SBA’s proposed size standard overhaul: What small business contractors need to know

On August 20, 2026, the Small Business Administration (the SBA) issued a proposed rule that would fundamentally overhaul the methodology that SBA uses to determine industry-by-industry small business size standards—the thresholds that dictate whether a company qualifies as “small” for purposes of government contracting set-aside programs—and new proposed size standards, utilizing that revised methodology. If finalized, the proposed rules would have far-reaching effects, including dramatically increasing size standards across hundreds of industries, potentially qualifying over 114,000 additional companies as small, and providing these companies with access to set-aside contracts and SBA loan programs. In turn, the government would benefit from a broader base of potentially qualified suppliers of goods and services within the “small business set-aside” category of contracts.

The proposed rules are receiving significant attention throughout the small business government contracting community. With that in mind, below is a summary of the key changes in the proposed rules and their potential implications for small business government contractors.

• Size standard methodology. In determining the size standard for each industry, the SBA would shift from a 7-factor methodology to a 3-factor methodology that considers the size of all participants in an applicable industry, the number of distinct markets in the industry, and international competition.
• Inflation and Productivity Adjustments. The SBA periodically adjusts its receipts-based size standards to take into account inflation. Under the proposed rule, the SBA would also consider productivity increases, so additional efficiencies from technological and other productivity improvements would lead to further increases in size standards.
• Size standard consolidation. The SBA currently uses 6-digit NAICS codes to determine size standards, which results in nearly 1,000 distinct size standards. Under the proposed rule, the SBA would simplify the size standards by using 4 and 5-digit NAICS codes and avoid confusion associated with which more specific 6-digit NAICS code applies. The SBA’s proposed consolidation would result in 338 individual size standards.
• Shift to employee-based size standards. Where it has discretion, the SBA would default to setting size standards for industries based on number of employees, rather than annual receipts. As a result, the size standards across a vast range of industries, including the construction industry, would shift from receipts-based size standards to employee-based size standards. The shift would provide more stability in a company’s size status since annual receipts are subject to greater fluctuations over time, including in connection with inflation, than employee counts. Using an employee-based size standard, a company could more efficiently determine its size status in connection with size certification obligations for new and ongoing contracting opportunities.
• Size standard increases. Under the revised size standard methodology, most size standards would increase, and no size standard would decrease. Notably, some size standards would increase significantly; for example, the size standard associated with NAICS code 541512 for computer system design services would increase from $37 million in annual receipts to $531 million in annual receipts. As a result, under the new size standards, companies that are currently small would likely remain small. Additionally, some companies that do not currently qualify as small, including those that are far above the current size standards, could newly qualify as small.
• Heightened competition. With higher size standards, more companies (the SBA estimates over 114,000) would qualify as small businesses. According to the SBA, more eligible companies would foster more competition and, as a result, better services, pricing, and value to the government. With a larger pool of eligible small businesses, current small businesses would compete for small business awards with companies that are, in some industries, ten times larger than they are. With such a large range in the potential sizes of small business in a single industry, companies that are currently small may be unable to effectively compete.
• Impact on mergers and acquisitions. The SBA’s recertification rules require small businesses to recertify their size status following a merger or acquisition. If a small business no longer qualifies as small following a merger or acquisition, then it risks losing eligibility for options and task orders on its small business set-aside contracts. The proposed higher size standards would provide potential purchasers with greater flexibility to acquire a small business and continue to certify the company as “small” following the acquisition. Maintaining a company’s small business status post-acquisition and related set-aside contract backlog can lead to lower risk for purchasers acquiring small businesses. Relatedly, a seller may see a higher valuation for its small business due to this lower risk and larger pool of potential purchasers.
• Mentor-protégé and joint venture agreements. Higher size standards may discourage larger companies from entering into mentor-protégé arrangements or joint venture agreements with smaller companies. If a company qualifies as a small business, it may no longer need to leverage the small business status of another company to access small business set-aside opportunities. This may cause a reduction in joint venture and mentor-protégé opportunities for small businesses that rely on joint venture or mentor-protégé relationships to develop past performance and grow.
• Expansion of small business subcontractors pool. Prime contractors seeking small business subcontractors would have a far greater pool of eligible small businesses to choose from. The larger pool may help large businesses fulfill their subcontracting plan obligations. Additionally, small businesses looking for other small businesses as subcontractors would also benefit from a larger pool in their efforts to comply with subcontracting limitations requirements on set-aside contracts.
• Application to other SBA programs & loans. The revised size standards would also apply to some other small business-related programs and loans; however, the specific impact would vary from program to program as some programs are subject to additional stand-alone size restrictions (employee and/or revenue restrictions) that are independent from these proposed size standards. For example, the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs have a stand-alone 500-employee eligibility cap (13 C.F.R. § 121.702), and the non-manufacturer’s rule (NMR) also has an independent size threshold, neither of which would be changed by the proposed rules. While newly qualified small businesses may be eligible for 7(a) and Economic Injury Disaster Loans (EIDLs), the SBA expects the proposed rules will have minimal effect on those programs, which are both subject to statutory caps. Thus, a business might qualify as “small” under the proposed standards but would still be ineligible for certain programs and other funding opportunities due to other applicable size-related requirements.

Commenting on the proposed rules

The SBA will accept comments on the proposed rules until September 21, 2026, and because of the significant changes included in the proposed rules, the SBA has already received over 65,000 comments. Interested parties can provide their feedback, whether positive or negative, on the proposed rules by submitting comments online to the SBA through Regulations.gov. The most effective comments will concern specific NAICS codes, the impact of a specific proposed new receipts-based or employee-based size standard on the particular commenter’s competitiveness, and (ideally) concerns with the SBA’s proposed methodology. We expect that these proposed rules will be subject to ongoing scrutiny as they proceed to adoption as final rules and thereafter, and we will continue to monitor ongoing developments.

McDonald Hopkins M&A attorney Francis Massaro and government contracting attorney Carissa Siebeneck Anderson are available to answer questions regarding small business government contracting issues, including in connection with mergers and acquisitions.