The “small business” title is about to become the new reality for over 114,000 companies who want to sell to the federal government. The Small Business Administration (SBA) recently released a new proposed rule that would not only adjust the small business size standards going forward, but also adjust the methodology of measuring these standards. With these changes, the SBA predicts over 114,000 additional businesses could qualify as small and compete in federal small-business set-aside contracts.
The main changes in the SBA’s proposed rule are:
Since industry comments are due by September 21, 2026, let’s review the rule and how it could impact the federal procurement landscape.
Before we launch into the changes, we’ll briefly recap how you can find out whether your small business is considered “small” in the eyes of the government. The SBA has a size standards tool on their site that allows you to enter information about your company and find out if you qualify as small. The system uses your primary North American Industry Classification System (NAICS) Code to measure this.
NAICS Codes are a classification system used to identify your primary industry, and they are self-assigned. Each NAICS Code is assigned a specifics size standard in either average annual receipts/revenue for the last five years or the average number of employees for the last 2 years (including part-time and temp). Our blog on size standards gives step-by-step instructions on how to input your company into the tool.
Depending on the NAICS, you could measure as small business under one code, or just be on the cusp with another. With the new rule, these standards would expand, giving more companies the opportunity to qualify as small. We’ll dive into this next.
The first change we see in this proposed rule is a major increase in employee-based and revenue-based thresholds. This would allow an additional 114,000 businesses to qualify as small. If you are a small business who has recently graduated out of your size standard, or you were always on the cusp, this is great news for you. With these new standards, you may very well qualify as small now and have access to small business set-aside contracts and additional socio-economic programs if applicable.
An increase in size standards is not all that uncommon for the SBA, but the second part to this proposed rule is what is causing a lot of buzz among industry experts. The SBA wants to make major changes to how size standards are calculated. The SBA created a separate white paper highlighting the revised changes to the size standards methodology. There are 5 main changes:
For 26 years, the SBA has used the traditional 6-digital NACIS codes to determine small business size standards, but that is all going to change under this proposed rule. SBA wants to calculate size standards based on a mix of 4-and 5-digit NAICS Codes instead of the classic 6 digits. This would narrow the possible size standards to measure from 995 to 338. The SBA is proposing this to mitigate confusion and simplify the list of industries to choose from for small businesses.
With this revision, the SBA proposes 338 size standards: 276 four-digit NAICS and 62 at the five-digit NAICS. Out of these 338, 208 would be employee-based, 129 would be revenue-based for thresholds.
The next update is converting industry groups from revenue-based size standards to employee-based ones. Traditionally in the latest methodology (2024), the SBA uses revenue-based size standards in industries which were neither manufacturing nor services unless the industry maintained certain conditions such as high capital intensity or low operational costs. The new rule will default to employee-based size standards, reducing number of firms that can fluctuate between small and “other than small” (large) with inflation, growth, etc.
Next, the SBA wants to update the factors used when determining small business size standards. In the 2024 methodology, the SBA used seven factors to calculate size standards including simple average firm size, weighted average firm size, etc. To more closely align the size standard's methodology with the Small Business Act's statutory language requiring a small business concern to be one which is “not dominant in its field of operations”, the new methodology will be pared down to three:
Additionally, the proposed methodology replaces the formula that averaged the seven factors above, with a calculation to convert average market size into a size standard.
Lastly, the revised methodology adds a productivity adjustment for revenue-based size standards. The 2024 methodology adjusts monetary-based size standards for inflation, but this new rule would adjust for inflation AND adds in adjustment for general productivity increases in U.S. economy as well. This puts revenue-based size standards on a more equal lane as employment-based size standards.
If you are already a federal contractor and realize you may now qualify for small business set-asides, or you are new to it all and just want to learn about business designations, check out these blogs:
For future updates on the small business size standards and other govcon news and insights, check out our blog and newsletter. If you are interested in getting a GSA Schedule or need help with your current contract, we are here to help.