A Major Change for Federal Contractors: The SBA’s Proposed Size Standard Rules

On August 20, 2026, the U.S. Small Business Administration (SBA) released two proposed rules that could significantly change federal contracting. By releasing a Revised Size Standards Methodology and a Proposed Rule on Small Business Size Standards at the same time, the SBA is proposing one of the most substantial updates to small business metrics in decades.

Usually, the SBA reviews its size standards every five years to adjust for inflation. However, this new proposal goes much further by changing how those standards are calculated.

If finalized, these changes could allow over 114,000 additional businesses to qualify as "small," including tens of thousands of active federal contractors. For small businesses, these rules could change set-aside eligibility, market competition, and long-term planning.

Here is a simple look at what the SBA is proposing and what it could mean for small businesses in federal contracting.

1. A New Way to Measure Business Size

In the past, the SBA used a complex, seven-factor system to set size standards. Under the new proposal, the SBA wants to simplify this into a three-factor formula to calculate an "average market size." This new formula looks at:

• National industry size

• The number of local/geographic markets

• International competition (net imports)

Instead of comparing firms only to traditional small businesses, the SBA aims to focus on whether a firm is "dominant" in its field. The proposal also factors in productivity growth alongside inflation and removes old caps on size standards.

2. Fewer Industry Codes to Track

Currently, the SBA sets size standards using almost 1,000 distinct 6-digit NAICS codes. This detail can make it hard for agencies to assign codes and for businesses to figure out their status.

To simplify things, the SBA proposes grouping these codes at the 4- and 5-digit levels. This would reduce the total number of size standards to 338, making it easier to track eligibility.

3. Counting Employees Instead of Revenue

In a major structural shift, the SBA wants to move from revenue-based standards to employee-based standards wherever allowed by law.

While some service sectors (like IT consulting and legal services) must stay revenue-based due to existing laws, many other industries—such as construction and retail—would switch to headcount. Counting employees can be more stable for contractors, as annual revenue can swing wildly due to inflation, material costs, or a single large contract award.

4. Much Higher Size Limits

Because of the new formula and the removal of caps, size limits for small businesses would rise substantially across hundreds of industries. The SBA has stated that no size standard will decrease; they will only stay the same or go up.

Some proposed increases for revenue-based codes are significant:

• Computer Systems Design (NAICS 541512): Proposed to go from ~$34 million to $531 million.

• Environmental Consulting (NAICS 541620): Proposed to go from $19 million to $295 million.

• Engineering Services (NAICS 541330): Proposed to go from $25.5 million to $252 million.

How This Affects Small Businesses

The impact of these proposed rules will depend on where your company currently stands in the market.

The Upside: More Room to Grow

Growing small businesses often hit a point where they outgrow their size standard. Losing small business status forces them to compete directly against multi-billion-dollar corporations, which can slow down their growth.

Higher size limits would give growing firms a longer runway. They could keep their small business status longer, stay eligible for set-aside contracts, and continue using SBA programs while scaling their operations.

The Downside: Tougher Competition

While higher limits help growing companies, they could create tougher conditions for smaller firms. With an estimated 114,000 new businesses entering the small business category, competition for set-aside contracts will likely increase.

If finalized, a firm with $5 million in annual revenue might have to compete for the same small business set-aside as a firm making $500 million. Smaller contractors may find it harder to win bids against newly classified "small" businesses that have significantly more resources.

Changes to Partnerships and Subcontracting

These rules could also alter how companies form partnerships or joint ventures. Larger companies that qualify as "small" again could become popular partners for joint ventures. Additionally, prime contractors looking for small business subcontractors will have a broader group of large, capable firms to choose from.

What Happens Next?

These are currently proposed rules, not final regulations. The SBA is seeking feedback from the public, and the comment period closes on September 21, 2026.

If you participate in federal contracting, now is a good time to review the proposed changes for your primary NAICS codes. Considering how higher limits or new competitors might impact your business can help you plan your strategy for the coming years.