SBA Proposes Major Overhaul of Small Business Size Standards for Federal Contracts

On August 20, 2026, the U.S. Small Business Administration (SBA) issued two separate publications that together could fundamentally reshape the federal contracting small business market. The first is a proposed rule revising the size standards used to determine which companies qualify as a “small business” for purposes of federal contracts and other forms of financial assistance from the SBA. The second is a notice of availability of the 2026 Revised Size Standards Methodology white paper, which establishes the new analytical framework SBA would use to set and review size standards going forward. Comments on both publications are due September 21, 2026.

This is the most consequential restructuring of small business size standards in decades. Size thresholds for professional services, information technology, engineering, and related markets would rise as much as tenfold or more, potentially changing how agencies structure solicitations and who is eligible to compete. SBA estimates that approximately 114,541 net additional firms would qualify as small, including 37,002 existing federal contractors newly classified as small; those contractors held more than 105,655 FY2025 contracts involving more than $71 billion in FY2025 obligations. Current size standards remain in effect unless and until final rules are issued. This Legal Update explains the proposed changes, the new methodology and size threshold impacts, and practical steps for federal contractors.

Background

Under the Small Business Act, a “small business concern” must be independently owned and operated and “not dominant in its field of operation,” a standard SBA implements through NAICS-based size thresholds measured principally by employees, annual receipts, or assets. SBA currently applies roughly 102 threshold levels across approximately 978 six-digit NAICS industries and 18 subindustry exceptions to determine eligibility for small business set-asides, SBA-guaranteed loans, and other regulatory preferences. SBA now proposes to replace its recently adopted 2024 methodology with a new framework it describes as more directly aligned with the statutory “not dominant” concept and has applied that framework to proposed revised size standards, meaning any finalized methodology changes would flow immediately into new industry thresholds; current standards remain in effect unless and until final rules are published.

Major Proposed Methodological Changes

NAICS Consolidation and Elimination Federal Contracting Exceptions

SBA proposes to reduce 995 size standards—mostly at the six-digit NAICS level—to 338 standards, set primarily at broader four-digit industry-group or five-digit industry levels. SBA says the change would simplify the framework, reduce classification disputes, and measure more firms against common standards.

SBA also proposes to eliminate all 18 federal contracting size standard exceptions, stating that the proposed industry group standards would exceed current exception levels for all but one industry, and requesting comment on whether any exceptions remain necessary. The affected exceptions span engineering, facilities management, dredging, forestry, transportation, aircraft parts, and Information Technology Value Added Resellers (ITVARs). Notably, the current “footnote 18” ITVAR exception to NAICS 541519—which currently uses a 150-employee standard—would be replaced by the broader NAICS 5415 group standard of $531 million in average annual receipts.

Default to Employee-Based Size Standards

The proposal would reverse SBA’s current default by making employee-based standards the presumption for non-service industries unless a receipts-based standard is necessary because an industry is “predominantly service-oriented” under a three-part test. Of the 338 proposed size standards, 208 would be employee-based, 129 receipts-based, and one asset-based. SBA states that it favors employee counts because they are less volatile than receipts, less affected by geographic cost differences, and less dependent on frequent inflation and productivity adjustments.

New Average Market Size Formula

SBA proposes to replace the current seven-factor methodology with a single equation based on three inputs: national industry size, the number of geographic markets, and a net-import adjustment. The formula estimates average market size by dividing national industry size by the number of geographic markets and adjusting for net imports, which SBA says better tracks the statutory “not dominant” concept and resembles antitrust market analysis. SBA would then convert that average market size into a size standard using a diminishing-growth formula, retain minimum floors of 500 employees and $30.6 million in receipts, eliminate explicit maximum standards, round final standards to the nearest 50 employees or $1 million, and remove the 2024 methodology’s federal contracting disparity ratios so set-aside participation history would no longer directly affect standards.

Productivity and Inflation Adjustment for Receipts-Based Standards

SBA proposes to adjust receipts-based size standards for both inflation and productivity growth—rather than inflation alone—using nominal GDP per employee. SBA says this would reduce the structural disadvantage faced by firms measured by receipts and would raise the historical $1 million benchmark to $30.6 million, compared with $9.7 million under inflation-only indexing; SBA would apply the same metric in regular reviews and, as needed, between reviews.

Estimated Impact: A Fundamentally Different Competitive Field

SBA estimates that 114,541 net additional firms—including 37,002 existing federal contractors—would qualify as small under the proposed standards. Those contractors held more than 105,655 FY2025 contracts and over $71 billion in FY2025 obligations. The practical effect would be a larger and more experienced eligibility pool for set-aside contracts, reintroducing firms with past performance, capture infrastructure, and delivery capacity. SBA acknowledges that firms nearest today’s thresholds would face the greatest increase in competition.

