SBA Proposal to Overhaul Size Standards Would Transform Federal Government Contracting

On August 20, 2026, the Small Business Administration (SBA) proposed to materially amend the way it establishes size standards for purposes of federal procurement. 

SBA simultaneously issued two rulemakings. First, SBA published the 2026 Revised Size Standards Methodology white paper (2026 White Paper), which explains the proposed changes to SBA’s methodology for establishing size standards. Second, SBA published a proposed rulemaking that applies the revised methodology and shows the substantial impact the changed methodology would have.

The proposed methodological changes would result in 114,541 additional businesses becoming eligible as “small” for a total of 6,459,508 potential small businesses. This is an increase of almost 2% from the previous count of 6,344,967.  

SBA has explained that the proposed changes are meant to simplify size standards and reflect current industry and market conditions. Simplification is meant to aid both contractors and agencies. For contractors, the changes should reduce confusion that may have served as unintentional hurdles to participation. (SBA pointed to the example of an entity unsure of whether it falls under Ship Building (1,300 employees) or Boat Building (1,000 employees).)  The changes would also eliminate confusion for agencies running the program, thereby reducing administrative burdens. Moreover, per SBA, not only will more entities be eligible for the substantial benefits afforded to contractors in the small business subcontracting and loan programs, but as more entities compete for the opportunities, the competition will produce greater value for the agencies.  

In Brief: How Size Certifications Work

SBA establishes size standards by assigning thresholds (e.g., receipts-based, employee-based) to North American Industry Classification System (NAICS) codes.  When a contractor self-certifies that it is a small business against a receipts-based NAICS code, it is doing so based on a five-year lookback. In other words, the entity certifies that the average annual receipts of the concern (and its affiliates) over the five most recently completed fiscal years fall below the threshold assigned by SBA to the NAICS code.   When a contractor self-certifies that it is a small business against an employee-based NAICS code, it is doing so based on a 24-month lookback. Put another way, the entity certifies that the average number of employees of the concern (and its affiliates) for each of the pay periods for the preceding completed 24 calendar months falls under the threshold assigned by SBA to the NAICS code.

Proposed Methodological Changes and How They Would Alter Size Standards

The most impactful proposed changes to the methodology are as follows:

Dramatic Increase of Size Thresholds

SBA is proposing a material change to the number of factors used to determine small business size standards. The 2024 SBA methodology used seven factors, but the 2026 White Paper reduces that to three: (1) national industry size; (2) number of geographic markets; and (3) an adjustment for net imports. These three factors are combined into a single “average market size” from which the size standards are calculated. According to SBA, the pivot from the seven factors was due in part to the fact that, although the factors were often associated with industry dominance, they did not directly relate and could lead to mismatches in size standards. SBA cites as an example how the small size of farms resulted in assignment of size standards “far below” those of firms in different sectors, even though small farms compete in national markets.  SBA intends for the three factors to align the methodology with the Small Business Act, which states that a small business is one that is “not dominant in its field of operation.”

With the new approach, the SBA notes that “[a]s average market size grows larger so to [sic] do size standards, but at a decreasing rate,” meaning there is no maximum size standard. However, SBA is proposing to establish a minimum of 500 employees for employee-based and $30.6 million for receipts-based standards “to ensure that all businesses that are small in absolute size can still access SBA programs.”

This is reflected in the proposed standards, as there are several industries that would have employee-based standards over the previous cap of 1,500 employees. Notably, proposed NAICS 5132 – Software Publishers (currently 513210) would change from a $47 million receipts standard to the highest employee-based standard at 3,600 employees. Regarding receipts-based standards, there would now be NAICS codes with a threshold over $1 billion (e.g., $1.011 billion for NAICS 5239, Other Financial Investment Activities) and NAICS code thresholds ranging from half a billion to nearly $1 billion (e.g., $531 million for the new broader NAICS 5415 group standard for Computer Systems Design and Related Services to $970 million for NAICS 5162, Media Streaming Distribution Services, Social Networks, and Other Media Networks and Content Providers), dramatically surpassing previous limits that were as low as $34 and $47 million. 

