standard system, and would undercut SBA's ongoing efforts to simplify

and consolidate size standards, where appropriate. As indicated above,

the purpose of this size standard is to establish a definition of small

business for an emerging industry where very large firms dominate the

industry, and where Federal procurements tend to be large scale, multi-

activity contracts. While other types of environmentally related

procurements usually will have a scope of work confined to one industry

activity and be smaller procurements. This generally is not the case

for environmental remediation services.

SIC Code Selection

Several comments expressed concern that a misclassification of

procurements by SIC code (and, therefore the size standard associated

with the SIC code) by a contracting agency would occur if the nature of

a procurement had to be determined before the actual scope of work for

each activity would be known. For example, a contracting officer

reasonably could believe that at least three distinct SIC codes were

involved, or that no SIC code would comprise more than 50 percent of

contract activities before contract award, but actual contract

performance would reveal a different pattern of work. These comments

warned that a dichotomy between pre-contract expectations and actual

contract performance experiences would result in an increased level of

protests.

The SBA recognizes that the actual distribution of work on a

multiple-activity procurement may differ from the anticipated

distribution. Nonetheless, contracting officers presently must use

their best judgment in designating a SIC code for a procurement based

on their knowledge of the work statement associated with the

procurement, and the situation for application of this SIC code is no

different. Moreover, SBA's experience with the base maintenance size

standard, where a similar assessment of work to be performed must be

made, has shown the approach to be workable.

Size Standards on Subcontracts

Several comments expressed concern as to the proper size standard

for a subcontract for environmental remediation services let by a

contractor which had been awarded a federal prime contract under a

different SIC code. For subcontracts of more than $10,000, current SBA

regulations provide that the same procedures for designating the proper

SIC code for a Federal prime contract also apply on subcontracts. Thus,

if a subcontract is primarily for environmental remediation activities

and can be identified with at least three separate SIC industries, none

accounting for 50 percent or more of the work, the environmental

remediation services size standard of 500 employees would apply. On the

other hand, if the subcontract does not have three or more separate

industries or one of its industries exceeds 50 percent of the value of

the contract, the appropriate size standard would be that of the

primary industry and not the environmental remediation industry's size

standard. For subcontracts of $10,000 or less, a size standard of 500

employees should be applied regardless of the nature of the work. SBA's

size regulations at 13 C.F.R. 121.910-911 discuss the designation of

SIC codes and size standards for subcontracting.

Compliance With Regulatory Flexibility Act, Executive Orders 11612,

12788, and 12866 and the Paperwork Reduction Act

General

This rule has been reviewed under Executive Order 12866.

Based on all available information, the SBA believes that this

final rule will have a significant economic impact on a substantial

number of small entities within the meaning of the Regulatory

Flexibility Act, 5 U.S.C. 601, et seq. Immediately below the SBA has

set forth a regulatory impact analysis.

(1) Description of Entities to Which This Rule Applies

Based on SBA's knowledge of the relative importance of

environmental remediation activities among the nine industries surveyed

in this rule, the SBA estimates that over 1,100 firms would immediately

gain eligibility to bid on procurements for this activity competed

under various small business and small disadvantaged business

procurement preference programs, or would be able to seek assistance

under the SBA's financial assistance programs. Of these 1,100 firms,

200 would fall in the $18.0 million to 500 employee (equivalent to

approximately $50.0 million) range and be included by SBA's decision to

adopt a size standard of 500 employees for this activity rather than

the proposed $18.0 million. SBA believes these 1,100 firms are active

in environmental remediation, but exceed the size standard of the

various environmentally related industries (construction, engineering,

refuse collection, etc.) in which procurements have been classified in

the absence of an environmental remediation services size standard.

Since the size standards for all but one of these industries are less

than 500 employees, a number of firms exceeding these industries' size

standards would gain eligibility. From a longer term perspective,

however, many more firms than the estimated 1,100 firms will eventually

be impacted by this rule, as firms expand or shift their capabilities

in response to the anticipated growth of federal contracting for

environmental remediation efforts.