The following examples involve some of the most heavily used federal contract services codes. Increases of roughly tenfold are common, illustrating how the proposed groupings could change eligibility and competitive positioning:

SBA estimates that roughly 172 currently small firms—and fewer than 200 in total—would be reclassified as other-than-small. Those firms are concentrated in Wired and Wireless Telecommunications (except Satellite) (NAICS 5171) and Waste Collection (NAICS 5621); SBA proposes no reductions where the measurement basis stays the same.

Under the “Rule of Two,” contracting officers are generally required to set aside an acquisition above the simplified acquisition threshold ($350,000) for small business participation when there is a reasonable expectation of receiving offers from at least two responsible small businesses at fair market prices. A materially larger eligible pool of small businesses could cause requirements that historically could not be set aside for lack of sufficient small business participation to satisfy the Rule of Two, potentially resulting in categorical exclusion of large businesses from work they have previously pursued on an unrestricted basis. Agencies may also consolidate or structure larger requirements for the more capable newly eligible firms, and obligations to incumbents reclassified as small may now count toward agency small business goals, giving agencies an added incentive to restrict competition.

The proposal could also address the long-criticized “mid-tier cliff” faced by firms that are no longer considered small, but remain too small to compete effectively with the largest primes. That benefit, however, does not eliminate the near-term risk that today’s large contractors lose access to unrestricted requirements as agencies recalibrate acquisition strategies.

Steps Federal Contractors Should Take Now

These proposals are relevant to every federal contractor—not only current small businesses. They could materially alter how agencies structure acquisitions, which requirements are set aside, who may compete, the economics of subcontracting and teaming, and the strategic value of small business status. Although neither proposal has immediate legal effect, contractors should begin modeling the consequences and preparing focused comments now.

NAICS codes and size status: Map each current six-digit NAICS code to the proposed four-digit industry group or five-digit industry, then compare the proposed standard with the firm’s size over the relevant averaging period. The measurement basis may also change—from average annual receipts measured over five years to employees measured over 24 months—which changes the calculation entirely for some firms. Firms should model both status and competitive implications at the solicitation, contract, and portfolio levels.

Current small businesses and potentially small businesses: Existing small businesses should model stronger competition from experienced, better-capitalized firms and assess whether fewer other-than-small contractors could reduce subcontracting opportunities. Firms that may newly qualify as “small” should assess status, engage agency customers and small-business specialists, prepare capture plans for restricted opportunities, and evaluate eligibility for SBA financing and socioeconomic programs, including 8(a), HUBZone, WOSB/EDWOSB, and VOSB/SDVOSB.

Subcontracting, teaming, and mentor-protégé arrangements: Prime contractors should assess whether current small business subcontractors and joint venture partners would retain their status, and whether subcontracting goals and credit remain achievable when fewer entities qualify as other-than-small. Some current mentors may themselves regain small-business status, changing program incentives, eligibility, and the available partner pool. Existing SBA Mentor-Protégé Program participants should re-examine whether their agreements and joint ventures still make strategic sense, and firms considering new arrangements should reassess partner selection under the proposed thresholds. Affiliation, limitations on subcontracting, and ostensible subcontractor analysis should be revisited for any contractor or joint venture that will pursue restricted work under the new standards.

Mergers and acquisitions: Substantially higher thresholds also create headroom for firms to combine and compete at greater scale without losing small business status, including platform-plus-tuck-in strategies that absorb combined revenue and remain below the new ceiling. Reduced pressure to stay below a threshold changes exit timing and strategy because owners have less need to sell before graduating. Businesses that become newly small may become attractive acquisition targets, and a broader pool of buyers able to preserve set-aside eligibility may raise valuations for small business sellers, deemphasizing the impact of SBA’s recertification rules. Buyers should test target size status under both current and proposed standards, and recognize that overreliance on set-aside revenue can still depress valuation at a subsequent exit.

Growth opportunities and business planning: All contractors should re-evaluate business development strategy and growth plans in light of prospective size status and the changed competitive field. A firm that has deliberately constrained hiring, acquisitions, or revenue growth to remain below a threshold may need to rethink that approach entirely. Contractors should reassess pipeline, bid/no-bid criteria, indirect rate structures, and capacity investments. The shift from receipts measured over five years to employees measured over 24 months may change the calculus around hiring and organic growth, as well as the timing and severity of the “size cliff.”

Comments: SBA has invited comment on the proposal’s NAICS aggregation, size measures, data sources, treatment of government-owned entities, geographic-market methodology, minimum standards, and inflation-plus-productivity metric. Affected contractors should submit focused comments tied to specific NAICS codes, size thresholds, and company data on competitive, teaming, acquisition, and graduation effects. Comments on both proceedings are due September 21, 2026, and may be submitted at www.regulations.gov under RIN 3245-AI67 / Docket No. SBA-2026-0199 for the proposed rule and Docket No. SBA-2026-0265 for the methodology notice.

We would be pleased to assist with impact assessments on size status, comment letters, and certification and capture strategy considerations.