SBA Proposes Sweeping Changes to Small Business Size Standards

Revised Size Standards Methodology
The current SBA methodology, last updated in 2024, uses seven analytical factors to calculate size standards based on six-digit North American Industry Classification System (NAICS) codes, producing 995 individual size standards. The revised methodology, which SBA presents as a significant simplification, makes five changes.

First, the revised methodology shifts the level at which size standards are calculated—from six-digit NAICS codes to either four-digit and five-digit NAICS codes—resulting in 338 individual size standards instead of 995. SBA states that this simplification will reduce confusion and make it easier for small businesses and contracting officers to determine what size standards applied to their business and the acquisition respectively.

Second, the revised methodology defaults to employee-based size standards for all industry groups or industries where SBA has discretion. It also reclassifies some industries previously classified as service industries to “other than service” industries. According to the revised methodology, 64 industries will transition from a receipt-based size standard to an employee-based one, and an additional six industries will transition from a mix of receipt-based and employee-based standards to a purely employee-based standard. SBA states that employee-based standards should reduce fluctuations between small and other-than-small status caused by revenue volatility, inflation and productivity growth.

Third, the revised methodology replaces the seven analytical factors used in the 2024 methodology with a single average-market-size measure based on three components: (1) the national industry size (including for-profit businesses, not-for-profit entities and government-owned entities); (2) the number of distinct geographic markets in which competition takes place; and (3) an adjustment for imports and exports to account for international competition. SBA states that these changes more closely align the methodology with the Small Business Act’s requirement that a small business concern be one that is “not dominant in its field of operations.”

Fourth, the revised methodology replaces the prior formula that averaged seven factor-specific size standards and imposed minimum and maximum thresholds, with a calculation to convert average market size into a size standard. The revised methodology has no explicit maximum size standard, although it retains a minimum, allowing size standards to vary over a larger range.

Fifth, the revised methodology adds a productivity adjustment for monetary-based size standards, in addition to the existing inflation adjustment. The proposed rule explains that the productivity adjustment accounts for technological improvements and growing worker skills that increase business costs and receipts faster than inflation alone.

Proposed Size Standards
Applying the revised methodology, SBA proposes 338 size standards: 276 at the four-digit NAICS Industry Group level and 62 at the five-digit NAICS Industry level. Of these, 208 would be employee-based, 129 would be receipt-based and one (Depository Institutions) would be asset-based.

The revised methodology has resulted in marked increases in both revenue and employee-based size standards. Notably, revenue-based size standards for various professional services industries would be increased drastically, in some cases more than tenfold. For example, the size standard applicable to NAICS code 541519, Other Computer Related Services, would increase from $34 million to $531 million (which applies to the NAICS industry group 5415, Computer Systems Design and Related Services, as a whole).

The proposed rule states that the revised standards would increase the total number of businesses classified as small from 6,344,967 to 6,459,508—a net increase of approximately 114,541 firms, or about 1.8 percent. SBA estimates that about 114,236 businesses would gain small business status while fewer than 200 would lose it. Engineering, information technology and management consulting services are among the industries with the largest numbers of currently active contractors that would become small. The proposed rule also does not reduce any size standard that retains the same size measure, even in the 45 industries where the application of the revised methodology might otherwise support a reduction, citing the difficult economic conditions small businesses have faced in recent years.

Impact on Federal Procurement
The proposed size standards could have a significant impact on the federal procurement landscape. SBA estimates that approximately 37,002 unique firms with FY 2025 federal contracts would be newly classified as small businesses under the proposed standards. Those firms collectively held roughly 105,655 contracts worth more than $71 billion. Once reclassified, these firms would become eligible to compete for contracts restricted to small businesses, and awards to them would count toward federal agencies’ small business contracting goals.

SBA states that the increased pool of eligible small businesses will enhance competition for federal contracts, which could result in better pricing and improved value for taxpayers. Newly eligible firms could compete for small business set-asides, and agencies could count awards to those firms toward small business goals. At the same time, growing small businesses that are approaching the current size thresholds could face increased competition from newly eligible firms. Large prime contractors may also see changes in the pool of suppliers eligible for small business subcontracting credit.

The proposed standards would also help address the so-called “benefit cliff” that discourages small businesses from growing because of the risk of losing their small business status and access to set-aside contracts. By raising size thresholds, the proposal would allow businesses to continue growing while retaining their eligibility for small business programs, supporting the broader goals of strengthening the defense industrial base and encouraging American manufacturing.

The proposed rule would not have retroactive effect and would impose no new reporting or recordkeeping requirements. Businesses would continue to register and self-certify in SAM as currently required. Prior to any final rule taking effect, contractors should consider mapping their current NAICS codes to the proposed groupings, modeling size status under both the current and proposed measures using affiliate-inclusive data, and assessing effects on capture strategy, pricing, teaming, supplier classifications and subcontracting plans.

Comments must be received by September 21, 2026, and may be submitted online at the Federal Register’s website.