The federal contracting definition of a “small business” could look very different under a sweeping new proposal from the Small Business Administration (SBA).
On August 20, SBA published a proposed rule that would overhaul the size standards used to determine which companies qualify as small businesses for federal contracting and other SBA programs. The proposal would simplify nearly 1,000 existing size standards into 338 and significantly raise the ceiling for what qualifies as “small” in a number of industries.
For government contractors, this isn’t simply a regulatory cleanup. If finalized, the changes could bring tens of thousands of federal contractors into the small business marketplace, potentially reshaping competition for set-aside contracts and giving growing companies more room before they graduate out of small business status.
SBA Wants to Simplify a Complicated System
Currently, SBA size standards generally rely on either a company’s average annual receipts or number of employees, with the applicable threshold determined by its North American Industry Classification System (NAICS) code. Those standards determine whether a company can compete for contracts reserved for small businesses.
The existing system includes 978 NAICS industries and 18 subindustry exceptions, according to SBA. Under the proposal, the government would move away from primarily setting standards at the detailed six-digit NAICS level and instead establish 338 standards at the broader four- and five-digit levels. Of those proposed standards, 208 would be based on employees, 129 on annual receipts and one on assets.
SBA is also proposing to eliminate the current subindustry exceptions.
The agency argues that broader groupings should make it easier for businesses and contracting officials to determine which standard applies, particularly when companies perform work that could fit within several closely related six-digit NAICS codes.
More Industries Could Be Judged by Employees
One of the biggest changes for contractors is SBA’s proposed shift toward employee-based standards.
Where the agency has discretion, its revised methodology would generally default to measuring business size by number of employees rather than annual receipts. SBA says that approach can provide more stability because revenues can fluctuate with inflation, productivity and business conditions.
That distinction matters in government contracting. Under current SBA rules, receipts used for federal contracting size determinations are generally averaged over the company’s latest five completed fiscal years. Employee-based standards, meanwhile, generally use the average number of employees for each pay period during the previous 24 calendar months. Affiliates must also be considered when determining size.
Moving an industry from receipts to employees could therefore change the small business status of individual contractors even without a dramatic change in the underlying company.
Some Size Ceilings Would Jump Dramatically
The proposed methodology also produces some eye-catching increases.
For example, SBA’s proposal would place Computer Systems Design and Related Services under a $531 million receipts standard. Under today’s more detailed system, Computer Systems Design Services and Other Computer Related Services each have a $34 million standard. Engineering Services, another major government contracting category, would fall under a proposed $252 million threshold.
Employee-based industries would see significant changes as well. SBA highlighted semiconductor manufacturing, where the applicable threshold would increase from 1,250 to 2,800 employees, and ship building, which would rise from 1,300 to 2,300 employees.
Importantly, these numbers are proposed, not final. Contractors should not begin treating the new thresholds as current eligibility standards.
Tens of Thousands of Federal Contractors Could Become Small
The potential contracting impact is significant.
SBA estimates the proposal would increase the number of businesses classified as small by approximately 114,541, bringing the total from about 6.34 million to 6.46 million under the data used in its analysis.
More specifically for the government contracting community, SBA estimates approximately 37,002 firms that held federal contracts in fiscal year 2025 would become newly eligible as small businesses. Those companies held approximately 105,655 contracts worth more than $71 billion.
That could substantially expand the competitive field for small business opportunities.
Companies newly classified as small could become eligible to compete for applicable small business set-asides, while agencies could potentially count awards to those businesses toward their small business contracting goals. Existing small contractors, however, could find themselves facing larger and potentially more established competitors for the same opportunities.
The effects wouldn’t necessarily stop with small business primes. Large contractors that rely on small business subcontractors could also see changes to the universe of companies that qualify toward subcontracting goals.
More Room to Grow Before Graduating
There is another important side to the proposal for growing government contractors.
Companies approaching an existing SBA threshold can face a difficult transition once they become “other than small.” A contractor may suddenly find itself too large to pursue opportunities that helped fuel its growth but still significantly smaller than the major primes it must now compete against.
Higher thresholds could give some contractors a longer runway to build capabilities, hire employees and increase revenue before making that transition.
SBA’s proposal would also avoid reducing standards in 45 industries where its new methodology otherwise indicated that a lower threshold could be appropriate. Instead, those industries would retain their current standards.
Contractors Have Until September 21 to Weigh In
None of these changes are final yet.
SBA is accepting public comments on the proposed rule through September 21.
For contractors, particularly those working in engineering, IT, consulting, manufacturing and other areas heavily represented in federal procurement, this is a proposal worth watching closely. Companies may want to compare their current size status with the proposed standards and consider how broader NAICS groupings or a switch from receipts to employee counts could affect future eligibility.
If the rule is ultimately finalized along these lines, the government won’t simply be changing the numbers in SBA’s size-standard table. It could be changing who gets to compete as a small business across a sizable portion of the federal marketplace.
