On August 20, 2026, the U.S. Small Business Administration (“SBA”) published two related Federal Register notices that, taken together, represent a significant restructuring of small business size standards for government contractors. The first, the SBA’s Revised Size Standard Methodology, provides a white paper explaining the analytical framework SBA proposes to use to generate new size standards. The second, the Proposed Rule that actually implements the Revised Methodology, proposes a new set of 338 size standards. Collectively, the two publications (hereinafter the “Proposed Rule”) have the potential to greatly expand the universe of companies eligible to qualify as “small” under Federal procurements. Comments on both publications are due September 21, 2026.
SBA proposed to replace the current table of small business size standards—which contains 102 different size levels covering 978 NAICS industries and 18 subindustry exceptions—with a streamlined table of 338 size standards and no exceptions. Among key changes include:
- NAICS Code Reduction and Simplification – Size standards would move from the current 6-digit NAICS industry level to a mix of 4-digit NAICS Industry Groups (276 standards) and 5-digit NAICS Industries (62 standards). According to the SBA, this simplification will reduce ambiguities for businesses that sit near the boundary between closely related 6-digit codes. For example, restaurants that operate partly as a buffet and partly as a sit-down establishment, or shipbuilders versus boat builders. The aggregation would cut the total number of standards from nearly 1,000 to 338 and eliminate all size standard exceptions.
- Default to Employee-Based Standards – Where SBA has discretion, the default would shift from receipts-based to employee-based size standards for industries that are neither manufacturing nor services, intending to reduce the frequency with which firms cross the small threshold due to inflation, productivity growth, or ordinary revenue volatility. The number of standards based on annual receipts would decrease from 496 to 129 (the statutory minimum categories that must remain receipts-based), with all other standards focusing on employee size.
- Simplified Formula – The SBA’s prior 2024 methodology established seven factors for determining eligibility: (1) simple average firm size, (2) weighted average firm size, (3) average assets per firm, (4) national four-firm concentration ratio, (5) national Gini coefficient, (6) first disparity measure of federal contracts, and (7) second disparity measure of federal contracts. The Proposed Rule replaces these seven factors with three, combined into a single “average market size” measure: (1) national industry size, (2) number of distinct geographic markets, and (3) an adjustment for net imports/exports.
- New Conversion Formula with No Ceiling – Under the prior 2024 methodology, for each factor SBA compared the industry to a reference group of other industries to produce a factor-specific size standard, then averaged the seven results to arrive at the final size standard. SBA also imposed a minimum and maximum ceiling. In effect, even if an industry’s market characteristics justified a larger size standard, the imposed ceiling capped it.
Under the Proposed Rule, rather than generating seven separate factor-specific standards and averaging them, the revised approach runs the average market size figure through a single mathematical calculation. Further, the Proposed Rule eliminates any explicit maximum size standard, retaining only a standard base minimum across all industries. Under this revised approach, nothing caps the calculation on the high end, resulting in potentially higher size standards for some industries well above what the old ceiling would have permitted. Conversely, a minimum standard is retained (generally, 500 employees or $30.6M receipts) to ensure the formula does not produce unreasonably low standards for certain industries.
The SBA believes this shift in formula better aligns with statutory requirements for small businesses to not be “dominant in its field of operations,” reasoning that a “field of operations” should reflect both what a business sells and the geographic market in which it competes. If analytical factors say a bigger firm still is not dominant in a large, geographically fragmented market, the new approach—sans ceiling—lets the size standard reflect that nuance rather than truncate it.
- Productivity Adjustment – In addition to the existing practice of adjusting monetary size standards for inflation, SBA proposes also to adjust for productivity growth in the broader economy, intending to place receipts-based thresholds on more comparable footing with the employee-based standards.
The SBA estimates the Proposed Rule would result in a net increase of approximately 114,541 businesses newly classified as small—including roughly 37,002 businesses that already hold federal government contracts. Consistent with previous methodology reviews, SBA is not proposing to reduce any size standards.
The Proposed Rule results in higher thresholds across manufacturing and other sectors—industries with employee-based thresholds in particular would increase substantially. Even in the 45 industries where SBA indicated a decrease may be appropriate, such as Natural Gas, Metal Ore Mining, and Waste Collection, the thresholds are expected to increase. Businesses that newly qualify as small may become eligible for small business set-asides and sole-source awards. Additionally, prime contractors that rely on small business subcontractors potentially have a much wider base of partners to consider for contracting opportunities. This, of course, will likely result in a larger pool of eligible small contractors, and therefore more competition to the detriment of many small businesses that rely on federal business.
As mentioned, comments on both the proposed rule and the revised methodology are due September 21, 2026. Unless and until the SBA formally adopts these policies, the current size standards remain applicable. In the interim, contractors should identify their applicable NAICS code(s) and compare the current versus proposed size standards using the tables published in the Proposed Rule to determine eligibility and potential impact. As part of this review, assess whether a shift from a receipts-based to an employee-based threshold, where applicable, impacts your small business status. Finally, consider submitting comments on either Federal Register notice, particularly if the shift from receipts- to employee-based, or the reduction to 4-digit NAICS code, significantly impacts your potential eligibility.