Finally, SBA proposes no decreases to any existing size standard.

Transfer of Many NAICS to Employee-Based Thresholds

The following general rule applies in SBA’s 2022 Table of Small Business Size Standards: if a NAICS relates to services, it has a receipts-based threshold, and if it relates to supplies, it has an employee-based threshold. 

SBA is proposing to revise its methodology so that the default size standard for all industry groups and industries will now be employee-based. The only exception will be for service industries where Congress has required the use of a receipts-based size standard. 

In the proposed rulemaking on SBA’s size table, the revised methodology transitioned 64 industry standards from employee-based to receipt-based standards (as well as an additional six that were previously a mix of employee- and receipt-based standards).

Consolidation and Simplification of NAICS Codes

Currently, SBA assigns size thresholds at the six-digit level for NAICS codes (e.g., 541612, Human Resources Consulting Services, has a $29 million threshold, while 541613, Marketing Consulting Services has a $19 million threshold). SBA’s 2022 Table of Small Business Size Standards currently assigns thresholds to 995 six-digit NAICS codes. 

In its revised methodology, SBA proposes calculating size standards at the four-digit and five-digit NAICS code levels rather than the current six-digit level. This change is supposed to make NAICS identification easier and reduce the likelihood of a contracting officer assigning an improper industry classification and size standard to a procurement. 

This proposed change would result in SBA assigning only 338 thresholds, 276 thresholds assigned at the four-digit level and 62 thresholds at the five-digit level.  

Elimination of Exceptions

SBA’s 2022 Table of Small Business Size Standards currently has 18 size standards exceptions.  SBA proposes to eliminate every single one under the reasoning that the methodological changes render them unnecessary.

Per SBA, the other changes it has proposed “ameliorate the issues these exceptions attempted to address in a patchwork manner.” All but one proposed size standard for relevant industries will be higher than the exception currently provides on the 2022 Table of Small Business Size Standards and, therefore, only one exception could potentially see current small businesses losing their size status. (That one exception is NAICS 562910, Environmental Remediation Services, which would lose the employee-based standard and is proposed to have a $113 million receipts-based standard for NAICS 5629 going forward.)

Adjustment for Inflation

The proposed 2026 methodology includes an adjustment to receipts-based size standards for productivity, joining the periodic adjustments for inflation.

Impacts to Federal Contracting and the GovCon M&A Market Due to Potentially Significant Increases in the Small Business Contractor Base

Current small businesses are justifiably concerned about what the competitive landscape could look like if size thresholds increase even half of the amount currently proposed. Contractors that have long since grown out of the current size standards — or engaged in M&A activity that leapfrogged them out — could now reemerge as competitors in small business set-aside competitions.

A potential shift of currently large contractors into the small business base also has implications for contractors that remain large. Following the Revolutionary FAR Overhaul (RFO), agencies are required under FAR 19.104‑1(a) to set aside exclusively for small business concerns any procurement valued over the simplified acquisition threshold when there is a reasonable expectation that offers that are “competitive in terms of fair market prices, quality, and delivery” will be obtained from at least two responsible small business concerns. This is commonly referred to as the “rule of two.”

Due to drastically expanding size standards, certain procurements that contractors would reasonably have expected to remain full and open (based on the sizes of their competitors) might now be set aside for small businesses at, e.g., receipts-based standards in the hundreds of millions. Again, only two competitors are needed for the rule of two to apply. Businesses that remain large under the new standards thus may be forced to adjust their pipeline expectations or may move toward identifying small business primes and potential new protégés with whom to team, so that they can compete for opportunities they otherwise would have expected to bid on themselves as large business primes.