(2) Description of Potential Benefits of This Rule

The establishment of a size standard of 500 employees would expand

procurement opportunities to hundreds of firms previously not

considered small and permit Federal agencies to better utilize

procurement preference programs for small business and small

disadvantaged businesses (SDB) and the SBA's 8(a) Program. The amount

of Federal contracting in this area is projected to fall in the

billions of dollars on a yearly basis. It is possible that over a ten

year period, Federal contracting will exceed $50 billion for this

activity. At present, many Federal procurements are not set aside for

small firms or reserved for SDB or 8(a) firms because the alternative

size standards for environmental work are considered too low, thus

restricting small business eligibility to firms without the resources

to adequately perform the work. The result is that the preference

programs for small businesses are not fully utilized and many contracts

which could be set-aside or reserved for small disadvantaged businesses

are competed on an unrestricted basis.

In the SBA's Business Loan Program, it is estimated that twelve

additional loans amounting to $6 million will be made to firms newly

eligible to participate in the program under the 500 employee size

standard established by this rule. This fairly small impact occurs

because only a small percentage of eligible firms seek financial

assistance in this program in any one year, especially firms within the

size ranges affected by this rule.

(3) Description of the Potential Costs of This Rule

The potential costs of the establishment of this size standard are

expected to be minimal. With respect to the General Business Loan

Program, no additional costs to the government should result since all

of the SBA's lending authority is established by appropriations which

the Agency does not have the authority to exceed.

The costs to the Federal government through the procurement process

are also thought to be minimal for two reasons: First, competition

between two or more small firms must be present before a contract can

be set aside for small business. Second, set-asides are expected to be

awarded at reasonable prices. If competition and reasonable pricing do

not exist on a proposed set-aside, the procuring agency is expected to

issue an unrestricted procurement. This process suggests that losses in

the form of increased costs to the government, if at all, are unlikely

to be significant.

In addition, this new size standard is not expected to have

significant adverse effect on competition, employment, investment,

prices, productivity, innovation or the ability of U.S. based

businesses to compete with foreign-based businesses in domestic or

export markets. The competitive effects of size standard changes differ

from those normally associated with most regulations affecting factors

such as prices of goods and services, costs of labor, profits, growth,

innovations, mergers and access to foreign trade because no firm is

required to respond to a size standard revision.

(4) Description of the Potential Net Benefits of the Rule

From the above discussion, the SBA believes that because the

potential costs of this rule are minimal, the potential net benefits

(potential benefits minus potential costs) would approximately equal

the potential benefits. The impact of the size standard would be

concentrated in Federal Procurement.

(5) Legal Basis for This Rule

The legal basis for this rule is sections 3(a), 5(b) and 15(a) of

the Small Business Act, 15 U.S.C. 632(a), 634(b)(6) and 644(a).

(6) Federal Rules

There are no Federal rules which duplicate, overlap or conflict

with this final rule. The SBA has statutorily been given exclusive

jurisdiction in establishing size standards.

(7) Significant Alternatives to This Rule

In compliance with the Regulatory Flexibility Act, the SBA has

examined alternatives to the 500 employee size standard established in

this final rule. Other alternatives have been considered and rejected

as discussed in the supplementary information above.

The SBA certifies that this rule will not impose any requirements

subject to the Paperwork Reduction Act of 1980, 44 U.S.C. chapter 35.

The SBA certifies that this rule will not have federalism

implications warranting the preparation of a Federalism Assessment in

accordance with Executive Order 12612. For purposes of Executive Order

12778, the SBA certifies that this rule is drafted, to the extent

practicable, in accordance with the standards set forth in section 2 of

that order.

List of Subjects in 13 CFR Part 121

Government procurement, Government property, Grant programs-

business, Loan programs-business. Small business.

Accordingly, part 121 of 13 CFR is amended as follows:

PART 121--[AMENDED]

1. The authority citation for part 121 continues to read as

follows:

Authority: 15 U.S.C. 632(a), and 632(b)(6), 637(a), 644(a) and

644(c).

Sec. 121.601 [Amended]

2. Section 121.601, Major Group 87 is amended by revising SIC code

8744 within Major Group 87 to read as follows:

Sec. 121.601 Standard Industrial Classification codes and size

standards.

