When is a small business not a small business? When it’s a large business. Confused? So is Sen. Claire McCaskill (D-Mo.).

McCaskill thinks the classification standard used by the government to categorize businesses for statistical purposes “simply doesn’t make sense” when applied to the federal small-business contract-award process and wants to do something about it.

She recently introduced the Fairness for Small Business Contracting Act of 2011 (S. 1590), which would require the Small Business Administration to create a new, streamlined classification system for small-business size determinations.

SBA currently uses the North American Industry Classification system (NAICS) to develop size standards for each of 1,200-plus industry classifications defined under NAICS, furnishing the business size criteria that federal agencies use to award contracts to small businesses. Under statutorily mandated goals, agencies must strive to award 23 percent of their prime-contract dollars to small businesses.

“There’s concern among industry about reducing the number of industry classifications all the way down from 1,200 to 20.” – Roger Jordan

McCaskill’s bill would scrap NAICS and replace it with a system comprising no more than 20 industry classifications. These classifications would be based on market conditions as identified by the most recent Economic Census of the U.S.

The bill also would eliminate the “non-manufacturer exemption” to small-business size determinations, under which non-product making companies that buy goods from large businesses for resale to the government can still be considered manufacturers. As a result of the exemption, many contract awards recorded as going to small businesses are actually performed by large businesses, McCaskill said.

“This allows a bigger size standard to be used, which means that a business that might be too large to qualify as small can get the contract–and the government can count the dollars toward meeting their small business goals,” said McCaskill, chairwoman of the Senate Subcommittee on Contracting Oversight.

Implemented in 1997, the NAICS was developed under the auspices of the Office of Management and Budget with input from the governments of Mexico and Canada. NAICS uses six-digit codes to identify specific goods or services and other business characteristics. The codes were intended to help the government collect, analyze and publish data about the U.S. business economy–not specifically for use as a tool in awarding government contracts.

When the government awards a contract, the contracting officer determines the NAICS code to describe the product or service being purchased. The size standard for that code defines the size of the company that can be counted as “small” or “other than small” for the contract and is based on either annual revenues or the number of employees the company has.

Because of the sheer number and complexity of the codes, it’s possible that a single company may be “small” for one procurement and “other than small” for another at the same time, depending on the nature of the work for the government, Mindy Connolly, chief acquisition officer at the General Services Administration, noted at a subcommittee hearing on small business contracts in July.

On the industry side, officials have reservations about the bill. “There’s concern among industry about reducing the number of industry classifications all the way down from 1,200 to 20,” said Roger Jordan vice president of government relations for the Professional Services Council, a trade association that represents federal contractors.

“Each individual industry has its own individual dynamics that ought to be considered and weighed in the development of size standards and by trying to trim those down into 20 major categories, you run the risk of having of certain industries lumped together [under] the same size standards, where on an individual basis the numbers would be quite different,” he said.

Jordan agreed, however, that the size standards should be more reflective of the federal marketplace. “The analysis of the federal marketplace is but one factor that the SBA considers in its comprehensive analysis of size standards,” he said. “Our view is that it ought to be more of a significant factor in that evaluation.”

At the American Small Business Coalition, chief executive officer Guy Timberlake described McCaskill’s plan, if it becomes law, as “a potential nightmare.”

“If you are going to create a new system for small businesses, this means agencies and prime contractors will have to learn a new system, potentially creating an even larger obstacle than what already exists for small businesses,” he said in a recent blog.