From a merger and acquisition perspective, these proposed changes are likely to render a substantial universe of contractors small businesses when they otherwise would have become other than small via natural growth and/or acquisition by a larger contractor, private equity, or venture capital. Should these proposed changes be implemented in roughly the proposed format, these medium-sized contractors would appear to be the “winners” under the proposed rulemaking. These contractors would have significantly longer runway prior to acquisition (i.e., remaining small for longer despite natural growth). They also could have a longer runway post-acquisition if acquired by a medium-sized contractor or a small- or medium-sized private equity or venture capital firm where, even considering the SBA affiliation rules, the new thresholds are particularly high. For example, SBA proposes a $531 million size standard for NAICS 5415, Computer Systems Design and Related Services. While this could reduce the need for certain medium-sized contractors to sell, overall it may further strengthen the GovCon M&A market because (1) some contractors will be rendered newly small again for certain size standards, making them more appealing acquisition targets, and (2) certain buyers will be able to preserve the post-close small business eligibility for themselves and their acquisition targets, lowering the business risk of such acquisitions and broadening the overall base of interested buyers. 

From an administrative perspective, because of these potential changes, medium-sized contractors and small- or medium-sized private equity and venture capital firms will need to undertake a self-assessment under the new NAICS codes to confirm whether the contractor and/or various portfolio companies have newly been rendered small. Contractors and investors will also need to more closely calculate their receipts and employees across their portfolio following acquisitions to ensure they are properly certifying as to small business eligibility, when previously this may have been an afterthought because such contractors/portfolios would have been clearly far about all size standards.

Potential for Fairly Immediate Impact

SBA is undertaking two rulemakings at once. SBA is “first” proposing material methodological revisions in its White Paper while at the same time proposing the new size standards. In doing so, SBA is foregoing the typical rulemaking process of seeking commentary on the White Paper analysis and then finalizing and publishing that methodology before moving on to the actual size standard changes.

By proceeding in this fashion, SBA will review and incorporate feedback from all the commentary it is currently collecting, make revisions to the methodological changes, and update the size table based on those revisions. Then, SBA would publish two final rulemakings that implement the sea change in SBA’s methodology while at the same time immediately applying those impacts to the SBA size table. Typically, once a final rulemaking is issued, the changes take effect within 30 days.

The stakes presented by these two proposed rulemakings, and the resultant industry temperature in response, would likely be lower if SBA took these two rulemakings incrementally. As it stands, industry must provide comments on, in places, fairly radical changes to size standards while such standards remain moving targets based on any additional changes to SBA’s methodology resulting from the rulemaking.

Next Steps

Engagement will be key to whether SBA moves forward with these proposed changes. Contractors interested in providing comments may consider engaging with SBA, as well as trade associations and congressional representatives.  

SBA is accepting stakeholder feedback and comments on the changes until September 21, 2026. 

These dramatic revisions of the size standards have already resulted in a flurry of comments. As of September 1, 2026, SBA has received over 100 comments on its 2026 White Paper and over 65,000 comments on its proposed Small Business Size Standards. These comments run the spectrum from positive to negative. Of the comments that are currently public, many show an appreciation for SBA raising the size standards in the face of inflation and economic changes. Specifically, these comments often cite the opportunity to grow while maintaining the support of the small business programs as reason to celebrate these changes.

On the other hand, many comments are less enthusiastic about the revisions. Some respond to specific NAICS codes, providing reasons SBA should reconsider the intended increase to that industry’s size standard. Several comments respond to the proposed rules universally, suggesting the changes will force small businesses to compete with larger, more established companies in a manner that contradicts the ultimate goal of the small business program. Those comments ask SBA to reconsider the rules and re-propose revisions that would not, in the view of the commentators, damage the ability of smaller entities to compete by opening the floodgates of eligible small businesses. As the process continues, the one thing that is clear is that SBA will have much to consider before issuing any final rule.

Crowell would like to thank Kathryn Carlson for her contribution to this alert