SBA Proposes To Fundamentally Redefine “Small Business”

WHAT: The U.S. Small Business Administration (SBA) has proposed a comprehensive rewrite of its small business size standards methodology. Rather than merely modify existing thresholds as it is required to do every five years, SBA proposes to replace the methodology used to determine which businesses are “small.” SBA’s rule would replace nearly 1,000 industry size standards with a consolidated 338 standards at higher industry classification tiers. It would eliminate all 18 subindustry exceptions, such as the IT Value Added Reseller (ITVAR) exception to the North American Industry Classification System (NAICS) code 541519 and the Environmental Remediation Services exception to NAICS code 56291. It would also make employee count, not revenue, the default measure wherever SBA believes the Small Business Act (the Act) permits. Thus, SBA estimates a net increase of approximately 114,541 small businesses, including 37,002 firms that held more than 105,000 federal contracts worth approximately $71 billion in fiscal year 2025. In some industries, the proposed employee limits are high enough that multibillion-dollar public companies could qualify as “small businesses.” Contractors should compare current and proposed standards using affiliated receipts and employee data, identify newly eligible competitors, assess set-aside portfolios and agency goaling, and evaluate planned transactions and recertification events, all of which may be impacted by this proposed rule. 

WHEN: SBA published the proposed rule and a separate Revised Size Standards Methodology on August 20, 2026. Comments on both are due September 21, 2026. The proposal is not yet effective and would not operate retroactively.

WHAT IT MEANS FOR INDUSTRY: If finalized, the rule would redraw the boundaries of the federal small business market, with effects that vary sharply by a contractor’s, or subcontractor’s, current position. Businesses that now comfortably qualify as small could face a much larger pool of eligible competitors, and firms approaching today’s thresholds would gain substantial room to grow while also facing larger rivals. Many midsize firms, and even some large businesses with relatively low employee counts, could become eligible for small business opportunities. Agencies could receive small business credit for awards to newly qualifying firms, including awards made through unrestricted competitions. Large businesses would also have a bigger pool of small business subcontractors. Although the proposal would not change SBA’s affiliation, joint venture, or recertification rules, the much higher thresholds would alter a critical input into each and could materially affect competition, growth strategy, teaming, acquisitions, and future size representations.

SBA Would Change Both the Structure and Theory of Size Standards

SBA currently maintains standards for 978 six-digit NAICS industries (the lowest NAICS level) and 18 subindustry exceptions.

The proposed rule would first consolidate them under 276 four-digit industry group standards and 62 five-digit standards. SBA expects the consolidation to simplify the system and reduce confusion for contractors and contracting officers among related classifications. But the groupings could also combine economically different markets. SBA’s justification under the Act for each four-digit level consolidation is where the United States, Canada, and Mexico are aligned on the proposed four-digit industries but not the sub-level classifications, and where the five-digit industries within a four-digit group are “reachable” through a series of cross-references.

The proposal also would overturn SBA’s traditional size measure across 66 of 192 industry groups currently classified under receipt-based size standards. SBA has generally used receipt-based standards outside manufacturing unless circumstances support counting employees; under the proposal, employees would instead become the default wherever SBA believes it has discretion. A firm measured by employees may have revenue, assets, or enterprise value far beyond what is currently associated with a small business.

The Act, however, requires a concern “providing services” to be measured by average gross receipts over at least five years, making SBA’s classification of industries as service or nonservice industries an important limit on the reach of that conversion. For this change, SBA proposes a three-step test: (1) are any physical objects transferred by the industry group; (2) does the industry group exist mostly to transfer such physical objects; and (3) is ownership or practical control over the object being transferred. Education services, legal services, and general freight trucking will remain under revenue-based standards under this test, but others such as resource extraction, construction, retailers, and software publishers will be reclassified.

Second, SBA would replace its seven-factor methodology to determine the size standard with a measure based on national industry size, geographic markets, and international competition. It would combine those inputs into an “average market size” and calculate the threshold from that figure, seeking to tie the standards more directly to whether a business is “not dominant in its field of operation.”

The change moves the inquiry from how a firm compares with traditionally small businesses to how large it could become before indicating potential dominance in a broader market. The current methodology caps receipts standards at $47 million and employee standards at 1,500 employees; the proposal has no maximum. Notably, the methodology would support lower standards in 45 industries, but SBA proposes to retain their current standards to protect American manufacturing, national security, and industrial base resilience. 

The Federal Contracting Effects Would Be Concentrated

SBA estimates only a 1.8% economy-wide increase in small businesses, but federal effects would be concentrated because thousands of established engineering, information technology, consulting, and other contractors would become eligible small businesses. Certain set-aside pools could balloon. SBA acknowledges that added competition could reduce incumbent probability and profits, but notes that it would increase competition for the Government.

Higher thresholds could allow more acquisitions and combinations to preserve small business status after affiliated receipts or employees are aggregated, but could reduce the transaction value of small business status by reducing scarcity. Businesses managed around a receipts ceiling also may face a different constraint if their industry changes to counting employees. Existing contracts would not automatically be reclassified; the standards would not apply until the rules require a new representation or recertification. Contractors with long-term multiple-award contracts, pending transactions, or anticipated recertifications should examine the final rule’s effective date and their next legally operative size determination.

More eligible small businesses would also allow for a wider pool of small business subcontractors to fulfill goals, and may lead to more small business subcontracting plan enforcement. Large businesses unaffected by the proposed rule directly should still assess how the changed standards may impact their subcontracting compliance programs.

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