* * * * *

----------------------------------------------------------------------------------------------------------------

Size

standards

in number

SIC (* = new SIC code in 1987, not used Description (N.E.C. = note elsewhere classified) of

in 1972) employees

or millions

of dollars

----------------------------------------------------------------------------------------------------------------

Major Group 87--Engineering,

Accounting, Research, Management, and

Related Services:

* * * * * * *

8744*.................................. Facilities Support Management Services\19\................ $5.0

Base Maintenance\20\...................................... $20.0

Environmental Remediation\23\............................. 500

* * * * * * *

----------------------------------------------------------------------------------------------------------------

\19\Facilities Management, a component of SIC code 8744, has the following definition: Establishments, not

elsewhere classified, which provide overall management and the personnel to perform a variety of related

support services in operating a complete facility in or around a specific building, or within another business

or Government establishment. Facilities management means furnishing three or more personnel supply services

which any include, but are not limited to, secretarial services, typists, telephone answering, reproduction or

mimeograph service, mailing service, financial or business management, public relations, conference planning,

travel arrangements, word processing, maintaining files and/or libraries, switchboard operation, writers,

bookkeeping, minor office equipment maintenance and repair, use of information systems (not programming), etc.

A\20\SIC code 8744: If one of the activities of base maintenance as defined below, can be identified with a

separate industry, and that activity (or industry) accounts for 50 percent or more of the value of an entire

contract, then the proper size standard shall be that for the particular industry, and not the base

maintenance size standard.

A``Base Maintenance'' constitutes three or more separate activities. The activities may be either service or

special trade construction related activities. As services, these activities must each be in a separate

industry. These activities may include, but are not limited to, such separate maintenance activities as

Janitorial and Custodial Service, Protective Guard Service, Commissary Service, Fire Prevention Service,

Safety Engineering Service, Messenger Service, and Grounds Maintenance and Landscaping Service. If the

contract involves the use of special trade contractors (plumbing, painting, plastering, carpentering, etc.),

all such specialized special trade construction activities will be considered a single activity, which is Base

Housing Maintenance. This is only one activity of base maintenance and two additional activities must be

present for the contract to be considered base maintenance. The size standard for Base Housing Maintenance is

$7 million, the same size standard as for Special Trade Contractors.

*****

\23\SIC code 8744: For SBA program assistance as a small business concern in the industry of Environmental

Remediation Services, other than for Government procurement under SIC code 8744, the following requirements

must be met: Such a concern must be engaged primarily in furnishing a range of services for the remediation of

a contaminated environment to an acceptable condition. Such services include, but not limited to, preliminary

assessment, site inspection, testing, remedial investigation, feasibility studies, remedial design,

containment, remedial action, removal of contaminated materials, storage of contaminated materials and

security and site closeouts. If one of such activities accounts for 50 percent or more of a concern's total

revenues, employees, or other related factors, the concern's primary industry shall be that of the particular

industry and not the Environmental Remediation Services Industry.

For purposes of classifying a Government procurement as Environmental Remediation Services under SIC code 8744,

the following is required: (1) That the general purpose of the procurement is to restore a contaminated

environment; and (2) that the procurement is composed of activities in three or more separate industries

identified with separate Standard Industrial Classification four-digit industry codes or, in some instances

(e.g., engineering), smaller sub-components of four-digit industry codes with separate, distinct size

standards. These activities may include, but are limited to, separate activities in industries such as: Heavy

Construction; Special Trade Construction; Engineering Services; Architectural Services; Management Services;

Refuse Systems; Sanitary Services, Not Elsewhere Classified; Local Trucking Without Storage; Testing

Laboratories; and Commercial, Physical and Biological Research. If any activity in the procurement can be

identified with a separate four-digit industry code, or component of a code with a separate distinct size

standard, and that industry accounts for 50 percent or more of the value of the entire procurement, then the

proper size standard shall be the one for that particular industry, and not the Environmental Remediation

Service size standard.

* * * * *

Dated: September 8, 1994.

Cassandra M. Pulley,

Deputy Administrator.

[FR Doc. 94-22677 Filed 9-14-94; 8:45 am]

BILLING CODE 8025-01-M